CH176520 - Sanctionable conduct by tax advisers: determining sanctionable conduct: what is sanctionable conduct?

What is sanctionable conduct?

A tax adviser “engages in sanctionable conduct” if, in the course of acting as a tax adviser, they do something (or omit to do something) with the intention of bringing about a loss of tax revenue.

The relevant standard of proof required for determining sanctionable conduct is the ordinary civil standard, the balance of probabilities. In other words, is more likely than not (i.e over 50% chance) that the conduct is sanctionable. The burden of proof is on HMRC.

When determining whether a tax adviser has engaged in sanctionable conduct, there are two tests.

1. Was the conduct in question carried out by the tax adviser in the course of acting as a tax adviser?

Answering this question requires us first to identify specific conduct, or a course of conduct. In practice, this could be almost anything that a tax adviser does – such as providing a piece of advice to their client, submitting documents to HMRC, or failing to submit documents to HMRC.

The conduct must be attributable to the person we are investigating, which could be an individual tax adviser or a tax advice firm.

We must be satisfied that the person’s conduct was in the course of acting as a tax adviser. This means that it was done as part of their business, or if they are an employee it was done as part of their employer’s business.

2. Was it done with the intention of bringing about a loss of tax revenue?

This test distinguishes sanctionable conduct from acceptable conduct. It is a test – we must ask ourselves whether it was the adviser’s subjective intention in doing what they did that it should bring about a loss of tax revenue. We must apply this test to the adviser’s knowledge and actions at the time they acted.

It does not matter if there is in fact no loss of tax revenue; what matters is whether that was the intended consequence of what the adviser did. In other words, was it the adviser’s aim to bring about a loss of tax revenue?

When determining whether the adviser acted with the intention of bringing about a loss of tax revenue, we must consider what the evidence tells us about the state of the adviser’s knowledge at the relevant time. To have engaged in sanctionable conduct, the adviser must have foreseen that a loss of tax revenue could be a consequence of their actions. There must also be some sense in which the adviser can be said to have intended to bring about the foreseen consequence. The test is not met where the tax adviser did not intend to bring about a loss of tax, even if that was the consequence of their actions.

Each case will turn on its own facts and on the quality of the available evidence from which an intention to bring about a loss of tax revenue may be found. In general, advisers who do any of the following will be engaging in sanctionable conduct:

  • Take a credible view of what the law requires, even where this might differ from HMRC’s own view
  • Follow HMRC’s published guidance, even where as a matter of law the guidance proves to be incorrect
  • Properly rely on a published extra-statutory concession
  • Make a genuine mistake, error, or inaccuracy in their advice or in a document submitted to HMRC, even where the error may amount to a failure to take reasonable care

FA12/SCH38/PARA3 as amended

Examples

The following examples illustrate sanctionable conduct by a tax adviser.

The following examples show where tax advisers have and have not engaged in sanctionable conduct. The examples do not consider whether the taxpayer themselves may also be liable to sanctions, as this is not relevant for determining sanctionable conduct.

Late filing – not sanctionable conduct

Brian’s client has a tax return due on 31 January 2027. Brian is preparing calculations for this return, but the client has not provided all the required information. Brian tells the client that if they don’t provide that information, Brian won’t be able to complete the calculations before the deadline, the client won’t be able to submit a complete and correct return, and the client may be liable to late filing penalties. The client decides not to submit their return by 31 January 2027.

The client provides Brian with the required information on 1 March 2027. Brian completes the calculations the without undue delay and lets the client know the information they need to submit their complete and correct return. The client submits their return on 1 April 2027.

Brian did not do anything to intentionally bring about a tax loss, and has not engaged in sanctionable conduct. In fact, Brian actively tried to prevent a tax loss by making sure the client was aware of the deadline for submitting the return and the consequences of submitting a return late.

Employee – sanctionable conduct

Daljit is a tax adviser working for a tax advice company. The tax advice company has in place clear guidelines about how work should be conducted and regularly reviews the work of employees to make sure that those guidelines are followed.

When preparing a return for a client, Daljit agrees with the client to use incorrect figures to reduce the liability. Daljit has engaged in sanctionable conduct.

During a regular review of Daljit’s work, the company finds out about what Daljit has done. They fire Daljit for gross misconduct. They also contact the client to make them aware of the correct tax position and the risks of using incorrect figures. The client refuses to amend their return. The company ceases working with the client.

The company has not engaged in sanctionable conduct as the actions of the company didn’t amount to intentional behaviour. They were unaware of the original situation despite having clear guidelines in place. They also  took steps to correct the situation as soon as possible. Daljit has intentionally brought about a loss of tax and has engaged in sanctionable conduct.

Using guidance/ESCs – sanctionable conduct

Jose has a client who is looking to reduce their tax liability. Jose tells the client that they can claim an allowance to transfer some of the partner's Personal Allowance to the client. Jose uses excerpts from HMRC guidance on Marriage Allowance to show how the client's tax liability could be reduced. Jose knows that the client and their partner are not married and will not qualify for Marriage Allowance, but does not tell the client this.

The client asks Jose to make a claim for the allowance based on the advice Jose has provided. Jose makes the claim. When receiving the claim, HMRC finds that the client is not married and stops processing the claim. Jose has engaged in sanctionable conduct by intentionally trying to bring about a loss of tax revenue. It does not matter that the loss of tax was not actually brought about.

Using guidance/ESCs – not sanctionable conduct

Erika provides tax advice to a coin-vending machine operator in relation to the tax point of sales from their vending machines for VAT purposes. Erika tells the client that the tax point is the date the machine is used. Erika also tells the client that there is an Extra Statutory Concession (ESC) which allows VAT to be accounted for when the takings are removed from the machine.

The ESC allows the tax point to be delayed until the takings are known, and may mean that the VAT is accounted for in a later accounting period than the one where the machine is used. Ordinarily, and without the ESC applying, this would be a loss of tax.

Erika has correctly followed the ESC for this client and provided correct tax advice, and no loss of tax revenue is brought about by this advice. Erika has not engaged in sanctionable conduct.

Legal interpretation – sanctionable conduct

Ahmed advises a company that it is possible to adjust the way it carries out certain transactions to reduce its tax liability. Ahmed knows that this advice has no realistic prospect of applying to the company’s circumstances and that there’s a low chance that a tribunal or higher court would agree that the adjustments lawfully reduce the company’s tax liability. Ahmed does not make the company aware of this.

By deliberately failing to make the company aware of the known legal risks when providing his advice, Ahmed has intentionally brought about a loss of tax revenue and engaged in sanctionable conduct.

Legal interpretation – not sanctionable conduct

Katie is advising a client on a new area of tax law. The client is unclear how the law will apply to their business. Katie reviews the legislation, HMRC guidance, and the client's circumstances, and determines that there are two different ways the law could apply to the client. Katie explains to the client that either treatment could be correct, but that on balance the treatment that resulted in a lower tax liability is more likely to succeed in court. The client submits their return on this basis.

Later, HMRC publishes guidance that clarifies HMRC’s view of the treatment. This shows that HMRC believes that the treatment that results in a higher tax liability applies to the client's circumstances. Katie makes the client aware of this change, explaining that this has not yet been tested in courts. Katie tells the clients that the treatment with a lower tax liability is still likely to succeed in court. The client decides not to amend their return.

Although Katie's position does not agree with HMRC's position, and that difference causes a lower tax liability for the client, Katie has not engaged in sanctionable conduct. Katie has made a genuine interpretation of the law and has not intentionally brought about a loss of tax revenue.

Third party adviser

Faith's client wants to claim a relief which Faith is unfamiliar with. Faith appoints another tax adviser, Gerald, to provide advice on the issue. Gerald claims to be an expert on the relief, including having a record of successful claims related to the relief. Faith has previously worked with Gerald and in those cases the advice provided was correct.

The client in this case does not qualify for the relief. Gerald has all the information needed to provide the correct advice. In the hope that Faith refers more clients, Gerald decides to tell Faith that the client can claim the relief and provides the calculations needed to submit the claim. Faith reviews the advice from Gerald and it appears correct for the client’s circumstances.

Faith did not know that the client could not claim the relief and has not engaged in sanctionable conduct. Gerald did know that the client couldn't claim the relief and has intentionally brought about a loss of tax. Gerald engaged in sanctionable conduct. It does not matter that the client did not appoint Gerald directly.

Change of adviser

Hardeep provides tax advice to a client on a single issue. The client provides Hardeep with information to provide advice, but the information is incomplete. Hardeep provides advice on the issue, but makes it clear to the client that it is only correct in relation to the information provided and that any changes in circumstance may alter the tax position.

The client then stops using Hardeep's services and appoints a new tax adviser, Isaac. When submitting a return, the client asks Isaac to use Hardeep's advice. Isaac doesn't check if the advice is correct for the client's circumstances. This results in an incorrect return being submitted.

Hardeep did not intend to bring about a loss of tax, and took steps to prevent a loss of tax by making the client aware of the limitations of the advice. Hardeep did not engage in sanctionable conduct. Isaac acted carelessly by not checking the advice provided by the clients, but did not intentionally bring about a loss of tax. Isaac did not engage in sanctionable conduct.