The Commission made much of the power imbalance between financial institutions and their intermediaries on the one hand and consumers on the other.
Mismatch in expectations
A stark example of this can be found amongst our experiences with R&D disputes. Smaller taxpayers, often starting out in a business venture, found themselves applying for R&D concessions. Engaging professional tax advisers, they made claims and, under self-assessment, received tax refunds. However, on audits, they found themselves having to pay back hundreds of thousands of dollars, the difference between the continued survival of the business and bankruptcy.
A common element in all of these cases is the insufficiency of documentary proof supporting the claim. The common expectation of taxpayers in these cases was that they had sought the advice and assistance of tax advisers to make the claims; they assumed that the claims were supported by the necessary evidence.
However, engagement terms always disclaimed proof – the client was responsible for ensuring there was sufficient proof of the amount being claimed whereas the client assumed that the tax adviser had checked for proof in coming up with the amount claimed.
Responsibilities of tax agents
Clients could rightly argue that tax advisers in such situations were selling what the tax advisers could not deliver.
However, the tax law clearly makes taxpayers responsible for their own tax affairs. Tax agents are not responsible for a client’s tax affairs, notwithstanding they may have been instrumental in the preparation of the client’s tax returns. Although a claim of negligence or breach of contract could be commenced, a well-crafted engagement letter would mean these are not successful. Even if successful, professional standards schemes and engagement letters ensure there is a cap on liability.
The “all care, no responsibility” aspect to the relationship between tax advisers and clients creates further tensions on the duty to avoid conflicts. If tax advisers are not responsible (or have limits on their responsibility) for the tax impact on clients, there is arguably a further misalignment of interests.
The Commission’s final report notes:
It is well known that the larger professional services firms have actively expanded the extent of their vertical integration. There is merit in observing the impact the self-interest created by such vertical integration and its dominance over the client’s interests has had on the banks. “[B]ecause the motivation for the [vertical] integration is, ordinarily, a self-interested one, the congruence of the [vertical integration] with the duty to act in the interests of the [client] must be closely examined.”
Ultimately, though, the most effective vigilance and supervision will come from clients. A client’s awareness of the potential for the tax adviser to suffer from self-interest, for that self-interest to conflict with what is in the best interests of the client, and the willingness to call out such conflicts and require measures to not just manage such conflict but eliminate it are important tools.
This vigilance, supervision and recognition of the potential for conflict should be integral parts of taxpayers’ tax governance policies, which we will look at in Part Four of our series.