The role of tax planning in legal advice is under increased scrutiny. Tax planners are now in danger of being viewed as ‘tax avoiders’ (HM Revenue & Customs) or even ‘tax evaders’ (Solicitors Regulation Authority) - and the implications could be career shortening for solicitors. Here is why.

The SRA’s position

The SRA views any reduction in stamp duty, legal or illegal, as wrong - and, by extension, misconduct. Its stamp duty evasion warning to the profession, published on 16 February 2012, warns that a Stamp Duty Land Tax scheme (SDLT) ‘is designed to reduce or eliminate the correct level of stamp duty payable on a property’. It adds that ‘buyers of property are free to use honest and proper tax planning to mitigate their tax liability’. However, the SRA concludes that it will ‘look very closely at the conduct of any firm that is actively involved in these schemes’.

The SRA has traditionally relied on warnings as evidence in support of disciplinary actions. Therefore, for ‘warning’, read ‘expect a disciplinary outcome’. The SRA is right to address the way some firms give stamp duty tax planning advice and justifies its stance by warning that the loss to HMRC could be between £500m and £1bn. If the schemes are lawful, why should any loss to HMRC be a relevant consideration for a regulator?

HMRC’s position

HMRC issues ‘spotlights’ to help consumers ‘avoid unwittingly entering into arrangements that HMRC is likely to see as tax avoidance’. The tax authority’s Spotlight 10: Stamp Duty Land Tax avoidance, issued on 7 June 2010, warns that property sales are deliberately being structured to avoid SDLT, by exploiting sub-sale relief. It doubts their effectiveness and says such schemes will be challenged in court.

So, while HMRC’s Spotlight 10 helps consumers unwittingly avoid paying tax (legally or illegally), the SRA’s ­warning suggests that those involved in such ‘schemes’ are acting immorally.

Cases at the Solicitors Disciplinary Tribunal (SDT)

In the case of Buckeridge and Heath, 23 September 2010, misconduct was alleged in SDLT mitigation in 25 transactions. The allegations concerned ancillary failures, not that involvement in the schemes was wrong in itself. Despite this, the SRA’s arguments to support a finding of misconduct included:

  • ‘HMRC did not consider the schemes to be legitimate tax avoidance schemes.’
  • ‘The aim of the scheme was to avoid the payment of SDLT.’
  • ‘£1,463,830 had been avoided in the transactions considered.’

The SRA appeared to consider that involvement in SDLT was wrong because HMRC thought so, and because HMRC collected less tax as a result of such schemes. In Dlay, 9 December 2011, It was alleged that the solicitor was in breach of rule 1 of the Solicitors Code of Conduct 2007, in that she lacked integrity and behaved in a way that was likely to diminish the trust the public places in her or the profession. The SRA’s arguments went further than in Buckeridge and Heath by ­arguing that: The SRA, as the frontline regulator of the solicitors’ profession, is duty-bound to regulate the conduct of solicitors. The SRA’s arguments in the SDT go beyond the action of regulation and suggest ‘support’ for HMRC. The SRA should limit the scope of its intervention to ensuring that HMRC is apprised of the schemes, not taking an absolute position that stamp duty mitigation is wrong on the basis that it provides less revenue for the country.

  • ‘The firm had acted in a number of conveyancing transactions where no, or insufficient… SDLT had been paid.’
  • ‘Property sale arrangements… had been artificially structured to avoid paying the correct amount of SDLT.’
  • ‘The respondent should have been in no doubt that the SDLT avoidance/mitigation scheme had not been a valid scheme’.

The implications

In the recent budget, the chancellor announced new legislation to close stamp duty avoidance loopholes, including the use of companies to avoid the charge, and the use of sub-sale relief under the Finance Act. The introduction of new legislation is an admission that the use of such mitigation is widespread, and that it is capable of being legally applied. If it were not so capable, there would be no need to amend the current ­legislation.

This raises three worrying questions:1. Why only stamp duty mitigation? Tax planning occurs in many different forms - for example, inheritance tax planning. A testator’s will may well be ‘artificially’ structured to reduce the amount of tax payable. The private client solicitor would be negligent if he failed to achieve this for the testator client. By extension, it may be negligent not to advise a client of the possibility of a structured arrangement that minimises the client’s costs. If the arrangement is not unlawful, there surely can be no regulatory breach.

2. Why is it misconduct for a solicitor to legally structure a transaction to avoid payment of stamp duty but not other taxes? Stamp duty tax planning may have earned its reputation from the secretive nature of stamp duty mitigation schemes, which have relied upon confidentiality agreements or the relative novelty of them in contrast to inheritance tax planning. However, I suggest the more likely reason is that such schemes are deemed capable of political attack, being perceived as the preserve of ‘the rich’.

3. If the SRA views involvement in stamp duty mitigation as inherently wrong, could it equally take the view that all solicitors and firms of solicitors are required to self-report such involvement (rule 10.4 of the SRA Code of Conduct 2011)? The SRA is not wrong to examine solicitors’ involvement in SDLT mitigation, though the regulator should be careful to regulate, and not to act politically. Loopholes are deficiencies in the statutes, and that is a matter for parliament to address, not the SRA. Equally, the SDT is not the proper forum to determine the validity of stamp duty tax planning advice.

Solicitors should be warned that, legally correct or not, there is a significant chance that giving advice on how to reduce stamp duty land tax liability will be viewed as misconduct with disciplinary and indemnity insurance ramifications.

Robert Forman is a senior associate at Murdochs Solicitors and the Lawyers Defence Group. He is also a panel member of the Solicitors Assistance Scheme