Raising standards, welcoming views and closing the gap in tax advice

This article considers the Government's attempt to kick incompetent, unprofessional, unscrupulous and substandard tax advisors out of the market.

Raising standards

Perhaps 'tax advisor' is a misleading term, which gives us a false sense of security.  It conveys the impression of a regulated industry, in the same way as the legal and financial advice sectors. In fact, anyone can provide tax advice and services to the general public, potentially opening up consumers to the risk of harm with limited 'levers' to control substandard advice. Indeed, HMRC statistics suggest that up to one third of tax advisors are unregulated.  It is therefore not surprising to see that the government is consulting on various different options to raise standards in the tax advice market, by implementing a strengthened regulatory framework.

Welcoming views

First, the government is asking for views on a proposal to mandate the registration of tax practitioners with HMRC. While the government accepts that, by itself, this step is unlikely fundamentally to raise standards, it would be essential to underpin a strengthened regulatory framework. The government notes that it could be implemented even if the broader proposals outlined below are not taken forward.

More significantly, the government is seeking views on three potential approaches to establish minimum standards for tax practitioners, improve monitoring, and enable effective enforcement action.  These three potential approaches are as follows:

• Approach 1: mandatory membership of a recognised professional body;
• Approach 2: joint HMRC-industry enforcement (the hybrid model); and
• Approach 3: regulation by a government body.

Under approach 1, tax advisors would be required to register and maintain their membership with a recognised professional body. This would involve meeting the entry and any ongoing requirements, and being subject to supervision and monitoring by the relevant recognised professional body.

Under approach 2, a tax advisor would either be registered with its recognised professional body, or, if unaffiliated with any such body, would be supervised by HMRC.

Under approach 3, tax advisors would be regulated by a government body, either a new, independent body, or by way of the expansion of the remit of an existing regulator. 

The government notes that approach 3 is currently considered to be a fallback option, if the professional body lead approaches are not practical or effective.

A number of key industry bodies, including the ICAEW, are understood to be in the process of responding substantively to the consultation.  Any responses should be submitted by 29 May 2024. A copy of the consultation paper can be accessed here.

Closing the gap

Overall, this appears to be a welcome and much-needed reform from the government to protect the public interest. Quality tax advice is expected to help taxpayers to pay the right tax and, in turn, enhance HMRC's efficiency, accuracy and transparency.

Although it is too early to be certain of all of the implications, we can foresee that an additional burden would be placed on the current recognised professional bodies were approach 1 (or, potentially, approach 2) to be adopted. Those bodies will therefore no doubt be considering their capacity and capability to take on a greater degree of supervision and responsibility, and considering any additional costs that would be associated with such an expanded remit. 

For existing tax practitioners who are members of professional bodies, it remains unclear how extensive an impact the proposed changes will have.  Under either of approach 1 or approach 2, it is likely that they will simply be able to rely upon their existing professional body membership.  They may also find that they enjoy an increase in market share, as some currently unregulated advisors choose to leave the industry rather than comply with any new regulatory requirements. 

Insurers may also find that previously unregulated advisors are more consistently seeking appropriate professional indemnity insurance, in line with any new regulatory requirements, once the requirements come into place.  Further, it may be that there will be some degree of reduction in claims against existing regulated advisors, as they are less likely to become embroiled in claims relating to the actions of unregulated advisors. In any event, Insurers will no doubt consider it prudent to review their policy wordings and proposal forms, in light of any changes that do come into place.