HMRC's powers: dishonest tax advisers

This article was first published in Taxation on 2 May 2025. The original article can be read here.

Several consultations were issued in March 2025 including one in relation to new powers for HMRC to deal with promoters of tax avoidance schemes. There are also ongoing debates about standards in the tax advisory market and with these in mind, it is worth a reminder of the powers already available to HMRC to address dishonest conduct by tax advisers.

The legislation is contained at Schedule 38 to Finance Act 2012 (Sch 38) and all references in this article are to that schedule unless otherwise stated.

The current legislation gives HMRC the power to fine or prosecute tax advisers who engage in dishonest conduct “with a view to bringing about a loss of tax revenue” (para 3(1)) regardless of whether that loss was actually incurred or whether the adviser was acting on the instruction of clients (para 3(3) and (4)). Dishonest conduct includes assisting a client to do (or omit to do) something and a tax loss is defined as a reduced or deferred liability, or an increase or bringing forward of a claim for relief (para 3(4)).

Compare this to money laundering or tax evasion where a taxpayer commits a crime by reducing or deferred liability, or increasing or bringing forward a claim for relief which they are not entitled to by law. If a tax adviser assists in tax evasion without reporting it, even just by being aware of it, then they are subject to money laundering laws and penalties including an unlimited fine and/or up to five years in prison (s334, POCA 2002). So the legislation in Sch 38 is a somewhat watered down version of the anti-money laundering regulations.

In Rogers v HMRC TC06617, the decision stated that the Sch 38 legislation is a “form of potential alternative to criminal prosecution for dishonest conduct by tax agents”. One of the reasons for implementing this alternative legislation could be because the standard of proof is the balance of probabilities, rather than beyond reasonable doubt. The onus of proof in either case is on HMRC to demonstrate that the conduct was dishonest.

The fact that Sch 38 exists suggests that the Crown Prosecution Service (CPS) has little appetite for prosecuting money laundering offences by advisers in relation to tax evasion, possibly because the bar for demonstrating knowledge or dishonesty is that much higher.

Sch 38 allows HMRC to issue a ‘conduct notice’ “if HMRC determine that an individual is engaging in or has engaged in dishonest conduct”. “Although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. If by ordinary standards a defendant’s mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards” (Barlow Clowes International Limited [2005] UKPC37).

In Rogers, HMRC issued a conduct notice on the basis that Mr Rogers, while acting as a tax agent, falsified invoices that assisted his client to under pay income tax and VAT. Mr Rogers admitted this to HMRC in a meeting regarding his client’s tax returns. In his appeal against the conduct notice, Mr Rogers stated that he had not acted dishonestly and that HMRC had given assurances that he would not be prosecuted.

The facts of the case describe that Mr Rogers repeatedly admitted to HMRC that he had falsified invoices and the Tribunal upheld the conduct notice. In a case such as this where the dishonest conduct was admitted freely, HMRC/the CPS could have prosecuted. The fact that they didn’t may be down to the assurances given in later meetings that Mr Rogers would not be prosecuted, or simply because there was no other incentive for them to do so.

In this case, the dishonest conduct appeared clear; Mr Rogers assisted his client by falsifying invoices in order that the client could claim a tax reduction where one was not due.

HMRC’s rhetoric is that Promoters of tax avoidance schemes are dishonest and this is shown in the consultation regarding tax advisers facilitating non-compliance. However, tax avoidance schemes are much more nuanced in that if advisers or promoters believed that the arrangements worked, it can be very difficult for HMRC to demonstrate that there was a dishonest state of mind. Some professionals who promoted the arrangements also entered into them, clearly demonstrating their belief that the arrangements worked. If a person acted based on their honest belief, “it is not an additional requirement that his belief must be reasonable; the question is whether it is genuinely held” (Barlow Clowes). If the belief appears to be genuinely held, then it becomes that much more difficult to prosecute.

Therefore HMRC can go for civil penalties under Sch 38 and hold promoters to account under it if they can gather sufficient evidence to demonstrate that on the balance of probabilities, a Promoter likely believed the arrangements did not work.

If a conduct notice is issued, it can be appealed in the usual way, as for an assessment. The appeal must be made within 30 days of the issue of the assessment and it must state the grounds of appeal (para (5)).

There are requirements within the legislation, which prevent a person from destroying documents for a period of time if they have been given a conduct notice or if HMRC has made them aware that a conduct notice “will be or is likely to be given” (para (6)). This is a useful tool in HMRC’s arsenal, as, if they are aware of (e.g.) Promoters but have insufficient information to know what documents to request under a formal information notice, this would ensure that either documents are retained or if they are not retained, that the person can be prosecuted for committing an offence under paragraph 6.

Subject to a conduct notice being issued or the person convicted and the conduct notice/conviction being unsuccessfully appealed (or the expiry of the appeal time limit), HMRC can request the tax agent or “any other person [who] the officer believes may hold relevant documents” to produce certain documents (para 8) in a File Access Notice (FAN). The request can also be made once a person has been convicted of a tax and dishonesty related offence after the person became a tax agent even if they are no longer a tax agent when the offence is committed (para 7).

The documents referred to in paragraph 8 are any “working papers…and any other documents received, created, prepared or used by the tax agent for the purposes of or in the course of assisting clients with their tax affairs.

Further, the legislation states that “it does not matter who owns the papers or other documents” and whether the documents relate to current or former clients providing that the documents are in the person’s “possession or power” to obtain. The request does not need to identify particular clients. The documents are also “not limited to that clients with respect to whom the tax agent is engaging in … dishonest conduct”. That means that once HMRC has issued a conduct notice in relation to an agent acting dishonestly for one client, all the agent’s documents regardless of to whom they relate, are available for HMRC’s perusal. This could put other clients at risk of investigation.

HMRC can request any information other than that relating to a pending tax appeal, “journalistic material” or personal records (albeit these can be provided if identifiable information is redacted). Documents covered by Legal Privilege (LP) are protected, though in current consultations, HMRC is looking to limit the protection offered by LP. Subject to this, HMRC can request documents going back up to 20 years to the date the FAN is given. The only ground of appeal against an FAN is that “it would be unduly onerous to comply”(para20). The appeal can be notified to the Tribunal if an appeal to HMRC fails and the decision made by the Tribunal is final.

The Tax Tribunal can approve the issuing of a FAN on the basis that the relevant criteria in paragraph 7 are met. The Tribunal does not need to consider whether the conduct notice was correctly issued, i.e. whether the person engaged in dishonest conduct.

There are further offences in the schedule including if a person destroys documents knowing that they are likely to be required even if a FAN has not yet been issued and a failure to comply. The penalty for destroying or concealing such documents is a fine of up to £50,000 or imprisonment for up to two years or both. Penalties for failure to comply with the FAN can be appealed on the basis of a reasonable excuse, which specifically exclude financial hardship and reliance on others.

Where a conduct notice is issued, the tax agent receiving it is liable for a penalty of between £5,000 and £50,000, with reductions given for telling HMRC, whether that disclosure was prompted or unprompted, the quality of the disclosure and level of compliance with any FAN (para 26).

For these purposes, the disclosure includes telling HMRC about the conduct, “giving HMRC reasonable help in identifying the client or clients concerned” and allowing HMRC access to records.

If the penalty is higher that £5,000, HMRC also has the power to publish details of dishonest tax agents in the same way the department publishes details of deliberate tax defaulters and potentially the organisation they work for. A quick Google search however yields no such list.

Similarly, there have been very few cases going to Tribunal on this point, meaning that either Agents who receive a notice do not appeal it or that HMRC has not used this legislation extensively. Similarly, the difficulty finding the list of dishonest tax agents (if there is one), demonstrates that all agents receiving the conduct notice receive minimum penalties and/or that the list is not publicised by HMRC in the same way that the list of deliberate tax defaulters is.

The question to be raised therefore is that if this power is not being used, why not? If it is being used, it should be more widely publicised to demonstrate the penalties for being a dishonest tax adviser. If the power is not employed due to HMRC’s lack of resources, it is unlikely that giving HMRC more powers will change the tax advisory landscape significantly and perhaps good quality resources should be increased first of all.

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