The other day my son asked me what I do for a living. What a hard question to answer to a twelve year old who has very little idea of what really takes place in the outside world! So, I resorted to simply telling him that I am a tax advisor and accountant and that I advise people on what tax they have to pay the jolly old tax man in a couple of our neighbouring islands. That is about as much information as I could give him without confusing him or boring him perhaps.
So what does a tax advisor really do? Simply put, a client outlines their specific circumstances and the transaction that they are looking at to the advisor and the tax specialist advises them of the tax consequences arising from that as well as how to structure the transaction itself.
What exactly does tax advice comprise of? Tax advice is a tricky thing and getting even more so by the day. This is because of increasing complexity in tax legislation and especially with the focus from HM Revenue & Customs in the UK on what they perceive to be aggressive and ineffective tax advice. HM Revenue & Customs are moving to levying penalties and sanctions on the tax advisor as well as the taxpayer for ineffective aggressive tax planning. Proper tax advice has to be robust and therefore must take full account of the client and transaction’s circumstances. It also has to take account of the fact that it may be looked at by third parties at some time in the future. Third party review could be anything from our professional association or perhaps by the tax authorities in the event of an enquiry.
The process of recording that advice is very important so it can be referred to later by the client, his other advisors or possibly the tax authorities. These steps include:
(1) An initial review of the client’s circumstances as well as the knock on tax effects of that on the transaction being looked at.
(2) A review of certain specific ways of dealing with the transaction, such as for example the VAT impacts of taking a specific course of action.
(3) Wider checks to there are no unintended consequences from areas such as company law, or tight legal interpretation issues that could impact on its efficacy.
(4) References to any disclosure requirements to tax authorities.
(5) The final and most important is to ‘stress test’ the structure to make sure that it really does work in the real world.
The overall aim of the advice is to get a result that gives a balanced outcome in terms of taxes and fits within the broad scope of the tax law as well as the tax authorities’ interpretation of that law.
Tax advice is often referred to as an art form, mainly because the advisor has to follow instincts gained from many years of experience of complex law and how that interacts with everyday life, financial recording etc. in determining a structure for the client. This art form aspect is probably why I refrained from trying to explain the unexplainable part of my work to my 12 year old son. He is unfortunately going to have to learn that part of life for himself.