HMRC probes professional services firms to tackle tax evasion

27 March 2019

With wealthy clients continuously turning to consulting, accountancy and law firms to help circumvent national tax schemes, thousands of such firms have suddenly been placed in the centre of thousands of tax evasion cases. The UK tax authority has issued thousands of production orders to professional services firms relating to investigations into tax evasion.

The Panama papers caused a wave of indignation to sweep the globe; however, their release ultimately did little to persuade legislators to take action. Despite growing global outrage at the existence of tax havens, the schemes for massive global conglomerates to swerve paying their share seem more popular than ever. Last year, an academic study found that that just 11 tax havens soak up some $616 billion in profits, as companies continue to leverage legal loopholes to move profits away from domestic tax regimes.

As clients continue to seek the loopholes necessary to shield their profits from taxation, there is a growing demand for consultants to help navigate the shifting landscape. This was illustrated by McKinsey & Company’s high profile addition of Sir Edward Troup in late 2018. Troup is a former civil servant, having worked with HM Treasury and then HM Revenue & Customs, and has long been a fierce critic of taxation, having previously said that "tax avoidance is not a moral issue", while describing tax itself as "legalised extortion".HMRC probes professional services firms to tackle tax evasion

Such is the expectation placed upon professional services firms to live up to this function of helping wealthy clients avoid domestic taxation, that they have even been targeted by legal action when they allegedly ‘fail’ to do so. Notably, Big Four firm Deloitte and legal giant Linklaters faced a lengthy feud with a former Arsenal investor, who claimed the pair’s negligence had caused her to have to pay tax on her sale of the football club’s shares. In the end, Lady Nina Bracewell-Smith settled her negligence claim against the two firms for more than £11 million.

In this context, it is not especially surprising that the UK’s tax body, HMRC, has decided to target professional services firms with regards to a large number of tax evasion cases. Between March 2017 and 2018, HMRC issued 1,414 production orders to accountancy, law and other professional services firms, in relation to investigations into tax evasion. While the number of orders has shrunk slightly from the 1,507 orders sent between March 2016 to March 2017 – which spiked from 1,276 the previous year – it still demonstrates how integral professional services firms have become to the phenomenon of tax evasion.

The orders, issued by HMRC’s Criminal Investigation Directorate, request that professional services firms surrender potentially incriminating information on their clients. While the number of orders is said to have fallen slightly according to RPC, HMRC is increasing the number of criminal investigations into those participating in arrangements designed to cut their tax bills. The City of London law firm said this could include employee benefits trusts and film financing investments. This represents a major shift, as HMRC historically favoured civil action against such individuals using tax tribunals, but is now launching criminal investigations.

Commenting on the news, Adam Craggs, Partner at RPC, told accounting news site Economia that even the commencement of a criminal investigation can have “serious practical difficulties” for businesses, and the length of these investigations can cause “a great deal of stress”. However, HMRC argued that this was not the case, and that it could not turn a blind eye to fully fledged fraud.

A spokesperson from HMRC stated, “Tax planning isn’t a crime and HMRC only criminally investigate arrangements presented as avoidance or tax planning if it is suspected they were actually fraudulent.”


Private equity firms ramp up sustainability focus

19 April 2019

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.