To advise or not to advise?

21 September 2021

The CIPP policy and research team discusses the recent HMRC consultation; Raising standards in the tax advice market, considering potential implications for payroll professionals

A tax adviser: a payroll bureau managing an outsourced payroll, an employer advising an employee about taxable benefits, tax software that carries out categorisation or calculations, a bookkeeper maintaining financial records and preparing year end returns. These were all examples of activities and professionals who may be providing tax advice, according to the consultation Raising standards in the tax advice market – released on Tax Day in March 2021(http://ow.ly/TcpD30rScWf).

The consultation considers whether mandatory professional indemnity insurance (PII) should be required for individuals providing tax advice. Given there is no current legal definition of tax advice, it also explores who should be considered a tax adviser. The CIPP asked the question, are payroll professionals tax advisers?

22% of almost 700 attendees at the 2021 BeConnected national forums said yes – they consider themselves to be tax advisers. The CIPP think-tank discussion with members in May 2021 highlighted several examples where payroll professionals could provide tax advice. In June 2021, the CIPP published its response to the consultation. This article explores some of the key themes raised.

Information, guidance and advice

The term ‘payroll professionals’ covers a wide remit of individuals who are involved in delivering payroll services. Overall, the profession engages in the provision of information, guidance and advice. However, individual responsibilities can differ substantially depending on the role that is being delivered.

What is involved in these three areas?

information – providing facts, statements and data to clients and employees, for example, the amount of tax deducted on a payslip
guidance – providing the reason behind a particular tax position, for example, an explanation of the calculation determining entitlement to statutory maternity pay, or pointing to the best practice approach
advice – providing a recommendation or taking action to change the end tax position of the individual or company.

Payroll processing, calculating gross to net pay, and dealing with employee or client queries are areas familiar to most payroll teams. For individuals delivering these services daily, they will often state that advice is not part of their remit. The CIPP encourages and empowers payroll professionals to push back where they are asked to provide tax advice, as it is a specialist skill which could have far reaching ramifications. Whilst many payroll professionals have extensive knowledge in this area, careful consideration should be given before providing tax advice.

There is, of course, a fine line between advice and guidance. The payroll function has a unique position, impacting every employee in a company. The information held by payroll makes it a trusted source, a confidant, with many employees and clients looking to payroll professionals for guidance and support with their wider financial affairs.

Take a tax code, for example: payroll receive a tax code from Her Majesty’s Revenue and Customs (HMRC) and are obliged to process the individual’s pay using that tax code – that is the end of that, isn’t it? Not necessarily. An employee could ask the payroll team why a certain tax code has been applied. The employee may share the breakdown that HMRC provided. They may ask how they increase their tax-free allowance. An eagle-eyed payroll professional may notice the employee is not claiming a homeworking allowance, or they may discuss the marriage transfer allowance, alongside a multitude of other elements that could alter the employee’s tax-free allowance.

Is this considered tax advice? It would certainly change the employee’s end tax position. Most employees in the UK are taxed through pay as you earn (PAYE) and it is unlikely they have accountants or specialist advisers to support them. Should payroll teams be discouraged from providing this type of advice to employees because it is not within their remit?

Financial awareness and wellbeing have taken the spotlight recently, and it is so important that we encourage the experts to help improve an individual’s financial position – not put barriers in place. But, where should the line be drawn? The CIPP labels this ‘the domino effect’: the slippery slope that can quickly shift from guidance to advice.

In-house vs bureau

Is there a difference between in-house and bureau environments? The simple answer is yes.

In-house payroll professionals are recruited for their knowledge, skills and expertise. Their roles and responsibilities are defined by the business that employs them and they deliver a service to both that business and its employees. When employees come to the in-house payroll team for advice, it is the responsibility of the business to ensure the payroll team do not act outside of their remit i.e., by providing tax advice (albeit this can be a grey area as considered above). If the business looks to the payroll professional for tax advice, and then acts on that advice to change the tax position of the company, an employee, or both, then acting on that advice should be at the risk of the business. The payroll professional should not be expected to insure themselves to protect the business they are employed by.

In a payroll bureau, payrolls are processed by way of business. The bureau provides a paid-for service to the client; therefore, this changes the position. It seems sensible that advice provided in this way should offer some protection to the client if the advice turns out to be incorrect. PII certainly has a role to play here – however, should it be the individual or the bureau who is insured?

It’s important to note at this point, that not all payroll professionals working for a payroll bureau will be engaged in tax advice. Many will take on a similar position to those in an in-house role. However, in a payroll bureau environment, it is likely at some points that clients will look to the payroll team for tax advice. Where a payroll professional provides tax advice to a client, it should be transparent that this is the service they are providing, ideally with some sort of written documentation to evidence. Whilst it could feel a little bureaucratic (no pun intended!), a process which consistently documents the advice provided protects both client and adviser. It gives the client clarity that they are being given a recommendation they can reliably act upon and creates a clear line for the bureau, so that other ad hoc discussions cannot be misconstrued as advice.

The role of software

The consultation reference to payroll and tax software increases the scope and potential complexities that legislation in this area could introduce. If a tax calculation is construed as tax advice, then all payroll software providers (or individuals developing the software) would be expected to hold PII, which their clients could claim against, should their software produce an incorrect calculation.

The CIPP considers this approach to be incorrect. Software which produces gross to net calculations has transformed the lives of payroll professionals, but it is still incumbent on the payroll team to take responsibility for the final calculations. Software is flexible, and many payroll teams adapt and develop technology alongside their provider to better serve their business. Creating a burden of PII on software providers is wrong. There should be an expectation that experts are using the software.

Software continues to develop. In the small and medium enterprise in particular, some marketing campaigns promote the simplicity that software brings to tax. Software providers should be cautious in this approach to marketing. The public will, and do, react, and act on the message of advertising, and this oversimplification could result in errors, encouraging users to rely too heavily on the product rather than their skill set.

Does PII raise standards in the tax advice market?

Simply…no. PII has its place in the tax advice market. Humans make mistakes and PII offers an element of protection to those who seek and pay for tax advice. However, PII does not raise standards. It does not remove unqualified, unskilled or unscrupulous individuals from the sector.

Encouraging and promoting education, both of tax advisers and the businesses/individuals that engage with them will have a bigger impact than the introduction of mandatory PII. Persuading businesses to look at the level of service provided, not just the cost, ensuring education, professional body membership and continuous professional development are all essential steps in improving standards.

Enforcement can also play a significant role in raising standards in this area. HMRC providing swift and decisive action when the system is being abused or misused will act as a future deterrent, and will encourage businesses not to engage with advisers without completing the necessary due diligence.

What does the future hold?

The CIPP and the payroll professionals it represents eagerly await the government’s next steps. Consultation responses are, at the time of writing, with HMRC to review and the impact this change could have on payroll professionals remains unclear. The CIPP will continue to keep members up to date in this area, until then, the full consultation response can be found here: http://ow.ly/SuLA50FH8Ly.