This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members understand what constitutes tax advocacy services when providing non-audit services to entities they audit.

Members may also wish to refer to the following related helpsheets and guidance:

• Management role
• FRC Ethical Standard
• FRC Technical Advisory Group – Rolling record of actions arising (FRC Rolling Record)

Subject to the transitional provisions set out in paragraphs 1.69 to 1.72, the FRC Ethical Standard 2019 becomes effective on 15 March 2020. This helpsheet addresses the requirements of both the FRC Ethical Standard 2016 and the FRC Ethical Standard 2019. Paragraph references are labelled 2016 or 2019 accordingly.

Paragraph 5.97 (2016) of the FRC Ethical Standard prohibits firms from providing tax services to entities they audit where this would involve acting as an advocate for the entity in the resolution of an issue that is material to the entity’s present or future financial statements or where the outcome of the tax issue is dependent on a future or contemporary (i.e. current) judgement by the firm in relation to the financial statements. The 2019 version of the FRC Ethical Standard (paragraph 5.75 (2019)) contains no reference to materiality or contemporary judgement, simply prohibiting the provision of tax services to an audited entity where this would involve acting as an advocate for the entity in the resolution of an issue.

In our view the key concern is that the auditor would be put in a position where the auditor’s objectivity may be compromised in order to defend a position that the audited entity has taken with the tax authorities. This will tend to arise where the tax authorities have indicated that they are minded to reject the entity’s arguments in respect of tax matters where the audit firm has been assisting the audited entity.

The FRC Rolling Record (21 July 2016 meeting) confirms that:

The absolute prohibition applies to representing the audited entity as an advocate before a tax authority, where the matter relates to issues which are material to the financial statements being (or which will be) audited, or where the outcome of the tax issue is dependent on a current or future audit judgment. However, the provision of information to the tax authorities about the issue under enquiry or explaining to the tax authorities the technical basis for the tax filing position or advising the client on the matters under enquiry is not acting as an advocate.

In our view, consideration should be given to the following factors.

Management role

The absence of meaningful involvement of management in determining the appropriate response to the tax authorities. The decision on how to assess and present the information provided by the audit firm should clearly be that of management.

Where an audit firm attends meetings and discussions with the tax authorities without management present (or present but not engaged), this may be indicative of the audit firm representing the audited entity.

The auditor assisting an audited entity in data gathering and analysis, co-ordinating tasks or progress monitoring action plans would not generally be indicative of representation.

A key related assessment is the competence and experience of management to be able to evaluate and determine a course of action (i.e. an assessment of informed management).

Nature of the inquiry

The formality, source and stage of the notification from HMRC may be indicative of whether the inquiry is essentially at procedural or ‘fact finding’ stages or is more genuinely of an ‘argumentative’ nature.

A notice of rejection of, for example, a VAT reclaim from a case officer might be indicative of a relatively standard procedure and requests for further explanation from HMRC are unlikely to be seen as taking on a significant advocacy role.

Indications of the tax authorities taking on a genuinely argumentative stance would include:

• Notice from the appropriate specialist technical division that they reject the taxpayer’s approach (as highlighted in paragraph 5.101 (2016) or 5.79 (2019) of the FRC Ethical Standard);
• Notification of a COP 8 or COP 9 investigation; or
• A tribunal listing.

It would be difficult to argue that an advisory role after this point was not advocacy and thus potentially subject to the prohibition if the criteria above are met. However, continuing to, for example, respond to requests for information and explanations after this point would not be regarded as advocacy.

Novelty of the tax treatment

Where the tax treatment that is the subject of the tax authority enquiry is well established in practice and/or in law, a reasonable assumption may be that the work of the audit firm is explanatory rather than advocacy. Conversely, advice which depends on a particular and unusual interpretation for a desired outcome may suggest an inter-dependency between the tax advice and the presentation to HMRC that would present a significant advocacy and self-review threat.

The FRC Rolling Record (21 July 2016 meeting) notes that:

In all instances which might involve, or reasonably appear to involve, the promotion by the audit firm of a position being taken by an audited entity, an advocacy threat should be considered to arise.

This should be assessed, and if significant, effective safeguards should be applied or the work refused.

Provisions Available for Audits of Small Entities

Where the Provisions Available for Audits of Small Entities are available, paragraph 6.12 (2016) or 6.12 (2019) of the FRC Ethical Standard permits an exception to the above prohibition. The exemption is subject to meeting the disclosure requirements of paragraph 6.15 (2016) or 6.15 (2019).

Public interest entities (PIEs) and Other entities of public interest (OEPIs)

Where a firm audits a public interest entity or other entity of public interest, it is prohibited from providing it (or its parents or controlled undertakings within the Union) with a range of non-audit services by virtue of paragraph 5.167R (2016) or 5.40 (2019) of the FRC Ethical Standard.

Prohibited non-audit services include the provision of tax advice, calculation of direct and indirect tax and support regarding tax inspections.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Ethics Advisory Service on +44 (0)1908 248 250 or via webchat.