ICAEW complaint: Chris Bailey and Less Tax for Landlords

I have just filed a complaint with the Institute of Chartered Accountants in England & Wales (ICAEW) regarding Chris Bailey, who co-founded Less Tax for Landlords, and appears to have been responsible for the inexplicable, and perhaps fraudulent, tax positions it took.

This is an unusual complaint for two reasons.

First, it seems unusually obvious that Mr Bailey took indefensible positions, contrary to the ICAEW Code. ICAEW would not ordinarily wish to second-guess technical positions taken by advisers, particularly before a court has reached a judgment. However in this case it should be able to conclude, without any difficulty, that Mr Bailey’s advice fell well below the expected standard – the positions he took were inexplicable. The most obvious example is Mr Bailey’s claims that his structure facilitated an inheritance tax exemption for landlords – see, for example, this video:

We have many more examples of indefensible positions taken by Mr Bailey in our report.

Second, the matter is now urgent. HMRC have written to LT4L’s clients, suggesting they withdraw from the scheme, make a disclosure by 31 January 2024, and settle their tax affairs. Mr Bailey is continuing to act for those clients, and it looks very much like he will be advising them to fight what is a hopeless case. This is a disgraceful conflict of interest.

LT4L told clients they had “peace of mind” because they were regulated by the ICAEW: the question is whether the ICAEW will act to protect those clients’ interests, and indeed the ICAEW’s own reputation.

I should add that Tony Gimple and Malcolm Rose, the other two LT4L founding directors, have denied that LT4L acted fraudulently. Neither has, however, been able to provide any explanation for why LT4L took positions that all the tax advisers we’ve spoken to regard as inexplicable. Mr Gimple says he relied upon Mr Bailey. Mr Bailey has not responded to our queries at all.

I’ve copied below the full text of my letter. A PDF version is available here.

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ICAEW (Professional Conduct department)

Metropolitan House

321 Avebury Boulevard

Milton Keynes, MK9 2FZ

UK

Sent by email: xxxxxxx@taxpolicy.org.uk to xxxxxxxxx@icaew.com

Dear ICAEW

Complaint re. Christopher Neil Bailey and Less Tax for Landlords

I am the founder of Tax Policy Associates Ltd, a think tank established to improve tax policy and the public understanding of tax.

I wish to make a complaint about Mr Christopher Neil Bailey, who is a member of the ICAEW. Mr Bailey founded and provided tax and accounting advice to Less Tax for Landlords Ltd (LT4L). The accounting and tax work for LT4L was undertaken by OCG Accountants Ltd, of which Mr Bailey is a director. OCG Accountants Ltd does not appear to be an ICAEW member firm, but we have seen accounts in which it stated that it was.

LT4L promoted a tax avoidance scheme – the “hybrid partnership structure”. The scheme was promoted for years, and sold to over 400 clients. LT4L told potential clients they had “peace of mind” because their staff and businesses were regulated by (amongst others) the ICAEW. However the scheme had no reasonable prospect of success, and has now effectively been shut down by HMRC Spotlight 63.

We set out full details in our report on LT4L, which is available at https://heacham.neidles.com/lt4l. Spotlight 63 was published the same day; it says the hybrid partnership scheme does not work and should have been disclosed under DOTAS. The following week, HMRC sent a “one to many” letter inviting users of the scheme to make a disclosure by 31 January 2024.

I would refer to you our report for the full background and analysis, but in short there are strong grounds for believing Mr Bailey breached the Code in several respects.

First, Mr Bailey and his firm took a series of positions that anyone with tax expertise would have known were indefensible.

At best, Mr Bailey failed to act with integrity, professional competence and due care; at worst, he may have committed fraud:

1. The main supposed benefit of the “hybrid partnership” structure was to reallocate rental property income from an individual member of an LLP to a corporate member, therefore achieving a lower tax rate and interest deductibility. The obvious problem is that the “mixed partnership” rules were introduced in 2014 to counter this, and the transfer of income stream rules also likely apply. In this video, Mr Bailey misdescribes the mixed partnership rules and a recent case on those rules; similar errors/misdescriptions were made in numerous LT4L materials (documented in our report). These are errors that would not be made by anyone with a cursory knowledge of the rules, or who had read the case he cited.
2. Mr Bailey promoted the LT4L scheme on the basis it could make a rental property business qualify for business relief from inheritance tax. In this video he says that the LLP would “turn into a trading business according to HMRC”. This claim is false, and anyone with even a cursory knowledge of inheritance tax or the “trading” concept would know that it was false. There are numerous other examples in our report of Less Tax for Landlords making the claim that their structure qualifies for business relief.
3. LT4L make a claim, which we find incomprehensible, that the CGT base cost of assets entering an LLP are rebased. These claims are false, and anybody with elementary knowledge of partnership taxation would know they are false. You can see an example of the claims in this video; there are more examples in our report.
4. LT4L did not disclose their scheme under DOTAS. When we queried this, they responded with arguments that suggested they had no understanding of DOTAS. We set this out in more detail in our report.

Each of the above failings: inheritance tax, mixed partnership rules, transfer of income stream rules, CGT, and DOTAS, is specifically identified by HMRC in Spotlight 63 as a failing of the “hybrid partnership” scheme.

It should be noted that these are not merely technical errors in publicity material; there is good reason to believe LT4L implemented over 400 LLP structures on the basis of these misapplications of the law (we explain this in our report).

We do not understand how a senior professional could have advanced, for years, a series of technical positions that anyone with tax expertise would have known were false, and to have implemented hundreds of structures on that basis. We have asked LT4L why they took these positions; they have declined to answer. One possibility is that Mr Bailey failed to act with professional competence. Another is that he knew the positions were false, and was committing a fraud on HMRC and on his clients. We do not know which is the case, and there may be other explanations.

Second, even if the scheme had worked, it would be an artificial tax avoidance scheme contrary to the Code.

As you are aware, the PCRT Fundamental Principles and Standards for Tax Planning requires that Members must not create, encourage or promote tax planning arrangements or structures that (i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation and/or (ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.

If the hybrid partnership scheme had worked as intended, and provided an inheritance tax exemption and the other claimed benefits, that would have been contrary to the clear intention of Parliament.

Third, LT4L made a series of false claims about their professional indemnity insurance.

LT4L claimed they were insured “up to £2m per case”.

However, as is usual practice, their insurer’s standard terms include an “agglomeration” provision which means that, if LT4L make the same error across all their clients, the £2m will not be “per case”, but will be shared by all the clients.

Furthermore, their insurer’s standard terms exclude “tax avoidance schemes”, and so it may be that their clients are completely uninsured.

Finally, LT4L claimed in their marketing that their insurance would pay out if LT4L “lost in court with HMRC”. That is, as you will appreciate, not at all how professional indemnity insurance works.

These false claims about insurance were specifically used to attract clients with the assurance that the structure carried no risk. We provide examples of the false claims in our report. No ICAEW member should make such false claims.

Fourth, Mr Bailey and LT4L have an impossible conflict of interest and should cease to act for their clients

Mr Bailey and LT4L are continuing to act for the clients to whom they sold the hybrid partnership structure. This is an impossible conflict of interest, of the type forbidden by the ICAEW guidance on identifying and managing conflicts.

We expect it is in their clients’ interests to argue that they were mis-sold a hopeless tax scheme that never had any prospect of success, to disclose to HMRC before the 31 January 2024 deadline, and to reach a swift settlement with HMRC with minimal interest and penalties. It is, however, obviously not in LT4L’s interest to concede any of this.

At this point an ethical accountant would decline to act, tell their clients that they should obtain independent advice, and assist in handing over files to successor firms.

A further conflict is raised by the (at best) incompetent nature of LT4L’s prior advice; LT4L clearly do not have the technical tax ability to advise their clients, and should cease to act.

The deadline

The upcoming 31 January 2024 deadline makes this complaint urgent. If Mr Bailey and LT4L are permitted to continue mis-advising their clients and, as a consequence, the clients do not reach a favourable settlement with HMRC by 31 January 2024, then many of those clients will suffer significant financial loss.

I would be grateful if you could acknowledge receipt of this letter. Do please let me know if you would like any further information.