United Project Consultants Pte Ltd (UPC) has the practice, since 1983, of declaring directors’ fees and expensed it in the company’s account each year. There were usually a small portion that was not apportioned to be decide by the Managing Director (MD) to reward for performance at a later date.
In 1992 UPC decided to make additional allocation of directs’ fees out of unpaid but declared fees.
Leong Kwok Onn (LKO) dealt with this additional IR8A & Form B in YA 1993 for directors fees for 1988, 1990 and 1991. Additional allocation also made in YA 1997. IRAS raised queries, LKO advise all unpaid fees should be allocated and additional IR8A forms submitted.
IRAS imposed penalty, matters went to court. The High Court initially sided with the Tax agent, no duty of care as the company had acted on its own on the make up of IR8A and Form B, that the tax agent did not have a full picture of the allocations of fees.
The Court of Appeal overturned the initial high court ruling and so LKO was liable to pay damages.
The court found that LKO failed to warn the UPC of the tax consequences of not declaring the unallocated fees for the directors as a whole. LKO had to pay 80% of the costs.
How do we define whether work performed on behalf of client amount to being a tax agent? The court established that LKO’s helped the MD on additional Form B and IR8A in 1993 meant that they knew there is an issue for the company’s director as a whole. Therefore LKO is liable for 1993 onwards.
MD knew that there was tax evasion, while claiming ignorance and had tried to use LKO as scapegoat. How to avoid getting into this kind of situation in the first place?
What is the duty expected of a tax agent? Was there a breach of duty in this case?
Are auditors liable for tax compliance and reporting?
Considerations by Auditors:
~ Formal letter on tax agent to establish responsibilities and expectations.
~ Does the duty of care extend to LKO as an auditor. The court of appeal is saying that the Accounting treatment (accrual of unpaid directors fees) did not lead to loss suffered.
~ The auditor has no responsibility on the reporting of tax to IRAS for the company and directors.
~ In summary the local test is “proximity”. A court must be satisfied that the defendant owes a duty to the plaintiff.
~ The need for tax agents to define their role and responsibilities clearly with the company and its directors before work can begin.
~ Ensure adequate professional indemnity insurance is in place to act as auditor and tax agent respectively.