KPMG Belfast arrests create serious issue for accountancy firm

Reputation is everything for professional services firms and so the decision by HM Revenue and Customs to arrest and question four KPMG partners in Belfast will have rung alarm bells at the firm’s Dublin headquarters.

While KPMG says it has no indication that it relates to the company’s business, or its dealings with clients, the fact that a large chunk of its Belfast management team is caught up in an investigation relating to tax evasion is not something that could be glossed over.So the firm decided to place the four men on administrative leave and senior partners were dispatched from Dublin to keep the show on the road North of the border.

The nature of the HM Revenue and Customs move - calling unannounced to the company’s office in Belfast and to at least some of the men’s homes – is unusual in cases of this kind. Often tax disputes are settled either in haggling between the two sides or in civil court cases. Not this time. The question now is why more dramatic action was taken this time and whether HM Revenue and Customs will now take this further. Having taken such dramatic action, there is much at stake here, too, for the tax authorities.

In terms of KPMG’s operations in the North, the arrests could scarcely have been any higher profile. The four included KPMG Belfast’s chairman, Jon D’Arcy and the head of its tax practice and a high profile figure in the North’s corporation tax debate, Eamonn Donaghy. Also questioned were Paul Hollway, who heads KPMG’s corporate finance business in Ireland and a fourth senior partner, Arthur O’Brien. The four are understood to argue that they did nothing wrong.

Investment fund

The most obvious link between the four men, apart from their employment by KPMG, is that they established an investment fund, JEAP- the name is drawn from the first letter of their first names. The vehicle was established in 2005, but suffered heavily in the property crash from 2008 to 2010, The four men pumped significant sums in to the various projects and incurred losses as the value of the projects were heavily written down. Senior partners in many of the leading accountancy and law firms were heavily involved in such investments over the years, some of which were driven by specific tax reliefs, and many lost heavily in the crash.

One likely area of tax investigation, sources say, is how these losses were used by the accountants in claiming relief against subsequent tax bills - there are Revenue rules and practices in these areas. Sources suggest that there had been some correspondence on the issue between the accountants and the revenue authorities, but nothing to suggest an action such as Wednesday’s was imminent. The question for the authorities is whether they acted proportionately.

The public nature of the action generates a significant issue for KPMG, which responded quickly by placing the four on administrative leave. It will, presumably, also be communicating with its clients.

The question now is what happens next and how quickly it will emerge whether further action will follow yesterday’s questioning. The problem for KPMG is that it could be dealing with a lengthy “ limbo” as tax authorities consider what, if anything, to do next.

To try to overcome this it would look likely that KPMG will try to put in place some kind of inquiry itself, undertaken by some independent experts, to try to establish exactly what happens.