THE professional services sector has built up a reputation as being a pillar of high ethical standards in the Hong Kong business community. With this high status comes a similarly high obligation for accountants, lawyers, surveyors and doctors not only to be above the law but to be seen to be operating ethically, given the position of trust that they hold with clients. However, this reputation for being above reproach is reeling from news of the results of a crackdown by the Inland Revenue Department (IRD) that has uncovered what the department believes are major tax abuses by professional services firms. Amid much fanfare, legislation was introduced just over a year ago to eliminate tax avoidance by executives. Investigations started under the jurisdiction of former tax commissioner Anthony Au Yeung-fu, and being continued by his successor Wong Ho-sang, use the tough legislation on service companies. However, an interesting development has become apparent in recent months. Increasingly, it is the perceived misuse by professional firms of service companies that dominates the IRD's attentions. According to a highly-placed tax source, thousands of cases of misuse of these vehicles by professional firms have been uncovered. Operatives, which range from some of the biggest names in the professions to small one and two-partner operations, look set to be forced to negotiate a settlement with the IRD. It is understood that partners from at least one large accountancy practice are in discussions with the IRD, with authorities believed to be asking for back taxes to be submitted as part of a package deal being hammered out. But there has also been a surprisingly high incidence of misuse of service companies in other professions, including doctors and surveyors. The high incidence of misuse of service companies in the professional services sector can be put down to a desire to reap the maximum advantage of tax deductions that these structures allow in areas such as housing and travel. While there has been little advantage in setting up service companies in terms of actual tax liabilities in the past, these structures offered major benefits because they allow deductions for fringe benefits. However, there is a growing perception in the IRD that many professional firms are operating contrary to last year's service companies legislation by attributing too high a proportion of their incomes to deductible expenses. Soon, both accounting and law firms will have another option - incorporation. Accountants have now officially had this right for about a month, while for lawyers, this move will soon be implemented into law. Some sources believe many accounting firms will act to incorporate as quickly as possible - a move which will allow them to salary-package the income of their partners. This is because partners of these firms will turn into employees for the first time - making such packaging possible. Effectively, it will mean partners of legal and accounting firms will be on a level playing field with normal executives. It will be interesting to see whether professional firms continue to use service companies once they have incorporated. Equally interesting will be the extent to which the IRD scrutinises these firms' future salary packaging practices.