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The UK faces a serious problem of avoidance of corporation tax, due in part to the complexity of the tax regime in the UK, but mainly because the international tax system gives multinational companies opportunities to shift profits between countries in ways that reduce their liabilities in the UK. The House of Lords Economic Affairs Committee says this damages the economy and undermines trust in the tax system, in a report published today.

The Committee supports the case for fundamental reform of the international corporate tax framework being pursued in the Organisation for Economic Co-operation and Development (OECD). They say there are too many opportunities for multinational companies to manipulate their affairs to reduce their global tax payments. The Committee says that this can undermine public trust in the tax system and calls on the Government to continue to play a full part in encouraging the OECD’s reform agenda to an early successful conclusion.

Treasury review of corporate taxation

The Committee says it is not clear that the OECD reforms will be effective or whether they can be achieved within the proposed two year timescale. The report therefore calls for the Treasury to undertake a fundamental review of the UK’s corporate tax regime, including the differential treatment of debt and equity. The present system can encourage multinational companies to take on excessive debt in the UK, including by borrowing money from an overseas subsidiary, to reduce their tax liability.

Other areas for consideration

Other areas the report calls for the Treasury to consider in their review include:

• The Government should consider a new system of regulation for tax advisers with the threat of removing advisers’ right to practise if they breach a regulatory code of conduct by promoting ‘blatantly contrived’ tax avoidance schemes.
• There needs to be better parliamentary oversight of HMRC, so that the public can be confident that tax deals it agrees with multinational companies are appropriate. The Committee is concerned that HMRC may not be assertive enough in these negotiations. In order to strengthen oversight while protecting tax confidentiality the Committee calls on both Houses of Parliament to establish a Joint Committee of MPs and Peers which can take testimony from HMRC in private. The Committee highlights the example of the Intelligence and Security Committee as a body that provides parliamentary scrutiny of an important area of policy while maintaining secrecy where necessary.
• A new requirement for firms with large operations in the UK to publish a summary of their corporation tax returns to ensure there is clarity on what tax has been paid and to enable Parliament and the public to see when action against tax avoidance is needed.
• The Committee recommends that HMRC should be adequately resourced to deal more effectively with multinationals and their tax advisors. The report is critical of the practice of HMRC employing seconded staff from the Big Four accountancy firms.

Commenting Lord MacGregor, Chairman of the House of Lords Select Committee on Economic Affairs, said:

“The Select Committee launched this short inquiry in response to public and political concern about corporate tax avoidance. There is a sense that corporation tax is voluntary for some multinationals which operate globally while small UK-based businesses go by the book and have to pay.  That brings the tax system into disrepute and loses much-needed revenue.

“We recognise that the Government is taking the lead in pursing international agreement to reduce tax avoidance but it is unclear whether these reforms can be achieved in two years. We have therefore made a number of recommendations for specific reforms the Government should consider on its own to deal with abuses.

“It is also important that the public are confident that Parliament is doing its job in scrutinising the tax authorities. We were concerned that HMRC’s duty of confidentiality to taxpayers limits scope for parliamentary oversight of HMRC’s dealings with multinationals. That is why we are now proposing that a new Joint Committee of the Commons and Lords be established that can take evidence in confidence and publish reports on any concerns it has on the way HMRC deal with the tax of multinational companies.

"We also think large firms should be required to publish a summary of their tax returns so the public and media and ensure they are paying their fair share.”

Further information

• About Parliament: Select Committees
• Visiting Parliament: Watch Committees