Parliamentary Committees and Public Enquiries
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Continuing weakness of HMRC in its efforts to deal with tax avoidance
The Public Accounts Committee published its 44th Report of this Session on tax avoidance: the role of large accountancy firms.
The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
"Our inquiry has exposed the continuing weakness of HMRC in its efforts to deal with tax avoidance. It is engaged in a never-ending game of cat and mouse. Among those ranged against it are the big four accountancy firms, which earn £2 billion each year from their tax work in the UK.
"They employ nearly 9,000 people just to provide tax advice to companies and wealthy individuals, much of which is aimed at minimizing the tax paid. Between them they boast 250 transfer pricing specialists whereas HMRC has only 65 people working in this area.
“The firms declare that their focus is now on acceptable tax planning and not aggressive tax avoidance. These protestations of innocence fly in the face of the fact that the firms continue to sell complex tax avoidance schemes with as little as 50 per cent chance of succeeding if challenged in court.
“The large accountancy firms are in a powerful position in the tax world and have an unhealthily cosy relationship with government. They second staff to the Treasury to advise on formulating tax legislation.
"When those staff return to their firms, they have the very inside knowledge and insight to be able to identify loopholes in the new legislation and advise their clients on how to take advantage of them. The poacher, turned gamekeeper for a time, returns to poaching.
“This is a ridiculous conflict of interest which should be banned in a code of conduct for tax advisers, as we have recommended to the Treasury and HMRC.
“Tax law is now hopelessly complex and outdated. Businesses now set up an office overseas to take advantage of low tax rates, simply by locating a computer and a few members of staff there. The UK must take the lead in demanding urgent reform of international tax law, so that companies have to pay a fair share of tax where they actually do business and make profits.
"The Government must take the job of simplifying our tax code seriously; yet the Office of Tax Simplification has just 6 people working in it.
“We are pleased that the four firms agree that there should be greater transparency over companies’ tax affairs. This would increase the pressure on multinationals to pay a fair share of tax in the countries where they make their money.
“HMRC has now introduced new measures to prevent companies who have lost tax avoidance disputes from receiving fresh government business. But these rules are far too narrowly focused and do nothing to penalize the companies making money by promoting tax avoidance.”
Margaret Hodge was speaking as the Committee published its 44th Report of this Session.
Confidence in our tax system can only be maintained if every company and every individual is seen to be paying their fair share of tax. We held hearings last year to investigate why some multinational companies pay little corporation tax despite doing a large amount of business in the UK, and why some individuals can get away with using contrived schemes to avoid tax.
We are also concerned about the role of tax advisers and in January 2013 we took evidence from Deloitte, Ernst and Young, KPMG, and PwC.
HM Revenue & Customs (HMRC) appears to be fighting a battle it cannot win in tackling tax avoidance. Companies can devote considerable resource to ensure that they minimise their tax liability.
There is a large market for advising companies on how to take advantage of international tax law, and on the tax implications of different global structures. The four firms employ nearly 9,000 people and earn £2 billion from their tax work in the UK, and earn around $25 billion from this work globally. HMRC has far fewer resources.
In the area of transfer pricing alone there are four times as many staff working for the four firms than for HMRC.
International tax rules
We were pleased that the four firms agreed with us that international tax rules are out of date and need to change to reflect the reality of modern business.
Modern communications mean companies need as little as a computer and a handful of staff to set up a place of business in a tax haven. Under current tax rules, this can be enough to establish that they can pay their tax there, rather than where the business activity takes place. This is unfair to responsible companies based in the UK who do pay their fair share of tax.
We welcome the Government’s commitment to reforming international tax laws, but this will be a lengthy process and, until it happens, we are concerned that companies will continue to find ways to avoid paying tax where they actually do business.
We believe that simplicity is key to fighting tax avoidance. The four firms agreed with us that tax law is too complex and a simpler system is in everybody’s interests. It is disappointing that HM Treasury’s Office of Tax Simplification is working with fewer than six full time staff and as a result has so far focused on abolishing unused tax reliefs, rather than being able to take a more radical approach to simplifying tax law.
Removing unused reliefs may be good housekeeping, but it does little to tackle the problem of complexity and does not prevent the continued abuse of some tax reliefs, such as those to encourage investment in films or donations to charity. We intend to examine those tax reliefs that are widely used and may be subject to abuse at a future hearing.
The four firms insisted that they no longer sell the type of very aggressive avoidance schemes that they sold ten years ago. While this may be the case, we believe they have simply moved to advising on other forms of tax avoidance which are profitable for their clients; such as the complex operating models they offer to major corporate clients to minimise tax by exploiting the lowest international tax rates.
The four firms have developed internal guidelines on where the line between tax planning and aggressive avoidance lies, but these principles do not stop them selling schemes with as little as a 50% chance of succeeding if challenged in court. Clearly HMRC has to consider the risk to the taxpayer of a protracted legal battle.
It would appear that firms and tax avoiders are taking advantage of the constraints under which HMRC is obliged to operate. Furthermore, HMRC is always constrained by resources.
Relationship with government
The close relationship that the four firms enjoy with government creates a perception that they wield undue influence on the tax system which they use to their advantage. They told us that they second staff to government to provide technical advice on changes to tax laws and that this has improved the quality of legislation.
The witnesses conceded that this may give the perception that they are able to influence legislation to help their larger clients to the disadvantage of smaller UK businesses.
More worryingly, we have seen what look like cases of poacher, turned gamekeeper, turned poacher again, whereby individuals who advise government go back to their firms and advise their clients on how they can use those laws to reduce the amount of tax they pay.
Since our hearing HMRC has announced that it is consulting on a set of draft rules to allow departments to ban tax-avoiding businesses from being awarded government contracts. This is a step in the right direction, but the draft rules as they stand are narrowly focused and would not cover those companies providing tax advice.
The draft rules would allow firms to win government contracts whilst also advising on schemes that allow their clients to avoid tax. We will want to monitor closely what rules emerge from the consultation process and how they are applied.