We don’t do 'tax products', PwC’s Kevin Nicholson tells Margaret Hodge
Heads of tax at the big four accountancy firms mounted a detailed and vigorous defence of their tax services this morning during a two and a half hour grilling by MPs on the Commons public accounts committee.
The committee, led by chairman Margaret Hodge, questioned Kevin Nicholson, head of tax at PwC; Jane McCormick, UK head of tax at KPMG; John Dixon, head of tax at Ernst and Young; and Bill Dodwell, head of tax policy at Deloitte. A video recording of the hearing is available on the Parliament website.
This is the first of a series of Tax Journal news reports on the PAC evidence session, which covered several contentious issues.
For some tax professionals, who have been dismayed at the direction of the public debate in recent weeks, some of today's exchanges may raise hopes of a more constructive dialogue.
In an early exchange Bill Dodwell explained how some large-scale commercial transactions require detailed tax advice merely to ensure that statutory tax reliefs, which are designed to ensure that no tax is payable, are obtained.
Hodge asked the witnesses to estimate how much tax their clients saved per pound of fees charged for tax advice. None was able to provide an estimate and Dodwell said it would be impossible to provide one. Most of Deloitte’s work did not feature a clear link between fees and tax saved, he said.
Dodwell was currently working on the demerger of a private company: ‘It’s a big piece of work, our fees are several hundred thousand pounds, but there isn’t a tax saving. It’s simply splitting up the group because that’s what the owners want us to do.’
Liberal Democrat MP Ian Swales, who warned earlier this month that ‘tax abuse’, if unchecked, posed a potential threat to the UK’s political system, asked Dodwell why the client was paying Deloitte’s fees if there was no tax saving.
‘Because they made a business decision that they would like their international group split up,’ Dodwell said. ‘We are trying to fit into the specific statutory [tax] reliefs that we have in the UK and elsewhere to provide that this demerger split won’t cost tax. If they stayed as they were it wouldn’t cost anything.’
Hodge suggested that Deloitte would design the split in ‘such a way to minimise their tax’. She added: ‘Avoiding tax has become a new way of making profits.’
‘I don’t accept that at all,’ Dodwell said. ‘This demerger is being done quite specifically for commercial reasons.’
Demerger reliefs
Published HMRC guidance sets out the rationale behind well-established tax reliefs for demergers. ‘Sometimes businesses grouped together under a single company umbrella could be run more effectively if they were allowed to pursue their own separate ways under independent management and ownership,’ HMRC’s company taxation manual says.
‘The tax system inhibits the splitting up of businesses in this way as such a split will normally involve a [taxable] distribution. The demerger provisions … aim to make it easier to divide and put into separate corporate ownership, the trading activities of a company or group of companies, but without any new controlling owner being involved. They do this by removing the distribution charge in appropriate circumstances, and making the distribution an “exempt distribution”.’
Conservative MP Richard Bacon said he understood ‘exactly’ what Dodwell was saying in relation to demergers. But new sources of tax work had emerged, he suggested. An investor wishing to acquire a UK business operating wholly in the UK might wish to ‘internationalise’ the business and ‘extract the tax that was being [paid in the UK] … by introducing the business into a larger international group’.
Dodwell replied: ‘You’re talking about the ability of a buyer of a company to raise acquisition finance. The interest on that debt will then, naturally, be offset against the profits of the business they’ve bought. That is something that happens when UK companies buy something in the US, for example. It also happens, as you say, when an overseas company buys something in the UK.’
He added that UK tax law sets out what interest is allowable for tax purposes.
Margaret Hodge noted that the witnesses represented a ‘huge industry’. In the UK alone, the big four’s fees for tax work, including advisory work and compliance, amounted to around £2bn.
‘It seems to me that the main purpose of what you are doing is to try and minimise the tax that either wealthy individuals or corporations pay.’
She asked Nicholson how he distinguished between ‘efficient tax planning, tax avoidance and tax evasion’. She said that according to today’s Times ‘the big four created 79 tax avoidance schemes in the past three years’.
The Times story related to schemes notified under the disclosure of tax avoidance schemes (DOTAS) regime. However, HMRC guidance confirms that some tax arrangements that are ‘not considered to be avoidance’ may need to be disclosed.
‘PwC disclosed 25 schemes, Deloitte and Ernst & Young disclosed 17 each and KPMG disclosed 20,’ the Times reported. But Nicholson argued that ‘scheme’ was ‘a bit of a misnomer’ in this context.
Evasion is illegal, he said. Hodge intervened to say that recent case law had reinforced the need for judgment in assessing whether a course of action was legal. ‘Judgments you often make on your tax avoidance schemes are found to be unlawful,’ she said.
Hodge told Nicholson that a PwC ‘tax official’ had told her that the firm ‘will approve a tax product if there is a 25% chance of it being upheld’. She added: ‘That is a shocking finding.’
‘I don’t know where that came from and I don’t recognise that statement,’ Nicholson said. ‘We don’t mass market tax products, we don’t produce tax products, we don’t promote tax products.’
‘I think we will challenge that statement,’ Hodge replied.
Nicholson said PwC’s code of conduct provided that advice given had to be supportable in law and fully disclosed. The firm had to understand the client’s circumstances: ‘We’re not just producing a clever idea and distributing it out.’
He added: ‘Finally, we must explain not just the tax risks but the reputational and commercial risks in that planning. We say to the client, “here are the options”. If you do it this way, this is how it works. These are the tax implications, these are the reputational issues … HMRC will view it this way, your shareholders might view it …’
Swales asked Nicholson whether PwC was evaluating reputational risk in giving advice.
Reputational risk would be discussed alongside other factors in considering the options available, Nicholson said, ‘particularly at the moment, around wider public concern’.
The client would decide how to proceed, based on their own circumstances, he added.
The DOTAS rules require firms to report to HMRC within five days of giving a piece of advice that has certain hallmarks, Nicholson said. ‘They are not mass-marketed schemes, they won’t even be schemes. In the vast majority of cases they will be bespoke pieces of advice to a client, and actually quite benign.’
Of the 25 schemes disclosed, 15 related to stamp duty land tax, the majority of which were ‘seen as benign by HMRC’, he said. About half of the arrangements were not implemented at all.
Only two of the 25 schemes disclosed had a ‘wider application’. Those were salary sacrifice arrangements, recognised by HMRC guidance as benign, and one was withdrawn: ‘So these are not schemes in the way that I think you’re describing.’
Hodge said she thought that ‘probably all four’ firms were devising schemes ten years ago. ‘And then DOTAS [enacted in 2004] came in and you were done over by the tribunal, they were largely found to be illegal, so you’ve now shifted to what you call much more personalised schemes.’
One scheme offered by PwC for a company was, she suggested, ‘a hugely complex company structure … with two subsidiaries in Jersey, one subsidiary in Luxembourg’. The ‘whole purpose’ of the complexity was, she said, ‘in your words minimise tax, in my words avoid tax’.
‘This is your personalised offer to large corporations, to create a very complex set of company structures,’ Hodge said.
She asked: ‘Do you offer complex structures involving setting up companies in low-tax jurisdictions like Luxembourg and Jersey … Do you do that for the purpose of minimising tax?’
‘It will be one of the things that’s taken into account,’ Nicholson replied.
‘Countries are competing for tax revenue more than they ever have done,' he said. 'In doing that they will create tax regimes which are particularly attractive for particular things. It might be the setting up of a finance company, it might be – in the UK at the moment – the patent box to encourage research and development, it might be manufacturing in the Far East.
‘While countries are saying “here’s a tax regime which will actually benefit you if you bring that business to us”, at the same time companies … are globalising. It’s not that they are just working across borders. They are actually centralising functions, for example procurement, and where they hold their finance and intellectual property.
‘Thirdly, in the modern economy the business model has changed. So when the rules were designed in the treaties in the [nineteen] twenties and thirties, and the transfer pricing models in the seventies and eighties, you were looking at economies which were predominantly domestic by nature, with very [few] cross-border transactions.’
The design of the international tax rules did not envisage ‘the current global model and countries competing for tax’.
Tax is one, but only one, of the things that companies wishing to globalise and centralise functions will take into account, he said.
During a later exchange Bill Dodwell told the committee that the commercial benefit of economies of scale, rather than tax avoidance, were behind the centralisation of functions for many companies. ‘There is a value to the business, and ultimately to the customer, in having that done as effectively as possible,’ he said.
We don’t do 'tax products', PwC’s Kevin Nicholson tells Margaret Hodge
Heads of tax at the big four accountancy firms mounted a detailed and vigorous defence of their tax services this morning during a two and a half hour grilling by MPs on the Commons public accounts committee.
The committee, led by chairman Margaret Hodge, questioned Kevin Nicholson, head of tax at PwC; Jane McCormick, UK head of tax at KPMG; John Dixon, head of tax at Ernst and Young; and Bill Dodwell, head of tax policy at Deloitte. A video recording of the hearing is available on the Parliament website.
This is the first of a series of Tax Journal news reports on the PAC evidence session, which covered several contentious issues.
For some tax professionals, who have been dismayed at the direction of the public debate in recent weeks, some of today's exchanges may raise hopes of a more constructive dialogue.
In an early exchange Bill Dodwell explained how some large-scale commercial transactions require detailed tax advice merely to ensure that statutory tax reliefs, which are designed to ensure that no tax is payable, are obtained.
Hodge asked the witnesses to estimate how much tax their clients saved per pound of fees charged for tax advice. None was able to provide an estimate and Dodwell said it would be impossible to provide one. Most of Deloitte’s work did not feature a clear link between fees and tax saved, he said.
Dodwell was currently working on the demerger of a private company: ‘It’s a big piece of work, our fees are several hundred thousand pounds, but there isn’t a tax saving. It’s simply splitting up the group because that’s what the owners want us to do.’
Liberal Democrat MP Ian Swales, who warned earlier this month that ‘tax abuse’, if unchecked, posed a potential threat to the UK’s political system, asked Dodwell why the client was paying Deloitte’s fees if there was no tax saving.
‘Because they made a business decision that they would like their international group split up,’ Dodwell said. ‘We are trying to fit into the specific statutory [tax] reliefs that we have in the UK and elsewhere to provide that this demerger split won’t cost tax. If they stayed as they were it wouldn’t cost anything.’
Hodge suggested that Deloitte would design the split in ‘such a way to minimise their tax’. She added: ‘Avoiding tax has become a new way of making profits.’
‘I don’t accept that at all,’ Dodwell said. ‘This demerger is being done quite specifically for commercial reasons.’
Demerger reliefs
Published HMRC guidance sets out the rationale behind well-established tax reliefs for demergers. ‘Sometimes businesses grouped together under a single company umbrella could be run more effectively if they were allowed to pursue their own separate ways under independent management and ownership,’ HMRC’s company taxation manual says.
‘The tax system inhibits the splitting up of businesses in this way as such a split will normally involve a [taxable] distribution. The demerger provisions … aim to make it easier to divide and put into separate corporate ownership, the trading activities of a company or group of companies, but without any new controlling owner being involved. They do this by removing the distribution charge in appropriate circumstances, and making the distribution an “exempt distribution”.’
Conservative MP Richard Bacon said he understood ‘exactly’ what Dodwell was saying in relation to demergers. But new sources of tax work had emerged, he suggested. An investor wishing to acquire a UK business operating wholly in the UK might wish to ‘internationalise’ the business and ‘extract the tax that was being [paid in the UK] … by introducing the business into a larger international group’.
Dodwell replied: ‘You’re talking about the ability of a buyer of a company to raise acquisition finance. The interest on that debt will then, naturally, be offset against the profits of the business they’ve bought. That is something that happens when UK companies buy something in the US, for example. It also happens, as you say, when an overseas company buys something in the UK.’
He added that UK tax law sets out what interest is allowable for tax purposes.
Margaret Hodge noted that the witnesses represented a ‘huge industry’. In the UK alone, the big four’s fees for tax work, including advisory work and compliance, amounted to around £2bn.
‘It seems to me that the main purpose of what you are doing is to try and minimise the tax that either wealthy individuals or corporations pay.’
She asked Nicholson how he distinguished between ‘efficient tax planning, tax avoidance and tax evasion’. She said that according to today’s Times ‘the big four created 79 tax avoidance schemes in the past three years’.
The Times story related to schemes notified under the disclosure of tax avoidance schemes (DOTAS) regime. However, HMRC guidance confirms that some tax arrangements that are ‘not considered to be avoidance’ may need to be disclosed.
‘PwC disclosed 25 schemes, Deloitte and Ernst & Young disclosed 17 each and KPMG disclosed 20,’ the Times reported. But Nicholson argued that ‘scheme’ was ‘a bit of a misnomer’ in this context.
Evasion is illegal, he said. Hodge intervened to say that recent case law had reinforced the need for judgment in assessing whether a course of action was legal. ‘Judgments you often make on your tax avoidance schemes are found to be unlawful,’ she said.
Hodge told Nicholson that a PwC ‘tax official’ had told her that the firm ‘will approve a tax product if there is a 25% chance of it being upheld’. She added: ‘That is a shocking finding.’
‘I don’t know where that came from and I don’t recognise that statement,’ Nicholson said. ‘We don’t mass market tax products, we don’t produce tax products, we don’t promote tax products.’
‘I think we will challenge that statement,’ Hodge replied.
Nicholson said PwC’s code of conduct provided that advice given had to be supportable in law and fully disclosed. The firm had to understand the client’s circumstances: ‘We’re not just producing a clever idea and distributing it out.’
He added: ‘Finally, we must explain not just the tax risks but the reputational and commercial risks in that planning. We say to the client, “here are the options”. If you do it this way, this is how it works. These are the tax implications, these are the reputational issues … HMRC will view it this way, your shareholders might view it …’
Swales asked Nicholson whether PwC was evaluating reputational risk in giving advice.
Reputational risk would be discussed alongside other factors in considering the options available, Nicholson said, ‘particularly at the moment, around wider public concern’.
The client would decide how to proceed, based on their own circumstances, he added.
The DOTAS rules require firms to report to HMRC within five days of giving a piece of advice that has certain hallmarks, Nicholson said. ‘They are not mass-marketed schemes, they won’t even be schemes. In the vast majority of cases they will be bespoke pieces of advice to a client, and actually quite benign.’
Of the 25 schemes disclosed, 15 related to stamp duty land tax, the majority of which were ‘seen as benign by HMRC’, he said. About half of the arrangements were not implemented at all.
Only two of the 25 schemes disclosed had a ‘wider application’. Those were salary sacrifice arrangements, recognised by HMRC guidance as benign, and one was withdrawn: ‘So these are not schemes in the way that I think you’re describing.’
Hodge said she thought that ‘probably all four’ firms were devising schemes ten years ago. ‘And then DOTAS [enacted in 2004] came in and you were done over by the tribunal, they were largely found to be illegal, so you’ve now shifted to what you call much more personalised schemes.’
One scheme offered by PwC for a company was, she suggested, ‘a hugely complex company structure … with two subsidiaries in Jersey, one subsidiary in Luxembourg’. The ‘whole purpose’ of the complexity was, she said, ‘in your words minimise tax, in my words avoid tax’.
‘This is your personalised offer to large corporations, to create a very complex set of company structures,’ Hodge said.
She asked: ‘Do you offer complex structures involving setting up companies in low-tax jurisdictions like Luxembourg and Jersey … Do you do that for the purpose of minimising tax?’
‘It will be one of the things that’s taken into account,’ Nicholson replied.
‘Countries are competing for tax revenue more than they ever have done,' he said. 'In doing that they will create tax regimes which are particularly attractive for particular things. It might be the setting up of a finance company, it might be – in the UK at the moment – the patent box to encourage research and development, it might be manufacturing in the Far East.
‘While countries are saying “here’s a tax regime which will actually benefit you if you bring that business to us”, at the same time companies … are globalising. It’s not that they are just working across borders. They are actually centralising functions, for example procurement, and where they hold their finance and intellectual property.
‘Thirdly, in the modern economy the business model has changed. So when the rules were designed in the treaties in the [nineteen] twenties and thirties, and the transfer pricing models in the seventies and eighties, you were looking at economies which were predominantly domestic by nature, with very [few] cross-border transactions.’
The design of the international tax rules did not envisage ‘the current global model and countries competing for tax’.
Tax is one, but only one, of the things that companies wishing to globalise and centralise functions will take into account, he said.
During a later exchange Bill Dodwell told the committee that the commercial benefit of economies of scale, rather than tax avoidance, were behind the centralisation of functions for many companies. ‘There is a value to the business, and ultimately to the customer, in having that done as effectively as possible,’ he said.
