The government should consider ‘naming and shaming’ those engaged in ‘the business of tax avoidance’, according to the Commons public accounts committee.
Promoters of avoidance schemes ‘run rings’ around HMRC, the PAC claimed in today’s report Tax avoidance: tackling marketed avoidance schemes.
The PAC welcomed HMRC's consultation on applying the model of financial services mis-selling rules to tax avoidance schemes, and the consultation launched last week on a change to the government’s procurement rules to deter avoidance and evasion.
But it pointed out that HMRC estimates that in 2010/11 the tax gap due to avoidance was £5bn; that there are ‘no penalties’ for promoting avoidance schemes; and that businesses make substantial sums of money from doing so.
‘Part of the problem is the UK's highly complex tax law, but simplifying the system alone will not solve the problem of tax avoidance. HMRC told us that the proposed general anti-abuse rule is designed to stop highly artificial schemes, but acknowledged that a wider range of measures is needed to combat tax avoidance,’ it said.
‘A game of cat and mouse’
The PAC defined tax avoidance as ‘using tax law to gain a tax advantage not intended by parliament’. HMRC does not name the companies that market, operate and use schemes, it noted, despite ‘evidence that public opinion can have a significant impact on the actions of large companies’.
Promoters of ‘boutique’ tax avoidance schemes know it will take time for HMRC to change the law and shut a scheme down, said PAC chairman Margaret Hodge: ‘Their clients can then take advantage of this window of opportunity to make a lot of money at the expense of the taxpayer, while the promoter simply moves on to a new a scheme and repeats the process. It is a game of cat and mouse and HMRC is losing.’
Promoters ‘pocket their fees’ whether their schemes work or not, she added. ‘HMRC should publicly name and shame those who sell or use tax avoidance schemes in order to discourage such activity. With at least £5bn lost to tax avoidance each year, HMRC has got to get much more robust in its approach. The requirement that promoters give early notification to HMRC of new schemes has resulted in the swift closure of some. But the department does not know how many promoters simply choose to ignore the requirement.’
The PAC acknowledged that HMRC has a ‘good rate of success’ when it challenges schemes, winning 51 out of the 60 cases it has litigated since April 2010. ‘However, this number is tiny compared to the number of open enquiries. HMRC stated it has 8,000 live litigation cases, of which 1,000 involve tax avoidance.’
Advance rulings
‘HMRC could learn from the variety of measures used in other counties to deter and tackle tax avoidance,’ the PAC said. ‘In Australia, promoters have to get clearance for schemes before they introduce them. An advance ruling system of this type could deter contrived avoidance schemes and increase certainty in the tax system. Australia has also introduced powers to fine those who promote schemes that could not reasonably be expected to work or comply with the advance ruling system. We encourage HMRC to look seriously at whether these and other measures could be effective in the UK.’
An HMRC spokesman said: ‘We are glad the report exposes the practices of promoters who sell tax avoidance schemes to wealthy individuals. In the last year alone the courts have ruled in HMRC’s favour in multiple tax avoidance cases where over £1bn has been protected. Additionally the government recently announced an extra £77m in HMRC funding to tackle evasion and aggressive avoidance; we have also already consulted on strengthening the regulations around these schemes; and, for the first time ever, this government is introducing a general anti-abuse rule which will make it even harder for people to avoid paying their share of tax.’
‘Where do you draw the line?’
Chas Roy-Chowdhury head of taxation at ACCA, told the BBC that naming and shaming was ‘a dangerous game to play’.
‘Where do you draw the line? There isn't a clear cliff edge between what you could say is acceptable tax planning, and what is unacceptable tax avoidance. I think there's some difficulty in terms of where do you pitch it, in terms of where you name and shame,’ he said.
Ian Cowie, personal finance editor at the Daily Telegraph, said the PAC seemed ‘keen to blur’ the distinction between legal tax avoidance and illegal tax evasion. He suggested that ‘MPs – including PAC members – should change the law to help HMRC rather than issue claptrap effectively calling for mob rule.’
‘Language is very emotive’
Jason Collins, head of tax at the law firm Pinsent Masons, said the report showed that despite HMRC’s best efforts tax avoidance is ‘still big business for some’.
‘The perception that a small minority of promoters continue to strut around like peacocks appears to have really got under the skin of the PAC. The PAC is recommending that HMRC comes up with more strategies for hitting promoters where it really hurts – in the wallet,’ he added.
‘Tax avoidance by High Net Worths is the preserve of boutique firms who do not do government work and are not in the public eye. The PAC appears to be advocating a strategy to strong arm those working with them who may be concerned about their reputation. The PAC’s language is very emotive, but thankfully it has stopped short of suggesting that the public should camp outside the offices of the country’s leading banks and tax advisers.
‘However, some of the criticism of HMRC is a little unfair as the PAC fails to acknowledge some of HMRC’s recent innovations, such as the settlement opportunity launched before Christmas for users of many of the schemes identified by PAC in the report. These new measures will take time to work through.
‘It shouldn’t be lost that HMRC has the data relied on by the PAC precisely because of earlier innovations like the disclosure of tax avoidance schemes (DOTAS) regime itself. The PAC should acknowledge some of the good work done by HMRC to help boost the organisation’s morale at a time when the country needs HMRC to be at the top of its game.’
Large firms
‘We are concerned by the involvement of large accountancy and law firms and banks in the promotion and facilitation of avoidance schemes,’ the PAC said.
‘HMRC told us that it was talking to these firms and noted the reputational risk faced by accountancy and law firms from involvement in avoidance. It also stated that the work done through the [DOTAS] disclosure regime had reduced the involvement of the top end of the market in avoidance and that the proportion of disclosures of tax avoidance schemes by the largest firms had declined from 25% in 2004 to less than 10% in 2011.’
HMRC chief executive Lin Homer told the PAC on 6 December: ‘We remain in very direct conversation with both the big firms and the big providers … One of the things you heard today, and it is our belief, is that there is a reputational element to this. Some of the big associations that represent tax specialists are also very clearly saying that there is a reputational risk in being involved in egregious tax avoidance, as well as a professional risk. I do think we have to continue making the risks of being involved in these schemes more overt and visible to people, both to the users of the schemes and the advisers.’
Hodge told Homer that the PAC would want to ‘call the advisers’, and the heads of tax at the big four accountancy firms were questioned on 31 January. Hodge noted at the January meeting that, according to a report in The Times, the big four ‘created 79 tax avoidance schemes in the past three years’.
The Times story related to schemes notified under the DOTAS regime, as Tax Journal reported on 31 January. HMRC guidance on the regime confirms that some tax arrangements that are ‘not considered to be avoidance’ may need to be disclosed.
All four heads of tax defended their firms’ tax practices. PwC’s head of tax, Kevin Nicholson, told Hodge that ‘scheme’ was ‘a bit of a misnomer’ in this context. ‘We don’t mass market tax products, we don’t produce tax products, we don’t promote tax products,’ he said.
The government should consider ‘naming and shaming’ those engaged in ‘the business of tax avoidance’, according to the Commons public accounts committee.
Promoters of avoidance schemes ‘run rings’ around HMRC, the PAC claimed in today’s report Tax avoidance: tackling marketed avoidance schemes.
The PAC welcomed HMRC's consultation on applying the model of financial services mis-selling rules to tax avoidance schemes, and the consultation launched last week on a change to the government’s procurement rules to deter avoidance and evasion.
But it pointed out that HMRC estimates that in 2010/11 the tax gap due to avoidance was £5bn; that there are ‘no penalties’ for promoting avoidance schemes; and that businesses make substantial sums of money from doing so.
‘Part of the problem is the UK's highly complex tax law, but simplifying the system alone will not solve the problem of tax avoidance. HMRC told us that the proposed general anti-abuse rule is designed to stop highly artificial schemes, but acknowledged that a wider range of measures is needed to combat tax avoidance,’ it said.
‘A game of cat and mouse’
The PAC defined tax avoidance as ‘using tax law to gain a tax advantage not intended by parliament’. HMRC does not name the companies that market, operate and use schemes, it noted, despite ‘evidence that public opinion can have a significant impact on the actions of large companies’.
Promoters of ‘boutique’ tax avoidance schemes know it will take time for HMRC to change the law and shut a scheme down, said PAC chairman Margaret Hodge: ‘Their clients can then take advantage of this window of opportunity to make a lot of money at the expense of the taxpayer, while the promoter simply moves on to a new a scheme and repeats the process. It is a game of cat and mouse and HMRC is losing.’
Promoters ‘pocket their fees’ whether their schemes work or not, she added. ‘HMRC should publicly name and shame those who sell or use tax avoidance schemes in order to discourage such activity. With at least £5bn lost to tax avoidance each year, HMRC has got to get much more robust in its approach. The requirement that promoters give early notification to HMRC of new schemes has resulted in the swift closure of some. But the department does not know how many promoters simply choose to ignore the requirement.’
The PAC acknowledged that HMRC has a ‘good rate of success’ when it challenges schemes, winning 51 out of the 60 cases it has litigated since April 2010. ‘However, this number is tiny compared to the number of open enquiries. HMRC stated it has 8,000 live litigation cases, of which 1,000 involve tax avoidance.’
Advance rulings
‘HMRC could learn from the variety of measures used in other counties to deter and tackle tax avoidance,’ the PAC said. ‘In Australia, promoters have to get clearance for schemes before they introduce them. An advance ruling system of this type could deter contrived avoidance schemes and increase certainty in the tax system. Australia has also introduced powers to fine those who promote schemes that could not reasonably be expected to work or comply with the advance ruling system. We encourage HMRC to look seriously at whether these and other measures could be effective in the UK.’
An HMRC spokesman said: ‘We are glad the report exposes the practices of promoters who sell tax avoidance schemes to wealthy individuals. In the last year alone the courts have ruled in HMRC’s favour in multiple tax avoidance cases where over £1bn has been protected. Additionally the government recently announced an extra £77m in HMRC funding to tackle evasion and aggressive avoidance; we have also already consulted on strengthening the regulations around these schemes; and, for the first time ever, this government is introducing a general anti-abuse rule which will make it even harder for people to avoid paying their share of tax.’
‘Where do you draw the line?’
Chas Roy-Chowdhury head of taxation at ACCA, told the BBC that naming and shaming was ‘a dangerous game to play’.
‘Where do you draw the line? There isn't a clear cliff edge between what you could say is acceptable tax planning, and what is unacceptable tax avoidance. I think there's some difficulty in terms of where do you pitch it, in terms of where you name and shame,’ he said.
Ian Cowie, personal finance editor at the Daily Telegraph, said the PAC seemed ‘keen to blur’ the distinction between legal tax avoidance and illegal tax evasion. He suggested that ‘MPs – including PAC members – should change the law to help HMRC rather than issue claptrap effectively calling for mob rule.’
‘Language is very emotive’
Jason Collins, head of tax at the law firm Pinsent Masons, said the report showed that despite HMRC’s best efforts tax avoidance is ‘still big business for some’.
‘The perception that a small minority of promoters continue to strut around like peacocks appears to have really got under the skin of the PAC. The PAC is recommending that HMRC comes up with more strategies for hitting promoters where it really hurts – in the wallet,’ he added.
‘Tax avoidance by High Net Worths is the preserve of boutique firms who do not do government work and are not in the public eye. The PAC appears to be advocating a strategy to strong arm those working with them who may be concerned about their reputation. The PAC’s language is very emotive, but thankfully it has stopped short of suggesting that the public should camp outside the offices of the country’s leading banks and tax advisers.
‘However, some of the criticism of HMRC is a little unfair as the PAC fails to acknowledge some of HMRC’s recent innovations, such as the settlement opportunity launched before Christmas for users of many of the schemes identified by PAC in the report. These new measures will take time to work through.
‘It shouldn’t be lost that HMRC has the data relied on by the PAC precisely because of earlier innovations like the disclosure of tax avoidance schemes (DOTAS) regime itself. The PAC should acknowledge some of the good work done by HMRC to help boost the organisation’s morale at a time when the country needs HMRC to be at the top of its game.’
Large firms
‘We are concerned by the involvement of large accountancy and law firms and banks in the promotion and facilitation of avoidance schemes,’ the PAC said.
‘HMRC told us that it was talking to these firms and noted the reputational risk faced by accountancy and law firms from involvement in avoidance. It also stated that the work done through the [DOTAS] disclosure regime had reduced the involvement of the top end of the market in avoidance and that the proportion of disclosures of tax avoidance schemes by the largest firms had declined from 25% in 2004 to less than 10% in 2011.’
HMRC chief executive Lin Homer told the PAC on 6 December: ‘We remain in very direct conversation with both the big firms and the big providers … One of the things you heard today, and it is our belief, is that there is a reputational element to this. Some of the big associations that represent tax specialists are also very clearly saying that there is a reputational risk in being involved in egregious tax avoidance, as well as a professional risk. I do think we have to continue making the risks of being involved in these schemes more overt and visible to people, both to the users of the schemes and the advisers.’
Hodge told Homer that the PAC would want to ‘call the advisers’, and the heads of tax at the big four accountancy firms were questioned on 31 January. Hodge noted at the January meeting that, according to a report in The Times, the big four ‘created 79 tax avoidance schemes in the past three years’.
The Times story related to schemes notified under the DOTAS regime, as Tax Journal reported on 31 January. HMRC guidance on the regime confirms that some tax arrangements that are ‘not considered to be avoidance’ may need to be disclosed.
All four heads of tax defended their firms’ tax practices. PwC’s head of tax, Kevin Nicholson, told Hodge that ‘scheme’ was ‘a bit of a misnomer’ in this context. ‘We don’t mass market tax products, we don’t produce tax products, we don’t promote tax products,’ he said.
