On 31 January the heads of tax from the ‘big four’ accountancy firms, Ernst & Young (John Dixon), KPMG (Jane McCormick) and PwC (Kevin Nicholson) and the head of tax policy from Deloitte (Bill Dodwell) were grilled by the Public Accounts Committee (PAC), chaired by Margaret Hodge MP, on their role in tax avoidance.
They were questioned on a range of issues concerning their firms, including the profits made from tax, their presence in tax havens, their role in the process for making new legislation, their role in advising government and even their own salaries.
What is the PAC’s remit?
The PAC is appointed by the House of Commons to examine the accounts of government departments to see how efficiently and effectively public money is spent. It is looking into tax avoidance in connection with its role in looking at HMRC’s accounts.
What was the PAC trying to understand?
The scale of the tax avoidance industry and what role the professions play in facilitating avoidance. The big four disclosed that revenues for their collective UK tax practices were approaching £2bn, but noted that 25%–50% of those revenues came from compliance work.
However, the PAC clearly believed that the big four’s main function was helping clients to get around tax law.
It highlighted a number of recent cases where big four ‘schemes’ had lost in court, slamming the big four for acting ‘unlawfully’ – which was technically true in that they helped clients to declare a tax position that was found not to have a basis in law, but conveniently missed the point that there was nothing illegal in holding an honest belief about the interpretation of the law even if that belief is proved mistaken. The PAC also elicited that the enterprise was risk free for the big four because it suffered no financial penalty if the planning failed.
The big four explained that they came out of marketed schemes in the mid-2000s and now just gave bespoke advice – the 79 schemes disclosed over the last three years under disclosure of tax avoidance schemes regime (DOTAS) being just marginal business.
The PAC noted that even if the advice was now highly personalised, the big four continued to market its ability to find tax ‘efficiencies’, perhaps identified working for one client before being sold to others.
What else did the PAC not like?
The PAC thought it was bordering on corrupt for the big four to have secondees in government helping to design legislation which they then advised their clients how to exploit. In particular, KPMG were castigated for their involvement in the design of the patent box and then for producing marketing literature which Margaret Hodge was convinced was to help clients to avoid tax in a way which was not intended by the legislation.
Having declared that she herself had been a local government consultant in PwC, Margaret Hodge also questioned whether the big four should be entitled to do consulting work for the government, whilst at the same time actively seeking to reduce the tax revenues out of which they were paid. The boutique tax avoidance firms grilled before Christmas could at least not be accused of having a hand in both.
The PAC clearly did not appreciate the answers given about the big four’s role in structuring international businesses – and in particular their acceptance that the current transfer pricing rules were in desperate need of updating. Margaret Hodge decried that such change would take ten years or more to effect, and in the meantime the big four were happy to make a lot of money helping clients to exploit the rules as they stood.
What about auditor independence and LPP?
The big four were challenged on whether they should be able to give tax advice to their audit clients. The PAC was pointed to various controls in place to reduce the risk, but it may not have been enough to persuade them that this dealt with any potential conflict of interest.
They also asked about the Prudential’s challenge to LPP and why it wanted to withhold information from HMRC. PwC said that the issue was not that the client actually wanted to withhold the information in question, but about ‘equality’ between the professions.
Was it a grown-up session?
Although the performance of Margaret Hodge brought plaudits from the left wing press – and at times she made highly personal criticisms of the panel – there was certainly no question of the PAC managing to land a knock-out blow. As one might expect, the big four stood shoulder to shoulder, and their only admission was to acknowledge that they did very artificial avoidance back at a time when it was more socially acceptable to do so. That said, the PAC did have some valid points to make about the relationship between government and the top firms.
But the PAC clearly had a fixed idea in its mind and was not prepared to accept that the big four has a real purpose other than to avoid tax. It is not good for attracting investment into the UK to have politicians grandstanding in this way.
Jason Collins is head of the tax group at Pinsent Masons
