Conclusions and Recommendations
1. The Corporation Tax paid by large businesses
is heavily skewed towards a small number of businesses. In 2005-06,
of the 700 largest businesses in the UK, 50 paid two-thirds of
the tax raised, and 181 paid none.
The analysis published in the National Audit Office's report provides
transparency on the variations in tax revenue and the contributions
from different sectors of the economy. The Department should publish
a similar analysis each year with explanations of the trends.
2. Businesses in the United Kingdom can legitimately
reduce their Corporation Tax payments by claiming a range of reliefs
and allowances. In some
cases, the liability may reduce to zero, even though the businesses
have made profits. The amount of tax foregone is likely to be
substantial, but is not visible. The Department should publish
an annual analysis by industry sector of the extent of these reliefs
and allowances, as well as their effect on tax revenues.
3. Of the £2.7 billion additional tax
generated by the Department's Corporation Tax enquiries in 2006-07,
99% came from 40% of the enquiries.
To increase the yield from enquiries and make better use of its
staff, the Department should target those businesses that pose
the greatest risks of non-compliance. To demonstrate its progress
in targeting risks it should publish annually the distribution
of its enquiries by value.
4. The Department aims to complete enquiries
within 18 months, but 42% of enquiries have been running for two
years or more. Because
of the delays the companies affected cannot determine their final
tax bill, and the Department's staff are diverted from working
to resolve current issues. By April 2009, it should aim to achieve
this 18 month target for at least 95% of enquiries, and identify
the reasons enquiries are not concluded to time.
5. The Department has appointed client relationship
managers to improve the relationship with large businesses and
identify key risks across the different taxes.
To establish whether the client relationship manager role adds
value, and improve overall compliance, the Department should undertake
an evaluation of their effectiveness by the end of 2009.
6. The Department does not have a robust measure
of the Corporation Tax gap (the difference between how much tax
large businesses pay and their theoretical liability).
It should develop such a measure and publish the results, with
separate estimates being produced for large businesses and for
small and medium-sized businesses, which are covered by its local
offices.
7. Around half the growth in global trade
currently comes from transactions between subsidiaries of multinational
companies. The Department
works through international fora, such as the Organisation for
Economic Cooperation and Development, to research and share information
on international tax avoidance practices. It should share information
and assessments on individual high risk companies with tax authorities
in other countries to inform its own risk assessments.
8. In the United Kingdom, groups of companies
are not required to prepare consolidated Company Tax returns so
the Department cannot assess the effective Corporation Tax rate
across a group of companies.
Tax authorities in Australia and Canada can analyse the effective
tax rates across groups of companies to differentiate high and
low risk businesses. The Government should consider whether consolidated
Company Tax returns would bring greater clarity on the tax position
of large conglomerates in the United Kingdom.
9. As the Department has reduced the use of
generic avoidance schemes, tax advisers have developed bespoke
schemes to help large businesses reduce their tax liabilities.
In its risk assessments, the Department should consider a number
of indicators to large business avoidance activity, such as the
cost of professional tax advice, the direct recruitment of staff
with expertise in tax avoidance schemes, and the businesses' wider
international record.
10. The Department has introduced a new approach
to dealing with large businesses to differentiate its treatment
of those it considers high and low risk.
The Department should publicise its new approach and emphasise
the likelihood of fewer enquiries for businesses with low risk
behaviour. It should also increase the number of penalties for
companies engaged in serious avoidance activity, by robustly applying
the new penalty regime when it comes into effect.
11. The Large Business Service faces a loss
of skills and industry knowledge as more experienced staff are
due to retire. The Department
should assess the number and skills of staff it needs over the
next 10 years and how it will recruit them, and develop a linked
training programme to enable it to have sufficient expertise for
its work.
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