3 Tackling tax avoidance
17. Businesses have the right to plan their tax
affairs efficiently to minimise their tax liabilities within the
rules and thereby maintain their competitive position compared
to other businesses. Companies can also legitimately use tax reliefs
and allowances provided for in legislation to reduce their tax
liability. However, the Department is keen to reduce the amount
of tax lost to the Exchequer through tax avoidance.[18]
18. Tax avoidance is not easily definable, but
it can involve highly creative ways of using complex tax laws
to reduce or defer tax. Interpretations of tax legislation can
differ so that businesses may regard their actions as acceptable,
while the Department may regard them as in conflict with the rules
or intention of the legislation. Businesses often seek help from
accounting and law firms, and investment banks in arranging their
affairs so as to minimise their liabilities. These advisers may
also develop bespoke schemes for their clients to reduce their
Corporation Tax.[19]
19. In 2006, the Government extended legislation
requiring 'promoters' of avoidance schemes to disclose, and 'users'
to declare, their use of schemes. At the end of February 2007,
the Department had received nearly 900 disclosures of avoidance
schemes and the Government had closed 350 of them with legislation.
The Department considered that the majority of marketed schemes
had been addressed by legislation or through litigation.[20]
20. The Department had seen a growth in bespoke
schemes to reduce tax liabilities, for example, by transferring
intangible assets out of the United Kingdom to low tax countries,
and paying the overseas company for use of those assets in the
United Kingdom. The Department was seeking to apply its transfer
pricing rules (governing the sale of goods between related companies)
on such arrangements. The yield from transfer pricing enquiries
on large businesses had increased from £118 million in 2003-04
to £473 million in 2006-07. The Department was working with
other tax administrations, which faced similar issues on structuring
arrangements, through the Organisation for Economic Cooperation
and Development.[21]
21. A business's tax advisers can be a major
influence on its tax risk behaviour and compliance with tax legislation.
Tax advisers that have devised and sold avoidance schemes may
also take measures to slow the Department's efforts to close the
scheme, to defend their investment. The Department has recently
led a study into tax intermediaries on behalf of the Organisation
for Economic Cooperation and Development. It examined the risks
that large firms of tax advisers, which may operate globally,
pose for tax systems. The Department places responsibility on
the chief finance officers of large businesses for their tax advisers
and ensuring compliance. The Department is also a member, along
with the tax administrations of the USA, Canada, Australia and
Japan, of the Joint International Tax Shelter Information Centre
based in the USA and the UK. The Centre coordinates intelligence
on international avoidance activity.[22]
22. The Department is also tackling avoidance
through its 'high-risk corporates' programme, in which senior
officials of the Department work directly with the management
boards of high risk businesses. Its aim is to influence the behaviour
of such businesses by warning them of its plans for extensive
investigation. On one business, the Department had set up a taskforce
of more than 150 officers and outside counsel. The Department
had covered around six large businesses in the programme, with
collectively several billion pounds of additional tax under consideration.
As a result, the Department had resolved significant tax issues,
secured additional tax and gained commitments from businesses
to change their approach.[23]
23. In 2006-07, the Department imposed penalties
on large businesses for negligence in their Company Tax returns
in only 19 cases, totalling £15 million. Five cases in 2005-06
and one in 2006-07 related to transfer pricing. Currently, there
is no statutory basis for the Department to impose penalties where
the completed enquiry reveals the business has sought to avoid
Corporation Tax, unless there is evidence of negligence, fraud
or failure to keep adequate documentation. The Government had
introduced a new penalty regime, which will come into force during
2008, and apply to Company Tax returns in 2009. The Department
expected these powers to make it easier to obtain a penalty where
there has been insufficient care to get matters right, while also
not imposing penalties for innocent errors.[24]
18 C&AG's Report, para 2.27 Back
19
C&AG's Report, para 2.27 Back
20
Qq 6, 105-106; C&AG's Report, para 2.29 Back
21
Qq 80-81, 105; Ev 16, para 5 Back
22
Qq 78, 107, 128-129; C&AG's Report, para 2.35 Back
23
Qq 3, 98; C&AG's Report, para 2.31 Back
24
Qq 85-86, 147; Ev 16, para 6, C&AG's Report, para 2.5 Back
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