Examination of Witnesses (Questions 1-19)
HM REVENUE AND
CUSTOMS
28 JANUARY 2008
Q1 Chairman: Good afternoon. Welcome
to the Committee of Public Accounts. Today we are considering
the Comptroller and Auditor General's Report HM Revenue and
Customs—Management of Large Business Corporation Tax.
Welcome back, Dave Hartnett, who is Acting Chief Executive of
HM Revenue and Customs. Would you like to introduce your colleagues?
Mr Hartnett: Yes, Chairman. Good
afternoon to you as well. To my left is Melanie Dawes, a member
of our Executive Committee who leads on business issues generally
and, to my right, Freda Chaloner, who leads the Large Business
Service.
Q2 Chairman: Thank you. Perhaps we
could start by looking at how good you are at raising this. If
we look at paragraph 2.7 which relates to figure five, I was quite
surprised to read, Mr Hartnett, that 58% of open inquiries involve
cases where the tax under consideration is less than £500,000.
So you have got 58% of your inquiries generating only 1% additional
Corporation Tax. Do you really have a grip on this tax?
Mr Hartnett: I think we do, Chairman.
We were very conscious that figure was too high. We have been
reducing it as we have switched our resource to bigger risks.
We have looked at these smaller risks and have closed a great
number of them down. I will just ask Melanie if she can give you
a number to give you a feel for it.
Ms Dawes: Since February, when
the Report was written and that figure was produced, we have cut
the number of issues for less than £500,000 by 55%. What
we have also done is introduce a more rounded measure of a small
issue that takes into account not just the monetary amount but
also looks at the probability of success and the impact on the
wider tax system. We have set ourselves a target for that in this
financial year of cutting those small issues by 75% and so far
we have achieved a 70% reduction in the nine months to the end
of December.
Q3 Chairman: So it would not be a
fair criticism to say you are concentrating on the small fry and
letting the big fish get away?
Mr Hartnett: Absolutely not, Chairman.
Some of the big fish are very big indeed. We have applied a lot
more resource to those, taking a taskforce approach to the biggest
risks, recently applying more than 150 of our officers, plus outside
counsel and others, on just one case.
Q4 Chairman: You see, what surprises
me is that many people will be as astonished by this as I was.
If we look at 1.12 what we see there is a third of large businesses
pay no Corporation Tax at all. That is extraordinary. Do you think
that members of the public, if they were watching this, would
find that very strange?
Mr Hartnett: I think members of
the public would be interested to know why that is.
Q5 Chairman: I think they would be,
so you are now going to tell us.
Mr Hartnett: If we were to explain
it to them I think they would begin to understand why it is like
that. London, as a financial centre, attracts the headquarters
of many corporates but not the economic activity behind it, so
there are many large businesses which have very little economic
activity to be taxed in the UK. Nearly 38% of the activity of
UK quoted groups happens abroad and much of the profit will be
taxed abroad. Some great UK corporations have very substantial
accumulated losses. Some industries in particular have a lot of
losses brought forward from the late 1990s, and I am thinking
of telecoms and manufacturing. The UK is regarded as having a
relatively generous regime for interest relief as well. Then,
of course, there are pension contributions. And it would be remiss
of me not to say that tax avoidance plays a part in this and we
bear down on that.
Q6 Chairman: That is what worries
me. Let us look at paragraph 4.9, and you have mentioned tax avoidance:
"Our consultation with large businesses indicated that they
felt there was a widening gap between the skill set of their tax
department staff and that of the Large Business Service."
Could it be that you are simply, not to mince words, being taken
for a ride by some big companies?
Mr Hartnett: I do not think so,
Chairman. I really do not believe that is a serious proposition.
With the introduction of tax disclosure rules in 2004 and with
Government having closed a great number of tax avoidance schemes,
what we are learning from both business and their advisers is
that marketed schemes are substantially in the past, although
clearly not entirely. We are seeing fewer disclosed and we test
to make sure disclosure is made. I think we have been very effective
in countering avoidance. Am I complacent, of course not I think
there is scope for us to do more.
Q7 Chairman: Do you think you really
have a proper measure of the gap between what companies are supposed
to pay and what they do pay? The technical term is tax gap but,
to put it in a way that ordinary people understand, do you actually
know whether people are paying the right amount of Corporation
Tax?
Mr Hartnett: I think we can be
confident in absolute terms that there is a tax gap. What we are
less confident about is how to measure it but there are broadly
two approaches. We can have a bottom-up approach through random
inquiries, a tried and tested method that we used for direct taxes
with small business, but which works much less well with big business,
and we can have a top-down approach through our estimates of tax
risk. I think we are getting better and better at estimating the
tax risk.
Q8 Chairman: You saying you are getting
better and better, but if we look at paragraph 2.11 we see that
Corporation Tax at risk is now at £8.5 billion. That is a
lot of money, is it not?
Mr Hartnett: It is a lot of money.
Q9 Chairman: So compliance amongst
large business is a very serious problem, is it not?
Mr Hartnett: Securing compliance
is something we are tackling vigorously, but a lot of the £8.5
billion is tax at risk which may be on technical issues, may be
cross-border issues. I am afraid I cannot tell you sat here at
the moment how much of that is tax avoidance but some will undoubtedly
be.
Q10 Chairman: Putting it in simple
terms the public might understand, would it not be helpful if
these large companies had to publish in their accounts what profits
they are making and what tax they are paying?
Mr Hartnett: I think that would—
Q11 Chairman: It would add transparency,
would it not, and reassure the public?
Mr Hartnett: It would certainly
add transparency but, Chairman, it is there for many of them already.
Q12 Chairman: It is there, is it?
Mr Hartnett: It is there for many
of them.
Q13 Chairman: Sorry?
Mr Hartnett: It is there for many
of them already. You can deduce that, and best practice for some—
Q14 Chairman: What do you mean "you
can deduce that"?
Mr Hartnett: You can look at the
published accounts, you can look at the tax account and you can
work out roughly what tax is paid against what profits, but the
big challenge in the UK compared with, say, the United States,
Australia and some other countries, is that we do not have a consolidation
for tax purposes in the UK of group accounts.
Q15 Chairman: Should we have one?
Mr Hartnett: A consolidation,
a merging of—
Q16 Chairman: Should we have one?
Mr Hartnett: I think it would
be quite helpful in terms of measuring compliance, but in the
past we have found it very difficult to come up with a proposal
that works.
Q17 Chairman: You are working at
it?
Mr Hartnett: We are certainly
doing that.
Chairman: Thank you, Mr Hartnett.
Q18 Mr Touhig: Mr Hartnett, you will
no doubt have seen the headlines generated when the Comptroller
and Auditor General published his report last year: "One-third
of the biggest UK businesses paid no tax" said the Financial
Times on 27 August, "Revealed: how multinational companies
avoid tax" from The Guardian on 6 November. Of course,
the Chairman has asked the question that was on everybody's lips,
how come one-third of the country's 700 largest businesses paid
no Corporation Tax in 2005-06. You did give some response as to
why that should be the case but can you give us a list of the
200 companies which paid no Corporation Tax in 2005-06 or 2006-07?
You can write if you do not have them.
Mr Hartnett: We certainly do not
have them to hand, Mr Touhig. We will look at that.
Q19 Chairman: You will look at it
or you will do it?
Mr Hartnett: No, we will do it
if we can. About 10% of those are gone, they no longer exist.
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