Examination of Witnesses (Questions 80-99)
HM REVENUE AND
CUSTOMS
28 JANUARY 2008
Q80 Mr Mitchell: Following up on
the point on transfer pricing, how much tax have you actually
collected from transfer pricing investigations every year since
1999?
Mr Hartnett: I am not sure I have
got every year since 1999 to hand, but for the last few years
it has been around £500 million a year.
Mr Mitchell: I hope you can give us some
figures on that for the report.
Chairman: You will get them.[5]
Q81 Mr Mitchell: I have an estimate here
which is compiled under the Freedom of Information. For 2004-05
it was £186 million; in 2005-06 £291 million; 2006-07,
£539 million, but that includes £300 million from a
single case.[6]
Do those estimates sound reasonable?
Mr Hartnett: They sound like the
right numbers. I was thinking of the present year and where we
have got so far and the previous year. It is 186, 291 and 539
that are the numbers I have got.
Q82 Mr Mitchell: Are those estimates
higher than in the previous period, in the 1990s? Were you raising
more then from transfer pricing?
Mr Hartnett: We will have to let
you know the answer to that, Mr Mitchell.
Q83 Mr Mitchell: It is my understanding
that the Australian authorities collected a billion in five years,
which is about the same as we are collecting over the same period.
The Australian economy is about a quarter of our size. Why are
they so good and you are so lousy?
Mr Hartnett: Maybe their companies
are rather more mischievous and full of gay abandon in relation
to transfer pricing than ours! I think I would need more information.
Q84 Mr Mitchell: But why are they
collecting so much more than you are?
Mr Hartnett: Perhaps because their
corporates are less compliant than corporates in the UK; that
is a plausible explanation. We have been working on transfer pricing
for a very long time. We talk to the corporates in the UK about
it and we talk to their boards about it, and we are vigorous.
It was the UK that led an awful lot of the OECD work on developing
international transfer pricing rules.
Q85 Mr Mitchell: In 1999 you introduced
penalties for transfer pricing. How many have been imposed? How
much has been collected under that system?
Mr Hartnett: A relatively small
amount generally in relation to large business because until very
recently—
Q86 Mr Mitchell: What is "relatively
small"? Can you give us a figure?
Mr Hartnett: Maybe a few million.
I will look to my right and left to see whether there is more
detailed information. I am sorry, what I am being told is that
we do not have precise figures for those years.[7]
What I wanted to say, Mr Mitchell, was this: until the Finance
Bill 2007 it was open to large groups of companies, in fact any
group of company, to readjust the way group relief operated so
that they could move profit that arose from transfer pricing adjustment
and cover it by group relief and let the profits arise in another
company where there would be no negligence and therefore no scope
for—
Q87 Mr Mitchell: There have been some
incredible examples of transfer pricing and how this is fiddled.
It has obviously been going on on a large scale. Are you satisfied
you have the staff competent to do it with 16 new appointments?
It is very labour-intensive, checking up on transfer pricing.
Mr Hartnett: I believe we have
some of the best people in the world working on transfer pricing,
and the addition of industry economic specialists to them is transforming
the way in which we do transfer pricing in the UK. As I hope I
said to Mr Bacon—otherwise I got slightly confused—we
have some very big transfer pricing inquiries indeed that we are—
Q88 Mr Mitchell: Okay. You say that
not much has been collected in penalties: why are you so nice
and kind and generous to big companies? Why are the fines here
in terms of peanuts to them, whereas in America it is capitalism,
is it not; and the land of free enterprise; and they are much
tougher on dealing with in particular the Big Four? I have some
examples here. KPMG admitted to criminal wrongdoing and agreed
to pay $456 million. They were then dealt with—because through
some fiddle in the sale of their consulting arm to Cap Gemini,
which was sold to British partners of Ernst & Young as well—they
were fined for the tax fraud involving the sale to Cap Gemini
of their consulting arm. Other countries—Australia, KPMG
were hit with a claim for up to 100 million of unpaid taxes and
penalties for allegedly breaching tax avoidance law. Why are we
so gentle? Do we want to show that we are nice to them, to attract
them to work here; is it Government policy to be nice to big capitalism
and not want to frighten them away?
Mr Hartnett: We are not gentle,
Mr Mitchell; that is not the approach. In the UK there are three
factors. First, we have done a lot of research with big business
as to the behavioural effect of penalties; and we have been leading
work for the Government on modernising—
Q89 Mr Mitchell: I notice you are
just schmoozing up to them to teach them the way of virtue, which
sounds about as useful as telling drug addicts to stop fixing?
Mr Hartnett: Let me just explain
the three issues, and then perhaps I can deal with that. We talk
to business, and they tell us that a penalty of £10 million
could lead to the resignation of a CEO or a CFO, and they take
great care not to get exposed to the penalties; and we see that.
I explained earlier on the difficulty we had with group relief.
The third issue is that the new rules introduced by Parliament
to provide the penalties which come in for events during 2008
and tax returns after April 2009, will make it much easier to
obtain a penalty where a corporate or anyone else does not take
sufficient care, or worse.
Q90 Mr Mitchell: You still have not
told me why the Americans are so much tougher—
Mr Hartnett: They have a different
regime.
Q91 Mr Mitchell: --- and why fines
for practices, which are heavy there, are so much lower in this
country for the same kind of thing?
Mr Hartnett: But the law is completely
different, Mr Mitchell. That is the issue. I am very pleased to
say in the UK that thus far at least we have not seen as serious
criminal activity as you described by KPMG.
Q92 Mr Mitchell: Can you tell us
how many staff from the Large Business Service—I get the
impression, frankly, that you are overrun with work and understaffed—have
left to join the Big Four in, say, the last three years?
Mr Hartnett: No more than between
six and twelve. If you need a precise figure, Mr Mitchell, we
will give you one.[8]
Q93 Mr Mitchell: Are you paying them
enough to ensure that we get—
Ms Dawes: We have recruited quite
a lot of people from the Big Four over the last few years. It
has been an active part of our strategy. In fact, to have a flow
of staff in both directions is really quite healthy.
Q94 Mr Mitchell: I notice you are
calling in the poachers to help the gamekeepers and taking advice
from them—
Ms Dawes: We have certainly found
that the people we recruited who have got recent experience of
working in the big firms have a brought a knowledge and an expertise
that have been really, really helpful. Sometimes that has been
about avoidance and approaches to avoidance, but sometimes it
has just been a commercial understanding and a different perspective.
Q95 Mr Mitchell: You are satisfied
that you are paying staff enough to keep quality gamekeepers dealing
effectively with the situation?
Mr Hartnett: I think the simple
answer to that is that businesses in the UK, and those who advise
them, look at our people and rate many of them very highly indeed;
thus the concern that Mr Touhig raised earlier on about what will
happen when 25% of our people go over the next however many years
it was.
Q96 Mr Mitchell: I want to know why
board members get involved in specific investigations. Do you
get involved in specific investigations?
Mr Hartnett: Occasionally.
Q97 Mr Mitchell: If I were to come
to you and say, "This inspector has been beastly to us ...
"
Mr Hartnett: I cannot remember
anyone doing that in the last many years. The reason I get involved
is the law can require me to. As a Commissioner of Revenue and
Customs—
Q98 Mr Mitchell: Can you tell us
how many you have got into in the last two years?
Mr Hartnett: I would say probably
half a dozen major cases—because we changed our approach.
We have in those a board-to-board engagement. I expect to see
the chairman, the CFO and CEO of major corporates that we are
investigating, to tell them why and put them on notice about how
we are going to conduct the investigation—
Q99 Mr Mitchell: Do they get a better
deal when you get involved?
Mr Hartnett: I sincerely hope
not.
5 Note by Witness: The yield from transfer
pricing enquiries on large businesses was £118m in 2003-04,
£138m in 2004-05, £230m in 2005-06 and £473m in
2006-07. Information is not available in relation to earlier years
because in many cases the records do not distinguish between the
yield from transfer pricing and the yield from other interventions
in respect of international tax avoidance. Back
6
Note by Witness: The figures given by Dave Hartnett to
the PAC are correct and are consistent with those given in a recent
FOI request from Richard Brooks of Private Eye. The figures quoted
here by Austin Mitchell MP appear to be a misreading of the FOI
figures, omitting the LC figures for 2004-05 and 2005-06 and transposing
two digits in 2006-07. Back
7
Note by Witness: Penalties can be charged in respect of
transfer pricing adjustments only where there is evidence of negligence
or fraud or due to failure to keep adequate documentation. Penalties
were charged in five cases during 2005/06 and one case in 2006/07.
Information is not available for earlier years. Back
8
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