Examination of Witnesses (Questions 100-119)
HM REVENUE AND
CUSTOMS
28 JANUARY 2008
Q100 Mr Mitchell: So do I! But is
it good corporate governance for board members to be schmoozing
up at this level?
Mr Hartnett: There is no schmoozing
going on, Mr Mitchell.
Q101 Chairman: It is. You are going
in to look at the reports of inspectors. He might have hit a brick
wall and you then come in as all emollient.
Mr Hartnett: No, not at all. If
I go and see the chairman of a major public company in the UK
or the subsidiary of a major US public company in the UK, it is
to look him straight in the eye, tell him how we are investigating,
what we are looking at, and how we will take it forward. That
is why I told the chairman of a major public company not very
many weeks ago that we would be putting 150 tax inspectors into
his company.
Mr Mitchell: The Chairman, I expect him
to be called in—
Chairman: Mr Hartnett, you can now start
schmoozing with Angela Browning!
Mr Mitchell: Just one more point!
Q102 Chairman: No, no, you have had
your time. You have done your schmoozing; you have had ten minutes.
All right, as it is you!
Mr Hartnett: I do not think he
has schmoozed me at all, though!
Q103 Mr Mitchell: If you cannot,
as you told the Chairman, estimate the tax gap for large companies,
how do you know how well or how badly you are doing?
Mr Hartnett: Well, we certainly
know how well or how badly we are doing on individual cases when
we see what sort of money we bring in. We are changing, as I said
earlier on, how we apply resource-to-risk, and I am very hopeful
that very shortly we will have sufficiently robust figures for
tax gap to be able to make those available. We have some ideas
at the minute, and that gives us some insights.
Mr Mitchell: End of schmaltz. Thank you
very much.
Q104 Angela Browning: Mr Hartnett,
I would like to concentrate on the 700 of the 2,400 large businesses,
the ones that bring you in £23.8 billion in corporation tax;
and the 7% of that 700 that are responsible for 67% of the revenue.
We have heard quite a lot about what you are doing, and I would
like to focus first on the here and now and the future, and then
at the end I would like to come on to this backlog of old inquiries.
If you look at part II of the NAO report, page 19, and this question
of the work of your Department to tackle corporation tax avoidance,
we see that since the Government required disclosure of tax avoidance
the Department has received nearly 900 disclosures, and the Government
has closed 350 schemes, almost 40%. In the light of the comments
that were made earlier about offsetting tax liability by the use
of pension input and so on, presumably those would be the sort
of schemes that would fall into the 60% that the Government has
sought not to close!
Mr Hartnett: No, I do not think
so. The schemes that require disclosure under the 2004 rules,
which have been improved since then, are schemes of tax avoidance;
they might involve artificiality or cross-border transactions;
some very artificial use of things like Scottish partnerships,
which are opaque in some countries and transparent in others.
The pension relief you talk about is simply a statutory deduction
for contributions to pension funds, and I am not sure I have ever
seen a corporate simply invest in a pension fund to lower its
tax bill; it seems to me to be a very expensive way to get a reduction
in tax.
Q105 Angela Browning: Thank you for
that, because I think we all understand it on a personal basis,
where sometimes people use pension input to ensure they keep below
the higher rate of tax and things like that; but I was just concerned
that, on that sort of scale, corporates were using some of these
devices; and, if so, should not the Government be looking at it,
because we see further on in the NAO report here, which I thought
sounded a little bit as though the Government felt they had exhausted—and
the graph itself shows that it is tapered down in terms of where
these disclosed avoidance schemes have been dealt with by the
Government; but we also see, worryingly, in 2.30 that the Department
has identified a move from the generic avoidance schemes to bespoke
schemes that are often specifically designed to cover large, one-off
transactions, or companies with specific structures. Can I put
it to you bluntly? Are you dealing with a backlog of historic
laws of unintended consequences, where companies that can afford
the smarter tax lawyers and tax advisers are, if you like, out-pacing
you in terms of the future and what they are doing to avoid tax?
Mr Hartnett: The outcome of the
2004 disclosure rules is that we initially saw a very significant
number of disclosures of schemes that had been marketed often
to many different corporates. There is one in the courts at the
moment, the tax-efficient off market swap scheme, which Revenue
and Customs won at the first stage and will be going on. What
it does in terms is take a swap, which is flat normally in economic
and tax terms, and front-load it to get a deduction, and then
if by magic seeks not to reverse that later on. Magic plays a
part in a lot of this! We have pursued schemes like that vigorously
and we have asked for legislative change when it has been needed
to stop the scheme. The major accounting and law firms, the big
corporates and commentators in the media say that those disclosure
rules have been very successful in stopping marketed schemes—not
entirely, but making a big impact. What we are seeing now is different
arrangements to try and reduce tax bills. For example, someone
with a very valuable product—I will not be more specific
but you will get a feel for what I mean—someone with a valuable
brand in alcohol may seek to move the brand out of the UK and
into a low tax country, and then pay for the use of it. We would
seek to apply our transfer pricing rules to that because we think
that that is not a straightforward way of reducing tax liability.
We are beginning to see clever structuring arrangements in big
corporates. Structuring is an issue all over the world in tax
administrations at the minute, trying to do things like that.
We and others are working through the OECD to determine the best
way to address it.
Q106 Angela Browning: Can I put to
you a very blunt question? Of the schemes that you have identified
on which the Government has then legislated to close the loophole—have
they responded 100% to your list of loopholes you have identified,
or are there outstanding ones you would like them to close; and,
if so, how big is that list?
Mr Hartnett: I think that the
overwhelming majority (I do not have a number for you) of schemes
that have been flushed out through the disclosure rules have either
been addressed by legislation, or are being addressed in litigation
because we do not believe they work; or, as a precautionary measure,
both litigation and legislation. This has been a very successful
approach.
Q107 Angela Browning: I wanted to
focus on this 7% of the 700. We are looking here at quite a small
number of companies on which you have to concentrate. They clearly
are advised by very clever people in terms of their tax liabilities
and tax law: have you identified a pattern, not from the companies
in that group but from those who advise them and whom they employ
to assist them on the legal side? Is that an area you have looked
at—not the companies, but those advising them?
Mr Hartnett: We have done two
very big pieces of work around that. As I said to Mr Bacon, we
have set up with other countries the Joint International Tax Shelter
Information Centre. We did that because the four international
countries could see that major firms of tax advisers which were
global in their nature were saying: "We have got something
that works in Australia; we know the UK rules are different; but
why do you not have a look at it and see how you can make it work?"
In the past it might have taken years of exchanging information
under a double taxation treaty to give us insight into that; now
we have seen arrangements where that exchange happens quite literally
within days of something becoming clear in one country. The other
piece of work I mentioned to Mr Bacon is UK-led with the OECD,
the study in tax intermediaries. Forgive the plug, but it is a
great read. It is on the OECD website. That is about managing
the risk that big firms of tax advisers produce for tax systems,
and putting it fairly and squarely in the lap of chief financial
officers of big business to take responsibility for their advisers.
I am not sure that always happened in the past.
Q108 Angela Browning: You said you
had specifically head-hunted people who would deal with exactly
this sort of area. Presumably, it is changing all the time and
there are new things coming. Are you absolutely certain you are
keeping pace with these changes? Are you putting the resources
in?
Mr Hartnett: We are putting the
resource in. Am I confident that we are keeping pace? No, I am
afraid not. We are keeping pace faster than we have ever done
before, but there are still—we call them boutiques—that
operate in the big financial centres—New York, London and
one or two other places, which are trying things out all the time—still
in the shadows—and we and our partner countries in JITSIC
are trying to flush these out.
Q109 Angela Browning: On the backlog
of old inquiries, which clearly is labour intensive, is there
any conflict now in the need for resources to go into the new
tax avoidance situations that you have just talked about, and
the need to mop up this backlog as quickly as possible? Where
does the pressure come?
Ms Dawes: In practice a lot of
the oldest inquiries do tend to be the most complex, often avoidance
schemes, particularly often transfer pricing; so there is not
a lot of conflict between tackling some of the old issues and
the bigger issues. We have made a lot of progress, nonetheless,
in bringing down the number of old inquiries but there were also
some smaller ones that needed attention.
Q110 Angela Browning: In this backlog
of old inquiries, what sort of analysis have you been able to
make in terms of whether, again, they can be grouped in terms
of where the genesis of them is? Are you able to identify, for
example, certain companies that are assisting these companies:
are they deliberately going slow so that they have got the money
for their use now while you sort out the problem? Pay late—as
with anything, very often gives people a good cash-flow situation.
Is there a pattern there, or are they just complicated old inquiries?
Mr Hartnett: There is a pattern
but it is not universal. Some are complicated old inquiries which
are just fiendishly difficult, where what is going on in industry
and commerce is not easily translated. I am going to give you
an example, if I may, which again demonstrates what can go on.
We have an investigation at the minute into an issue we are very
worried about. It has been around for a while as an investigation.
We are meeting obstruction at every stage from the tax advisers
and the company, challenges to our rights to ask for information
and challenged to our interpretation—
Q111 Angela Browning: I am sorry,
but I am going to run out of time any second now. Do you have
discussions, and are they of any help, with the Chartered Institute
of Taxation?
Mr Hartnett: We consistently discuss
things with the Chartered Institute of Taxation and the other
bodies, but also with the heads of tax of major tax advisers with
their chairmen for UK and Europe, and relatively recently with
their global chairmen as well, to make very clear our concerns.
Q112 Dr Pugh: I will be very brief
because much of what I want to ask has already been asked by Mr
Mitchell, so I will not repeat that. Can I ask you for confirmation
of some answers you gave to Mr Mitchell? You are going to give
us figures on the number of poachers becoming gamekeepers and
gamekeepers that become poachers—in other words the transfer
of staff from the Revenue to the private sector and so on tax
lawyers and firms and everyone else?
Mr Hartnett: Yes, of course. [9]
Q113 Dr Pugh Have you given us figures,
or are you going to give us figures on the turnover in senior
management at the top where you have obviously the most skilled
people?
Mr Hartnett: I am not sure I quite
understand the question. We can try and give you some figures
about retirements and people who leave the for private sector,
where we think the number is very small. As I think I was saying
to the Chairman right at the start, we have a larger number of
fledgling specialists coming through to be trained to replace
people going. We can try and do that.
Q114 Dr Pugh: It is a very complex
game being played between the tax authorities and various corporate
lawyers on the other side, and all of them very skilled and intelligent
people. It would be—
Mr Hartnett: So are our people
as well.
Q115 Dr Pugh: Absolutely, which is
why I am very interested, if they are intelligent and able, that
they stay there and there is not a haemorrhaging of any sort to
other walks of life or, for that matter, to the corporate tax
sector. You can give us some indication of that.
Mr Hartnett: We will certainly
do that.
Dr Pugh: The NAO report states on page
37: "The Department has based its strategy on the premise
that the majority of businesses want to pay the right amount of
tax at the right time." That is your strategy, and the premise
you based it on. Is it not slightly optimistic or Panglossian?
I would have thought that most businesses wanted to pay as little
tax as possible and as late as possible!
Q116 Chairman: For those watching,
just describe Panglossian.
Mr Hartnett: Chairman, I was going
to be able to cope with Panglossian. It is the first time, Dr
Pugh, if I may say that in this Committee Voltaire has come to
the fore to my knowledge!
Q117 Chairman: Well done!
Mr Hartnett: Let me read you something
that I have brought along as an aid. It is a quote from the widely
published corporate responsibility statement of a major company.
They say this: "Tax planning is perfectly acceptable provided
it is consistent with the laws of the jurisdiction concerned ...
"—here is hope for you in the next few words—"
... and has regard to the intention of the legislature as well
as the strict letter of the law." I am with you entirely:
four or five years ago, before we really began to bear down on
tax avoidance, I would have been surprised to see that, and it
is now happening. The next three lines state: "Artificial
transactions whose sole purpose is to reduce tax should not be
undertaken, particularly those that have no economic effect other
than tax-saving."
Q118 Dr Pugh: To be fair, it is a
commendable ethical position; I am just sceptical of whether they
always carry it out.
Mr Hartnett: May I quickly give
you another example?
Q119 Dr Pugh: I am sure you will—yes.
Mr Hartnett: We have seen recently
a major corporate, with whom we settled a number of issues, come
to us and say: "We settled all those issues for the last
seven or eight years. We did a scheme of tax planning the following
year, and this is just to confirm that we will be reversing it
in our taxation computations and we do not want to take advantage
of it."
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