HM Revenue & Customs response to supplementary
questions submitted by Mr Austin Mitchell
1. Mr Hartnett said he had intervened in half
a dozen big cases. Which cases has he intervened in, why and what
the outcome of his intervention was?
2. You mentioned that you had been personally
involved in half a dozen major cases in two years. I've had indications
that you were in fact involved in more. Which is correct?
Mr Hartnett met with senior officers of major
corporations where it has been apparent that intervention at that
board level can lead to issues being progressed and an improved
relationship between the taxpayer and HMRC. This sort of board
to board engagement is a key feature of HMRC's High Risk Corporates
Programme. Statutory rules of confidentiality prevent cases from
being identified.
3. Mr Hartnett said loopholes had prevented
the penalty rules they've established on transfer pricing working
until this year. HMRC have known about these loopholes for a long
time so why haven't HMRC acted to close them before and why weren't
Ministers advised to close them?
Legislation was introduced in 2007 on penalties
for incorrect returns that means penalties now apply to group
companies in exactly the same way as to singleton companies. Before
that it was possible to escape a penalty by offsetting losses
arising in one group company against a transfer pricing adjustment
(or indeed any adjustment) in another group company, reducing
the tax effect of the adjustment to zero and eliminating a penalty
position. This change was introduced as part of a balanced package
which sought to support those who seek to comply with their tax
obligations whilst coming down hard on those seeking an unfair
advantage by not complying. It is a product of the wider HMRC
Review of Powers, Deterrents and Safeguards set up following the
merger of Inland Revenue and Customs and Excise.
4. Mr Hartnett said that HMRC don't have penalty
figures but now I've looked back through my records and I was
told in a PQ answer on 6 July 2006 that there have been, then,
five cases of transfer pricing penalties. What are they?
Statutory rules of confidentiality prevent individual
cases from being identified.
5. Mr Hartnett seems, from the NAO report,
to be working under the impression that very few large companies
avoid tax (p37 and Dr P Pugh p115). I don't think that is right.
Could HMRC give us an estimate of the number of groups dealt with
by the large business service who have undertaken an avoidance
scheme in the last five years?
HMRC does not keep a running total of the number
of groups engaged in CT avoidance.
6. Mr Hartnett quoted approvingly from an
unidentified company's views on corporate responsibility. Is it
correct that this was in fact a quotation from HMRC's Varney review?
No. The extract from a company's corporate responsibility
statement does indeed appear in the report of the Review of Links
with Large Business. A copy of the relevant statement was obtained
before the Review was published and what appears in the Review
was an extract of that statement.
7. Mr Hartnett alluded to the law of diminishing
returns to suggest that more staff would not always mean more
income. How many thousand staff are you away from that point?
As Mr Hartnett said in his response to the Committee,
we do not know precisely whether an increase in staff would lead
to increased revenue from compliance work.
As the Committee has heard, the Large Business
Service has been changing the way it works by resourcing to risk;
moving staff away from low risk and low yield work and focusing
on higher risk businesses and issues and it is true to say that
compliance yield has increased.
We are also investing in the developing the
professional and technical skills of staff to better deal with
those increased risks.
But this also needs to be balanced against the
need to protect the integrity of the whole tax system and the
need to respond in an appropriate and proportionate way to non-compliance.
8. You mentioned that 150 tax inspectors had
gone into one company. That would be a huge proportion of your
inspectors working for one of your 700 customers. Is it correct?
There must have been something horribly wrong to merit this.
Resourcing to risk involves the Department moving
the focus away from customers who have been classed as low risk
to those customers deemed to be a greater risk.
At the top end of this process is the High Risk
Corporates Programme, which deals with customers whose behaviour
is considered to cause serious risk to the payment of tax.
Alongside board to board level engagement persuading
customers to change behaviour from the top down, is the deployment
of concentrated resource from across the Department to these highest
areas of risk to carry out in-depth investigations with greater
intensity and faster timescales.
This approach is consistent with the risk management
principles that were set out in the framework announced by the
Department in March 2007, which has been widely publicised.
9. The response to Q3 (clarification as to
the reason for the delay in taking action to close the loopholes
affecting the implementation of the transfer pricing penalty rules)
does not answer the question put.
We are not able to comment on advice to Ministers.
Work on closing the loophole was taken forward as part of the
HMRC Review of Powers, Deterrents and Safeguards which was set
up following the merger of the former Inland Revenue and Customs
and Excise. Legislation was introduced in 2007.
10. The response to Q4 (I was told in a PQ
answer on 6 July 2006 that there have been, then, five cases of
transfer pricing penalties. What are they?) should give the number
of cases, even if it is not possible to identify the companies
involved.
The latest figures show that there have been
seven cases of transfer pricing penalties from 2004-05 onwards.
Again, statutory rules of confidentiality prevent individual cases
from being identified.
11. On the issue raised in Q5 (Could HMRC
give us an estimate of the number of groups dealt with by the
large business service who have undertaken an avoidance scheme
in the last five years?) Mr Mitchell understands that you have
surveyed 70 large companies and established levels of avoidance.
He would be grateful if you could let the Committee have the survey.
As part of an ad hoc survey on a number
of issues, carried out in autumn 2004 and early 2005, HMRC questioned
departmental Case Directors on perceived levels of avoidance.
Results were obtained for 102 large companies. HMRC's statutory
rules of confidentiality prevent the release of the survey data.
12. You said during the hearing that 150 of
your officers were recently applied to one case. The response
to Q8 (You mentioned that 150 tax inspectors had gone into one
company. That would be a huge proportion of your inspectors working
for one of your 700 customers. Is it correct?) does not confirm
this. Mr Mitchell would be grateful if you could clearly confirm
of correct your statement during the hearing and give as many
details of the case as possible.
As previously explained, the High Risk Corporates
Programme is a new approach to our highest risk customers that
involves working enquiries in greater depth and to much faster
timelines.
150 staff were involved in the case quoted at
the hearing. Some were engaged full time but the majority would
have had varying degrees of involvement whilst continuing to be
deployed on other cases or work areas. This level of deployment
was necessary for a few months whilst we worked with our customer
to accelerate and conclude around 200 open enquiries.
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