Conclusions and recommendations
1. The UK Government needs to get a grip on
large corporations which generate significant income in the UK
but pay little or no tax.
Despite an increase in total tax revenues of £4 billion from
last year, corporation tax revenues have fallen. Multinationals
appear to avoid UK corporation tax by arranging their corporate
structures, transfer payments and royalties to move money to low
tax jurisdictions overseas. There is little credible information
to inform public debate over the equity of corporate tax payments
and HMRC lacked clarity when explaining its approach to enforcing
the corporation tax regime. Since multinational companies are
able to set up in any country, this may need international co-ordination
to resolve. HMRC should work with HM Treasury to:
- police our tax borders more
efficiently, introducing national measures to secure a fair contribution
to the tax base from multinational corporations;
- lead international efforts, particularly within
the EU, to reform the way in which multinational companies are
able to transfer earnings overseas and thereby potentially avoid
tax payments;
- publish clear sector benchmarks for common charges
such as royalty payments and intellectual property rights; and
- develop best practice standards in the information
companies should make publicly available about their tax practices
and work with the relevant bodies to make them part of mandatory
reporting requirements.
2. HMRC needs to be seen to challenge practices
to prevent the abuse of transfer pricing, royalty payments, intellectual
property pricing and interest payments.
HMRC needs a far more determined approach to dealing with multinationals
and their tax affairs. Top officials need to challenge the status
quo and be more assertive, for example in accepting that excessive
levels of royalty payments are appropriate when businesses are
making a loss. Given the high-profile cases of large companies
avoiding tax and the Department's selective prosecution practice,
there may be an impact on the compliance rate of individuals and
small and medium companies who feel victimised. HMRC should direct
more effort into challenging artificial arrangements, be more
willing to prosecute improper corporate arrangements and make
more information available to the public about this aspect of
its work.
3. HMRC is too passive in its approach to
closing the tax gap. It has only reduced
the gap between what is due and what is collected by £1 billion
since 2005. Closing the tax gap is central to public perceptions
of fairness during a period of austerity and of cuts to public
services and HMRC appears to be complacent in its approach. HMRC
must set immediate and ambitious targets to reduce the tax gap.
4. This Committee lacks confidence that HMRC
both has and is using the business intelligence systems it needs.
HMRC is rationalising 3,000 systems down to 13 big systems. Private
sector tools for business intelligence analysis develop quickly,
but HMRC does not. In 2004, and again in 2009, this Committee
recommended HMRC use risk profiling to better target debt collection
activities; but full implementation of systems to enable systematic
analysis of debt and of debtor behaviour (known as "analytics")
has been delayed from April 2011 to October 2012. HMRC should
use its fully implemented analytics systems to develop a sector-by-sector
approach to compliance activity so that it focuses resources on
priority areas.
5. HMRC is unduly complacent about the rollout
of the Real Time Information (RTI) system and the child benefit
changes. We are concerned that, with four
months to go to the main roll out of RTI, the project has been
rated amber by the Major Projects Authority. The Institute of
Chartered Accountants in England and Wales (ICAEW) thinks that
the Department's current plans will increase the burden on small
businesses and therefore on the Department's workload. Similarly
more individuals will be required to register for self-assessment
as a result of the changes to child benefit. HMRC believes that
there will be negligible impact from both sets of changes and
do not have contingency plans to deal with delay or fluctuations
in workload. By the end of March 2013, HMRC should provide the
Committee with details of its plans to manage the burden on small
businesses as a result of RTI; and provide credible contingency
arrangements should the main rollout of RTI between April and
October 2013 not go according to plan.
6. HMRC is persistently unable to get a grip
of error and fraud in tax credits. The
estimated level of error and fraud in tax credit payments was
between £2.08 billion and £2.46 billion in 2010-11,
which was higher than both the estimate for 2009-10 and its target.
Given its performance, HMRC is unlikely to recover tax credit
debt before the introduction of Universal Credit. Families may
receive less money from the new system, and will receive even
less if they have to repay tax credit overpayments. The poor administration
of tax credits will undoubtedly deter some of the most needy from
claiming tax credits yet HMRC has not made any estimate of the
extent of this. HMRC must improve its use of data and analytics
to target its interventions more effectively and improve the accuracy
of tax credit awards by the end of 2012-13.
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