Tax avoidance: tackling marketed avoidance schemes - Public Accounts Committee Contents

1   Marketing tax avoidance schemes

1.  HM Revenue & Customs (HMRC) estimates that in 2010-11 the annual tax gap due to avoidance across all taxes and customers was £5 billion.[2] Our hearing focussed on marketed avoidance schemes that are sold to one or more high worth individuals with the aim of reducing their tax liability. At 31 March 2012, the total tax at risk from avoidance by individuals and smaller companies over all tax years was £10.2 billion.[3] In each of the last two tax years, around 10,000 people reported the use of a marketed tax avoidance scheme, and there were at least 324 different schemes in use in 2011-12.[4]

2.  The Committee took evidence from representatives from three companies involved in designing and selling schemes or arrangements that use tax reliefs or avoid tax. We were told that there is a lot of money to be made in selling avoidance schemes. Commissions paid to promoters can be up to 20 per cent of the tax saved.[5] Tax Trade confirmed that it was in the business of selling tax mitigation schemes, and that one of the schemes it promoted— 'Working Wheels'—was effectively a device that allows investors to avoid tax.[6] We were told that companies will sign up as many clients as possible and will continue to sell a scheme until HMRC changes the law to remove the tax advantage and closes the scheme down. All the schemes Tax Trade has sold—including 'Working Wheels'—have now been closed down but once this happens promoters simply move on to the next scheme.[7]

3.  The other two companies, Future Capital Partners and Ingenious Media, were involved in schemes which use tax relief that Parliament has introduced, including the relief introduced in 1997, to encourage investment in the British film industry. These included using sale and leaseback to acquire completed films and lease them back to the films' producers, and creating partnerships to invest in films. These schemes often involve the use of loans to increase the amount invested and therefore the tax relief claimed. For example, the Terra Nova scheme involved investors being loaned 85% of the investment to increase the trade losses that, as partners to the investment, they could use to offset tax liabilities.[8] Future Capital Partners stated that since 1997 it had been involved in partnerships involving £6.5 billion.[9]

4.  Both Future Capital Partners and Ingenious Media asserted that their organisations existed to raise money to invest in the British film industry and denied that they exploited tax reliefs to get a tax advantage that Parliament never intended.[10] Ingenious and Future Capital Partners also denied that they were involved in "exit schemes" to allow partners to leave partnerships to avoid the tax liability that arises when the partnerships become profitable.[11] We were not convinced that this is the case in practice. The legislation introduced in 2007 to limit the use of tax reliefs in partnerships was introduced because they were not being used as Parliament intended, including in the film industry.[12]

5.  People seeking to avoid paying tax often use offshore structures to make their affairs less transparent. Partnerships deliberately use offshore structures in Jersey and other countries to avoid the requirement to register at Companies House, thus maintaining the confidentiality of those involved.[13] Offshore companies are also used for administration to avoid consolidating all profits and losses in one set of accounts. While there may be valid reasons for using offshore structures, this contributes to a lack of transparency about the finances of some investment partnerships and makes it hard to see how much tax they are paying or how much profit they are generating.[14]

6.  Tax Trade told us that the complexity of the tax system contributed to the opportunities for tax avoidance, and that simplifying the tax system could reduce avoidance.[15] The witness accepted that this complexity allows legislation to be used in a way that was not intended by Parliament, as summarised by the ruling by Justice Henderson in 2007 that: "This is in my view one of those cases, which will inevitably occur from time to time in a tax system as complicated as ours, where a well-advised taxpayer has been able to take advantage of an unintended gap left by the interaction between two different sets of statutory provisions."[16] HMRC said it was always actively engaged in planning future legislation and evaluating existing legislation and that the Office of Tax Simplification (OTS) was working to simplify the tax system, but we understand that there are only six people in the OTS.[17] HMRC told us that tax simplification would not remove all avoidance as some avoidance, in areas such as the film industry, took place through the abuse of Parliament's intention in introducing the relief.[18]

7.  A General Anti-Abuse Rule (GAAR) is being introduced in the 2013 Finance Bill. HMRC expects the GAAR to act as a further deterrent against tax avoidance, and cited evidence of a firm withdrawing from the market in anticipation of it becoming law.[19] However, HMRC acknowledged that it will take a considerable time for the first case to be litigated under the new legislation, and does not expect the GAAR to remove the need for other anti-avoidance legislation or for DOTAS.[20]

8.  Other countries, for example Australia, use an advance rulings system where promoters apply to the tax authorities to get a ruling on whether tax structures are within the law before implementing them. [21] We were told that this practice could reduce the uncertainty about what is tax avoidance and what is not. It could also reduce investment in avoidance schemes, as it is not possible in Australia to raise money for investments seeking to exploit a tax advantage unless there is an advance ruling from the Australian Tax Office approving the scheme.[22] Furthermore, Australia has penalties for promoters who do not comply with the advance ruling system or who promote a scheme in a way that is artificial in relation to that scheme, unlike the UK where there are no penalties for promoting tax avoidance. HMRC admitted that the Australian system had worked well in tackling mass marketed avoidance schemes.[23]

2   Figure 1.3, HMRC, Measuring Tax Gaps 2012, October 2012 Back

3   Figure 4, C&AG's Report, Tax avoidance: tackling marketed avoidance schemes, Session 2012-13, HC 730 Back

4   C&AG's Report, Figure 9 and Figure 10  Back

5   Qq 13, 147 -149, Q 158,  Back

6   Qq 4, 19 - 22 Back

7   Qq 50, 103, 104, 111 Back

8   Q 122 Back

9   Qq 152 - 153 Back

10   Qq116, 120, 121, 124, 125, 197, 203, 204, 224 Back

11   Qq 175-180, 205-214 Back

12   Qq 123 -125, 202, 223 Back

13   Qq 139-143, Ev 37 Back

14   Qq 256-267 Back

15   Qq 6, 9, 36, 52-54,  Back

16   Q 48, Ev 38 Back

17   Qq 303, 305 Back

18   Q 303 Back

19   Qq 328, 332, 333 Back

20   Qq 328, 333 Back

21   Appendix 3, C&AG's Report, Tax avoidance: tackling marketed avoidance schemes, Session 2012-13, HC 730 Back

22   Q 323 Back

23   Qq 323, Appendix 3, C&AG's Report, Tax avoidance: tackling marketed avoidance schemes, Session 2012-13, HC 730 Back

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Prepared 19 February 2013