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.
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.
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.
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. 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. 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 soldincluding 'Working Wheels'have
now been closed down but once this happens promoters simply move
on to the next scheme.
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.
Future Capital Partners stated that since 1997 it had been involved
in partnerships involving £6.5 billion.
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.
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
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.
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.
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.
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.
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
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.
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
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. 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.
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. 
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. 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
2 Figure 1.3, HMRC, Measuring Tax Gaps 2012, October
Figure 4, C&AG's Report, Tax avoidance: tackling marketed
avoidance schemes, Session 2012-13, HC 730 Back
C&AG's Report, Figure 9 and Figure 10 Back
Qq 13, 147 -149, Q 158, Back
Qq 4, 19 - 22 Back
Qq 50, 103, 104, 111 Back
Q 122 Back
Qq 152 - 153 Back
Qq116, 120, 121, 124, 125, 197, 203, 204, 224 Back
Qq 175-180, 205-214 Back
Qq 123 -125, 202, 223 Back
Qq 139-143, Ev 37 Back
Qq 256-267 Back
Qq 6, 9, 36, 52-54, Back
Q 48, Ev 38 Back
Qq 303, 305 Back
Q 303 Back
Qq 328, 332, 333 Back
Qq 328, 333 Back
Appendix 3, C&AG's Report, Tax avoidance: tackling marketed
avoidance schemes, Session 2012-13, HC 730 Back
Q 323 Back
Qq 323, Appendix 3, C&AG's Report, Tax avoidance: tackling
marketed avoidance schemes, Session 2012-13, HC 730 Back