Tax avoidance: the role of large accountancy firms - Public Accounts Committee Contents

Conclusions and recommendations

1.  The UK tax system is too complex and a more radical approach to simplification is needed. Nearly 9,000 of the four firms' UK employees are engaged in tax work. The four firms agree that the tax system is too complex and stated that no-one benefits from this. The Office of Tax Simplification is grossly understaffed and has focused on abolishing tax rules that are no longer necessary, rather than more radical simplification. HM Treasury and HMRC should work together to make more radical progress in simplifying the UK's tax code, and should equip the Office of Tax Simplification with the resources and influence it needs to help them do so.

2.  There is no clarity over where firms draw the line between acceptable tax planning and aggressive tax avoidance. The four firms stated that they would no longer engage in some of the schemes they devised ten years ago, such as the cases they have lost in court. We heard about the guidelines that firms have to govern their tax advice, but they are still devising complex schemes that look artificial and their appetite for risk appears high—selling schemes that they consider only have a 50% chance of being upheld in court. HM Treasury should introduce a code of conduct for tax advisers, setting out what it and HMRC consider acceptable in terms of tax planning. Compliance with this code should determine whether or not these firms can access both government and wider public sector work.

3.  It is inappropriate for individuals from firms to advise on tax law and then devise ways to avoid the tax. The four firms second staff to HM Treasury to advise on technical issues in drafting legislation. They conceded that this may give rise to a perception that they have an influence on the formulation of tax policy that smaller businesses do not have. The four firms maintained that their involvement had improved the quality of legislation, but we are concerned that the very people who provide this advice then go on to advise their clients how to use those laws to avoid tax. We were told by the four firms that the advice they offer to clients in regard to specific tax laws is in line with what Parliament intended those laws to achieve. HM Treasury should ensure that the code of conduct we have proposed for tax advisors sets out how conflicts of interest should be managed when a firm advises government on the formulation of tax law and subsequently provides tax advice to clients in related areas.

4.  We welcome the four firms' agreement that tax laws are out of date and need revising. We heard that international tax rules have not changed to reflect the way businesses operate globally and through the internet. It is too easy for companies to exploit these rules by setting up structures in low-tax jurisdictions, rather than pay tax where they actually conduct their business and sell their goods and services. We heard helpful examples of ways of better matching taxation with economic activity, as used in some US states. In line with the Committee's first recommendation in our Nineteenth report, the UK must take the lead in demanding the urgent reform of international tax law.

5.  Greater transparency over companies' tax affairs would increase the pressure on multinationals to pay a fair share of tax in the countries where they operate. We are pleased that the four firms agree that there should be more transparency over where companies make profits and pay tax. The four firms stressed that this information needs to be readily understandable to enable fair comparisons. Tax returns are complicated documents and by themselves would not provide enough context and information for someone who is not a tax expert to interpret. In our Nineteenth report, we recommended that companies should publish more information on their tax affairs. In response, the Government told us "HMRC will continue to work in partnership with HM Treasury to ensure strong standards are developed and maintained through relevant international fora such as the OECD."[1] We think HMRC and HM Treasury should push for an international commitment to improve transparency, including by developing specific proposals to improve the quality and credibility of public information about companies' tax affairs.

6.  HMRC is not able to defend the public interest effectively when its resources are more limited than those enjoyed by the big four firms. The four firms employ almost 9,000 people as part of their UK tax practice. For instance HMRC has 65 transfer pricing specialists whereas the big four firms alone have around 250. In our report on tackling marketed avoidance schemes we found that HMRC does not know what level of resource it commits to tackling tax avoidance. Government must ensure that HMRC is properly resourced to challenge the advice given by the four firms and others to companies and individuals seeking to aggressively avoid tax.[2]

1   Treasury Minutes: Government responses on the Fourteenth, the Seventeenth to the Nineteenth, and the Twenty First Reports from the Committee of Public Accounts Session: 2012-13, HM Treasury, Cm 8556, 25 February 2013 Back

2   HC Committee of Public Accounts, Tax avoidance: tackling marketed avoidance schemes, Twenty-ninth Report of Session 2012-13, HC 788, February 2013 Back

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Prepared 26 April 2013