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

1  The role of the four firms in providing tax advice

1.  Confidence in our tax system can only be maintained if individuals and companies pay, and are seen to be paying, their fair share of tax. We held hearings in November and December 2012 to investigate why some multinational companies pay little corporation tax despite doing a large amount of business in the UK, and why some individuals can get away with avoiding tax through the use of contrived schemes. This led us, in January 2013, to take evidence from four large accountancy firms to understand their role in tax avoidance.

2.  Providing tax services to companies and wealthy individuals is a huge industry, worth almost £2 billion to the four firms each year in the UK, and almost $25 billion globally (Table 1).[3] The four firms' estimates of how much of this was helping taxpayers to comply with legislation—such as by filling in tax returns—ranged from a third to a half.[4] This means that the majority of their business comes from tax advice. Some tax advice results in transactions or restructuring that are undertaken for commercial reasons and are tax neutral. However, much of the advice is aimed at minimising the tax that wealthy individuals or corporations pay.[5] The four firms maintain that tax advice is not consistently more profitable than their other services, but, at an average of more than a fifth of UK turnover, they are nonetheless deriving a substantial part of their revenue from tax advice.[6]

Table 1: Scale of the four firms' tax practice, 2011-12[7]
PwC DeloitteE&Y KPMGTotal
Global revenue from tax practice US$7,944mUS$5,900mUS$6,011m US$4,860mUS$24,715m
UK revenue from tax practice£659m £453m£431m £310m£1,853m
Proportion of UK turnover 25% 19%26%17.5% 22%
UK employees3,005 2,1412,0811,670 8,897

3.  Large accountancy firms are in a powerful position in the tax world. They have a very good understanding of how HMRC applies tax law, which they can use to advise clients on which arrangements HMRC is likely to challenge. Through their work in advising government on changes to legislation they have a detailed knowledge of UK tax law, and the insight to identify loopholes in new legislation quickly. They also have the technical skills, knowledge and infrastructure to assist clients who come into dispute with HMRC, and the resources to sustain this challenge for the years it can take to litigate.[8] The four firms employ almost 9,000 people as part of their UK tax practice. By contrast, HMRC's resources are limited. For example, HMRC has 65 transfer pricing specialists, whereas the four firms have around 250.[9] PwC agreed they had a responsibility not to abuse their position of power.[10]

4.  The four firms were clear that they do not provide advice which would help clients evade tax, which is illegal, although they accepted that some schemes on which they advised were ruled against by tribunal and would be unlawful to run again.[11] They recognised that the distinction between tax planning and tax avoidance—using tax law to gain an advantage that Parliament never intended—is difficult to define and remains a grey area.[12] PwC and KPMG told us that they have developed guiding principles or codes of conduct to define what advice is acceptable.[13] These include that advice should be supportable in law, and that the tax, reputational and commercial risks of suggested options should be explained fully to clients. KPMG introduced its principles in 2004 owing to concerns that some of the transactions being entered into were becoming increasing artificial and the growing view of Government, the courts and wider society that this was unacceptable.[14] It has updated its principles in response to changes since, including in December 2012 in response to the Government's plans to introduce a General Anti-Abuse Rule.[15]

5.  Maintaining the principle that tax advice should be supportable in law seems incompatible with all four firms having lost cases at Tribunal. The four firms maintain that the number of cases they lose is very low as a proportion of the advice they give, that these cases relate to advice they gave around 10 years ago, and that they would no longer advise on the use of such schemes.[16] However, their current principles only require their advice to have more than a 50% chance of succeeding if tested in court and there are no consequences for the firms if their scheme is rejected at a Tribunal.[17]

6.  All four firms said that they discussed reputational risks with their clients, and that there was no longer any appetite for schemes where the sole purpose was to reduce tax. It is difficult to square this with some companies' tax practices, for example those we heard about in our hearing with Google, Amazon and Starbucks.[18] These tax structures do not seem to have factored in reputational risk or to be compatible with the spirit of Section 172 of the Companies Act, which requires companies to consider "the impact of the company's operations on the community".[19]

Advice provided by the four firms to government

7.  The large accountancy firms sit on tax advisory panels and also second staff to government to provide technical advice when tax legislation is amended or created. Ernst and Young told us that providing this advice has helped improve the quality of legislation. It acknowledged that they also benefit from the insight into Government thinking that this work gives them.[20]

8.  There is a risk that the large accountancy firms' provision of advice to government creates a perception that they wield undue influence in the creation of legislation, in their own interests and those of their clients. KPMG emphasised that the firms provide technical advice rather than actually writing tax law.[21] This may be so, but few MPs are tax experts and Parliament relies on the technical advice that is provided by technical experts such as those seconded to government by the four firms.[22] KPMG conceded that there might be a perception that big businesses, through their relations with the large accountancy firms, have special access to the design and implementation of tax policy which small businesses do not. It stressed that they represent a wide range of clients, including small taxpayers, and that they advise government on how proposed policy will impact on the commercial world as a whole.[23]

9.  We are nonetheless very concerned by the way that the four firms appear to use their insider knowledge of legislation to sell clients advice on how to use those rules to pay less tax.[24] KPMG seconded staff to advise government on tax legislation, including the development of the 'Controlled Foreign Company' and 'Patent Box' rules. It then produced marketing brochures relating to both sets of rules highlighting the role its staff had in advising government. The brochure 'Patent Box: what's in it for you', suggests that the legislation is a business opportunity to reduce UK tax and that KPMG can help clients in the 'preparation of defendable expense allocation'. KPMG denied that it was advising its clients on how to use those laws in ways that Parliament did not intend, but we are not convinced by its insistence that all the advice it offers to clients seeks to fulfil the purpose of the legislation.[25]

3   Qq 1-33 Back

4   Qq 8-10, 17, 28 Back

5   Q 33 Back

6   Qq 16, 20, 25 Back

7   Ev 26, 29, 30 & 31 Back

8   Q 166 Back

9   Qq 53-58; Ev 33 Back

10   Q 166 Back

11   Q 63 Back

12   Q 78 Back

13   Qq 34-39, 78-82 Back

14   Q 86 Back

15   Qq 92, 93 Back

16   Qq 44, 65, 66, 85-88 Back

17   Qq 72, 73, 77 Back

18   Committee of Public Accounts, HM Revenue & Customs: Annual Report and Accounts 2011-12, Nineteenth Report of Session 2012-13, HC 716, December 2012 Back

19   Qq 38, 90, 94, 95 Back

20   Qq 173-175 Back

21   Q 150 Back

22   Q 151 Back

23   Qq 158, 160 Back

24   Qq 150-156 Back

25   Qq 150-154 Back

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© Parliamentary copyright 2013
Prepared 26 April 2013