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 legislationsuch as by filling in tax returnsranged
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
| Deloitte | E&Y
| KPMG | Total
|
Global revenue from tax practice |
US$7,944m | US$5,900m | US$6,011m
| US$4,860m | US$24,715m |
UK revenue from tax practice | £659m
| £453m | £431m |
£310m | £1,853m |
Proportion of UK turnover | 25%
| 19% | 26% | 17.5%
| 22% |
UK employees | 3,005 |
2,141 | 2,081 | 1,670
| 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 avoidanceusing tax law to gain an advantage that Parliament
never intendedis 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
|