Public Accounts Committee - Minutes of EvidenceHC 666

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Oral Evidence

Taken before the Committee of Public Accounts

on Monday 28 October 2013

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Guto Bebb

Meg Hillier

Fiona Mactaggart

Austin Mitchell

Ian Swales

Justin Tomlinson


Amyas Morse, Comptroller and Auditor General, Paul Keane, Director, National Audit Office, Ashley McDougall, Director, National Audit Office, and Madeleine Smith, Alternate Treasury Officer of Accounts, were in attendance.


HM Revenue and Customs 2012-13 Accounts

Examination of Witnesses

Witnesses: Edward Troup, Tax Assurance Commissioner, HM Revenue & Customs, Jim Harra, Director-General, Business Tax, HM Revenue & Customs, and Jennie Granger, Director-General, Enforcement & Compliance, HM Revenue & Customs, gave evidence.

Q222 Chair: We have a new person looking after us from the Treasury. Welcome.

Welcome to you all. We are thin on the ground because people have not been able to get to Westminster today, but I am sure the quality of our questioning will make this a very worthwhile occasion for you all.

I don’t know whether this is for you, Mr Troup, but when you responded to the recommendations in our previous inquiry on tax, you said that, although the tax gap is quite a theoretical concept-we will come back to that-it is a health check on your performance. The tax gap has now gone up. Does that mean that HMRC is chronically and institutionally incapable of collecting tax in the way it should?

Edward Troup: First, I am sorry that Lin Homer is not here. I think she has already sent her apologies to you, but I am standing in.

Yes, I am the right person to answer on the tax gap, and we did say that it is a health check. It has gone up from £34 billion on an adjusted basis last year to £35 billion in cash, but it has come down in percentage terms from 7.1% to 7.0%, which we think is a better measure, because if Parliament puts up the rate of tax, as it did in that year for VAT, the tax gap tends to go up.

Q223 Chair: Yes, but corporation tax came down. Various taxes have gone up and down, and you have never previously used that as an argument for justifying an increase in the tax gap.

Edward Troup: No, but we have always looked at the tax gap as a percentage measure. Since 2005-06 it has come down from 8.3% to 7.0%. If the tax gap was still 8.3% now, we would be losing £7 billion more tax through the tax gap than we currently are. In that sense, I think it is a health check. If we had not brought the tax gap down from 8.3% to 7.0% over that period, we would be losing that £7 billion, which is roughly the amount of improved compliance that we have had over the period.

Q224 Chair: Am I right that in 2011-12, which is the year we are looking at, you therefore collected an extra £1 billion in tax? That is 0.2% extra tax from what we collected in 2010-11: £475.6 billion.

Edward Troup: The compliance yield for that year was actually-

Q225 Chair: Is that right? Can you just answer yes or no? Is it up by £1 billion?

Edward Troup: Tax receipts were £1 billion up.

Q226 Chair: So that is 0.2% more in 2011-12 than you collected in 2010-11.

Edward Troup: I don’t think we can take credit or take the blame for changes in the overall economy or for policy decisions made by the Government to cut or increase tax rates, but those are all reflected in tax receipts.

Q227 Chair: Don’t tell us that. The problem with that whole argument is that you say you are doing better and better, but if you actually look at the money in-there may be all sorts of reasons for it-it is not better; it is 0.2%. I assume that we are talking about a cash sum, not a real terms sum.

Edward Troup: That is cash.

Q228 Chair: Yes, it is a cash sum, so in real terms we got less in tax in 2011-12 than we did in 2010-11, in effect-in real terms.

Edward Troup: Total cash receipts went up by £1 billion, as you say. Our compliance yield went up over that by-I do not have the figures in front of me for the actual compliance intervention receipts; one of my colleagues may-

Q229 Chair: That is definitional. Overall, for us-people who pay their taxes-the extra money that you guys manage to collect on our behalf should have gone up quite a lot. As you said, the VAT rate went up, although as I said, corporation tax came down, but let us give or take a bit there: more comes in on VAT than comes out on the other one. All that being true, in real terms, you actually collected less in 2011-12 than you did in 2010-11.

Edward Troup: Tax receipts overall were, in cash terms, £1 billion up. I have not got the calculation as to what that means in real terms.

Q230 Chair: Well, it must be £2 billion or £3 billion down. May I ask about that gap? I understand that it is a theoretical construct. The Prime Minister said in his speech in Switzerland, when he talked about tax avoidance, that the behaviour of multinationals in "setting up ever-more complex tax arrangements abroad to squeeze their tax bill right down" has crossed the boundary into aggressive tax avoidance, and they should-in his famous little quote-"wake up and smell the coffee". Am I right in suggesting to you-he was alluding to what came out in our session with Starbucks, Amazon and Google-that none of that is included in your calculation of the tax gap?

Edward Troup: The impact on tax receipts of international rules is effectively reflected in the measurement of theoretical tax receipts that we could get. If the international tax rules were different, then the theoretical tax receipts would be different as well, and that would impact on the tax gap. The tax gap-

Q231 Chair: Am I right in saying that the sort of issues that we were discussing in relation to Starbucks, Amazon and Google-I completely understand that you cannot talk about individuals, but that is what the Prime Minister was referring to-and the tax that could have been payable from those companies is not included, because it is not seen to be within the rules?

Edward Troup: The tax gap that we measure is a compliance tax gap.

Q232 Chair: It does not include that. I am asking whether it includes the Starbucks scenario, the Amazon scenario or the Google scenario.

Edward Troup: It does not include the amounts of tax that some of the commentators have said these companies should pay. That is correct.

Q233 Chair: Thank you. There is research that I saw in an article in the Daily Mail based on American filings of the five big internet companies-covering Apple, Amazon, Google, eBay and Facebook, but not Microsoft, Yahoo! and others-that suggested that, in 2011-12, those five companies avoided paying £685 million, based on the American filings. Am I right in assuming that your figure on the tax gap does not recognise that these companies did anything wrong?

Edward Troup: Well, off or on the tax gap, our responsibility is to make sure that we collect all of the tax that is due under the law. If someone is claiming that those companies ought to pay more tax under the law or that the law ought to be changed for them to pay more tax, that is absolutely not included in our measure of the tax gap.

Q234 Chair: It is not included in your measure.

Edward Troup: It is not a measure that is included in our measure.

Q235 Chair: What I am getting at with all this is that, while I understand that the tax gap is a theoretical figure, even as a theoretical figure it does not include a lot of what ordinary punters in the street think we should be collecting, particularly from the large corporations.

May I ask you something else? In 2009, which is the last year for which I have figures, 30% of companies on the register-838,370 companies, to be precise-were not asked for a tax return; they did not provide a tax return to HMRC. How many did not provide a tax return to HMRC in 2011-12?

Edward Troup: Active companies or all companies on the register, because there are obviously quite a lot of dormant companies on the register?

Q236 Chair: All companies. I accept that there are dormant companies. It is just that 30% is a heck of large figure. Dormant companies might-you tell me-be about 8% or 10%, if we are lucky.

Edward Troup: I do not have those figures.

Q237 Chair: Do you know, Mr Harra?

Jim Harra: I don’t have the figure for that next year. I suspect that, in percentage terms, it is not materially different from the previous year.

Q238 Chair: Why was that?

Jim Harra: The main reason why we do not seek tax returns from all companies is because a significant number of them are either dormant, or registered in the UK but are not within the UK charge to corporation tax, because they are in fact operating outside the UK.

Q239 Chair: What is your system of checks?

Jim Harra: First, we have a risk-based check. We send out a form called CT41G to every company, asking them for information about whether they are active. For those that say that they are not active, we then have a rolling programme of checks over a period on their dormancy.

Q240 Chair: I know that this is a 2009 figure. Can you give me the 2011-12 figure?

Jim Harra: I cannot offhand, I am afraid.

Chair: Can any of you? You are here talking about the 2011-12 accounts.

Jim Harra: I am afraid I cannot give you that figure. It will not be materially different, but I can certainly write to you afterwards with that figure.

Q241 Chair: Let us assume that there are about 800,000 to 900,000 companies. They are not all dormant, are they? Do you check all those 900,000?

Jim Harra: Over five years, on a rolling basis, we review the dormancy of companies.

Q242 Chair: Every company?

Jim Harra: Every company that we register as dormant, we review periodically over a period of time.

Q243 Chair: But dormant isn’t the lot?

Jim Harra: The two main categories are either because they are dormant-company registration agencies set up shelf companies and keep them on the shelf, ready to sell to clients-or, increasingly, because the charges to register a company in the UK are low. We find that, for example, a lot of German businesses register on the UK register, but they operate only in Germany, so they are not within the charge to UK tax. Those would be the two main reasons.

Q244 Chair: And you can tell this Committee that of those 838,370 companies in 2009-a similar figure possibly today-all of those would have been checked? Or do you do a risk-based assessment, meaning that you will check a sample?

Jim Harra: Our process is to review dormancy on a periodic basis. Our experience is that the risk in that population is low.

Q245 Ian Swales: Can I ask for clarification on something that Jim has just said? Why would a German company take the time to register in this country? Just because it is low-cost would not make me go and register a company in a country I was not interested in.

Jim Harra: It has been our experience. I mentioned Germany in particular because it has been our experience that German businesses will register in the UK, because the charges for doing so are much lower than in Germany. Under EU law, they are entitled to establish wherever they wish.

Chair: What’s the purpose?

Q246 Ian Swales: Why would they do that? Is that to avoid tax in Germany?

Jim Harra: No. It is to save them the registration cost.

Q247 Mr Bacon: So you mean that they trade in Germany, and their customer base is German-or perhaps they export and their customer base is overseas-but they do so as a UK-registered company?

Jim Harra: They will be on the UK register of companies.

Q248 Mr Bacon: But so long as none of the activity takes place in the UK, they don’t attract any liability for tax in the UK.

Jim Harra: That’s correct.

Q249 Justin Tomlinson: What is the difference in the fees?

Jim Harra: I do not know offhand. This is one of the things that we looked into. The number of companies that were not active in the UK was growing, and one of the reasons was because we were seeing an increasing number of companies from elsewhere in the EU choosing to use the UK register.

Q250 Ian Swales: A final question. The cost of registering a company in different countries might vary, but it is not a huge cost of running a business. It is probably beyond the scope of today, but you seem to be suggesting that the UK has some regime-not just the cost of registration, but some other advantage-that would make companies register here. I cannot believe that it is simply to pay £200 rather than £800 or something. What else is going on?

Jim Harra: You are slightly talking to the wrong person, because it is not about tax, but about company registration and the behaviour. We have looked into it to get an understanding of why we were seeing the registration behaviour that we were. I can certainly pick up afterwards with you and write to you and explain that.

Ian Swales: The only relevance is that one of the Committee’s concerns is this sort of tourism around the EU that seems to be going on, where you set up companies, invoicing points and so on, and one way or another you are extracting advantage from that. That just might be another example of that.

Q251 Chair: I want to ask one more question on the tax gap, and then I am going to go to Austin. What I was trying to demonstrate by my question is that the tax gap is the tip of the iceberg of the money that is owed between the money that you collect and the money that would be owed if everybody paid their fair share according to either their individual wealth or the profits they make from their economic activity. Have you any idea how big the tax gap would be if you had regard to, for example, tax being paid by Starbucks, Amazon, Google, Apple, eBay and Facebook, or if you had a less optimistic view about the amount of illegal trading that goes on? How big could it be?

Edward Troup: I cannot answer that question, because you are effectively asking whether I can think of an alternative view of how we levy corporation tax that could give us more corporation tax in the UK.

Q252 Chair: The Prime Minister said he thinks the behaviour of multinationals that set up ever more complex tax arrangements has crossed the boundary. He said, "Wake up and smell the coffee." He thinks we should be getting money from these people; you say we can’t. If you added all that in, how much bigger would the tax gap be?

Edward Troup: That is a policy judgment; it is not for me to-

Q253 Chair: No, it is not. I am asking for the quantity. I cannot believe that you haven’t calculated the amount that would be outstanding if the changes that the Prime Minister wants and is pursuing through the G8 and G20 were introduced. You must have a figure for that.

Edward Troup: No, we don’t.

Q254 Chair: Why not?

Edward Troup: Because if we are going to make some changes, first we need to know what they are. As you know, an action plan has been published by the OECD with 15 different areas that we want to take forward. Some of them are complex things about what constitutes a permanent establishment. We have not put through our systems, for all the companies that could be affected, what that could produce.

Q255 Chair: Why not?

Edward Troup: We also have to take into account the fact that if the OECD makes that change UK companies that do not currently have permanent establishments overseas would pay tax there, so we would lose some revenue from them. Our job is to collect the tax from the law as it stands. It would require an awful lot of work to do that calculation.

Q256 Chair: With the greatest respect, you make estimates all the way across the piece. You make estimates about the tax gap, you make estimates about how much extra you are going to get from the extra resources you get. I cannot believe that you have engaged in negotiations at G8 and G20 level and that you haven’t responded to the views of the Prime Minister of this country and made a guesstimate of the amount we are losing out on.

Edward Troup: Jim is going to contribute something on this.

Jim Harra: As you are aware, Chair, at the behest of the G20 the OECD is carrying out a base erosion and profit shifting project. It made its first report in February this year. One of the things it was charged with doing in that report was to estimate how much tax is at stake in base erosion and profit shifting. It concluded that it was unable to do so on the basis of the current information it holds for two reasons: in play is both how much tax is taxable and how that tax should be allocated between the different states in which a multinational operates. It is doing more work, but it concluded in February that it could not put a number on how much is at stake globally. It is clearly in the billions.

Q257 Chair: Okay. Globally is an even bigger ask. I am asking why you have not done, as you do for lots of things, a back-of-the-envelope estimate of what we are talking about.

Jim Harra: We don’t have that figure.

Q258 Chair: At the moment, therefore, your tax gap is purely the tip of an iceberg.

Jim Harra: Our tax gap is a complete measure of non-compliance with current tax law. It does not include a measure of how much additional tax might be collected if you changed the policy.

Q259 Fiona Mactaggart: The Chief Secretary keeps referring to the general anti-avoidance rule that has been in force since July this year. It occurs to me that that is very relevant, in terms of the tax gap. I want to know whether you have used those powers in any of the double taxation treaty cases.

Edward Troup: The general anti-avoidance rule has indeed been enacted.

Q260 Fiona Mactaggart: Have you used it?

Edward Troup: No, we haven’t.

Q261 Fiona Mactaggart: Have you used it in any case since it was enacted this summer?

Edward Troup: No, because it has not yet fully come into force. There is an advisory panel that has to be set up, which has now been set up, to look at the guidance. It is an anti-abuse rule; it is not an anti-avoidance rule.

Q262 Fiona Mactaggart: Absolutely. I am reading the guidance that is on the internet, which says that "where there are abusive arrangements which try to exploit particular provisions in a double tax treaty, or the way in which such provisions interact with other provisions of UK tax law, then the GAAR can be applied to counteract the abusive arrangements." The regulations exist; why haven’t you used them?

Edward Troup: They can and will be used. Jim may correct me, but they will not be in force until 31 March next year, as I recall.1

Jim Harra: In my experience, the general anti-abuse rule is already having an impact, in that businesses, wealthy people and their advisers are adjusting their behaviours in response to it, and some of them in anticipation of it; a number of major accountancy firms, for example, announced the closure of some of their activities in advance of it. In terms of then actually applying it to people who are still persisting in abusing, it is too early in the day for us to have invoked it.

I believe that the detailed guidance that we have published on how it is going to apply makes it clear that, where a multinational business sets up its affairs in ways that comply with the tax law, it will not have an impact on that company. I believe that in evidence to another Committee I have already explained that I do not believe that the GAAR will have a direct application on the kinds of structures that this Committee has reviewed.

Q263 Fiona Mactaggart: So why will it have an impact on the tax gap at all?

Jim Harra: Because it will counteract abusive avoidance schemes, on top of the targeted anti-avoidance rules that we have. It is a general application, so it gives us another string to our bow in challenging those schemes.

Q264 Austin Mitchell: I doubt that. It is a very feeble measure. Let’s go back to the scale of the tax gap. I am interested: you said you were minimising it, so why is our estimate of the tax gap so much smaller than the EU’s estimate? Its estimate is that the tax gap for the total EU is €1 trillion, which would be about 850 billion quid. We are a major economy in the EU, so our share of that 850 billion quid must be quite substantial, and certainly far bigger than £35 billion. So why is our estimate so much lower than the EU’s estimate of the tax gap?

Edward Troup: Can I deal with that? First of all, there are very few countries in the world that actually publish a comprehensive tax gap as we do. The EU has published a VAT gap, which broadly agrees with our assessment, but gives a slightly higher figure: it gives 13%, whereas we give 10.4%. That compares very well to other countries. I would also say that not only are we one of the very small number of countries that does publish a comprehensive tax gap-Mexico, the US and Sweden are the only three others, I think-but we have recently had an IMF study, which was published on their website last week, affirming the robustness of our methodology. We are quite happy that our methodology and our tax gap as a measure are as good as possible given the difficulties of assessing any comprehensive tax gap.

As I say, on the EU’s methodology, which is only for the VAT gap, we do very well. We do slightly worse than Germany on their measure, but considerably better than France and Italy.

Q265 Austin Mitchell: This is all very self-congratulatory. Surely you would want to play it down, because you appear to be more effective that way.

You said you couldn’t include in the tax gap the estimates of any loss through the avoidance measures taken by the big firms that we interviewed, such as Amazon and Google. As you said you couldn’t estimate those, let me provide you with the help of the material that was given last week: Google’s own accounts as presented to the SEC in the States show that they had £3.25 billion revenue from people with addresses in the UK. They reported to you that they had only £506 million in the UK in the same year. That is a lot less than they were telling the Americans they were making out of this country. On that £506 million, they had a profit of £36.2 million and paid £11.2 million in tax. There is a huge gap there between the transactions and the profit they are making in the facts and figures reported to the SEC and what they are reporting to you.

Edward Troup: I am not quite sure what the question is.

Q266 Austin Mitchell: Okay, let me formulate the question again. We had evidence from whistleblowers about how this was done. There is an article that you have probably seen in the International Monetary Fund’s Fiscal Monitor 2013 about something called the double Irish Dutch sandwich, which you may have heard of. It is an interesting technique. The essence of the technique-Google was applying it, as was Facebook-was that sales made in this country were reported as sales made in Ireland, so that the companies paid less tax. We heard evidence from a whistleblower that it was a fiction-that the sales had actually been made in this country, and therefore should be accountable in this country. Did you investigate that evidence, which was sent to HMRC as well as to us, to see where the sales were actually made and where the tax was due?

Edward Troup: As you have heard before, we cannot talk about individual taxpayers. As tax assurance commissioner, I am not, as the Committee knows-

Q267 Austin Mitchell: Was it investigated?

Edward Troup: Sorry, can I just finish? I will try to answer the question as far as I can. Jim and his people are responsible for investigating it. My job is to make sure that all the tax due under the law is collected, as far as possible. If Jim and his people were not following up on that sort of information, I would be very unhappy. It is my responsibility to sign off on all the large settlements, both accepting and denying them. Jim is not going to say what he did in relation to a particular taxpayer, but I can tell you generally that I would be unhappy. In a sense, I am giving you an indirect assurance that in such cases, we follow up and make sure that the information is-

Q268 Chair: Let me ask you a question. I hate these general things. To be honest, Jim, we passed you our whistleblower.

Jim Harra: Yes.

Chair: And, I think, to anybody who met him and heard him, he was an incredibly credible whistleblower. What leaves me astounded in cases like that is why on earth you don’t just test the law. Why not litigate? My understanding of the OECD model tax convention, which governs all the tax treaties in the UK, is that it allows the HMRC to deem a sale to have taken place in Britain if the sale is effectively concluded here, even if the legal authority to conclude the contract is held by a rubber-stamp operation elsewhere. It looks to me that under the OECD model, you should be litigating. If he was telling us 90% of the truth, you should be litigating, and yet we see absolutely nothing. Why have you not chosen to litigate and test your powers?

Jim Harra: Chair, first of all, I acknowledge that you referred the whistleblower to us. I believe that he has confirmed to the press that we met him, took evidence from him and paid a great deal of interest to what he had to tell us. That is what we do with anyone who provides evidence. We take it very seriously, and we always act on it if it indicates non-compliance by a taxpayer.

In those kinds of commissionaire structures, set up in particular by US internet giants, we have to look for evidence that the offshore organisation does nothing more than rubber-stamp: that it does not, for example, over-rule local people. We gather extensive evidence in major cases to determine that. I cannot say what we have done or may be doing in any particular case, but I can say that both in the particular case of this whistleblower and more generally, we always act on the evidence that we are given, and we are very grateful to the Committee for referring him to us.

Q269 Chair: I hear that you act, but bluntly, we do not see it. You have not litigated; you have not tested. We look at all the rules under which you operate. We are not daft here. Applying a tiny bit of common sense, we think there is room for you to at least test your powers and litigate. When do you decide to litigate? Why have you not litigated with one single internet company?

Jim Harra: We have a published litigation and settlement strategy that sets out when we do and do not litigate.

Q270 Chair: Why aren’t you, in these instances? Explain to the Committee.

Jim Harra: I cannot talk about that particular company, but in general terms-

Chair: You haven’t litigated with one internet company. That is the point.

Q271 Austin Mitchell: You are hounding people on tax debt-small and medium-sized companies particularly-and yet here you are, taking this supine attitude and not even investigating evidence we dredged up, which has been given to you, about how taxes have been avoided. Why hasn’t it been investigated and action taken?

Edward Troup: I think Mr Harra has come as close as he can to giving you some reassurance that it has been investigated. That is not quite what he said, but I hope you have taken that reassurance from his comments. And, in response to the question of why we have not litigated, that is because we have to collect the tax that the law provides for. If the law provides the tax, we will make sure it is collected. And actually, we persuade large businesses that the tax is due and we do not need to litigate. But we are still litigating a number of cases-not necessarily in the internet field-where businesses disagree with us on the application of the law.

Jim Harra: I would say that the BEPS project is there because a number of tax jurisdictions are all in the same position; it is not just the UK. We are all subject to that OECD convention, which constrains what we can do in these commissionaire structures. We liaise very closely with tax authorities right across the world who are grappling with the same businesses as us. I am comfortable that we are doing as well as any tax authority in the existing rules.

Q272 Austin Mitchell: Will you take action against the double Irish Dutch sandwich?

Jim Harra: If I can gather evidence that demonstrates a good chance of winning-

Austin Mitchell: You’ve seen that evidence.

Jim Harra: -and the company does not concede, I will definitely litigate.

Q273 Austin Mitchell: I suggested last week that having all that revenue going to Ireland rather than being taxed here was some way of making amends for the Black and Tans. Why, in this country, can’t we tax profits made in this country?

Jim Harra: I think that is the aim of the OECD convention, but one of the problems is that it is quite old and it has not kept up with modern businesses and, in particular, internet businesses.

Q274 Austin Mitchell: But we can impose flight taxes and energy taxes-John Major wants to impose energy taxes. We can impose all sorts of taxes, so why cannot we impose tax on this?

Edward Troup: That is what the OECD is seeking to do.

Chair: I think there is a slightly different thing going on. In my view, you are not testing the limits of the UK. Can I bring in Fiona, who has been waiting and listening?

Q275 Austin Mitchell: I have two more questions. A lot of tax evasion comes through trusts. Do you have a register of trusts, what they are doing and what is their beneficial ownership?

Edward Troup: Jennie, do you want to come in on that?

Jennie Granger: We have a register of taxpayers and, of course-

Austin Mitchell: Taxpayers, yes. But trusts?

Jennie Granger: And some of them will be trusts, but not a register of trusts per se, Mr Mitchell. In relation to that, and offshore trusts in particular, one of our challenges, as you would know, is to be able to identify who are ultimate beneficiaries of those trusts. But let me assure you that in relation to companies, which we have already talked about, and trusts and individuals, one of the big breakthroughs for us is that, through Connect, we run all the data we receive against taxpayers we have.

Q276 Austin Mitchell: So you have a central register of trusts.

Edward Troup: No.

Austin Mitchell: No, you do not?

Jennie Granger: We have a register of taxpayers.

Q277 Austin Mitchell: Okay. In a number of cases, tribunals and courts have struck down tax avoidance schemes used by firms, with action taken and money recovered, as it should be. What action has been taken in any cases against the firms-the big four in particular-who are prolific in inventing and selling tax avoidance schemes: the people who organise the theft?

Jim Harra: First, if they overstep the boundaries of what is acceptable, we will take action against them. For example-

Q278 Austin Mitchell: Have you taken action?

Jim Harra: Yes. For example, two directors of the Vantis tax group, which purported to sell a charity tax avoidance scheme, were imprisoned because our investigation showed that it was not an avoidance scheme; they were relying on fraud to make it work. So, where we can identify fraud, we take that kind of action.

Over the course of the summer, the Government has been consulting on a tougher set of rules to apply to promoters of avoidance schemes that would identify what we regard as high-risk promoters: these are the promoters at the very edge of this industry who are not transparent about what they do, do not co-operate with us and, frankly, are often not transparent with their clients, either. Included in that consultation, for example, is a proposal for a penalty for those high-risk promoters if they do not comply with a higher standard of information disclosure.

Austin Mitchell: Well, the public image, in my conclusion, is that instead of dealing with them and prosecuting, you are actually in cahoots and they are brought in to advise on anything you do, so that they can shape the whole system appropriate to their ends.

Chair: We will come back to that when we deal with CFCs.

Q279 Fiona Mactaggart: Mr Troup, you said that you were the person responsible for signing off deals that you use instead of litigation. You will be aware that we were uneasy about some of the deals that your predecessor had signed off. Could you tell the Committee how many times you have agreed a deal and how many times you have rejected a deal since you have been in post?

Edward Troup: I commend to the Committee my first annual report, which was published this summer. That describes exactly what I did during my first year-in fact less than a complete year.

First, I would say that we do not do deals. There is a published litigation and settlement strategy, which Jim has referred to.

Edward Troup: The principle of that is that we will only settle on the tax that we think is due, 100%. The governance procedure, which is all set out in here, means that the largest deals and the most sensitive ones come to me and two other commissioners. Once they have been put together as a proposal for settlement we are not engaging with the taxpayer. We are saying yes or no. Of the 22-this is all in the report, and I do commend it.

Q280 Fiona Mactaggart: There has been some time since that report. Could we have up-to-date figures?

Edward Troup: I do not have up-to-date figures but they will be in next year’s report. I would be happy-

Q281 Fiona Mactaggart: Could you provide the Committee with a note? Thank you.

Edward Troup: I could provide the Committee with a note for the first half year of how many proposals we have had.

Q282 Mr Bacon: Could you just finish your previous answer?

Edward Troup: Yes. Of the 22, 11 times we approved the settlement proposal that had been put forward by the team-sorry, by the taxpayer.

Q283 Chair: By the taxpayer, not the team?

Edward Troup: The taxpayer’s proposal for settlement. We are effectively seeking 100%. Six times we approved the proposed settlement but with conditions, and five times the taxpayer’s proposal for settlement was rejected as not being compliant with the litigation and settlement strategy.

Q284 Chair: Can I just ask two questions? Then I want to move on to another issue. When did you last litigate a company that you deal with in the large business service on any corporation tax issue? When did you last litigate?

Jim Harra: We published a press release in July this year identifying eight litigation successes in the first half of this year against large business avoidance, which brought in over £1 billion. Some of that was corporation tax and some was other taxes. We do actively litigate against large businesses all the time.

Chair: So you have done eight cases this year.

Jim Harra: That was eight avoidance cases involving large business. There are other non-avoidance cases as well. We currently have-

Q285 Chair: Is the avoidance corporation tax avoidance or VAT?

Jim Harra: It will have been a mixture. It was certainly not very much VAT.

Q286 Chair: When was the last case of litigation around an allegation of corporation tax avoidance against one of your large businesses? One of the businesses that you deal with in the large business service. When was the last one?

Jim Harra: If we go to the press release, it contains an appendix for a full list of all our avoidance litigation decisions and also lists those from large businesses.

Q287 Chair: Okay. Maybe you can tell me which one is about corporation tax and one of the companies that come under your purview.

Jim Harra: I believe the most recent one was in July this year, when we won against a company called Vocalspruce, which was a subsidiary of a FTSE company, where we secured £88 million.

Q288 Chair: In corporation tax?

Jim Harra: Yes, I believe that is correct. I will need to look.

Q289 Chair: All right. Can we move on to talk about Swiss bank accounts? Can you tell me how much you have got so far in 2013-14 from money owed in those bank accounts? In this year, how much have you got in?

Edward Troup: We had an initial payment of £342 million. This is converted from Swiss francs in some cases. That was in January this year, and since then we have had subsequent payments. So that is not in the 2013-14 year. With the other payments that we had so far, we have £782 million. That, of course, is money that we would just not have got otherwise.

Q290 Chair: Can you tell me how much in the first six months of this year?

Edward Troup: For the financial year it will be £258 million plus £181 million. So it is the £782 million, excluding £342 million, which I think makes £440 million.

Chair: This year.

Edward Troup: Yes, so far this financial year.

Q291 Chair: In his autumn statement last autumn the Chancellor estimated the income from the agreement in the year 2013-14 to be £3.12 billion. That was then incorporated into the Government’s borrowing figures. Correct?

Edward Troup: Yes, that is the number.

Chair: You so far have got £440 million-

Edward Troup: I think the £342 million may be treated for national accounts purposes as being in this year, so we have got £782 million.

Q292 Chair: Why would it be treated as in this year, if you got it last year? It will not be. So, out of the £3.12 billion that the Chancellor put into the estimated income, which was then obviously relevant to public expenditure figures on debt and deficit and on borrowing, you so far have collected £440 million.

Edward Troup: We have received from the Swiss that amount, and it is significantly less than the amount that we expected this year-

Q293 Chair: Why is it less?

Edward Troup: The whole principle of the deal is that we get money in two ways: the cash withholdings in this year; and disclosures of names of individuals who, rather than being subject to withholding and preserving their anonymity, are happy for their names to go forward for investigation. So far we have had more than 18,000 individual names given to us; we have sent out 9,000 letters in total to them. It was always expected that total receipts would be what we get this year plus, over a number of years, what we get through investigation.

Q294 Chair: I am sorry, but it wasn’t. What the Chancellor put into his autumn statement, which was then fed into his borrowing figures and into what he said about the deficit and the debt, was £3.12 billion. You have so far collected £440 million. I do not believe that there is any accounting device that takes last year into this year, but even if that were the case you are still, halfway through the year, miles behind your estimate. Why?

Edward Troup: Because at the moment it looks as though we are going to get less in this year, so I agree that-

Chair: Why?

Edward Troup: We are pursuing this with the Swiss-we have an agreement with the Swiss that requires all sorts of audit arrangements and disclosure arrangements in relation to the withholding tax and the names. I have been to meet my Swiss counterpart, and I have reassured myself on the audit arrangements that they have put in place. During the first half of next year, we will start to get the results of that audit and we will find out to what extent the cash that we do not get this year is going to be offset by receipts that we get in future years, so that we can estimate the total amount that we get.

Q295 Chair: Did you agree the £3.12 billion?

Edward Troup: It was a forecast agreed-

Chair: Did you agree it?

Edward Troup: It was a forecast made by the Office for Budget Responsibility, working with our analysts on the best information that we had-

Q296 Chair: Did you agree it? I am asking a very simple question.

Edward Troup: No, I did not agree it. It is not my responsibility-

Chair: You are responsible for delivering it.

Edward Troup: No-sorry, may I be clear about the agreement? The agreement puts obligations on the Swiss to pay some amounts to us. Having signed the agreement, which is getting in money that-

Q297 Chair: No, the agreement puts obligations on you to trace those people who had those accounts in Switzerland-we will come back to how many there are-to get the tax due. That is the agreement.

Edward Troup: No, that is a misunderstanding. We did not have any means of tracing them.

Chair: They gave you the names.

Edward Troup: The Swiss agreement was groundbreaking in that the Swiss entered into an agreement to do certain things and to give us certain amounts of money. What we were concerned with was that they were performing their duties-

Q298 Chair: They gave you the names.

Edward Troup: They have given us 18,000 names. For the money that we have had so far, they do not give us the names-that is the principle of the agreement, that we get the withholding for this year and then the names, which we deal with in the future. That is an obligation on the Swiss.

Q299 Chair: With great apologies, Mr Troup, £3.12 billion was written down and fed into the public expenditure account-I cannot believe that that was done without your agreement. Maybe that was done with your disagreement.

Edward Troup: It was done on the basis of the best information that we had about how much were the funds of the people whose names we do not have in Switzerland, and how much we expected to get from them by way of withholding this year.

Q300 Ian Swales: Is that because they can move the money? That is what we all thought would happen as soon as this announcement was made-that the very people whom we were after would take their money out of Switzerland and move it to some other shady place. Is that what has happened?

Edward Troup: It is certainly a question that we would want to ask.

Q301 Ian Swales: Have you not asked it already?

Edward Troup: We have asked the Swiss; they are doing the audit; and we expect to get better information as a result of that audit and of other investigations.

Q302 Chair: Mr Troup, it appears now that the figure of £3.12 billion was completely unrealistic-right?

Edward Troup: It is certainly more than it looks as though we are going to get this year, yes.

Chair: More! At the moment, you are more than £2.5 billion light. At best, you will get a quarter of what you said-at best, on current trends. Who is being held to account for that failure? Time and time again, we sit here and have these discussions. That is a lot of money-more than £2 billion-being fed into the public expenditure figures. Who is being held to account for that? You?

Edward Troup: First, it is money that we would not have got through any other means. Secondly, it was the best estimate. I am happy to stand behind it as the best estimate at the time of the money we expected to get this year. That was the best estimate. We are getting money that we would not have got by any other means. We obviously want to pursue through the Swiss agreement and through any other sources of information to understand why the amount we get this year is falling short of what we expected to get.

Q303 Chair: Who is being held to account for the failure to reach anywhere-you are getting to about 20% or 25% of the figure that was fed into the public expenditure for 2013-14? Who is answerable for the failure of someone in the system to get the income in that was predicted you would get in?

Edward Troup: Sorry, it was a forecast-

Q304 Chair: It’s an Alice in Wonderland figure, isn’t it?

Edward Troup: There are two elements to this: the performance of the Swiss and the question of our forecasting. It looks as though our forecasting is not going to be accurate. No forecasting ever is completely accurate. What we need to challenge now is whether the Swiss are performing under the agreement. Mr Swales asked whether there was money that has gone elsewhere. That is where we should focus our attention and we are.

Q305 Austin Mitchell: Who made the estimate of £4.4 billion worth of revenue from it over the next three years? Was that you or the OBR?

Edward Troup: We had the usual discussion with the OBR. We produced the basis of our estimates. The OBR challenged those. They were naturally, as they are, sceptical and challenged us hard on the estimates. It is their forecast. It is an OBR forecast but it is based on information and estimates that we have provided.

Q306 Austin Mitchell: Isn’t that a bit too high? Well, far too high, actually. It includes the assumption that as well as the money being paid by the Swiss banks, rather grudgingly, I suppose, lots of people would cough and say, "Oh yea, my god, I should have paid this tax. Here it is." Is that a likely assumption?

Edward Troup: No, that is not quite right. Every Swiss bank is required to look at all its-

Q307 Austin Mitchell: It does include the assumption that people will voluntarily-

Edward Troup: No. There was no assumption that they would cough voluntarily. The assumption is that they would either retain anonymity and then a deduction would be made from their accounts and paid to us, or their names would be put forward by the Swiss, under the disclosure arrangements to us, whether they liked it or not. So one way or another one of those two things had to happen. Either there was withholding or there was a disclosure.

Q308 Austin Mitchell: Is that likely? People are going to disguise it. That is why they went to Switzerland in the first place. Rather than putting the money into a bank account they are going to buy Swiss bonds or something. Then you don’t know at all.

Jennie Granger: If I could come in with some information there. In terms of people coming forward voluntarily, 600 have come forward-

Q309 Austin Mitchell: Is this from the Lagarde list?

Jennie Granger: No, this is from the Swiss agreement. Six hundred have come forward of whom 200 have already settled £2 million in revenue attached to that. As Mr Troup said, 18,000 bank accounts have been sent to us. We have already started writing to people about those. That is people who have chosen, rather than to keep anonymity, to have their bank account disclosed.

Q310 Ian Swales: Why have the US chosen to prosecute some people while we have not? What is the reason for that? Clearly one of the main things that is going on here is tax evasion, isn’t it? People are essentially breaking the law in many cases by moving their money out of your reach. Why haven’t we had any prosecutions?

Jennie Granger: We have had four prosecutions in relation to offshore.

Q311 Ian Swales: In relation to Switzerland specifically?

Chair: We’ve had one.

Jennie Granger: Yes.

Q312 Chair: Let’s come back to that. I want to come back to the issue of prosecutions. I want to get the get the figures out. Amyas did you want to come in on that?

Amyas Morse: I have a sort of human question. When you went to see them to say, "I am a bit disappointed by the shortfall in the money," I know we are talking about Switzerland, but they must have said something to you besides, "We’ll carry out an audit." They must have given you some indication of what had happened, surely?

Edward Troup: You’ve got to remember that my contacts are with the Swiss Government. The obligations effectively fall on the Swiss banks. They are certainly in no doubt as to our concern that we were not getting the flow of money which we expected, anticipating exactly this sort of challenge, which seems to me entirely right. They have taken that away.

Amyas Morse: Come on, if you were sitting having a coffee with these people, and you said, "What the heck went on?" they cannot have not given you any answer at all. Even informally, they must have given you an indication of what had actually gone on. It is surely not unfair to ask that. You might even have said, "Just give us a clue as to what might have happened." It is surely not unreasonable to ask that.

Edward Troup: Did I come away completely reassured that we were going to get the full amount of the £3 billion? No, I did not.

Q313 Chair: The full amount of what?

Edward Troup: The £3 billion that you referred to this year.

Q314 Chair: Actually, they said £5.3 billion was the deal over six years.

Edward Troup: Did I make it clear that Her Majesty’s Government were not at all happy with this? Yes, I did. I am not going to say what actions might flow from this, because that is a matter of agreement-

Amyas Morse: Forgive me, I am really not asking that question. I am just asking a common-sense question, which is, when you had the discussions, there must have been somebody who was prepared to speak to you like a human being. When you said, "What can possibly have happened that these are so different?" somebody must have given you some indication of what had actually happened on the ground. Were they just not prepared to unbend at all?

Edward Troup: We are certainly concerned about the sort of questions that Mr Swales has raised-

Amyas Morse: I am just asking you for an actual straightforward answer.

Q315 Ian Swales: There is a basic question here that you must have an idea on. Is the base against which you are wanting to take this tax from radically different to what you thought it was, or are the Swiss banks doing what they do so well, which is playing things extremely tight, and they are not going to give you the proportion of that base that you originally thought? It can only be one of those two things, and did they not say which it was?

Edward Troup: I will come back to the start of all of this. We had no hard information about the names; that is why we entered into this agreement because it was an opportunity to get money which we would not otherwise have got. We have made a huge amount of progress in getting £782 million which would not otherwise have been obtained by the Exchequer. We still do not have sufficient information; we still would like more information, and this is an agreement that has had to take account of Swiss banking secrecy. I think that we are all agreed, and the world is moving on to a position where actually retaining banking secrecy in relation to tax affairs is not the way the world is going. We still have to work with the Swiss within the framework of their banking secrecy approach. We do not have the information that we would like.

Q316 Ian Swales: But with respect, if I was a Swiss banker, I would find it much more attractive to argue strongly to keep money in my customers’ accounts than to give it to the UK Government. It just seems to me that we ought to have a clear answer as to whether they are doing what they said they would do in terms of the proportion of those accounts they would pay over, or have the accounts now been siphoned out, which is what I suspect and what Parliament thought would happen when the Chancellor made his announcement? We gave them plenty of warning to move it.

Q317 Chair: Can I be a bit more specific on the same thing? In the autumn statement documents, it said that £40 billion was the amount of funds held by UK residents in Switzerland. That was the figure in the documents, so that must have come from somebody. You then had a cut-off date of March of this year for declaring the assets held in Switzerland by UK residents, is that right?

Edward Troup: That is correct.

Q318 Chair: And has that £40 billion gone down?

Edward Troup: We do not know. This is the information we need.

Q319 Chair: Well, where did you get the £40 billion from?

Edward Troup: The £40 billion was extrapolated from the investigations and from some of the information we had had previously. We extrapolated across the whole UK population to try to estimate from the people that we did know about, and knowing how many other people there were of those characteristics in the UK, how much in total might be held in Switzerland. This is the problem with banking secrecy. We do not know. It was an estimate. It was a forecast. It was the figure on the basis of which the £3 billion was made.

Q320 Chair: So what have you learned? The cut-off date was May 2013, so we have had six months since the cut-off date when presumably somebody has got a list with a figure on it of the amount of funds now held by UK residents in Switzerland.

Edward Troup: No, we do not have that list.

Q321 Chair: The Swiss do?

Edward Troup: Well, in aggregate they do, but I do not think that they are held in one place. The individual banks have obligations under the agreement to pay us cash by way of withholding or to supply names by way of disclosure. Not all of the banks have yet completed that exercise. We have not had disclosures from all of the banks yet, because they have the whole of this fiscal year in which to do it, but we are collecting. We have 18,000 names and, as Jennie has said, we have acted on 9,000 of those already. Six hundred people have come forward voluntarily simply as a result of hearing this agreement had been entered into, and we have received £782 million.

Q322 Chair: You keep repeating the same thing; I am trying to move us on. Is the figure below the £40 billion figure in the supporting documents for the 2012 autumn statement?

Edward Troup: We do not know.

Q323 Chair: You have no idea how much money has gone, has seeped out in the way that Ian Swales has suggested.

Edward Troup: No, we do not.

Q324 Ian Swales: I wonder what on earth the conversation that you had with the Swiss banks contained. Was it anything beyond seeing how your kids were and where you were going on holiday? I am trying to imagine what was actually said, given the answers you have given the Committee today.

Edward Troup: I think I indicated in my previous answer that we conveyed our concern about the amounts that we were receiving, and of course we asked questions about what information and what action would be taken. As I say, I am not going to go any further into that. I-

Q325 Chair: Just out of interest, why can’t you? I think it was Dave Hartnett who originally said that most of this money is probably money due in tax. Probably originally, the £40 billion ought to have all come to the UK in tax. It isn’t just cash that they held-

Edward Troup: No, the £40 billion-

Chair: Well, that was his line.

Edward Troup: The £40 billion was the accounts.

Q326 Chair: It was tax avoidance that got it there. I can’t see any reason for this being confidential. You have no idea of the amount of money that the Swiss banks now collectively think is held by UK residents in Switzerland that they haven’t actually-

Edward Troup: We have no information to update the £40 billion. We very much hope that we will get information to update the £40 billion, and indeed-

Q327 Chair: By the time of the next autumn statement, in a couple of weeks’ time?

Edward Troup: No, I don’t think so. I think we will revise the forecast for receipts at the next autumn statement, simply because of the reasons you give, in terms of the receipts so far, but building a picture of what is in Switzerland is intrinsically extremely difficult. There are a number of routes whereby we are doing it, and the agreement was effectively seeking to get at money where we could not find or get hold of the individuals by any other means.

Q328 Chair: I think we find that pretty incredible. Let me just take you back to what you said last year, which I have no doubt you recall. We talked about this. I said: "You have got one" prosecution "at the moment." You said: "We have had one so far. We have got another dozen criminal ones in train." I ask you: "Another dozen?" You reply: "Another dozen criminal ones in train"; and then you go on about the ones that have appeared. Why is it that none of those "in train" has ever reached the courts?

Edward Troup: I’m going to ask Jennie to come in in a minute, but can I just remind the Committee first of all that we are not a prosecuting authority; we do criminal investigations, and the prosecutions-

Q329 Chair: Please don’t go off the subject. You said to us last year that you had another dozen criminal ones in train. My understanding is that none of those has reached the courts. The CPS knows nothing about them. Where are they? Just those dozen-I’m not asking you about others. You told this Committee you had another dozen criminal-

Edward Troup: In fact, we had 15 criminal investigations which were under way. Some of those went across to the CPS-

Q330 Chair: No, they didn’t. It knows nothing about them.

Edward Troup: Yes, some of them went across to the CPS, but they did not meet, in all the cases which went across to the CPS apart from the one which we have successfully prosecuted, the standards of evidence or other conditions which the CPS will put before they prosecute. For others of them, the individuals went through the Liechtenstein disclosure facility. We collected the tax; we collected the interest; we collected penalties. That comes back to the point that while criminal prosecutions are very good as a deterrent and very good publicity, they are expensive and not the most effective way of collecting-

Q331 Chair: Let me just say to you, Mr Troup, you have done one. You misled the Committee last time, because you said there were another dozen-you now tell me 15-criminal ones in train. None has ever reached the courts, and my understanding from the CPS is that it does not know of any of them. You tell us that you’ve only got £440 million in this year, against a provision that you put in of £3.2 billion, and you’re not doing any other prosecutions. This is just laughable.

Edward Troup: First of all, the prosecutions you referred to were to do with the HSBC Swiss disc and were not to do with the Swiss agreement; it is a separate matter. Under that, we have had, as you know, 3,500-

Q332 Chair: I am frightfully sorry, but your answer to me last year was completely on the Lagarde list of Swiss banks.

Edward Troup: Yes, sorry, the Lagarde list; that’s not the Swiss agreement. The HSBC Swiss list, which you have referred to as the Lagarde list, is not the Swiss agreement. The Swiss agreement is a separate matter from that list and that disc. My answer last year was on the prosecutions and investigations that we were following up.

Q333 Chair: Have those 12 gone in? You have only had one prosecution.

Edward Troup: We have had one prosecution out of the 15 which has actually gone through to criminal prosecution.

Q334 Chair: Which we knew about last year, because you told us about it last year.

Edward Troup: Yes, indeed. That is correct.

Q335 Chair: But you have had none in the ensuing year.

Edward Troup: No, because Parliament has given us two ways of pursuing tax fraud. It has given us civil investigation powers, which are extremely effective and allow us to maximise the amount of tax interest and penalties, and it has given us criminal prosecution powers, which are actually not an effective way for us to maximise the amount of tax interest and penalties, which is what Parliament wants us to do. Parliament has given us a choice as to how we pursue particular elements-

Chair: I understand all that. You do not have to tell us-we are not stupid. But you are being so ineffective in pursuing this particular debt, in that you have only managed to get £440 million. I cannot understand why you cannot, in those circumstances, employ one little weapon in your armoury-just make a few cases show cases. It is so bloody obvious.

Q336 Ian Swales: I think what bothers members of the public is the vigour with which the authorities pursue people who defraud a few thousand in benefit compared with the vigour with which we pursue people who evade thousands and thousands in tax. That is what the public do not like. I think that they expect to see some equity, because we are talking about the public pound in both cases. That is why we keep asking this question.

Jennie Granger: May I just come in on that? There have been four convictions in the-

Chair: Sorry. You will have to speak up.

Jennie Granger: I am sorry. There have been four convictions in the last year. Not all of them are to do with Swiss HSBC, you are correct. There was only one in relation to that.

Q337 Chair: That had already occurred before the hearing last year.

Jennie Granger: In three of the four cases, custodial sentences have been imposed. The way that we have used prosecution in relation to this has mainly been focused on those who lie to us during the process of disclosure. To answer your main question, we actually use the same process with small businesses as well. We encourage all taxpayers to come forward, come clean and to pay all tax and penalties.

To give you an example of the advantage that has been in this neck of the woods, 56,000 taxpayers have settled up since 2007, in relation to their offshore affairs. That is £1.3 billion that has come in from that. That is a cost-to-yield rate of 1:130. Similarly, if I take this year’s figures for what we do in the small business personal tax area, we conduct about 800,000 inquiries. We certainly do some prosecutions in relation to that. There were 770 charging decisions this year. All those decisions, however, are in relation to deliberately forging documents, deliberately faking businesses, or indeed, organised crime. It is not trivial; it is quite serious. We do not make the final decisions on this, of course; the CPS does.

Q338 Ian Swales: I guess the point is that if you knowingly move money offshore to avoid tax, is it avoidance or is it actually evasion, which should lead to criminal prosecution in more cases? Where people claim benefits for those who do not exist or whatever, they are in the courts very quickly. That is what the public feel-that we do not go after people who fail to pay over public pounds with the same vigour.

Jennie Granger: In relation to evasion, most cases are dealt with civilly, and that is true whether it is small businesses or whether it is in this area. As I have said, what we try to do is certainly to use prosecution as a deterrent, but it is not the main part of the toolkit. The main part of the toolkit is how we get people back on track and, as fast as possible, get that money back to the Revenue with penalties and interest.

Edward Troup: And that is set out in our published criminal and investigation policy, which says that it is our policy "to deal with fraud by use of the cost effective Civil Investigation of Fraud…procedures, wherever appropriate."

Q339 Mr Bacon: Before we move off that, you mentioned the CPS making the decisions. When does the CPS make the decision as opposed to it being made by the Revenue and Customs Prosecution Office?

Jennie Granger: We don’t ever make the decision to charge in these cases. We investigate and then refer things to the CPS. If it is clear in the process of investigating that there is no case to answer, obviously we do not refer in those cases, but that is because the investigation has either seen more information come to light showing full compliance, or shown clear reasons why it is not in the public interest to prosecute.

Edward Troup: We are not a prosecuting authority.

Q340 Mr Bacon: I know you are not. You hived off your prosecutions division to a separate body called the Revenue and Customs Prosecution Office, which had a director called David Green last time I checked. We took evidence on their accounts, which I remember clearly because the first act of the chief operating officer whom David Green QC appointed to run the business was to award £100,000-worth of HR consultancy to his wife. What I am really asking is when does the CPS do it and when does the Revenue and Customs Prosecution Office do it? I am not asking when you do it-I know that you do not do it because you are not a prosecutions authority.

Edward Troup: I’m sorry, I am displaying my ignorance here but I thought that the Revenue and Customs Prosecution Office was part of the CPS. Perhaps I have misunderstood.

Paul Keane: It is again now-it was previously a separate entity.

Q341 Mr Bacon: Has it now merged? It was a separate body with its own accounting officer.

Paul Keane: It was, certainly when the Committee has had hearings in the past when it was the Revenue and Customs Prosecution Office, but it has now gone back into the CPS.

Q342 Mr Bacon: It has now just been merged with the CPS?

Paul Keane: Yes.

Mr Bacon: Okay.

Q343 Chair: I have one more question on this, then I want to move on. Of the 15 HSBC cases, how many resulted in settlements that incorporated both penalties and interest charged?

Edward Troup: If they were settled, they would have all settled with interest and penalties.

Chair: How many?

Edward Troup: I do not have that number for those 15 but I can certainly let you have it.

Q344 Chair: And how many were abandoned?

Edward Troup: I can let you have that as well. If they were abandoned, that will have been because we were satisfied that no liability was actually due or that there was no prospect of recovery of any amount.

Q345 Chair: I would be grateful for a note on that.

We now move on to controlled foreign companies. The Government introduced changes to the controlled foreign company legislation. Is it right that the intention was to protect the UK tax base?

Jim Harra: Yes, that is correct.

Q346 Chair: All right. So is it possible for a UK tax-based company to borrow money and charge interest on that money against profits to offset its tax liability?

Jim Harra: Yes. If a UK company borrows money for the purposes of its business and pays interest, that will generally be tax deductible.

Q347 Chair: Is there nothing in the rules to stop that UK-based company putting the money it has borrowed into a lower tax jurisdiction or elsewhere in return for share capital? If it borrows money in the UK and gives it to a company based in a tax haven in return for share capital, is there anything in the rules that stops that?

Jim Harra: There are a variety of anti-avoidance rules, including an unallowable purpose rule, that act as constraints on when interest is deductible, but there is no rule prohibiting a UK company from investing in an offshore subsidiary company, no.

Q348 Chair: With money that it has borrowed and on which it gets tax relief here in the UK.

Jim Harra: That is possible, yes.

Q349 Chair: Okay. Is it then possible for the money that has found its way to the tax haven or a low-tax jurisdiction to be invested by another arm of the company in another jurisdiction? Let us take Germany as an example. The company in Germany borrows for investment in Germany the money that the UK company earning tax relief has placed into a tax haven. Is that possible?

Jim Harra: I am not an expert in German tax law. It would be a matter for the German tax authorities to determine whether a German company can have a deduction for such interest.

Q350 Chair: My understanding is that you know that they will be able to offset the interest they pay for the money they borrow from the tax haven, which is money that was originally borrowed in the UK. They will be able to offset interest against their tax liabilities, won’t they? It is common sense. I accept that you are not an expert in German tax, but you know a heck of a lot about tax law so you must know from a common-sense perspective whether that is right or not.

Jim Harra: I would say that it is entirely possible.

Q351 Chair: Okay. So is it right that by using that structure one multinational company enjoys double tax relief when it is borrowing the money only once?

Jim Harra: If you follow the chain of borrowings, obviously you start off with a UK company borrowing money from someone, so they have a taxable receipt of the interest they receive, and right through the chain that you described there is only one set of tax relief, end-to-end, for the interest-

Q352 Chair: No, there are two sets of tax relief. There is a set of tax relief here in the UK and there is a set of tax relief in my example of Germany-I could have used France or anywhere.

Jim Harra: Then theoretically there are two tax charges that balance those out: one on the initial company from which the UK business borrowed, and one on the offshore company through which the-

Chair: Say that again. Explain that to me.

Jim Harra: Well, you start off with a UK company borrowing from someone to invest in an offshore subsidiary. That someone it borrowed from will be liable to tax on the interest it receives, so right through that chain, in theory, each one cancels the other out, but inevitably, because one of the companies in the chain is in a tax haven, the risk is that profits will be shifted into that tax haven.

Q353 Chair: I want to stick to this one multinational, not take it back up the chain. I want to look at the multinational, which can enjoy two lots of tax relief. To add another ingredient, the whole purpose of our giving tax relief for that sort of borrowing is to encourage economic activity here in the UK. No such economic growth or investment took place here in the UK.

Jim Harra: There are two possibilities. One is that if the UK company had an unallowable purpose for its borrowing in the first place, an anti-avoidance rule would be triggered and it would not get a reduction. The more likely scenario is that there will be a UK CFC charge on 25% of the profits of the tax haven company.

Chair: There will be what?

Jim Harra: Sorry, a controlled foreign company charge, so when you have a controlled foreign company in a tax haven-

Q354 Chair: No, there won’t be in this instance. That’s the whole point, because you won’t trace it.

Jim Harra: There is a general rule in the new CFC rules which applies a charge to corporation tax in the UK on 25% of the profits of the controlled foreign company if it is a finance company in the group.

Q355 Chair: There isn’t a profit. The company in the UK has borrowed money. It gets tax relief on the borrowing. It gives that borrowed money to a tax haven where there is no tax of course, so there is no tax being charged there. The tax haven then lends the money to another arm of the company in Germany. That company in Germany, borrowing from the tax haven, is charged interest, probably excessive interest, and can therefore claim tax relief in Germany. So there are two lots of tax relief and the only one to make a profit would be the tax haven company, and as it is in a tax haven, it does not pay tax.

Jim Harra: Well, if the company in the tax haven made a profit in the circumstances you describe, it would be a controlled foreign finance company and it would be subject to a charge to UK corporation tax on 25% of its profits.

Q356 Ian Swales: Let’s clarify the maths. You are not saying 25% tax; you are saying that 25% of the profits would be subject to tax.

Jim Harra: Yes, that’s correct, based on the CT rate.

Q357 Ian Swales: So 5% would be the tax charge: 20% of 25%.

Q358 Chair: Let me quote Mr Edwards of KPMG who said, that while the policy won’t strictly say it, borrowing in the UK to equity fund your finance company for it to on-lend, is fine. "Significant UK tax saving, potentially yes. There’s that opportunity there."

Jim Harra: Yes, the CFC rules are designed to protect the UK-

Q359 Chair: Is Mr Edwards wrong or right? He designed them.

Jim Harra: If I can go back to the CFC rules, they are there to protect the UK from profit-shifting to subsidiaries in low-tax jurisdictions. Because we have a territorial corporation tax system, they are focused on the shifting of UK profits, so the shifting of German profits is a matter for the German tax-

Q360 Chair: We are not talking about UK profits, we are talking about the UK company borrowing money if it exported its profits. It is doing it in a much more devious way, Mr Harra, which Mr Edwards knew about and he devised this scheme with Mr Troup. What I want to know is when you knew about it. This is a blatant or flagrant misuse-I am getting my words wrong.

Mr Bacon: "Blatant" is fine.

Q361 Chair: It is a blatant misuse of the rules to avoid paying corporation tax here and to get profits abroad. It is so obvious.

Q362 Ian Swales: As the same article says, you can easily end up with a net tax rate of minus 15%-in other words, you are getting money in-particularly if the first leg that you referred to is also borrowed offshore. You are assuming that the UK taxman will get their hands on the first leg of the transaction, but the chances are that they will not, because either the initial borrowing will be offshore or the UK entity lending the money will ensure that the tax charge disappears. It is a perfect chain, and it is leading to the massive incentive to own British business offshore. If you look, it is virtually every utility, every retail chain, every water company and every telephone company. Any company that makes high profits in the UK is in play the minute it declares them, because it is so attractive. The financing arrangements that the Chair is talking about mean that you are pretty crazy if you keep all this onshore, because it is so attractive to finance from offshore.

Jim Harra: First, you are right that in the chain, the initial borrower may or may not come from the UK. Theoretically, you are looking at where taxation falls globally. Capital can flow very freely across borders and we are not in a position to restrict where that capital flows. The aim of the CFC rules is to protect the UK Exchequer against the shifting of profits to offshore subsidiaries in low-tax jurisdictions, while at the same time keeping the UK competitive. For example, under the old CFC rules, we were starting to see a small but significant number of global companies migrating away from the UK, because the UK CFC rules were seen as an impediment.

Q363 Chair: I am going to bring in Guto, but, Mr Harra, I cannot bear what you said. You said that the aim was to protect profits made here so that they could be properly taxed. We will come to Mr Troup in a minute, but you have devised a mechanism that is well known by all the four big accountants, which are all flogging it all around the system, that gets the profits offshore and that fails to ensure that the profits made in the UK are taxed here. When did you discover that? Everyone else knows it. Private Eye is chock full of it, "Panorama" did a programme on it and The Independent has it. Everyone has it. You must have known about it. When?

Austin Mitchell: You should have got your boots on.

Chair: When did you know?

Jim Harra: We have devised a set of CFC rules that are designed to protect the UK Exchequer.

Q364 Chair: You cannot tell us that, because the rules are not doing that.

Jim Harra: There are, of course, balances to be struck within that, and how those balances are struck is a political decision. It is a matter of policy for the Government.

Q365 Chair: So did you know when you devised the rules that this loophole was available? Is that what you are telling me? When they were first implemented, did you know that the loophole could emerge? Yes or no? Did you know at that time, because you wanted to protect capital coming into the UK?

Edward Troup: Can I come in on this? My name is being taken in vain a little on this.

Chair: No, I will question you in a minute. I am interested in Mr Harra, who is responsible for the implementation. Did you know, when they were devised?

Jim Harra: Yes.

Chair: Did you know?

Jim Harra: We had a very good understanding of how we expected the CFC rules to work. They have only recently come into force. Where we see them being used in ways that we do not anticipate, we will, of course-

Q366 Chair: Did you anticipate and know this?

Jim Harra: I do not actually agree with the analysis of what is happening in this example.

Q367 Ian Swales: Before we move on, just a quick question of clarification. Do you keep records? Do you know how much allowance you have given for foreign interest payments against corporation tax in the past year, for example?

Jim Harra: We carry out an annual monitoring exercise on the interest flows intra-group to overseas. We do that by tracking the main debtor companies, which are non-financial companies. We exclude from that businesses such as banks, where finance is on their trading account. That survey, which I believe was run from 2009 to 2011, is the most recent information that we have and looks at the largest debtors, who account for about 60% of non-financial debt. The net annual outflow from the UK from that exercise is about £4 billion. That is made up of about £10.5 billion gross outflow, less about £6.5 billion inflow.

Q368 Ian Swales: Up till 2011, you said?

Jim Harra: I believe it is 2011.

Q369 Ian Swales: Because it has only started happening on an industrial scale since then-this whole issue of wholesale foreign ownership and foreign capital. Almost all our newspapers-except The Independent, which is why it is the one doing these articles-are doing it now. Any company that is not, like Boots, Cadbury, Betfair or whoever, finds somebody knocking on their door who will do it for them.

That is the system we have now set up. It has already happened to most of our big, regular profit-making companies. They are now in a situation where there are huge amounts of foreign interest in the way they are structured. Also, you qualified your statement with "intra-group". I would imagine it is fairly easy, either genuinely because you are using a foreign bank, or more subtly because the name of the organisation that you are dealing with does not look like an intra-group company. I would imagine the figure is far bigger than that.

Jim Harra: I think we have good information about which entities are and are not within the international group. You are right that if they borrow independently from a foreign bank, it is not included in that figure, because we are trying to track the movement of money within international groups going across the UK border in both directions.

Chair: KPMG’s Edwards, who had been on the inside because he was seconded to the Treasury to devise these laws as they were framed, confirmed that the scheme had been envisaged. Mr Harra, you appear to be the only one who didn’t understand it was happening.

Q370 Guto Bebb: When the Chair outlined the structure, the response we had from you was that that would be subject to CFC rules, which would then look at that as something that could be taxed in the UK. How often have you attacked that type of structure in order to try to recover tax?

Jim Harra: The new CFC rules have not been in place for very long- we do not even have the first set of accounts for most businesses that have been using them-but we do have good intelligence about how they are being used. Where we have concerns about how they are being used, we will either take action under existing legislation if we can or advise Ministers if we believe they need to be reported.

Q371 Guto Bebb: In other words, the structure as described could currently be used for tax avoidance purposes.

Jim Harra: It is potentially being used out there. Whether we think it is going to be successful in reducing tax or whether we think we can impose the CFC charge all remains to be determined.

Q372 Austin Mitchell: As I understand it, the Germans and the Canadians have rules on thin capitalisation, so that tax relief can be limited to the amount of business a company transacts.

Jim Harra: A number of countries have restrictions on the deductibility of-

Q373 Austin Mitchell: But why don’t we have them nationally?

Jim Harra: Again, that is a matter of policy, not a matter of administration for me. You mentioned thin capitalisation specifically. We do have thin cap rules in the UK, and a number of other anti-avoidance rules, to prevent abuse, but those are manning the border posts of a very generous UK policy on deduction of interest, which is part-

Q374 Austin Mitchell: But it is generous to other people. An equity fund can buy, say Boots, pay it down with debt and then use the debt overseas.

Jim Harra: The Government’s approach is that they want to have a competitive corporate tax system. Having a generous regime for interest deductibility is part and parcel of that, but there is protection for the UK Exchequer right around the edges of that in terms of anti-avoidance rules such as CFCs, thin capitalisation rules and-

Q375 Austin Mitchell: But does any other country have a tax system which is so generous to other countries?

Jim Harra: Some other countries have equally generous interest deductibility rules, yes, and some others restrict interest deductibility.

Austin Mitchell: We should stop charitable giving and just carry on with this.

Q376 Chair: I have one more quote. Kashif Javed, another KPMG person-God!-said, "What the Revenue has explained to us is that they wouldn’t look to try and challenge the benefits of their regime, you know, to aggressively challenge the residence of finance companies." You must have seen that article. Go on. You have had loads of time to prepare an answer to it.

Jim Harra: I have seen the article that you are referring to. In terms of challenging the residency of some of these companies, I suspect there is not a great deal in it for us. One of the challenges of taxing these interest flows is that it is relatively easy to set up, for example, finance companies and companies that own IP in these countries with the infrastructure they need to establish residency. What we have is the finance company CFC charge, where we accept that it is resident in the tax haven, but 25% of its profits are chargeable to UK tax. That is a rule of thumb.

Q377 Chair: Did Ministers know about this scheme when they implemented the CFC rule changes? Did they realise it was a potential loophole? Did they understand that?

Jim Harra: Ministers and HMRC were not fully aware of how people would try to exploit the regime, which is why we monitor it very closely after it is taken up.

Q378 Chair: But Mr Edwards from KPMG, who was helping you devise it, was completely aware. He went out and sold it.

Jim Harra: Over the course of two Governments, there was extensive consultation done on the CFC regime, which means that we have a good understanding of how it is used and where the risks are.

Chair: And how it can be exploited.

Q379 Ian Swales: May I come back to the question of thin capitalisation? Your website includes a lot of detail on that subject, and I would like to explore how it works. For example, one of the comments is that an interest rate is charged at an arm’s length rate. The Independent last week was full of examples of inter-company loans being charged at 16%. Do you believe that is a good arm’s length rate for an inter-company loan?

Jim Harra: We would look at the facts of each case to determine what we think an arm’s length rate should be. Obviously it will vary, depending on the risk profile and the terms and conditions of borrowing.

If I can go back to the basic protection that we have, there are two ways that we can tackle excessive borrowing or excessive interest. If we think a company is too highly geared-in other words, if it has been funded with an equity and credit balance that would not happen in the market-we will challenge whether any interest should be deducted from the borrowing on the grounds that it should have been put in as equity. That is the thin capitalisation argument. In addition, even if the company passes the thin capitalisation tests, we will only allow a deduction for an amount of interest, which would be the amount that would be paid on an arm’s length basis. We have access to economists, for example, who go through all that, and it is done on a case-by-case basis.

I believe that the articles that were published this week acknowledged that, in a number of cases, we have indeed restricted the interest deduction. But it won’t always be apparent, I am afraid, from looking at a company’s accounts whether we have done that.

Q380 Ian Swales: What do you do if a UK company suddenly buys shares in an offshore country-let’s say Luxembourg-lends the money back to the UK, and miraculously the amount of interest they pay is roughly the same amount as the UK profits, as quite a number of companies have done? What do you do about that?

Jim Harra: What we would do is look at whether any of our anti-avoidance rules can be deployed either to restrict or deny the deduction or if it complies with the rules. Obviously, this country does a lot of offshore investment. It is part of our economy.

Ian Swales: What if it doesn’t? I know you are not going to talk about individual cases, but the group that owns the Daily Express, for example, did exactly that about two years ago.

Chair: All of them-BHS, Maplin, Pets at Home, Ask, Zizzi, Pizza Express, half of the health companies that get money from the taxpayer. It goes on and on.

Q381 Ian Swales: My real point is that now you just have to do it. You have to move your money offshore and charge it back in interest to get rid of your profits, or somebody will come and do it for you-a venture capital company in London/Luxembourg will buy your company and do it. That is their main edge, as Betfair found with their aggressive takeover, which I think was repulsed recently. This was a large profit-making UK company. The vulture capitalists come in straight away. Their main edge is the ability to move their profits offshore. How come, in those cases, where you have profit-making UK businesses, they are able to do this? Why do you allow that to happen?

Jim Harra: If the borrowings are used for the purposes of their business, they will almost invariably qualify for a deduction of an arm’s length amount of interest. If, on the other hand, the borrowing is for an unallowable purpose, for example merely to get a tax advantage, we will seek to disallow the deduction.

Q382 Ian Swales: Where is the dividing line? If a company either borrows or moves its own cash to an offshore legal entity, and then loans the money back, of course the loan is in the business, but how do you get to the fact that it is being done for tax avoidance purposes?

Jim Harra: There is clearly an incentive for international groups to locate their group finance company in a low-tax jurisdiction. In the case of the UK, if it is a UK-parented group, where our CFC rules came in, a choice was made in creating the new CFC rules that, rather than trying to police each case, case by case, we would have a rule of thumb that assumes that 25% of the profits of the CFC finance company were diverted UK profits, and that gets taxed. That is the rule that Parliament passed.

Q383 Ian Swales: There is an underlying rule in all this, which is that people should be carrying out only transactions that make sense for their business. Are you saying that fancy footwork on finance is a legitimate path of any business, and that therefore you would not judge a move such as that which I have just described to be outside the realms of running a newspaper or a pizza shop? You would say that that is a normal part of running the business?

Jim Harra: It depends on the circumstances of the case, but international groups that have presences in many countries often have a group finance company, and they will often locate that in a country that is low tax.

Q384 Chair: A final question for you, Mr Harra, and then I want to ask some questions of Mr Troup.

Pascal Saint-Amans, head of tax for OECD, told a US congressional committee in June that most countries, but specifically not the UK, strengthened their CFC legislation to make sure that you fight the delocalisation of profit in low-tax jurisdictions. The UK has lowered its corporate income tax, but it has also changed its CFC legislation in a way that is not about strengthening it. Is the head of tax at OECD wrong in his assessment of the Government’s approach to CFCs?

Jim Harra: The UK’s previous CFC regime, when you looked specifically at the legislation, may well have been tougher.

Chair: Is he wrong? Do you disagree with him?

Jim Harra: In my view, the old CFC rules were extremely difficult to enforce, because they were under constant legal challenge. In addition, groups were effectively leaving the UK.

Q385 Chair: Is he wrong? Mr Hara, you are avoiding answering the question. He has asserted that we, unlike all the other countries in the OECD, weakened our CFC rules in the legislation that we passed. Is he right? Is he wrong?

Jim Harra: In my view, our new CFC rules are workable.

Q386 Chair: Are they weakened or strengthened?

Jim Harra: I am not going to make a comment on whether they were weakened or strengthened. They are workable. They were devised after a lot of consultation and were ultimately passed by Parliament.

Q387 Chair: I take it that they have been weakened. Thank you for that.

Mr Troup, you were in charge of tax policy in the Treasury when the decision was taken to adopt this more territorial approach.

Edward Troup: The Chancellor is in charge of tax policy. I was leading the teams that were giving advice to Ministers on tax policy. That is quite an important distinction.

Q388 Chair: But you were there giving advice to Ministers when they decided to adopt a more territorial approach to CFCs?

Edward Troup: Under both Governments, as Jim has said-

Q389 Chair: I am not making a party political point. I am asking you about your role.

Edward Troup: I was there from 2004 onwards.

My point is Jim’s point, which is that whether you describe the previous rules as strong or not, there were two effects. First, they were just not working from an enforcement perspective, because it was becoming increasingly difficult-

Q390 Chair: I do hate this avoiding. Were you there? That was the only question I asked.

Edward Troup: I was there.

Q391 Chair: You were there, and you were giving advice when the decision was taken to adopt a more territorial approach.

Edward Troup: I cannot remember when the decision was taken. Although the previous Government did take that decision, and I was there, I think-

Q392 Chair: You were there under this Government, because I remember coming to see you about the previous head of tax.

Edward Troup: I do not know when the decision was taken. I was certainly in the building.

Q393 Chair: You were there, and you were head of tax. Richard, Ian and I came and talked to you about various issues at HMRC. I remember that.

Edward Troup: I would have been there because it would have been 2011.

Q394 Chair: Yes, you were there. So did you know when those rules were devised, on which you gave advice, that they could be used by multinational companies to wipe out their UK profits?

Edward Troup: I am going to risk going back over what Jim has talked about. We have a major challenge collecting corporation tax in the 21st century, in an open economy with capital flows. We need to try to tax, as this Committee has challenged, the profits that are earned in the UK. If we simply take a UK company and try to tax its worldwide profits, as we found during the 1980s and 1990s, the tax system would not work. The tighter we made the rules, the more businesses moved their headquarters overseas.

A balance has to be struck between finding a way of taxing profits in the UK and not driving business overseas. Ministers had taken the decision that they wanted generous interest rules, but they also wanted a degree of protection, under the CFC rules, that was compliant with EU law, that did not drive businesses overseas, and that provided an adequate deterrent to profits being shifted outside the UK. That was a completely unsquareable circle. A set of rules was put together with a great deal of consultation; throughout this process we consulted with a range of stakeholders, with Ministers involved throughout. It was absolutely recognised that, because it was an unsquareable circle, it was inevitable that there would be some degree of leakage, and it would not be possible to achieve exactly the effect we wanted, which was only to tax profits in the UK, prevent businesses moving overseas, and prevent profits being shifted overseas.

The set of rules is much more workable and effective. It is clearly understood. There is no sense of somebody devising them and then not knowing what had happened. Jim has said that we did not know exactly what people would do, because we cannot know exactly what businesses would do, but they are achieving the effect. Businesses are not leaving the UK. To that extent, it is a success.

Q395 Ian Swales: There were three impacts of all this. Were they discussed? The first is the incentive for UK business to be owned offshore. Secondly, there is the incentive for UK businesses to manufacture offshore, because that would no longer be treated as part of their tax base. Thirdly, there is the effect on UK competition of these companies of multinationals being able to have an inside track in the way that they finance their organisations. Those three economic effects are absolutely stark now in our economy. Were they discussed at the time?

Edward Troup: I think that on all three of those we are in a better, or certainly no worse, position than we were under the old rules. The incentive for overseas ownership is a feature, as you describe it, of our generous interest deductibility, and although, through the worldwide debt cap and some other measures, we have tightened up on that-Ministers have adopted a generous interest deductibility set of rules-I do not think we are any worse off under that. I do not really understand the point about manufacturing overseas. If you manufacture overseas, you pay tax there at the local tax rates. If you manufacture in the UK, you pay tax here at the local tax rate.

Q396 Ian Swales: It is the CFC issue.

Edward Troup: But the CFC rules do not apply if you manufacture overseas, because manufacture is excluded.

Q397 Chair: I have two or three questions on this, and then I will bring you back, Ian. One is: why did other countries strengthen their CFC rules, and why haven’t we? They want to be as competitive as we do. Why have they done that?

Edward Troup: After we abolished exchange control in 1979, there was a significant outward flow of money, which required us to introduce the CFC rules in 1984. Because we were one of the first countries to abolish exchange control in this part of the world, we were one of the first countries to have CFC rules. They were very tough; they were too tough. Actually, other countries-

Q398 Chair: So you disagree with the OECD as well.

Edward Troup: I disagree if you take a point version, but have we ended up with CFC rules that are somehow weaker than other countries’ CFC rules? No, I do not think we have.

Q399 Chair: Well, the OECD does think that. Is it true that you said at some time that "Taxation is legalised extortion"?

Edward Troup: I am very glad that Mr Murphy and others go back and read the articles I wrote in the FT in the 1990s.

Q400 Chair: Did you say that?

Edward Troup: I wrote a whole series of articles.

Q401 Chair: People go back the whole time to stuff I did in the 1990s and 1980s, I can tell you. You never get away from your past.

Edward Troup: The article was making the point-indeed, it is relevant to a lot of what we discussed today about tax being a matter of law-

Q402 Chair: Did you say "Taxation is legalised extortion"?

Edward Troup: In the context of that article, which you read, I was making the point that it should not be left to the discretion of tax administrators to decide how much was due; it had to be left to the rule of law, and that is quite an important principle.

Q403 Chair: Did you say "Taxation is legalised extortion"?

Edward Troup: In the context of that article, those words appeared. If you read on-

Chair: You said it-thank you.

Edward Troup: Would you like me to read it?

Chair: No. I was interested; I would never dream of putting those four words together. Can I talk about the GAAR amendment?

Q404 Mr Bacon: You know that George Orwell said never to use the passive if you can use the active. You said, "those words appeared." How did they appear-by magic?

Edward Troup: No. It is late on a Monday afternoon. I do have to admit that I did write those words.

Mr Bacon: You did; thank you. I was just checking.

Edward Troup: But I would like you to read the whole article. It is a rather good article, I have to say.

Mr Bacon: Please send it to the Committee, and we will definitely read it.

Edward Troup: Well, Mr Murphy put most of it up on his blog today.

Q405 Chair: Did you also say, of the GAAR, that "The taxpayer would be laid at the mercy of the bureaucrat"-that is you, Mr Harra?

Edward Troup: I am a bureaucrat these days, too.

Q406 Chair: You are not; he is the one who does it. We will come to you, Mr Harra, but did you say "The taxpayer would be laid at the mercy of the bureaucrat"?

Edward Troup: A proposal for the GAAR was put forward by the previous Government in 1998. That-

Q407 Chair: Did you say that?

Edward Troup: I said it of the GAAR that was put forward by the previous Government in 1998.

Chair: I know; now we have a toothless one, and it is okay.

Edward Troup: And having no protection for the taxpayer whatsoever.

Q408 Chair: Given those views, are you really the best person to lead the people’s fight against tax avoidance?

Edward Troup: It is very kind of you to say that I am leading the fight. Actually, Jennie and Jim and the 30,000 people-

Q409 Chair: You are their boss. You are the top person here-although you are not accountable for Switzerland; I hear that.

Edward Troup: I am a tax professional, but as the papers have written today, Jim is our most senior tax inspector, so he ultimately is leading the fight, with Jennie and her people.

Chair: Right. We want to talk about Eurobonds. It seems to me that they are working for big businesses, not the taxpayer, really.

Q410 Ian Swales: The question of eurobonds has been well-reported in the media in the last week; this is another version of what we have been talking about. HMRC said in its consultation that "in recent years a number of groups have issued Eurobonds between companies in the same group, and listed them on stock exchanges in territories such as the Channel Islands and Cayman Islands, where they are not actually traded. In effect, the conversion of existing inter-company debt into quoted Eurobonds enables a company to make gross payments of interest out of the UK to a fellow group company, where otherwise deduction of tax would be required." That is a special case of what we were just talking about. Quite rightly, you thought that that was out of order and put it out for a consultation. According to the reports, the usual suspects told you that it would be a bad idea to do anything about that, so you will not be doing anything. Can you talk us through the process by which you went from deciding that you wanted to do something to not doing anything?

Jim Harra: The Government has not said that it will not do anything about it, but it has decided that it would not be right to implement the proposal put forward in that consultation, because it is clear that that would not have had the desired effect, which was to yield the £200 million we had anticipated. The eurobond exemption has existed since 1984. It is a means by which UK businesses can access international finance, because it allows that finance to flow without the deduction of withholding tax. We monitor how it is used, and we were concerned that intra-group finance, in the circumstances you described, was not how we originally envisaged the exemption working, although we are clear that that is the effect of the rules unless and until some reform is made.

We put forward the proposal in the belief that that would hopefully yield about £200 million. We are satisfied, from the responses we received and further analysis we did, that that would not have been the result of the measure we proposed. Therefore, the Government decided that it would not proceed with that.

Q411 Ian Swales: Why is that?

Jim Harra: For a number of reasons. First, it was demonstrated to us that not all intra-group lending in these circumstances originates within the group: some of it is external borrowings moved through a group finance company, at which point they use the eurobond exemption. Arguably, that is within the original policy intent. Secondly, because there is a wide array of other ways whereby withholding tax does not apply, what the measure would have done is just put some administrative obstacles in the way, which people could have got around. The issue is still under review and, in particular, the whole question of withholding taxes and how they can be used to prevent profit shifting is being looked at in the context of the BEPS project.

Q412 Chair: In the context of what project?

Jim Harra: Sorry, the BEPS-base erosion and profit shifting-project, which the OECD is leading on behalf of the G20.

Q413 Ian Swales: Would you agree that, as a top tax director of a very large company said to me, this whole issue of moving capital and interest around is the No. 1 method of tax avoidance used by large companies?

Jim Harra: It depends on your definition of tax avoidance. There is no doubt that, as I described, there are large amounts of capital and interest flowing across borders. The UK does have a generous regime for giving deduction for interest, and therefore that is something that we have to monitor all the time, and that we have to use the anti-avoidance rules to police all the time.

Q414 Guto Bebb: Obviously, HMRC did a consultation. When the consultation was announced, it was said that eurobond exemption was used to circumvent the need to deduct tax at source. We have seen a number of newspaper stories highlighting the potential savings for companies engaged in this process. I know that you cannot speak about individual companies involved in your investigations, but to what extent has your research identified a figure for the losses incurred by the Exchequer as a result of these activities?

Jim Harra: Our best estimate at the time when we put the proposal out for consultation was that there was about £200 million of additional tax that we might have been able to recover from this measure. As it happens, we now believe that it would not yield anything approaching that, but that was our best estimate and remains our best estimate of the target that you might be able to achieve if you could devise a protection that would work in these circumstances.

Q415 Guto Bebb: HMRC therefore obviously disputes the figures that were announced today by The Independent, which claimed the figure was £72 million for one company.

Jim Harra: I have obviously read The Independent articles this week, and they conflate two different things. They conflate the withholding tax, which you would obviously get if eurobond exemption did not apply, with excessive deduction of interest, for which there are other separate measures.

In terms of the withholding tax, some of the articles have failed to take account of the fact that there will be a behavioural change, and that financing will operate in a different way where there is still not withholding tax; the UK gives up its right to withholding tax in a large number of double taxation agreements, or reduces it, in return for some reciprocal concession by the other country. In one of the examples used in The Independent this week, it assumed that there would have been a 20% withholding tax, but in fact there would have been a 10% withholding tax under the relevant double taxation agreement-the sum there is zero. In addition, finance can be structured in such a way that the return is not in the form of interest, and therefore there would be no withholding tax.

We concluded that what was going to happen if we implemented that measure would have been a number of behavioural changes, which would have significantly reduced the yield, and increased the admin burden, effectively, for companies and for HMRC. Ministers concluded then that it would not be wise to implement that measure, but we will keep it under review and try to find a way of doing that.

Q416 Guto Bebb: To be fair, it sounds as if what you are saying is that your original comments when the consultation was announced have been contradicted by the work that you are doing.

Jim Harra: What has happened is that the original proposal we consulted on, which we only consulted on because we believed we could implement it and make it work, we have had to conclude we were wrong about.

Q417 Chair: I have a couple of general questions. Dave Hartnett has been around again, and he is quoted in The Times, which I picked up, as saying that tax relief on films, as applied by my friend Patrick McKenna, is nothing more than "scams for scumbags". Do you agree?

Edward Troup: There was a decision of the High Court last week, to which I think you are referring, on some comments that Dave Hartnett made last year. I do not think that we would have used such colourful language, but as you know, film schemes-

Chair: I envied it, actually; I thought it was a good description.

Edward Troup: I am sure you would have used such colourful language, but we might not have. As you know, we have seen and are vigorously challenging a very large number of cases in which film tax relief, which we recognise is a perfectly legitimate tax relief with a legitimate objective, has been used in a way absolutely contrary to Parliament’s intention, and we will continue to challenge such cases.

Q418 Chair: Can you talk a bit about the composition of the board? I am particularly interested in how many people have grown from inside HMRC. How many people have come up through the ranks, been promoted and trained through HMRC? How many have you brought in from the private sector?

Edward Troup: The board, not including non-executives? You mean the executive committee of the department-

Q419 Chair: The non-executives would sit on the board, wouldn’t they?

Edward Troup: Yes, but they do not take part in the executive decisions relating to any taxpayer; they are simply a challenge.

Q420 Chair: No, but they are on your board.

Edward Troup: I am sorry, but I do not have an answer.

Q421 Chair: Let’s do the executives, and then we will do the non-execs.

Edward Troup: None of the non-executives have come through the department. They are, by definition, externals with external experience. Jim has been around HMRC for the longest, so he will correct me if I am wrong. Lin Homer, as you know, is a career civil servant who has not come up through the department. I have been in the Treasury for the past 10 years and in the department for the past year. Jim has been in the department for-

Jim Harra: Over 29 years.

Edward Troup: Nick Lodge, who has recently been confirmed as director general of benefits and credits, has been there for-

Jim Harra: More than 20 years.

Edward Troup: Jennie, as you know, has been here for a year, but she is very much a career tax person.

Jennie Granger: I have spent 30 years in the Australian Taxation Office.

Edward Troup: Ruth Owen, who is director of personal tax, has come from DWP, where I think she spent most of her career, which has been extremely pertinent to the challenges of her responsibility for personal tax. And then we have HR, IT and finance directors, none of whom, I think, are career HMRC people, but that is very much the model of the civil service today-you get experts into those fields.

Jennie Granger: Simon Bowles might want to challenge us about how old you have to be at HMRC before you are regarded as a local.

Edward Troup: Yes, he has been here for quite a long time.

Jim Harra: Five years, I think.

Q422 Chair: The other thing I am worried about is that I read somewhere-it was probably in the same Private Eye article-about the appointment relating to the GAAR. This Mr David Heaton was appointed to the committee that judged whether a proposed tax scheme was abusive or unreasonable, yet he is the guy who, it is said, wants to keep money "out of the chancellor’s grubby mitts". He was doing a particularly awful scheme in which he exploited the statutory right to maternity pay to get more money out of the Revenue by upping the pay just in those weeks used to assess entitlement to paternity pay.

Edward Troup: I may have given the wrong date to Ms Mactaggart about the commencement of the GAAR. I will write to correct that.

The GAAR advisory panel is headed by Mr Patrick Mears, who was appointed following a proper competition. It is an advisory panel. It is not making decisions; it is giving advice, as provided for in legislation enacted by Parliament. In consultation with us, Patrick Mears appointed a panel, and Mr David Heaton, to whom you referred, resigned very shortly after that particular fact came to light.

Q423 Chair: Why on earth did you appoint him if you knew? Do you go to all those "101 ideas on how to stop paying tax, either corporate or personal" things, Mr Harra? Do you send your spies along?

Jim Harra: I do send my spies along.

Q424 Chair: Mr Heaton seems to be particularly grubby, in that he talked about keeping money "out of the chancellor’s grubby mitts". Then there is the really awful scheme that he proposed at the conference for exploiting an important benefit, statutory maternity pay, for a wrong purpose.

Edward Troup: I understand that the interviews for the members of the panel were chaired by Patrick Mears. Each of the candidates was expressly asked "Is there anything in your closet? Is there anything you have said?"

Q425 Mr Bacon: "Have you written any articles?".

Edward Troup: I am not sure whether that was asked. That particular interview was not in the public domain at the time and, as I said, Mr Heaton resigned fairly briskly after it came to light.

Q426 Chair: You must have known. It is not that big a world. It is a small world, as I am coming to realise. Tax avoidance advisers are all there.

Q427 Austin Mitchell: Certainly the people who recorded the speech.

Q428 Ian Swales: I have two quick ones to raise. I know we are going to have a separate hearing about reliefs at some point. The NAO is doing some work on that. I would like to ask one quick one, which is that we had a hearing about charitable tax relief. How do you determine offshore charities? If people say they have paid money to an offshore charity, what sort of checks can you make and do you make about the legitimacy of the charity? It sounds to me as if it is absolutely wide open.

Edward Troup: I am not sure whether we have anyone here who can answer that. We have not got anyone here from personal tax.

Q429 Ian Swales: Wrong person, we will perhaps pick that up when we do the reliefs. It feels as if it must be wide open in terms of how that works.

Amyas Morse: We do have a report coming out.

Q430 Ian Swales: My final point is congratulations really for getting after the accountancy partners who were involved in the scam of moving their remuneration from their partnerships into companies, which was recently reported. It completely blows the cover, if you like, on their stance on these issues. I am just wondering whether you would describe that activity as avoidance or evasion?

Jim Harra: I take it that you are referring to the measure that the Government have put forward on partnerships. It is doing two things. One is that it is changing the rules for limited liability partnerships to make sure that those people who are properly employees are taxed as employees. It is also changing the rules to prevent the profits of any partnership from being allocated to a corporate member, which would then pay tax at a reduced rate and not in proportion to its input to the partnership.

Q431 Ian Swales: Are you saying that it was perfectly acceptable before the Government said anything that accountancy partners would allocate their remuneration effectively to a corporate vehicle? Are you saying that that was okay?

Jim Harra: I think the fact that the Government are proposing to bring forward quite significant changes in this area is because it does require a change in the law to enable us to tackle that behaviour. Whether or not you call that behaviour avoidance is every person’s opinion. What I think the Government are clear about is that it is not how they want to see the partnership rules being used, which is why they have brought forward these measures.

Q432 Ian Swales: Let us press this a bit further. Why would you have allowed that even under the old rules? Would that not have been equivalent to the scam of paying money to the Channel Islands to avoid national insurance? Is it not of the same order? It would be great to have your salary paid to a corporate vehicle to avoid higher rate tax.

Edward Troup: I have a slight feeling that we are being damned if we do and damned if we don’t. Having identified this as something where there was a loss of tax, in discussions with the Treasury, the rules have been changed, which is what you are asking us to do elsewhere.

Q433 Ian Swales: Sorry. To be fair, I did start my remarks with congratulations. I am just curious-I am not being critical-to know how that was even allowable in the first place.

Jim Harra: I think the type of arrangement that the new legislation is directed at is not what I would characterise as evasion. It has been about people setting up partnerships with corporate members and exploiting the ability to allocate losses and profits within the partnership to reduce tax. It is a form of avoidance, but we need to change the rules to be able effectively to tackle that.

Q434 Ian Swales: A final point on limited liability partnerships, I am guessing that it is not just accountants who are doing it. There is this whole issue of the very large number of LLPs that have now come into being since they were made a legitimate vehicle some years ago. How does HMRC tackle those organisations when the normal company approach does not apply because they are not companies, and often their ownership is quite opaque.

Jim Harra: There is specific legislation which provides that, for tax purposes, they are partnerships and that is the way that we then tax them. That is the piece of legislation that creates a weakness which has allowed some people to disguise what is in reality an employment relationship, as self-employment in a partnership, which is why the LLP tax rules are being changed to counteract that.

Q435 Ian Swales: Is it fair to say that the partners of many LLPs are either opaque or offshore organisations?

Jim Harra: There is a whole variety of people who use LLPs. One of the trends that we have seen in recent years exploiting the tax rules is for some relatively low-paid people, like catering and cleaning staff, to be purported to be partners in a limited liability partnership, often, we feel, without them even being aware, in order to sidestep employment taxes. It ranges over some very wealthy and sophisticated professional people, but increasingly in recent years it has been used to exploit low-paid workers as well.

Q436 Ian Swales: So, as you have rightly done in the case that I started with, you are bringing that forward now as a potential policy requirement to change it?

Jim Harra: Yes.

Chair: Right, Guto, Austin and then I’ve got one final area I want to cover.

Q437 Guto Bebb: I have two broad questions, one of which touches on the tax gap. I was so happily listening to the Chair that I did not get in at that point.

Chair: Sorry, apologies.

Guto Bebb: No problem at all. The first question is about the total tax take. It appears that the money coming in from personal taxation fell in 2011-12. That is primarily blamed on a fall in self-assessment or the tax collected through self-assessments. Is the number of people registered for self-assessment higher or lower during that year? Obviously the employment figures, which have been very strong, have been driven primarily by an increase in self-employment. I am curious as to whether the Revenue has seen more people registered for self-assessment even though the total tax take has fallen.

Edward Troup: We will probably have to write to you on that. I don’t have self-assessment numbers in front of me.

Q438 Guto Bebb: Okay. Secondly, we have been talking about large companies avoiding tax. Certainly a key concern that I have from my constituents on a regular basis is the issue surrounding VAT and registration. When VAT accounts for a significant portion of the tax gap, what sort of work do you do to try to identify those businesses that should be registered for VAT but are not, because it is obviously a source of frustration for many businesses that play by the rules that they seem to be undercut by those businesses that do not?

Jennie Granger: This is a particularly hidden economy. It can be lack of registration, certainly, or it can be not fully disclosing income. We have been making a lot of inroads with that, with both our campaigns and taskforces. For example, last year nearly £7 billion of the yield that we brought in was from VAT. Some of it is in this area. One of our best weapons is the amount of data matching we can now do through our Connect system that starts to flush out where we start to see income or other indicators-wealth indicators-that suggest that a business is not disclosing all that it can. Of course, we also, which the NAO has commented on, have a particular focus on VAT repayment and, in particular, at its most virulent, the MTIC scheme. So there is a range of things that we do in that. I think you are asking more about how we find the hidden economy part of this. As you said, data matching in particular has helped us a lot with that in recent years.

Q439 Guto Bebb: A final question: from a policy perspective has any work been undertaken on the way in which the cliff-edge impact of the VAT threshold contributes to the creation of this black economy around the margins of where people register their VAT? Has there been any analysis of the way in which policy could be changed in order to reduce that cliff-edge effect on small businesses?

Jim Harra: I believe analysis has been done over time. The UK’s threshold is set at a turnover of £79,000 which is quite high and means that there are not as many businesses around that cliff-edge; if you had set it at £25,000 to £30,000 far more businesses would be affected. No matter where you put the registration threshold, you are bound to have that cliff-edge effect for whatever number of businesses are clustered around it. We are conscious that thresholds such as that one and others can sometimes create an incentive for taxpayers to keep or purport to keep their turnovers below that level. Obviously Jennie’s people police that.

Q440 Meg Hillier: We have been talking a lot about big businesses, but day-to-day in my constituency small business owners raise many issues with me. While you are here, I just wanted to touch briefly on real-time information and how that is going. You have already extended the deadlines for smaller businesses, which has been welcomed locally, but are you confident that you are going to meet the target of delivery by April of next year?

Edward Troup: I am sorry, but this is the second go that you have had on the accounts and Ruth Owen, who is responsible for RTI, came to the first one. I do not think that any of us have come equipped with RTI facts. I am sorry, but we can certainly take questions and come back to you on that.

Q441 Austin Mitchell: Why do you place so much reliance on bringing in people from the big four accountancy houses and law firms? After all, they are selling advice on how to avoid taxes for a steady fee income and have an interest in making schemes as easy to evade and avoid as possible. However-the Chair mentioned the example of the man who wants to keep money out of the Chancellor’s pockets-accountancy house people were advising on the general anti-avoidance measures and on the patent box and were even brought directly into the Department. It is incredible. These people do not have Chinese walls in their own heads; they are there to pursue the interests of their big accountancy houses, themselves and their clients. Why should we bring them in to the process of formulating policy? I do not suggest that Grimsby police should bring in the local burglars to the crime prevention committee for advice on what crime prevention measures should be taken. Why is it permissible with this measure when they are robbing the country and not in burglary prevention?

Jim Harra: I suspect that the big four companies may not agree with that analogy, but I will leave that to them. First of all, I will say that we do not place a big reliance on them at all.

Q442 Austin Mitchell: Does HMRC lack the necessary expertise?

Jim Harra: I do not believe that we do. As I said, we do not place a big reliance on them. If I can take my area, for example, there are some 3,000 staff in business tax in HMRC and I currently have two secondees from the big four, which is a very small number in that context. So we certainly do not lack expertise. However-

Q443 Chair: Where are they in your organisation?

Jim Harra: I believe that they are working on policy initiatives.

Chair: Quite. That is the problem.

Q444 Mr Bacon: Do the secondees tend to be quite senior?

Jim Harra: They can vary in size, but-

Mr Bacon: I did not ask about size.

Jim Harra: Sorry. They can vary in seniority. We go for the particular expertise in the area that we want.

Q445 Chair: So they write the policy and then go out and flog it.

Jim Harra: That is not what they do.

Chair: Mr Edwards does on the CFCs.

Jim Harra: We do find that they have made a very useful contribution, because they are very highly skilled tax professionals, but, from working with their clients, they have insights that are helpful. Also, they are people who are going to have to operate whatever we design, so they can give us practical assistance on what the operational impacts will be of different designs. Clearly, however, we keep a grip on what the policy objective is, we assess their input and we advise Ministers. They have an input in that, but they in no way lead or control it.

Edward Troup: I do think that there is some misunderstanding that there are some secrets that are part of the policy world that they can somehow take out. We are completely transparent about our policy. Mr Swales has been looking up our guidance on thin capitalisation while we have been sitting here. There is nothing about our policy or our policy guidance that is not transparent once the policy is announced.

Austin Mitchell: Except the policies are too soft.

Q446 Chair: Hang on. The secrets are twofold. The first is that they all too often advise companies, which, because of commercial confidentiality, you cannot share with us. They will advise company A and get a deal for them out of you-you make shake your head, but that is the way that the world works-and then use that intelligence to inform their negotiations with company B. That is the first thing. The second thing is that, like the other KPMG character, Mr Edwards-I keep talking about this Mr Edwards, but I have now lost my little piece of paper-went in and did the technical writing of the rules, which no parliamentarian can do and which only technical people can. They write those technical rules in such a way that they can then identify the loopholes that they can exploit when they go back to their companies.

Edward Troup: I do not think there is a shred of evidence that that is true, and I personally would very much like to see-

Chair: I will find the quotes from Mr Edwards. Where is my bit of paper?

Mr Bacon: Was it in the bit about patent box?

Q447 Chair: This was not patent box. This was the guy who did the CFCs. When I was a Minister, I talked to my stakeholders. What I did not do was to select one set of stakeholders at the expense of others. When we look at how you consulted on the eurobonds, who devised your CFC rules and who devised the patent box, you only talked to one group of stakeholders. It always seems as though you are on the side of big business, not on the side of the ordinary, hard-working, completely law-abiding taxpayer. That really is what gets everybody’s goat.

Jim Harra: I cannot agree with that characterisation.

Chair: Of course you can’t, but it is true.

Jim Harra: There are two stages to policy making. First of all, there is consultation about what the policy should be. In that, we have public consultation and anyone can put forward their views. The next stage is the technical design of what is, unfortunately, quite complex and technical legislation, where we do find that it can be useful to have experts from the big four in our teams, because they have expertise and because they know how their clients operate and what the operational impact will be. But it is very much a design phase.

Q448 Chair: Why don’t you bring Richard Brooks and Richard Murphy in?

Jim Harra: If they wish to apply on secondment-

Q449 Chair: No, why don’t you consult some of the charities that are trying to protect developing countries?

Jim Harra: When it comes to consultation, we very much do.

Q450 Chair: There are a whole lot of other people. I think you are right to consult the accountants; nobody is against that. What I find offensive is that you seem to consult one bunch of interested parties at the expense of the rest of us. That is offensive.

Jim Harra: We certainly do consult with the NGOs on the policy, for example. It is more usual when we are in that final design phase that we are engaging tax professionals to assist us with that.

Q451 Ian Swales: As I understand it, the PFI Green Book, which was heavily designed by outside experts, still includes the assumption that 6% of the PFI income comes back in tax. We know from hearings and so on that virtually none of that income comes back in corporation tax, because all the PFI deals end up being structured with offshore arrangements. Even secondary schools are now owned in the Channel Islands. Have you made any input to the Treasury saying that that assumption needs changing because we are not seeing the tax coming back?

Edward Troup: That is a procurement issue for the Treasury. I do not know the answer to that, and I do not think any of us has that. There is a process, obviously, on all these things.

Q452 Mr Bacon: Are your buildings still owned by Mapeley Estates in Bermuda?

Edward Troup: We do have a contract with Mapeley, which covers a significant proportion of our estates.

Q453 Mr Bacon: Is it extant? I remember at the time you did this deal with them and they promptly moved offshore, so you became one of the country’s leading tax avoiders. I am just trying to find out whether it is extant. Is it ongoing?

Edward Troup: There is a Mapeley contract. I do not know the location of the company with which-

Mr Bacon: Bermuda, unless it has moved back again.

Chair: I doubt it.

Edward Troup: Mapeley is now owned by another outfit, so I am not sure exactly.

Q454 Mr Bacon: It has not come back to the UK, has it?

Edward Troup: Amyas has looked at all this, and he may know who ultimately owns Mapeley now. No, it is not in the UK, I don’t think.

Q455 Mr Bacon: On the subject of tax allowances, how many different allowances are there in total?

Edward Troup: We have got a lot of notice of that question.

Jim Harra: Yes, we have been sharing different numbers with the National Audit Office.

Amyas Morse: This is in our forthcoming Report, which you are going to have a hearing on.

Q456 Chair: My understanding, Richard, according to the Office of Tax Simplification, is that there are 1,078 different tax reliefs.

Jim Harra: That, I believe, is the number that has been published.

Q457 Mr Bacon: I know that we will come to this later, but do you know the total value of those in terms of the extent to which they are taken advantage of in the economy?

Chair: That is what Amyas is going to give us.

Amyas Morse: We are going to be having hearings on this.

Q458 Austin Mitchell: Returning to the advice of the big four accountancy houses, they are enormous in power, scale and brutal brainpower, and HMRC is comparatively puny against the power they can bring to bear. I missed the part in the Bible when David goes up to Goliath to ask for advice on what stones he should use in his slingshot. Goliath says, "Here’s a ping-pong ball. It will be wonderful in your slingshot. It is specially flight tested." I missed that part of the Bible, but I have a final question, which is irrelevant to that.

The National Audit Office told us last year that 41,000 tax avoidance schemes are under scrutiny. Can you please tell us what has happened and what progress has been made with those investigations?

Edward Troup: We are coming back with that in December. If you want us to go into it now, we are happy to do so, but I know there is a commitment to come back in December.

Chair: Let’s do it then. Austin, is that okay? You can have another right old bash at it then.

Austin Mitchell: Okay.

Mr Bacon: And you can give us a different biblical quote then.

Q459 Chair: I want finally to do VAT and the NHS. Who is that?

Jim Harra: That would be me.

Q460 Chair: I have had a series of representations about this. I know it is complex, but it has been attracting attention. There are three separate issues. One is whether it is an employment agency or a temp staffing agency. An NHS trust recruits a doctor. If it recruits them from a staffing agency, VAT is due on the whole of the locum doctor’s salary and everything. If it is just an introduction and the trust recruits them through an employment agency, you pay VAT only on the recruitment fee. I am right about that, aren’t I?

Jim Harra: That is correct.

Q461 Chair: That anomaly between the two regimes has led to PwC in particular devising schemes to exploit the difference. PwC now does business with getting on for 100 trusts. What are you doing about this?

Jim Harra: I wrote in some detail to the National Audit Office about this a couple of weeks ago. We certainly have concerns about how this is operating in practice. There is no doubt that where they do this properly and legitimately that is the way the VAT rules work, but of course it then means that the locum becomes an employee of the NHS and it has to take on the responsibilities of employer.

Q462 Chair: But they could be sacked within a week.

Jim Harra: But what we have seen is some very short-term appointments being structured in that way which is not how the scheme was originally described to us and is not the basis on which we originally gave our view about its VAT treatment. We have a review under way on that, and just this month we have met the Recruitment and Employment Confederation, which has its own concerns about it, to get its assistance with our review. We expect that by the end of this financial year we will have tackled cases that we believe are not operating VAT correctly. It is a cause for concern.

Q463 Mr Bacon: How short-term?

Jim Harra: Some that we have been told about may be a day-

Q464 Mr Bacon: An employment contract for a day.

Jim Harra: Yes, which is clearly not how the scheme was described to us, so we reserve our right to challenge that, but we have to investigate it, obviously.

Q465 Chair: Okay. Another wheeze in the NHS is when a trust buys goods. If it buys them in a managed service contract it avoids VAT, and if it buys goods directly they are VAT-chargeable. The issue has been raised concerning pathology services. Is this a VAT-avoidance device and, if so, why do you tolerate it? I have three questions.

Secondly, there is an overall loss to the public purse because it is not just that the NHS, which is publicly funded, then does not pay the VAT. It is not circular, because 8% or thereabouts goes to the managed service contractor, so there is a seeping out of 8% and the Government loses that. Do you agree?

Thirdly, the concern has been raised with me that it is all right for the bigger companies that provide pathology services to set up a managed services contract, but that SMEs, which the Government are anxious to encourage, just cannot do that so they lose out entirely in this area of business from the NHS.

Jim Harra: On managed laboratory services, NHS hospitals obviously have a choice either to operate their own in-house laboratory or outsource that service. It has been successive Governments’ policy to ensure that the VAT system does not distort those outsourcing choices. Therefore, they have put in place a VAT refund scheme, which means that if an NHS hospital decides to outsource and suffers VAT, it can reclaim it. The aim is to remove VAT from the equation of the outsourcing decision. What I would say about NHS funding generally is that its irrecoverable VAT is taken into account in its funding by the Treasury. To the extent that NHS bodies find ways to recover VAT, that will impact on the funding they get from the Treasury.

Q466 Chair: I hear that, and it is welcome. Would you accept two things? One, you lose the money on the managed services contract. Because that is NHS money, it is taxpayers’ money.

Jim Harra: As I said, the aim is to take VAT out of the equation. If an NHS hospital finds that it can make savings by outsourcing its laboratory services-

Q467 Chair: It will save 12%. VAT is 20%, so it will save 12%, but we the taxpayers lose 8%, because you get yourself into a managed services contract, and they will charge.

Jim Harra: I think it is for the NHS hospital to determine whether it is getting good value for money for the public purse.

Q468 Chair: No, it is for us to determine whether using that as a device to avoid VAT serves the taxpayer’s interest well. What I am saying to you is that I do not think it does, because you will end up having to pay the managed services contract management fee.

Jim Harra: It is not so much about avoiding VAT. What the scheme does is ensure that the Government give a refund to the NHS body on the VAT that it suffers when it outsources, so that it is in the same position-

Q469 Chair: I don’t think you understand me. I understand that a company sets up a managed services contract to provide pathology services to a hospital. By doing that, it then avoids VAT, but the managed services contractor asks a fee for the work he is doing, and that fee is a loss to the public purse. It is not the VAT loss; it is the loss of that fee to the NHS, which is funded by the taxpayer.

Jim Harra: On the VAT analysis, I do not recognise the avoidance, but certainly the fee is an outgoing from the public purse. If that is not made up by a better saving, presumably the NHS body should not be doing it.

Q470 Chair: The final thing I wanted to ask was about pharmacies. There is a further loophole which disadvantages hospital pharmacies. Drugs to in-house pharmacies are not considered business supplies for VAT purposes, because they are bought to fulfil a statutory purpose. Therefore, they have to pay VAT, but if it is outsourced-say, to Boots, who were in the papers a couple of weeks ago for not paying any UK tax and relocating offshore-Boots can claim back the VAT. Boots gets a financial advantage on price over the in-house hospital pharmacy.

Jim Harra: There certainly is a net VAT advantage to an NHS body from outsourcing its pharmacy services to outpatients, compared with doing them in-house.

Q471 Chair: Is that good, especially when it is Boots and they outsource their profits?

Jim Harra: However, that advantage is the kind of thing that the Treasury then takes into account in the funding of the NHS generally.

Q472 Mr Bacon: Hang on a minute. If you were a hospital, you might have, in effect, an incentive to cut a deal with Boots or some other pharmacist and say, "You can recover VAT and we can’t. How about a private arrangement whereby we split the difference?" Are you aware of any such arrangements like that?

Jim Harra: No, I am not aware of any, and I would expect that others might well take a dim view of them. All I can say is that we have no evidence of any VAT avoidance through these structures, but we are aware-

Q473 Chair: Was it the policy intent to close down in-house hospital pharmacies?

Jim Harra: This is the way that the European VAT system works.

Q474 Chair: But was that our policy intent?

Jim Harra: I am not aware that it is the policy intent, and I am not aware that, when combined with the funding mechanisms that the Treasury use, it is actually the effect. Although a particular NHS body can gain a tax advantage from outsourcing out-patient pharmacy, the Treasury is then aware that the irrecoverable VAT to the NHS has reduced and will therefore take that into account in its funding.

Q475 Ian Swales: But they won’t look at it hospital by hospital.

Jim Harra: They will not do it body by body, I assume, but they will do it for the NHS.

Q476 Ian Swales: Well, I am sure that the management of a particular hospital is just going to look at it on the basis of pound notes. They will not take account of the hope that the-

Edward Troup: This is how the VAT system works.

Q477 Chair: I know how it works but you can actually have a go at it and see. In both these instances, whether it is in the buying of goods and services, where we lose the management fee and damage SMEs, or in the pharmacies, where you are basically killing off in-house pharmacies, that is the policy intent. Be explicit about it.

Jim Harra: We certainly do police it. For example-

Q478 Chair: I know that you police it. It is not a question of policing. The actual policy has this impact. If that is not the policy intent, you should look at it.

Jim Harra: Certainly in relation to pharmacies policy the EU VAT does have that effect. The main mechanism for counteracting that is through the Treasury’s funding of the NHS.

Q479 Chair: Finally, we asked about your executive but failed to ask you about the non-executive. Can you describe to me the non-execs at HMRC?

Edward Troup: If there is a list in the back of the accounts, we will go to those. Otherwise I would rather just drop you a note.

Q480 Chair: Is any of them from an NGO?

Paul Keane: There is a list on page 29.

Edward Troup: I think their biographies are also in here, but I might be wrong.

Q481 Chair: Who are they? Ian Barlow-what was he, ex-KPMG?

Mr Bacon: He is chairman of the Racecourse Association.

Chair: Yes, but he is ex-KPMG. John Whiting was previously at PricewaterhouseCoopers. Edwina Dunn-where is she at?

Edward Troup: She formed a company called Dunnhumby that worked for Tesco in developing its clubcard. Janet Williams is a former deputy assistant commissioner of the Metropolitan Police.

Q482 Chair: Did she work for any-she worked for a private company. She is "a Non-Executive for a private company".

Edward Troup: She is president of a UK charity. Norman Pickavance comes from Morrisons. Volker Beckers is from RWE npower. Leslie Ferrar has a number of non-executive positions and has a life of public service.

Q483 Chair: What is her background? She is ex-KPMG.

Edward Troup: Sorry, I am reading things out that you can read for yourselves.

Q484 Chair: Yes, she was a tax partner at KPMG.

Edward Troup: Philippa Hird was in HR at ITV. Colin Cobain has retail experience and Paul Smith is no longer with us.2

Q485 Ian Swales: Have you ever considered having what you might call grit in the oyster? You could have a campaigner on behalf of taxpayers on your board.

Edward Troup: This is something you have discussed with Lin before.

Q486 Chair: I don’t think we have actually, but we are now discussing it with you in her absence.

Edward Troup: Perhaps you haven’t. I am going to defer to Lin.

Chair: Maybe she can write to us, because we want an HMRC that is on the side of the people, not on the side of big business. Thank you.

[1] Note by witness: The GAAR came into force for tax when the 2013 Finance Act received Royal Assent on 17 July 2013, and applies to abusive arrangements entered into on or after that date. The NIC Bill that is currently going through Parliament extends the GAAR to NIC, and is expected to come into effect by the end of March 2014.

[2] Note by witness: Paul Smith is currently a Non Executive Director. Colin Cobain stood down as a Non Executive Director at the end of September, 2013.

Prepared 19th December 2013