1 Business tax and tax avoidance |
1. On the basis of a report from the Comptroller
and Auditor General on HM Revenue & Customs' (HMRC) 2012-13
Annual Report and Accounts, we took evidence from HMRC on its
progress in dealing with various personal tax, business tax and
tax avoidance issues.
HMRC is responsible for collecting UK taxes and duties from businesses
and individuals and providing financial support to taxpayers through
tax credits. It has three strategic priorities: to improve customer
service; to reduce operating costs; and to reinvest money from
its efficiency savings to generate increased tax revenue.
In 2012-13, HMRC brought in £475.6 billion of revenue, an
increase of £1.4 billion or 0.3% in cash terms compared to
2011-12. There was
a real terms reduction in revenue over the two years.
2. Each year HMRC publishes its estimate of the
tax gap to set out the difference between the amount of tax it
collects and the amount that should be collected according to
its interpretation of the intention of Parliament in setting tax
law (the theoretical liability).
HMRC's most recent estimate of the tax gap, for 2011-12, is £35
billion, a £1 billion increase on 2010-11, although the tax
gap as a proportion of the theoretical tax liability decreased
slightly from 7.1% to 7.0%.
3. HMRC's calculation of the tax gap does not
include an assessment of the amount of tax lost through tax avoidance,
therefore it represents only a fraction
of the amount that the public might expect to be payable.
The Prime Minister has called for measures to tackle tax avoidance
and the Organisation for Economic Co-operation and Development
(OECD) is also considering this issue. However, HMRC said it
had not attempted to calculate how much more tax would be owed
to the UK by multinationals were such anti-avoidance measures
introduced. It considered that any calculation based on the OECD's
initiatives to date would require a significant amount of work
and be unreliable, as the OECD's work was still on-going. HMRC
said that the OECD was uncertain about how much money would be
involved globally, and how this should be allocated between different
4. HMRC has not tested the limits of its power
to address aggressive tax avoidance. It has not prosecuted any
major internet company despite huge differences in the value of
UK sales reported in the US and in the UK, and allegations that
sales had been recorded as being made offshore in order to reduce
tax liabilities, despite the sales actually being made in the
UK. HMRC reported that it investigates all such claims and that
it is pursuing prosecutions against a number of businesses.
5. HMRC said that in the first half of 2013,
it had secured £1 billion through prosecuting eight large
businesses for their involvement in tax avoidance.
It also told us it was committed to taking action against individuals
and firms which invent and sell targeted avoidance schemes in
the UK that overstep the boundaries of what is acceptable. It
reported that it had recently secured two convictions for fraud,
and that Government is currently consulting on measures to identify
high-risk promoters of tax avoidance schemes and to penalise those
who do not disclose information about their activities.
6. In October 2011 the UK and Swiss governments
signed an agreement to tackle offshore tax evasion, under which
the 2012 Autumn Statement forecast that HMRC would receive £3.12
billion in 2013-14. The forecast was based on joint analysis by
HMRC and the Office for Budget Responsibility (OBR) of the information
received from Swiss banks.
HMRC told us that it had received £440 million in the first
seven months of 2013-14,
just 14% of the total amount expected this year.
HMRC was unable to explain why the data it provided to the OBR
resulted in such an inflated estimate. Although HMRC had met
with the Swiss authorities to express concern about this shortfall,
it could not elaborate on what had been discussed, or what explanation
the Swiss government gave for the inadequacy of the information
provided by Swiss banks.
7. Most of the £440 million received came
from amounts withheld by the Swiss banks to settle the liabilities
of account holders from the UK who wish to remain anonymous. HMRC
has the right to investigate individuals who waive their right
to anonymity but it has made little progress in doing so. Of the
18,000 names provided by the Swiss government, HMRC has secured
settlements with 200 people and brought in £2 million of
revenue. HMRC does
not know how much of the estimated £40 billion held by UK
citizens in Swiss bank accounts has been moved out of Switzerland
since the agreement was made public.
8. When we took evidence on HMRC's 2011-12 accounts
in November 2012, HMRC had 15 criminal investigations underway
into individuals on the so-called Lagarde list (of Swiss bank
account holders with potential UK tax liabilities) and it had
secured one prosecution. HMRC told us in October 2013 that there
have been no further prosecutions since.
Six of the 15 cases are currently under civil investigation and
the remaining nine have agreed to provide disclosures under the
Liechtenstein Disclosure Facility.
9. HMRC told us it had struggled to devise rules
that struck the right balance between taxing business profits
in the UK and not driving business overseas. It claimed the desired
policy outcomes of only taxing profits in the UK, preventing businesses
moving overseas and preventing profits being shifted overseas
was in effect impossible to reconcile, and that some degree of
tax leakage was inevitable.
10. Under existing rules UK tax-based companies
may reduce their tax liability by borrowing money in the UK to
invest in an offshore subsidiary and then offsetting the cost
of borrowing against their UK profits.
HMRC told us that if it identified that such borrowing was for
an unallowable purpose, such as solely to get a tax advantage,
it would consider whether anti-avoidance rules could be deployed
and seek to disallow the deduction.
11. HMRC confirmed that recent changes to the
Controlled Foreign Companies (CFC) rules had been designed to
protect the UK tax base.
However, the new CFC rules had weakened the tax regime, in that
they now allowed companies which move their finance operations
offshore to reduce their tax liability.
Under the new CFC rules, HMRC considers any UK company that locates
its finance operation in a low-tax jurisdiction to be liable for
corporation tax on a quarter of its profits, which means that
the total tax due amounts to 5% of all profits. In contrast, the
corporation tax liability of a company located only in the UK
amounts to 20% of its profits.
12. HMRC told us that it no longer intended to
implement proposals it had put out to consultation to address
a tax loophole arising from the use of Eurobonds. The Eurobond
exemption allows groups of companies to issue Eurobonds, listed
on the stock market of territories such as the Channel Islands
and Cayman Islands, and trade them between companies within the
group without tax being deducted. While HMRC did carry out a public
consultation, it explicitly sought comments from those who benefited
from the loophole and who therefore opposed the change.
2 HM Revenue & Customs 2012-13 Accounts, Report
by the Comptroller and Auditor General, June 2013 Back
C&AG's Report, paragraph. 7 Back
C&AG's Report, paragraph 1.2 Back
HM Revenue & Customs, Measuring tax gaps 2013, October
Qq 222-223 Back
Qq232-235, 258 Back
Qq 252-256 Back
Qq 277-278 Back
Q295; C&AG's Report, paragraph 1.9 Back
Q 292 Back
Qq 312-314 Back
Q 309 Back
Qq 322-323 Back
Qq 333-334 Back
Supplementary note on Q343 provided by HMRC to the Committee,
11th November 2013 Back
Qq 345-348, Back
Qq 380-381 Back
Qq 382-387 Back
Qq 354-357 Back
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