House of Commons - HMRC Tax Collection: Annual Report & Accounts 2012-13

HMRC Tax Collection: Annual Report & Accounts 2012-13 - Public Accounts Committee Contents

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.[2] 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.[3] 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.[4] 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).[5] 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%.[6]

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.[7] 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 states.[8]

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.[9]

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.[10] 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.[11]

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.[12] 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.[13] 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.[14]

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.[15] 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.[16]

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.[17] Six of the 15 cases are currently under civil investigation and the remaining nine have agreed to provide disclosures under the Liechtenstein Disclosure Facility.[18]

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.[19]

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.[20] 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.[21]

11. HMRC confirmed that recent changes to the Controlled Foreign Companies (CFC) rules had been designed to protect the UK tax base.[22] 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.[23] 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.[24]

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.[25]

2 HM Revenue & Customs 2012-13 Accounts, Report by the Comptroller and Auditor General, June 2013 Back

3 C&AG's Report, paragraph. 7 Back

4 C&AG's Report, paragraph 1.2 Back

5 HM Revenue & Customs, Measuring tax gaps 2013, October 2013 Back

6 Qq 222-223 Back

7 Qq232-235, 258 Back

8 Qq 252-256 Back

9 Qq265-271 Back

10 Q284 Back

11 Qq 277-278 Back

12 Q295; C&AG's Report, paragraph 1.9 Back

13 Q 292 Back