4 We started the debate on tax practices
but much more still needs to be done
We shone a light on the once secret tax avoidance
industry and gained public and cross party support for a more
robust response from government
37. Before we began to take a close interest
in tax avoidance, those who promoted the use of contrived schemes
to exploit loopholes in legislation and tax relief schemes appeared
to be winning the game of cat and mouse with HMRC. Our interest
has forced the debate and some real progress has been made. We
have frequently commented on the adequacy of HMRC's response to
tax avoidance, questioning whether it has the skills and capacity
to tackle complex schemes and its willingness to litigate or take
other action against individuals and the tax planning industry.
We welcomed HMRC's renewed focus on compliance work when it has
increased the number of its staff working in this area by 6%,
from 25,500 to 27,000.
38. Our February 2013 report on tax avoidance
found a lack of transparency about who marketed and used tax avoidance
schemes. We concluded that HMRC's approach relied on retrospective
investigations and litigation of individual cases which were time-consuming,
costly and not always effective. We recommended that HMRC urgently
calculate how much it spent on tackling the estimated £5
billion worth of tax that was lost to avoidance each year so it
could tell us how much of a return it achieved from its anti-avoidance
work; and that it should ensure that it was making full use of
its existing, or potential powers, to tackle uncooperative promoters.
39. HMRC accepted our recommendations and made
attempts to redress the balance with scheme promoters and users
by setting up a new counter-avoidance directorate to bring together
its operational and policy responses in one place; and by setting
out plans to improve its management information so it had a better
idea of the information it already had and where it needed to
refine its understanding to have more impact.
40. Our report in April 2013 focussed on the
role of tax advisors including Deloitte, Ernst and Young, KPMG
and PwC who between them at the time employed nearly 9000 people
and earned £2 billion from their tax work in the UK, and
around $25 billion globally. We welcomed our witnesses' acceptance
that international tax rules were out of date and in need of change
to reflect the reality of modern business. We concluded that the
Office of Tax Simplification, with fewer than 6 FTE staff, was
grossly understaffed to deliver the radical simplification that
was needed and it should therefore receive the resources and influence
that it needed from the Treasury.
41. The firms told us they no longer engaged
in aggressive tax avoidance schemes, but we were still concerned
that it was not clear where the line between acceptable tax planning
and aggressive tax avoidance lay. Of significant concern to us
was the Treasury's inappropriate use of staff from these firms
to provide advice to government on tax law, only for them to devise
ways to avoid the legislation they had helped to frame at later
dates. Whilst the firms denied this happened, we recommended that
the Treasury should introduce a code of conduct for tax advisers,
setting out what is acceptable in terms of tax planning and how
to manage conflicts of interest when a firm advised government
on the formulation of tax laws and subsequently provided tax advice
to clients in related areas.
42. We also uncovered that multi-national organisations,
such as Google, Starbucks and Amazon had not been sufficiently
challenged by HMRC about their artificial tax structures. For
example, despite generating $18 billion of revenue from the UK
between 2006 and 2011, we found that Google paid the equivalent
of just $16 million of UK corporation taxes in the same period.
We were unconvinced by Google's argument that its sale of advertising
space to UK clients took place from Ireland, because despite sales
being billed from Ireland, most sales revenue was generated by
staff in the UK. We have taken evidence on other well publicised
examples of tax avoidance, and potential tax evasion, for example
the correspondence leaked from PWC Luxembourg about tax settlements
and more recently HSBC's private banking arrangements.
43. It is clear to us that much more needs to
be done to reform HMRC into a more diligent and determined organisation
that is able to challenge both the individuals and corporations
that use artificial corporate structures to avoid tax and also
those who promote and market such devices. It remains of concern
to us that individuals and SMEs are pursued with greater vigour
and are more likely to end up in the courts than powerful multi-national
companies. The pace of change to date has been slow and somewhat
hampered by the complex tax laws in place, but it is essential
that this work continues and HMRC is supported by the Government
in doing so.
We challenged the abuse of tax reliefs, particularly
those involving charitable donations
44. Tax reliefs range from fundamental components
of the tax system, such as personal tax allowances, to tax expenditures
with more specific policy objectives such as film tax relief.
We reported in June 2014 that despite there being 1,128 tax reliefs
in the UK, there was a lack of transparency and accountability
for them and no adequate system of control following their introduction.
Neither HMRC nor the Treasury were able to keep Parliament adequately
informed of changes in the costs of reliefs because after their
introduction tax reliefs are were not managed or evaluated closely.
This lack of oversight meant government was unable to respond
promptly to unexpected increases in the costs of tax reliefs-especially
important as the NAO told us about 26 reliefs that had increased
in cost by more than 50% in real-terms in the past 10 years and
30 that had increased in cost by more than 25%.
45. We recommended that the Government establish
clear accountabilities and set out its commitment to introducing
a framework for the effective assessment, management and reporting
of tax reliefs; provide proportionate feedback and analysis to
Parliament on the costs and any cost changes of reliefs; and for
it to develop stronger checks and balances to guard against the
increasing complexity that is created by continually creating
more reliefs.
46. When we revisited this issue in January 2015,
we were disappointed by the progress made by HMRC and the Treasury.
Whilst HMRC accepted its responsibility for monitoring, evaluating
and assessing tax reliefs, it rejected the notion that this responsibility
extended to the cost of a relief. We firmly rejected this assertion.
They had also failed to improve the transparency and costs of
tax reliefs to Parliament. Until these basic areas are addressed,
Parliament will not have the transparency it needs to ensure that
tax reliefs are securing the benefits promised when the legislation
was passed.
47. As a reinforcement of our argument about
tax avoidance in general, we found weaknesses in how specific
tax reliefs were being managed that left them exposed to abuse
by promoters. Successive governments have legislated to exclude
charities from income tax, for example Gift Aid allows charities
to reclaim the basic rate of tax paid on donations. At the time
of our report in February 2014, charities received just over £1
billion in tax repayments through Gift Aid donations. However
we discovered a sinister industry that abused these tax reliefs
and threatened to undermine the public's confidence in charitable
organisations. In June 2013 we examined the Cup Trust, which was
set up as a charity under the Charities Act 2011 as a way to avoid
tax. The organisation went on to give just £152,292 to good
causes, whilst attempting to claim back £46 million from
HMRC in Gift Aid on an income of £177 million.
We fostered international relationships to tackle
tax avoidance, as an effective response relies on cross border
cooperation
48. Our inquiries into tax avoidance demonstrated
that international tax law, and the tax practices of multinational
companies, have had a significant bearing on the amount of tax
paid in the UK, and affects governments and citizens across the
world. We held an international conference in the City of London
with 200 delegates to discuss the nature of the problem, the progress
made to date, particularly in relation to the work of the OECD,
the challenges that we still face and potential solutions at both
the national and international level.
49. On tax avoidance in there was consensus amongst
delegates about the need to simplify the tax code, which at the
time of our conference stood at 17,000 pages. Delegates told us
that both the Government and companies spent too long avoiding
and chasing tax because of this complexity.
50. Conference delegates were in broad agreement
with us that international tax laws and their administration are
no longer appropriate for the 21st century. We concluded
that whilst the current rules had been introduced to eliminate
borders and encourage global trade, companies had increasingly
adopted global, decentralised business models that resulted in
companies operating in multiple locations, for example sales in
Europe, production in Asia, and R&D in America, but not paying
tax on profits anywhere.
- We heard how the G20 and OECD had begun a process
of international tax reform to combat tax avoidance. To support
this agenda, we heard how the OECD led negotiations to improve
transparency, leading to the Automatic Exchange of Information
which was expected to have 92 signatory countries by 2017. Delegates
were told that as a result of this initiative, Sweden had recovered
€139 million from 230 exchanges of information with Germany.
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