HMRC's progress in improving tax compliance and preventing tax avoidance - Public Accounts Committee Contents

2    HMRC's progress in tackling tax avoidance

15. HMRC has taken action to address some of the Committee's previous concerns on tax avoidance.[24] However, it acknowledges that it can take a long time to investigate avoidance cases and get them into court, and recognises that it has to bring avoidance schemes to a conclusion more swiftly. For instance, the Liberty scheme began in 2005 and was closed down in 2009, but it has taken until 2014 for HMRC to take this case to a tax tribunal.[25] HMRC told us that up to £10 million of the total £400 million tax at stake from the 2,000 users of this scheme may not be recoverable because in 30 cases HMRC failed to start Section 9 inquiries (into a personal tax return) within the 12 month statutory deadline.[26] This may be just the tip of the iceberg. Though HMRC suggested this failure was an exceptional instance among the 750,000 Section 9s issued annually, it was unable to tell us how much delays had cost across the different tax avoidance schemes. HMRC accepts there have been delays in the past in pursuing compliance proceedings against tax avoidance schemes, partly due to delaying tactics and obstacles put in their way by scheme promoters.[27]

16. HMRC assured us that it has the right number and quality of staff to tackle tax avoidance. It explained that it had established a new counter-avoidance group, under an experienced director, to put its anti-avoidance work and resources in one place.[28] HMRC also told us that its investment in recruitment and training, such as through its tax academy, means it can recruit high-calibre graduates who value both the professional training and excellent day-to-day work that HMRC offers.[29] Though there is movement of staff between HMRC and the private sector, HMRC told us that it did not have a significant staff retention problem.[30]

17. This year's Finance Bill introduced a new accelerated payments measure. HMRC predicted this will be a "game changer" for tax avoidance schemes because it requires those in marketed avoidance schemes to pay their tax bill up front if they want to dispute HMRC's assessment of what they owe. HMRC said that for promoters of avoidance schemes being able to delay any settlement with HMRC for several years was in many ways as good as winning the case.[31] HMRC has just published its list of 1,200 suspected tax avoidance schemes, involving 33,000 individuals and 10,000 businesses, and covering an estimated £7 billion potential tax revenue.[32] HMRC assured us that the accelerated payment scheme would reduce significantly the backlog of tax avoidance cases and estimated that it would bring in an additional £4.9 billion in extra tax revenue.[33]

18. We queried whether HMRC's litigation strategy for avoidance cases is too cautious. We have heard in the past from the major accountancy firms that they would continue to promote avoidance schemes even when there was a 50% chance of these being successfully challenged.[34] HMRC told us that last year it defeated 30 avoidance schemes and protected £2.7 billion through litigation. It said it is proud of its 80% success rate in avoidance cases, arguing that its high level of success is an important deterrent.[35] HMRC emphasised the importance of measures outside of litigation. For example, it has not taken Employee Benefit Trusts to court, and sees reaching a settlement as the most effective way of resolving them. Unlike marketed avoidance schemes which often have a large number of followers, Employee Benefit Trusts tend to be bespoke, making individual case-by-case litigation costly.[36]

19. We asked whether HMRC is doing enough to challenge promoters of avoidance schemes. HMRC responded that new measures in this year's Finance Bill would enable it to target those it identifies as the high-risk promoters who continue to market aggressive avoidance schemes. The measures would put additional obligations on such promoters so HMRC would be able to monitor what they are doing.[37] Where HMRC identifies new schemes as aggressive, it publishes a warning to tax agents that the scheme is risky and will be challenged.[38] We have seen evidence that accountancy firms are continuing to devise more complex tax avoidance schemes designed to get around DOTAS (Disclosure of Tax Avoidance Schemes) rules and the new General Anti-Abuse Rule. HMRC told us that it does not rely solely on the DOTAS scheme to identify avoidance schemes, but also uses risk assessment of returns, and monitors tax avoidance discussions on internet chatrooms and other media.[39]

20. HMRC told us about its progress in acting on information from the Falciani list, which it received in 2010, of 130,000 potential tax evaders using the Geneva branch of HSBC. HMRC identified from this list 3,600 potentially non-compliant UK taxpayers. To date, HMRC has received £135 million from individuals on this list, compared to £220 million received by Spain and £188 million received by France.[40] It does not have an estimate of the final expected yield. In respect of the so-called Lagarde list (a shorter list of Swiss bank account holders with potential UK tax liabilities), HMRC told us it was making progress on the 15 civil investigation cases it had mentioned when we took evidence on HMRC's 2012-13 accounts in October 2013. In addition, there are a further 13 criminal investigations ongoing. HMRC has secured one prosecution, which has generated fines and compensation totalling £830,000.[41] HMRC does not know how the resources it commits to international businesses' tax compliance compare with the resources that other nations in Europe commit.[42]

21. HMRC emphasised the importance of international co-operation to increase the transparency between tax authorities and multinational and tax authorities about where they operate and where their profits are earned. It told us that the UK is a leading participant in the OECD BEPS (Base Erosion and Profit Shifting) project to address corporate tax planning strategies that artificially shift profits to low tax jurisdictions, and had led the way on improving international transparency over the 'beneficial ownership' (determining who has the benefits of ownership) of businesses.[43] The OECD is due to report to the G20 on progress on the first 7 of the 15 action points for the BEPS project in September 2014, and the remainder in 2015. [44]

22. We raised concerns about the transparency of UK limited companies which are controlled elsewhere, and so do not file annual accounts in the UK.[45] HMRC was not able to tell us how many foreign controlled UK companies did not file accounts with Companies House. It told us that HMRC was making greater use of Companies House data, for example, to cross-check annually for dormant UK companies.[46]

23. There have been a number of recent policy changes to the UK tax regime, including changes to the arrangements for taxation of controlled foreign companies and the introduction of the patent box, a relief allowing companies to pay a lower rate of Corporation Tax on profits earned from patented inventions and other innovations. HMRC told us that the costs and benefits of these measures had been set out in consultation documents prior to their introduction but we were not convinced that the expected benefits had materialised.[47] Research into seven companies that had relocated to the UK for tax purposes suggests that this has generated little inward investment and job creation in the UK in return for the tax benefits the companies receive.[48] We are also aware of international tax experts claiming that it is easier for multinational companies to gain tax residency in the UK than in the Netherlands. HMRC said that it did not recognise this concern and told us that all EU tax authorities had to apply the same tests on the control and management of operations.[49]

24   Public Accounts Committee, HMRC Tax Collection: Annual Report and Accounts 2012-13, Thirty-Fourth Report of Session 2013-14, 19 December 2013 Back

25   Q 92 Back

26   Qq 81-5 Back

27   Qq 44, 92 Back

28   Q 48 Back

29   Q 98 Back

30   Q 99 Back

31   Qq 44, 93 Back

32   Qq 87- 90 Back

33   Q 94 Back

34   Q 93 Back

35   Qq 56, 92 Back

36   Q 52 Back

37   Qq 47, 48 Back

38   Q 97 Back

39   Q 96 Back

40   Qq 101, 103-104 Back

41   Qq 100, 111 Back

42   Q 28 Back

43   Qq 50, 118 Back

44   Q 51 Back

45   Q 114 Back

46   Q 117 Back

47   Qq119-123; HMRC written evidence Back

48   Q 124 Back

49   Q 127 Back

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Prepared 18 November 2014