Improving tax collection - Public Accounts Contents

Conclusions and Recommendations

1.  The complexity of tax law and the constraints on HMRC's resources mean that it is fighting an uphill battle against those who are determined to cheat the tax system. During this Parliament, we have repeatedly challenged HMRC to improve its performance. In particular, we have pushed HMRC to be more robust in addressing tax avoidance by multi-national companies, tackle the promoters and users of tax avoidance schemes, improve customer service, and be more even-handed in its treatment of taxpayers. HMRC has accepted over 80% of our recommendations and has made some significant improvements to its business. We note that HMRC has continued to reduce its headcount, which fell by 24,600 between 2008 and 2014. To address the deficit in the public finances, it is critically important that HMRC collects as much of the tax revenue that is due as is possible. Investment in HMRC more than pays for itself, with a minimum return of £10 for every £1 invested in HMRC staffing. Its resources must also reflect the scale of the challenge it faces in tackling a vast and sophisticated tax planning industry which supports aggressive tax avoidance by wealthy people and large companies.

Recommendation: HMRC could collect more of the tax that is due if it had more resources devoted to this work and it should be assertive about making this case to HM Treasury and Parliament. It should set out how much additional tax it could collect if it was granted more funding to build its capability in the most critical areas.

2.  We remain concerned that some multi-national companies who transact business in the UK are not paying the appropriate amount of tax. The evidence we heard from Google, Starbucks, Amazon, Shire and the large accountancy firms showed that the practice of creating artificial structures and transactions to exploit international tax boundaries and so avoid tax in the UK is widespread. Designing ways for multi-national companies to avoid tax is a lucrative business and it is clear that the voluntary code of conduct for tax advisors is not working in all cases. We note that some of the companies which avoid UK tax and those that provide advice on how to do so continue to benefit from large public sector contracts. Work is underway to reach international agreement on changes to tax rules and to improve the exchange of information and transparency of reporting. While we expect the Organisation for Economic Co-operation and Development (OECD)'s work in this area to have a positive impact, it will take some time. We expect HMRC to take a much more proactive approach to challenging and tackling artificial tax arrangements.

Recommendation: HMRC and government must set out how they will tackle tax avoidance by multi-national companies more robustly, rather than waiting for the OECD's work to bear fruit. This should include introducing new offences to penalise those involved in advising or helping companies and individuals avoid or evade tax.

3.  We are concerned that HMRC's relationship with large accountancy firms is too cosy. In our February 2015 report on the role of large accountancy firms we drew attention to the need for HMRC to take a more active role in challenging the advice given by large firms to their multinational clients. In its response, published on 19 March, HMRC disagreed with our recommendation for it to challenge tax advice, citing only what it does to challenge non-compliance by the multinationals themselves. We also recommended the introduction of a new code of conduct for tax advisers and consultation on how it could be best implemented. The Department also disagreed with this recommendation, despite our assertion that existing codes of conduct are simply not preventing firms from promoting tax avoidance schemes. The Department's response to our February report is out of kilter with wider policy to clamp down on aggressive tax avoidance and is not in taxpayers' best interest. We urge the Department to reconsider its response.

4.  For as long as the United Kingdom has such a complex tax code, opportunities for aggressive tax avoidance and evasion will continue to be exploited. This Government came into office committed to reducing tax reliefs but in practice the number of reliefs has increased by almost 100 so that, according to the Office for Tax Simplification, we now have 1,140 tax reliefs. Even the most ethically-based reliefs like Gift Aid tax relief can be exploited to avoid tax by those determined to cheat the system. We have reported separately on tax reliefs and made recommendations for improved management and accountability, but the fact we have so many inevitably impacts on the efficiency and effectiveness of HMRC.

Recommendation: HMRC and HM Treasury should renew their efforts to review all tax reliefs and radically reduce the number in the tax code.

5.  There are not enough prosecutions for tax evasion to act as an effective deterrent to those who break the law. HMRC clearly favours bringing in revenue quickly over prosecutions—which it told us can take many years to complete—but we are not convinced that they have struck the right balance between prosecuting tax evaders and allowing them to settle their affairs. The tax system relies on people following the rules, so HMRC needs to show that it comes down hard on tax cheats and change the perception that it is far too tolerant of those who break the law by hiding their income. HMRC must work within inter-governmental agreements such as the Liechtenstein Disclosure Facility. However, we are concerned that the current system still causes the odds to be stacked in favour of tax evaders using offshore accounts when the worse that will happen if they are caught is that they will pay the tax they owe and a fine. HMRC told us that it had increased the number of prosecutions overall, but these are for a wide range of tax offences. We are not persuaded that HMRC and the Crown Prosecution Service are doing enough to prosecute serious tax evasion cases.

Recommendation: HMRC should gather evidence to establish the effectiveness of prosecutions in deterring tax evasion by wealthy individuals. HMRC should work with the Crown Prosecution Service to significantly increase the number of prosecutions.

6.  We welcome new powers obtained by HMRC to tackle marketed tax avoidance, but the number of unresolved cases is still a major concern. When we reported in 2013, HMRC appeared to be on the back foot in tackling marketed tax avoidance as its approach of challenging the users of tax avoidance schemes after the act made it too easy for the promoters and users of such schemes to benefit from them. In response to our recommendations, HMRC has established a new directorate to tackle this problem and it has asked for and received new powers which should allow it to disrupt the behaviour of promoters and serial tax avoiders. It is too early to see an impact from these new measures. Meanwhile, HMRC has identified a further 24,000 unresolved cases involving marketed tax avoidance since 2012. Its best estimate is that more than 65,000 cases remain unresolved.

Recommendation: HMRC should set a timetable and a trajectory for bringing down the number of open cases that relate to marketed tax avoidance schemes. HMRC should also consider where else in its business it could strengthen its compliance approach by applying the same principles it has used to address marketed avoidance schemes.

7.  Our evidence shows that some HMRC customers receive an unacceptable quality of service. HMRC accepts that its recent customer service performance has not been good enough. It has not met its own targets and it forecasts that it will not be able to answer over a fifth of phone calls from customers this year. HMRC's customer charter commits it to provide an even-handed service, but only 63% of individuals and small businesses say that they think HMRC acts fairly, compared to 87% of large businesses. HMRC accepts that small businesses who seek to make contact with HMRC too often receive a service that is not good enough. It told us it was aiming to provide a better and more personalised service for small businesses and to offer more ways for customers to provide and obtain information electronically.

Recommendation: HMRC should aspire to provide a service on a par with good practice in the private sector to all its customers, and should set out how and when it will achieve this.

8.  We are deeply disappointed by HMRC's handling of whistleblowers. We consider that HMRC's use of powers reserved for tackling serious criminals against Mr Osita Mba was indefensible. HMRC told us that it had changed how it deals with whistleblowers and that it now provides information to its audit and risk committee who can use this to challenge how HMRC handles whistleblowers.

Recommendation: HMRC should tell us when it makes use of the powers granted to it under the Regulation of Investigatory Powers Act against whistleblowers from within HMRC. It should also provide us with the information on whistleblowing that its audit and risk committee receives so that we can gain assurance over the appropriateness of HMRC's approach to managing whistleblowers.

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Prepared 26 March 2015