Tackling corporate tax avoidance in a global economy: is a new approach needed? - Economic Affairs Committee Contents

CHAPTER 5: HM Revenue & Customs (HMRC)


112.  The House of Commons Public Accounts Committee accused HMRC of not being "sufficiently challenging of multinationals' manifestly artificial tax structures".[124] The Committee recommended: "HMRC needs to be much more effective in challenging the artificial corporate structures created by multinationals with no other purpose than to avoid tax."[125]

113.  HMRC's defence is that it is simply collecting the tax it can under the rules as they stand, a point acknowledged by the Public Accounts Committee.[126] Mrs Lin Homer, chief executive and permanent secretary of HMRC, said: "We pursue the tax that is due under our laws as opposed to the tax that people might wish was due."[127].

114.  When dealing with complex multinationals there is however scope for judgment as to how much tax is due under the law. Since the tax affairs of companies are confidential, it is difficult to make a judgment whether HMRC is assertive enough in its enforcement of the rules. Mrs Homer said: "If you talk to many of the big businesses that have a customer relationship manager [at HMRC], they might feel that is more a technique by which we hold their feet to the fire than the more cosy description that some people seem to apply to it. We would see that as a robust relationship rather than anything else."[128]

115.  Much of the evidence to our inquiry supported this view and was positive about how HMRC approaches multinationals—it was variously described as "amongst the best in the world"[129] and "successful"[130] with "many significant improvements" in recent years.[131] Those who praised HMRC are however mainly multinationals and their advisers. Their evidence is first-hand since they deal with HMRC directly. But they clearly have an interest in HMRC not becoming tougher. Other witnesses were more sceptical. Mr Richard Brooks, a journalist and former tax inspector, told us that HMRC in general "needs to be tougher and to stand up to the aggression on the other side". He added: "When you get across the table from them [multinationals] and their lawyers on a tax avoidance scheme, they do not always play nicely. Tax inspectors need to be able to deal with that."[132]

116.  There is some independent evidence of HMRC's effectiveness from the National Audit Office (NAO). It asked a former tax judge, Sir Andrew Park, to examine five recent tax settlements between HMRC and multinationals. The report concluded that all of these settlements were "reasonable ones for [HMRC] to have reached in the circumstances" and "at least one may have been better than reasonable".[133] [134] The NAO had full access to all information about the settlements which totalled £3.6 billion,[135] but did not reveal the identity of the multinationals concerned, respecting HMRC's duty to maintain taxpayer confidentiality.

117.  A subsequent legal challenge brought against HMRC by the pressure group UK Uncut gave a rare insight into the process leading to one of these settlements, which was revealed to be with Goldman Sachs. During the negotiations, the investment bank "threatened to withdraw" from a code of practice on the taxation of banks in order to win a concession from HMRC.[136] Such a withdrawal would have been embarrassing for the Chancellor of the Exchequer and HMRC, according to an email by Mr David Hartnett, the then Permanent Secretary for Tax at HMRC.[137] Although Mr Justice Nicol ruled in HMRC's favour that the settlement with Goldman Sachs was lawful,[138] he described it as "not a glorious episode in the history of the Revenue".[139]

118.  We welcome the National Audit Office's assurance that the five settlements it reviewed were "reasonable". But we remain concerned by the evidence we received that HMRC's approach to multinationals was not assertive enough, and the Commons Public Accounts Committee's critical findings of HMRC that the tax collector is not "sufficiently challenging" of multinationals.


119.  Given concerns about HMRC's assertiveness with multinationals, effective oversight of the tax collector may be needed to maintain confidence. But the need for taxpayer confidentiality makes this difficult to achieve. Rt Hon Margaret Hodge MP, chair of the Commons Public Accounts Committee, told us:

"The problem at the moment is that HMRC will never give us any evidence—will never tell us anything. Whenever you ask them a question, it is always, 'We cannot discuss that because of confidentiality of taxpayers' interests'. HMRC is also a non-ministerial department, so it is in a very odd situation, in that it also cannot satisfy a Minister in confidence as to whether or not the action it has taken on an individual case is appropriate."[140]

120.  Ms Hodge proposed a committee of MPs akin to the Intelligence and Security Committee that would take evidence on multinationals' tax affairs in private: "What this [proposed] Committee might do would be to be able to question and see the details which we have not been able to see—the Vodafone deal, the Goldman Sachs deal, the Google deal. How does HMRC come to the judgment that Google is acting lawfully?"[141]

121.  But Mr Edward Troup, Tax Assurance Commissioner and Second Permanent Secretary of HMRC, argued there was already independent oversight:

"The NAO can look at any aspect of our businesses. It looks at our annual report and it can have complete access to any taxpayer information in the course of doing so, although it is precluded, subject to some statutory restrictions and limitations, from disclosing it further . …. Parliament has not seen fit to go any further than to allow the NAO that independent scrutiny, but we believe that the arrangements which we have set up and my role provide a very significant degree of additional assurance to Parliament, the public and the media that we are doing things in a consistent, even-handed way."[142]

122.  But Professor Freedman said if the NAO were to be involved in greater scrutiny of HMRC more resources would be needed: "Although the National Audit Office advises the PAC and does a very good job on value for money, it does not have a lot of tax experts. So one thing you might want to think about is whether that could be something that could be boosted … or there could be a separate organisation like an inspector general of taxation."[143]

123.  As HMRC's dealings with taxpayers are normally confidential, Parliament and the public are prevented from assessing how effective and robust is HMRC's pursuit of tax compliance by multinationals.

124.  Parliament should have greater oversight over HMRC. We recommend that Parliament should establish a joint committee—made up of MPs and Peers—along the lines of the Intelligence and Security Committee. HMRC should be required to give members of this new committee private access to the details of individual settlements with multinationals so as to provide effective parliamentary oversight of HMRC while maintaining taxpayer confidentiality. The new committee could be advised by the National Audit Office which would need to recruit more tax experts for this role. We request both Houses to consider this recommendation as soon as possible.


125.  There was general agreement amongst our witnesses that HMRC needs more resources to deal with multinationals. The Association of Chartered and Certified Accountants (ACCA) argued for more funding for HMRC: "Regrettably the long term decline in funding and staffing levels, and with it morale and then inevitably performance, has been a consistent feature of the past decade."[144] Mr Brooks argued that: "The resource problem is of long standing; it has not just come about because of recent cuts. Jobs were being cut from a very small base in the first place and the Revenue has been cut to the bone; it does not have the resources."[145] The Association of Revenue and Customs (ARC), a union for HMRC employees, also estimated that further investment of £312m into HMRC would deliver £8bn of additional tax revenue.[146]

126.  Both the Institute of Chartered Accountants of Scotland (ICAS) and the ARC raised concerns about HMRC's shortage of transfer pricing experts.[147] ARC estimated that HMRC's transfer pricing experts are "barely four times that of a single multinational corporate" of which HMRC deals with hundreds.[148] Mr Jim Harra, Director General of Business Taxation at HMRC, said that with extra funding announced last December 100 extra people would be recruited to risk-assess large businesses and that another 15 people would join HMRC's transfer pricing specialist team.[149] He added: "We do not have a significant issue with retaining skills, and indeed possibly almost uniquely in the public sector we are in the lucky position of being able to recruit new people, so we are recruiting 200 graduate entrants this year to make the tax inspectors of tomorrow."[150]

127.  Further increases in funding will not however be forthcoming. In the latest Spending Round, HMRC's budget is to be cut 5% in 2015-16 from the previous year to £3.1 billion.[151]

128.  HMRC needs sufficient high quality staff with deep expertise in corporate tax to deal effectively with the tax affairs of complex and well-resourced multinationals. In order to achieve this, we recommend that HMRC should be better resourced.

129.  Concerns have been expressed that HM Treasury and HMRC lack sufficient in-house expertise to design and implement appropriate tax legislation. According to the Public Accounts Committee, the Big Four professional firms second staff to HM Treasury to advise on technical issues in drafting legislation.[152] The "firms maintained that their involvement had improved the quality of legislation, but we are concerned that the very people who provide this advice then go on to advise their clients how to use those laws to avoid tax".[153] The Public Accounts Committee concluded: "It is inappropriate for individuals from firms to advise on tax law and then devise ways to avoid the tax."[154]

130.  For HMRC, Mr Harra told us: "It is very rare for us to buy in professional advice."[155] Mrs Homer said it would be uneconomic to keep certain experts on staff: "Sometimes you need a very deep expert for a particular area at a particular time, and it would be foolish to waste resources maintaining all those types of expertise for the moment when you need them. I think a mixed economy is sensible, but we have some very deep experts in HMRC. We keep some of them in cupboards, really."[156]

131.  The use of staff seconded from the Big Four accountants by HM Treasury and HMRC to help design taxes is counterproductive. The risks are two-fold: that those on secondment will not have any incentive to design robust, hard-to-avoid taxes and that when they return to private practice they will be better placed to advise how to exploit loopholes. We recommend that the Treasury and HMRC should be better resourced to design and implement taxes, without undue dependence on short-term professional advisers.

124   Public Accounts Committee, Tax avoidance-Google (9th Report, Session 2013-14, HC Paper 112), page 5. Back

125   IbidBack

126   IbidBack

127   Q144. Back

128   Q149. Back

129   GlaxoSmithKline. Back

130   Moore Stephens. Back

131   BP. Back

132   Q76. Back

133   National Audit Office (13 June 2012), HM Revenue & Customs-Settling large tax disputes, page 6. Back

134   The NAO stated their criteria for determining whether a settlement value is reasonable: "Does the settlement represent fair value for the Exchequer and the taxpaying community generally, rather than being favourable to the taxpayer? This includes considering whether the settlement was as good as, or better than, the outcome that might be expected from litigation, considering the risks, uncertainties, costs and timescale of litigation. Are the terms of the settlement lawful and is the settlement value within the range permitted by tax law?" National Audit Office (13 June 2012), HM Revenue & Customs-Settling large tax disputes, Page 16. Back

135   National Audit Office (13 June 2012), HM Revenue & CustomsSettling large tax disputes, Page 14. Back

136   UK Uncut Legal Action Ltd v HMRC (2013). Back

137   IbidBack

138   Ibid. Back

139   IbidBack

140   Q98. Back

141   Q98. Back

142   Q146. Back

143   Q127 Back

144   ACCA. Back

145   Q76. Back

146   Association of Revenue and Customs. Back

147   ICAS, Association of Revenue and Customs. Back

148   Association of Revenue and Customs. Back

149   Q150. Back

150   Q151. Back

151   HM Treasury (June 2013), Spending Round 2013, Cm 8639. Back

152   Public Accounts Committee, Tax avoidance: the role of large accountancy firms (44th Report, Session 2012-13 HC Paper 870), page 4. Back

153   Ibid, page 5. Back

154   IbidBack

155   Q153. Back

156   Q153. Back

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