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".
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."
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.
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.".
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."
115. Much of the evidence to our inquiry supported
this view and was positive about how HMRC approaches multinationalsit
was variously described as "amongst the best in the world"
with "many significant improvements" in recent years.
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."
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".
 The NAO had full
access to all information about the settlements which totalled
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.
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.
Although Mr Justice Nicol ruled in HMRC's favour that the
settlement with Goldman Sachs was lawful,
he described it as "not a glorious episode in the history
of the Revenue".
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,
"The problem at the moment is that HMRC will
never give us any evidencewill 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
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 seethe
Vodafone deal, the Goldman Sachs deal, the Google deal. How does
HMRC come to the judgment that Google is acting lawfully?"
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."
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."
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
124. Parliament should have greater oversight
over HMRC. We recommend that Parliament should establish a joint
committeemade up of MPs and Peersalong 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."
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."
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.
126. Both the Institute of Chartered Accountants
of Scotland (ICAS) and the ARC raised concerns about HMRC's shortage
of transfer pricing experts.
ARC estimated that HMRC's transfer pricing experts are "barely
four times that of a single multinational corporate" of which
HMRC deals with hundreds.
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. 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."
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.
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
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.
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".
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."
130. For HMRC, Mr Harra told us: "It
is very rare for us to buy in professional advice."
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,
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
Moore Stephens. Back
National Audit Office (13 June 2012), HM Revenue & Customs-Settling
large tax disputes, page 6. Back
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
National Audit Office (13 June 2012), HM Revenue & CustomsSettling
large tax disputes, Page 14. Back
UK Uncut Legal Action Ltd v HMRC (2013). Back
Association of Revenue and Customs. Back
ICAS, Association of Revenue and Customs. Back
Association of Revenue and Customs. Back
HM Treasury (June 2013), Spending Round 2013, Cm 8639. Back
Public Accounts Committee, Tax avoidance: the role of large
accountancy firms (44th Report, Session 2012-13 HC Paper 870),
page 4. Back
Ibid, page 5. Back