18 Nov 2014 10:13am

PAC slams HMRC's anti tax avoidance strategy

HMRC needs to buck up its ideas and focus on speeding up its work against tax avoidance, the Public Accounts Committee says

It criticises the time the department takes to take action against tax avoiders and accuses it of not doing enough to tackle companies that exploit international tax structures to minimise UK tax liabilities.

“HMRC’s action against tax avoiders continues to be unacceptably slow, putting tax revenues at risk,” said PAC chairman Margaret Hodge.

She pointed to the Liberty tax avoidance scheme through which 1,600 people – including singers Gary Barlow and Katie Melua, TV presenter Anne Robinson and actor Sir Michael Caine – channelled £1.2bn.

The scheme created huge artificial “losses” offshore which its members took advantage of to avoid tax.

It was launched in 2005 and closed down four years later, but it was not until this year that HMRC took the case to a tax tribunal.

“Up to £10m of the total £400m tax at stake from the 2,000 users of this scheme may not be recoverable because in 30 cases HMRC failed to start inquiries into personal tax returns within the 12-month statutory deadline,” Hodge said.

“This may be just the tip of the iceberg. Although HMRC says Liberty was an exceptional case among the 750,000 personal tax return inquiries each year, it was unable to tell us how much delays had cost across the different tax avoidance schemes.

“HMRC must do more, faster,” she added. “It should report on the progress it has achieved by using new powers granted by parliament to tackle tax avoidance and show that it is using its existing powers with sufficient urgency.”

Hodge was speaking about the conclusions contained in the PAC's latest report on HMRC’s progress in improving tax compliance and preventing tax avoidance.

She said the committee was also deeply concerned about the £1.9bn error in setting targets for compliance work that HMRC admitted to earlier this year which led the department to present misleading information to parliament about improvements in its performance.

“HMRC reported it had exceeded its targets significantly when in fact it had only just achieved the anticipated level of performance,” she said.

“Astonishingly, this significant error in a key performance measure went undetected by HMRC’s own system of governance and internal audit for three years.”

In the report, the PAC expresses surprise that in spite of the error, HMRC does not intend to change any of its internal quality assurance systems or governance around performance information. It welcomes the fact that the National Audit Office will be providing independent checks on the quality of the compliance data HMRC reports but stresses that relying on such assurance is no substitute for effective internal checks.

The report also criticises the government for claiming to be playing a leading role in the international tax transparency campaign while at the same time introducing harmful tax practices back home.

“Recent changes to the UK tax regime, such as those for controlled foreign companies, have been challenged by international bodies like the OECD and European Commission as constituting ‘harmful tax practices’ by making it easier for global companies to avoid paying tax in the jurisdictions where they make a profit,” it says.

“International tax experts believe that the UK’s tests for companies to gain tax residency are less rigorous than in other EU jurisdictions and research into seven companies which have recently relocated to the UK for tax purposes suggests that the economic benefits for the UK are minimal.”

It recommends that both the Treasury and HMRC should provide the PAC with details of the progress it is making in addressing the exploitation of international tax structures.

It should also set out the actual costs and benefits of the recent changes that have been introduced to the UK tax regime.

Julia Irvine


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