Out-Law News | 20 Dec 2013 | 9:41 am | 4 min. read
Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that as HMRC had no responsibility for the design of the international tax system, the PAC's report on its 2012-13 accounts was "not helpful". Of particular concern were its comments in relation to the controlled foreign companies (CFCs) regime and interest reliefs, she said.
"The PAC does a useful job in ensuring that Government money is spent wisely," she said. "It is right that it should enquire into the efficiency of HMRC. However, a large part of its questions on this occasion – and some of its key conclusions – relate to Government policy and not the administration of the tax system. It is not HMRC which 'determines the tax system for business', but Government."
"This approach is not helpful, as it does not inform public debate while undermining HMRC, by continually criticising it for areas which it is not responsible for. It also risks the PAC's work being seen as politically motivated. The PAC can, and should, question how rules are applied but it is not up to HMRC to change those rules," she said.
In its report, the PAC criticised HMRC for the methods it used to calculate the annual 'tax gap', a rough measure of the difference between the amount of tax owed to HMRC and the amount actually collected. It said that by not gathering information about how much potential tax revenue is lost through "aggressive tax avoidance schemes", HMRC underestimated the amount of money actually lost to the Exchequer.
"Contrary to what the PAC report says, the published tax gap does include a measure of the tax lost from avoidance, as well as evasion, but it can only measure non-compliance with existing tax law – it cannot estimate how much tax might be due if tax laws were different." HMRC said in response to the report.
The PAC made a number of recommendations which it said would enable HMRC to demonstrate more clearly that it "deals robustly with individuals and companies who deliberately mislead it". It called on the department to pursue more aggressively large international businesses and individuals that "knowingly mislead or withhold information", and to be more explicit about the limitations of its current measure of the tax gap.
"Last year the Department collected less tax in real terms than it managed to collect in 2011-12," said PAC chair Margaret Hodge. "This was despite the stated ambition to crack down on tax avoidance. The tax gap as defined by HMRC did not shrink, but in 2011-12 grew to £35 billion. Yet that measure does not capture all the tax government should be collecting. For instance, this figure does not include all the tax revenue lost to aggressive tax avoidance schemes."
"HMRC aims to make the UK more attractive to business but the incentives to international corporations may also enable them to avoid tax. Changes in the controlled foreign company rules and the failure to close the loophole created by Eurobonds are two examples showing where it has become easier for companies to avoid tax while ordinary people continue to pay their share. If that is HMRC's real intent, then it should be open about it. When designing the tax regime for businesses, HMRC needs to strike the right balance between support and enforcement," she said.
The PAC said that HMRC had "not considered adequately the impact that changes to the tax regime" designed to make the UK more attractive to businesses would have on their behaviour. It said that the CFC regime had been "weakened" and now incentivised UK companies to move their finance operations offshore, while multinational companies could also use the Eurobond rules to lend money to their UK subsidiaries via low-tax jurisdictions and offset the interest payments against their UK profits.
However, tax expert Heather Self said that the report contained "some fundamental misunderstandings" of how the various rules worked.
"The tax gap measures the difference between tax collected and tax estimated as due under current law," she said. "It cannot, and should not, measure tax which might be collected if the law were to be changed. Similarly, the Government has a clear policy of having a relatively generous regime for interest relief, backed up by anti-avoidance rules."
"HMRC can only bring in the tax that is due under the law and we cannot collect what is not legally due, however much the Committee might want us to," HMRC said. "The Public Accounts Committee already knows that we cannot prosecute multinational companies for activities that are lawful within the international tax framework and has itself acknowledged that the kinds of international tax planning by large businesses that it has reviewed are lawful."
The PAC also criticised HMRC for "massively overestimating" how much it could collect from UK holders of Swiss bank accounts under the agreement between Switzerland and the UK that came into force on 1 January 2013. In the 2012 Autumn Statement, the Treasury estimated that £3.12bn in unpaid tax would be collected in 2013-14; however, the PAC noted that the department had only collected £440 million to date.
"It is right for the PAC to challenge why the estimates were so far out, and to seek explanations," said Ray McCann of Pinsent Masons. "The forecast may simply have been wrong – it was always going to be difficult to estimate the extent of something hidden from HMRC. In addition more people may have opted for disclosure rather than the automatic withholding arrangements and many will have used the Lichtenstein Disclosure Facility (LDF) to disclose irregularities. Some account holders will have had no UK tax due as they are non-doms, and some money may have been moved on elsewhere."