The UK’s tax authority is “losing its nerve” over taking legal action against multinationals who pursue aggressive tax avoidance schemes, MPs say today.
HM Revenue & Customs has been criticised for not doing enough to tackle the controversy generated by low levels of tax paid to the UK Exchequer by companies such as Starbucks, Amazon and Google.
The criticisms are contained in a report by the House of Commons Public Accounts Committee (PAC), which is published today and suggests that HMRC was holding back on pursuing large companies while going after individuals and smaller businesses.
“While HMRC told us that it is committed to collecting the tax that the law provides for, the lack of prosecutions against multinational corporations seems at odds with HMRC’s stance on pursuing tax debt from small and medium-sized businesses in the UK,” the PAC report said. “HMRC has yet to test how existing tax law impacts on global internet-based companies.”
The withering report also identified a shortfall in the amount of unpaid tax held in Swiss bank accounts by UK taxpayers which should have been clawed back by HMRC.
The taxman has only extracted 14 per cent of the unpaid tax it hoped to extract from Swiss accounts so far this financial year as part of a drive to tackle offshore tax evasion.
On the behaviour of global companies who use legal methods to avoid paying tax, the chair of the committee, Labour’s Margaret Hodge, claimed that the “tax gap”, as defined by the HMRC, did not include tax revenue lost to aggressive tax avoidance schemes.
The “tax gap” between the amount owed to the Exchequer and the amount actually collected grew by £1 billion to £35bn in 2011-12 when compared with last year. But when the committee was taking evidence from HMRC, Ms Hodge argued that if tax legally avoided by international companies such as Google, Amazon and Starbucks were included, the tax gap between the amount owed and tax revenue would be far larger.
Ms Hodge said: “HMRC holds back from using the full range of sanctions at its disposal. It pursues tax owed by the smaller businesses but seems to lose its nerve when it comes to mounting prosecutions against multinational corporations.”
The report said the tax gap “underestimated” the amount of cash lost to the Exchequer and noted that HMRC did not attempt to gather intelligence about how much tax revenue is lost through aggressive tax-avoidance schemes.
The tax arrangements of global companies with a British presence created huge controversy last year when it was revealed that Starbucks had only paid £8.5 million of corporation tax in Britain since its launch in 1998, despite sales of £3bn.
Google and Amazon have also faced attacks from the PAC over the tax they pay in the UK. Members of the public have boycotted companies for adopting policies which, they believe, see firms exploit the system to pay as little tax as possible.
The political anger saw Google chairman Eric Schmidt hauled in front of the PAC to explain his company’s tax arrangements.
According to today’s report, HMRC brought in £475.6bn in revenue for the government in 2012-13 – an increase of £1.4bn, or 0.3 per cent, in cash terms over the previous year.
But in real terms, after inflation was taken into account, tax income actually fell last year compared with 2011-12.
On the unpaid tax held in Swiss bank accounts, the report found that HMRC had collected just £440m so far this financial year, rather than the £3.12bn forecast in the Chancellor’s 2012 Autumn Statement – the equivalent of just 14 per cent.
MPs on the committee said they were “astonished” HMRC was unable to explain such a “huge” shortfall and urged it to press the Swiss authorities to provide accurate information about cash held by UK taxpayers.
HMRC should use the information to “pursue more vigorously” the amounts it was owed in unpaid tax, it said.
The report recommended that HMRC should be more willing to pursue prosecutions against individuals and large businesses, to test the boundaries of the law and to demonstrate firm action against those who have knowingly misled or withheld information.
The report said that “in pursuing unpaid tax, HMRC has not clearly demonstrated that it is on the side of the majority of taxpayers who pay their taxes in full. It does not use the full range of sanctions at its disposal to pursue vigorously all unpaid tax, and its measure of the tax gap does not capture all the avoided tax that it should be collecting”.
Last night, HMRC claimed the criticism was unjustified. It said its method of calculating the tax gap was robust and had been endorsed by the IMF.
In a statement, it pointed out that the proportion of taxes that are due but not paid has fallen from 8.3 per cent in 2005-6 to 7 per cent in 2011-12. It added that it would not hesitate to take large businesses to court to reclaim the tax they owed.
An HMRC spokesman said: “We strongly dispute the conclusions in the Public Accounts Committee report and challenges the committee’s selective and misleading use of figures.
“HMRC seeks to collect the tax that is due from all taxpayers, so that everyone pays their fair share in accordance with the tax laws passed by parliament.”
Emma Seery, of Oxfam, said: “Despite strong rhetoric from the government promising a crackdown, these figures show it is still falling well short of getting the richest people to pay their fair share.”
Analysis by Elspeth Orcharton: Important questions remain unanswered
THE report by the Public Accounts Committee (PAC) focused on the tax gap – the tax that should have been collected but was not.
This is a shortcut method of considering what is going well or badly at HMRC.
The PAC focused on the methodology used by HMRC, but most of us are not that interested in methodology, more in finding smarter solutions.
What it did not dwell on was the impact of HMRC’s cut in resources of around 20 per cent, a number that would have shaken most organisations’ ability to deliver.
Clarity about what investment would be required to accelerate the narrowing of the tax gap, and how the PAC might support that call, would have been positive additions to the report.
The other major tax gap criticism was about the estimated tax loss from aggressive tax avoidance. The General Anti-Abuse legislation, which only became law in July, stops aggressive tax avoidance.
As HMRC gets all its powers from the legislation passed by MPs, and HMRC did not have full powers for the year in question, it is unfortunate that those same MPs should criticise HMRC for not applying powers they did not have.
The PAC suggests HMRC has not adequately considered the impact of legislative tax developments on attracting international business. But should HMRC alone take the blame, when this was government policy?
Every political party now, and come the next general election, should be asked to state clearly what it envisages as the balance between making the UK an attractive business location for global operators through the tax system, and maintaining the UK tax take.
• Elspeth Orcharton is director of tax at the chartered accountants body ICAS