Government losing millions through tax loop holes

The Commons Public Accounts Committee said it was “very concerned” at the way the “big four” firms – Deloitte, Ernst and Young, KPMG and PwC – were able to exploit loopholes in the tax laws.

Committee chairman Margaret Hodge said the practice represented a “ridiculous conflict of interest” which should be banned.

“The large accountancy firms are in a powerful position in the tax world and have an unhealthily cosy relationship with government,” she said.

The committee warned that HM Revenue & Customs (HMRC) was engaged in a “battle it cannot win” in seeking to stem the losses to the Exchequer from tax avoidance.

HMRC has far fewer resources than the big four firms which employed almost 9,000 staff and earned £2 billion a year from their tax work in the UK.

The committee particularly highlighted the way the firms seconded staff to the Treasury to advise on technical issues in the drafting of legislation only for the individuals concerned to return to advise clients on how to use those laws to avoid tax.

“Through their work in advising government on changes to legislation they have a detailed knowledge of UK tax law, and the insight to identify loopholes in new legislation quickly,” it said.

It gave the example of KPMG whose staff advised on the development of “controlled foreign company” and “patent box” rules, and then issued marketing brochures highlighting the role they had played.

The brochure “Patent Box: what’s in it for you” had, it said, suggested the legislation represented a business opportunity to reduce UK tax and that KPMG could help clients in the “preparation of defendable expense allocation”.

The committee said it was “inappropriate” for individuals from firms to advise on tax law and then devise ways to avoid the tax.

“We have seen what look like cases of poacher, turned gamekeeper, turned poacher again, whereby individuals who advise government go back to their firms and advise their clients on how they can use those laws to reduce the amount of tax they pay,” it said.

“We are... very concerned by the way that the four firms appear to use their insider knowledge of legislation to sell clients advice on how to use those rules to pay less tax.”

While the firms insisted they no longer sold the “very aggressive” avoidance schemes on offer 10 years ago, the committee said they had simply moved on to offering other forms of tax avoidance advice.

It said they still offered schemes with as little as a 50 per cent chance of succeeding if challenged – suggesting a willingness to take advantage of HMRC’s need to weigh the risks of becoming involved in protracted legal battles.