Today’s report from the PAC is the culmination of a year’s worth of heated enquiries which began with the Google, Amazon and Starbucks tax avoidance scandals.
The report found that the tax gap, as defined by HMRC, grew in real terms over the last year to £35 billion ($57 billion). But as this figure does not include the kinds of tax avoidance strategies employed by multinational companies like Google, Amazon and Starbucks, the report concluded HMRC has failed to recognise the true tax gap.
HMRC responded: “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. 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 overestimating how much it could collect from British holders of Swiss bank accounts. The tax authority has brought in £440 million in the 2013-14 tax year so far, out of an initial estimate of £3.12 billion.
However, the PAC's strongest criticism was accusing HMRC of going after soft targets like small and medium-sized companies, while letting the big multinational corporations off the hook.
“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,” said Margaret Hodge, PAC chairwoman.
“HMRC holds back from using the full range of sanctions at its disposal,” Hodge added. “It pursues tax owed by the smaller businesses but seems to lose its nerve when it comes to mounting prosecutions against multinational corporations.”
The PAC has called on HMRC to 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.
Source of the problem
Ray McCann, a former tax inspector at the UK tax authority who is now with Pinsent Masons, believes the problem is one of under-resourcing and understaffing.
“The government has operated a campaign to cut staff at HMRC,” McCann said. “Staff numbers will have fallen from 100,000 in 2005 to 65,000 next year. But as many of these are senior staff, the problem is actually much worse. HMRC has lost hundreds of thousands of man years in experience.”
McCann says he is surprised HMRC is not performing worse given such difficulties.
But Richard Brooks, also a former tax inspector at the tax authority, who has since become a journalist for Private Eye magazine exposing tax avoidance scandals, says the problem is not just one of under-resourcing, but one of attitude.
“HMRC has lost the appetite, at a very senior level, to take on evasion and avoidance,” Brooks said. “One reason why the German army was so useless on the Eastern Front in World War 2 is because Hitler killed or sacked all the generals that were awkward. At HMRC, the top layer of people don’t know about avoidance, or they don’t care about it. And anyone who is independent minded and wants to go after avoidance is not brought up to senior level.”
Although Brooks left the tax authority in March 2005, he has continued to offer to share with them information he has uncovered on corporate tax avoidance, but HMRC has refused to meet with him. While he was there, he reports that he was made unpopular for giving opinions that did not chime with the philosophy of HMRC’s leadership.
“They don’t want to talk to anyone outside the cosy circle of accountants and lawyers. They don’t want to collect tax and haven’t realised there’s a cultural problem.”
Brooks is critical of HMRC’s light touch, exemplified by a customer relationship manager used to ensure the authority does not upset taxpayers. He believes only a heavy recruitment campaign for staff not drawn from the accountancy firms will bring in the long-term cultural change necessary for the authority to do its job properly.
Richard Murphy, director of Tax Research, believes the problem is systemic and change must come at the very top. He singles out Lin Homer as “incompetent” and Edward Troup as “disloyal”.
“Second in command is Edward Troup, the solicitor who in 1999 wrote in the FT that “taxation is legalised extortion,”” Murphy said. “That libertarian attitude is antithetical to the job he now holds but I suspect typifies the board of HMRC where far too many of the independent directors have little experience of tax and if they do got it in the likes of KPMG, PWC and Npower. Is it any surprise that we have a tax authority that does not wish to collect tax when it is directed by people who have made their careers out of ensuring it is not paid and who do not believe in its power to do good?”
Murphy argues that, with a board that does not believe in its own brand – collecting tax – HMRC lacks the desire to go to the government and demand the resources necessary to get its job done.
“HMRC is under-resourced and under-staffed, but the top management aren’t committed to their task,” Murphy said. “Their loyalty is to the companies and firms where they spent their careers before going to HMRC.”
The Association of Revenue and Customs (ARC), the union representing senior staff at HMRC, however, lays the blame at Parliament’s door, rejecting the PAC’s report as simplistic.
“If Parliament wants HMRC to really tackle the tax gap one way would be provide it with more resources,” said Gareth Hills, president of the ARC. “While corporates may be using existing legislation or structuring their arrangements in a way which allows them to use international law to their advantage, HMRC has to operate within that existing legislative framework. Any successful legal challenges may require legislative changes and, crucially, the political will to drive through such change. Additionally, it is difficult to see how any changes to the international tax rules could be made unilaterally by the UK.”
McCann does not believe the issue is an ideological one, but argues that any change at HMRC will take time and HMRC has not yet caught up with the pace of political pressures arising from the recent focus on tax avoidance scandals.
“If you want to change the dynamic of how large corporations are policed, it’s like a ship, it takes time to change direction,” McCann said.
Brooks is sceptical any change will come.
“HMRC will respond to the PAC with a line and some misleading figures,” Brooks said. “They will remain in denial – they’re waiting for the next government when Hodge won’t be PAC chair.”
But the chances of a Labour government shaking things up at HMRC are slim to none. Opposition insiders have said that Shadow Chancellor Ed Balls would not touch HMRC.
Brooks’ solution is the one that led him from tax inspector to investigative journalist.
“The deterrent effect of public exposure has done more to stop tax avoidance than HMRC has done in the last 20 years.”