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
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
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
"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
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
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.
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
"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
"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
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
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.
deterrent effect of public exposure has done more to stop
tax avoidance than HMRC has done in the last 20 years."