HMRC 'lost nerve' over big tax avoiders, say MPs

Report highlights how Treasury is owed £35bn in missing tax payments and says HMRC pursued small firms, not global giants

British officials have "lost their nerve" in tackling tax avoidance by global corporations and have presided over a £35bn tax gap as they pursue easy prey such as small businesses and individuals, a committee of MPs says.

In a report that highlighted how the Treasury is owed missing tax payments of £35bn, the public accounts committee added that HM Revenue and Customs has left the state with another multibillion pound shortfall by failing to gather £2.6bn of an expected windfall from Swiss banks.

The findings follow a series of damning reports into HMRC by the committee which have addressed its failings over taking on tax-avoiding corporations such as Google, Starbucks, Vodafone and Amazon.

On Wednesday Vodafone, one of Britain's leading multinationals, made a rare gesture of tax transparency by breaking down its payments on a country-by-country basis.

The company revealed that it paid "little or no corporation tax" in the UK but its direct tax payments – including business rates and national insurance – had dropped by nearly 20% to £275m last year.

Last year HMRC, led by chief executive Lin Homer, promised to launch an unprecedented campaign to increase tax collection, particularly from large corporations.

But in a report released on Thursday the planned income from the Swiss accounts were written into Chancellor George Osborne's budget estimates in last year's autumn statement and said it was "astonished" at HMRC's failure to account for the shortfall.

HMRC brought in £475.6bn in revenue for the government in 2012-13, an increase of £1.4bn over the previous year.

But in real terms, after inflation was taken into account, tax income fell last year, compared to 2011-12, while the "tax gap" – between the amount owed to the Exchequer and the amount collected – grew by £1bn to £35bn in 2011/12.

The shortfall was widely seen as an embarrassment for the coalition at a time when it wanted to be seen as clamping down on wealthy firms and individuals.

Margaret Hodge, the chair of the committee, said that HMRC had not clearly demonstrated it was on the side of the majority of taxpayers and had failed in its ambition to crack down on tax avoidance.

"The tax gap as defined by HMRC did not shrink, but in 2011/12 grew to £35bn. 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 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.

"It predicted that it would collect £3.12bn unpaid tax from UK holders of Swiss bank accounts and this figure was built into budget estimates, but in 2013-14 it has so far secured just £440m. We were astonished that HMRC could not give any reasons for such a shortfall."

The report said HMRC needed to show that it was dealing "robustly" with individuals and companies who deliberately mislead it. It noted that just one individual out of 16 identified targets on the so-called Lagarde list of Swiss account holders with potential UK tax liabilities had been successfully prosecuted.

The lack of prosecutions against multinational corporations seemed at odds with HMRC's stance on pursuing tax debt from small- and medium-sized businesses in the UK, the committee noted.

In a reference to widespread criticism of tax arrangements at Amazon and Google, the committee pointed out that tax officials have yet to test how existing tax law impacts on global internet-based companies.

The findings were rejected by HMRC, which accused the committee of "selective and misleading use of figures", particularly when calcuating the tax gap. A spokesman said MPs had highlighted the increase in money which had not been collected instead of calculating a percentage of uncollected tax, which has actually gone down.

"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.

"We have secured more than £50bn of additional tax from our compliance work since 2010, including £23bn from large businesses," he said.

Meanwhile, Vodafone revealed that its direct contribution to the UK from taxation dropped 18.6% to £275m in the year 2012-2013 from £338m a year before. The figure includes corporation tax as well as business rates, employers' national insurance and many other items.

Vodafone said it paid "little or no corporation tax" in Britain because its profits in the UK were relatively small at less than £300m and were dwarfed by capital spending of more than £1bn on its UK network and interest costs in excess of £600m paid to British banks.

The company set out the tax it paid in 27 countries compared with a year earlier in unusual detail for a British company. Its biggest direct tax bill was in Turkey, where it paid £454m. Vodafone said it wanted to be open about the tax it paid after it was attacked over its contribution in the UK.

The company said: "As the UK government wants more investment in UK infrastructure and jobs, it allows all businesses to claim relief for the cost of assets used in the business against their profits when determining their corporation tax bills.

"The government also provides relief to all businesses for the cost of interest on their debts to UK banks and financial institutions. Vodafone is no different to any other UK business."

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UK economy 'buoyant' as services sector grows at fastest rate in two years

Surging service sector workloads prompt biggest increase in new staff hires since before the financial crisis hit in 2007

Hopes of an economic recovery are growing as the UK's dominant services sector expanded at its fastest rate in more than two years, according to monthly data.

Service sector firms, which account for three-quarters of the economy, reported surging workloads in June, prompting the biggest increase in new staff hires since before the financial crisis hit in August 2007.

The purchasing managers' index soared to 56.9 in June, up from 54.9, its highest level for 27 months. A figure above 50 means growth, according to Markit, which compiles the survey.

The services sector is leading the UK economy out of recession, says the British Chambers of CommerceThe strong demand for services comes as Mark Carney, the new Bank of England governor, starts his first monetary policy committee meeting buoyed by a slew of positive economic data. This week saw confirmation that British manufacturers enjoyed their strongest growth for two years in June, while the construction sector grew for the second consecutive month.

The figures confirm that the UK continues to outperform the eurozone, where combined manufacturing and services output continues to fall. "The buoyant picture for June means the economy is on course to expand by at least 0.5% in the second quarter, with more growth to come," said Chris Williamson, Markit's chief economist.

"New orders and job creation across all sectors are now rising at the fastest rates for almost six years, led by the vast services economy, boding well for robust growth momentum to be sustained as we move into the second half of the year."

David Kern, chief economist at the British Chambers of Commerce, said the figures confirmed that services were leading the UK out of recession.

"I don't believe that the economy is booming, but the figures confirm the recovery is under way," he said. The recovery is widely spread, he added, although the service sector is performing better than other parts of the economy.

"It would be wrong to say we can relax now," he said, warning of risks from renewed problems in the eurozone, the fallout from the US Federal Reserve's decision to wind down financial stimulus, and in the UK, rising inflation and tight access to credit. "Many small firms are still finding it difficult in getting finance on acceptable terms; there is a bottleneck."

The surging demand for services has dampened expectations that the Bank of England will opt for more financial stimulus when it concludes a two-day monetary policy meeting on Thursday.

The data reinforces the view that the Bank will sit tight on quantitative easing, said Howard Archer, chief economist at IHS Global Insight. But he predicted the bank would not give up on QE and forecast an injection of £25bn into the economy in August. "This reflects our belief that Mark Carney is likely to be keen to build up escape velocity from extended economic weakness."

Article Source : http://www.guardian.co.uk

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Bank of England condemns lobbying by banks against new rules

Deputy governor of the Bank of England, Paul Tucker has called for new measures to be introduced before the end of the year

City regulators have brushed aside complaints by Barclays and Nationwide over tough new liquidity rules, saying UK banks would need to put them into effect as soon as possible, years ahead of an international deadline of 2018.

The deputy governor of the Bank of England, Paul Tucker, responsible for financial stability, said lobbying against the change by the banks was "completely unacceptable", and regulators would not be deflected "one iota" from the task.

He told MPs the rules should be introduced before the end of the year to curb the risk exposure of Britain's highly leveraged banks.

Barclays and Nationwide complained vociferously against the "shock" decision by regulators last month to fast-track the new rules, which they said would harm their finances and ability to lend.

At a meeting last week Mervyn King, the former Bank of England governor, told MPs that large banks' executives had lobbied the Treasury and No 10 to block the rule changes before 2015.

Barclays hinted that it could restrict lending to households and businesses if the rules were to bite this year.

The row comes as US regulators on Tuesday made clear they intended to push ahead with the new rules on bank borrowing levels and higher reserves ahead of deadlines established by the Bank for International Settlements.

Much to the annoyance of the head of JP Morgan, Jamie Dimon, and of highly leveraged banks such as Wells Fargo, Dan Tarullo, the Federal Reserve governor in charge of regulation, promised a stricter lending ratio, tying the amount banks can lend to the equity held by shareholders.

He said the reserve was close to putting forward a plan that would place a tougher cap on leverage for US banks.

"The Basel III leverage ratio seems to have been set too low to be an effective counterpart to the combination of risk-weighted capital measures that have been agreed internationally," he said.

Banks have complained vociferously that regulators are demanding they move more quickly to safer levels of capital and lending.

The Tory MP Andrew Tyrie, who heads the Treasury select committee, said he was concerned that the banks were throwing their weight around.

Andrew Bailey, who heads the Prudential Regulation Authority, which will monitor banks and insurers, confirmed that George Osborne was approached by several banks over the new rules, but that the PRA's independence was confirmed by the chancellor.

"We are certainly aware that there are conversations that happened between the banks and officials and ministers," he said. "The thing that concerns me is that we are trying to build, frankly, a transparent process that has accountability in it."

Martin Taylor, a former Barclays chief and an external member of the financial policy committee, which will guard the financial system from a repeat of the 2008 crash, said: "The reason the banks are squawking is that the PRA and Andrew Bailey are doing their job, and you might say about time too."

Bailey said that banks were behind schedule in cleaning up their balance sheets after suffering extra costs from the payment protection insurance scandal and the euro crisis last year.

Paul Tucker told MPs new regulations should be implemented sooner to curb the risk exposure of Britain's highly leveraged banksHe said he wanted the rule in place as soon as possible and that regulatory staff were looking at banks' plans for how they could implement it.

"We have made clear that we will go through these with the public, with the institutions during the course of this month. And we will publish. We will make clear what the outcome of that is," Bailey told MPs.

The PRA said on 20 June that it would set a leverage ratio of 3% for UK banks, which would limit the amount they could lend relative to their capital.

Barclays has a leverage ratio of 2.5% after adjustments, while the Nationwide could only manage a 2% ratio.

Tyrie said: "FPC members today made clear that they feel a 3% leverage ratio is an appropriate minimum backstop and that the FPC can make recommendations in this area, even without an explicit power of direction. Bank lobbying of government only serves to reinforce the need for the power to set the leverage ratio to lie with the independent FPC, not the Treasury."

Lloyds is expected to split 600 branches into a separate business next year to increase competition in the banking sector following an attempt to sell the new business to the Co-op, which fell through.

The MP Jesse Norman asked Bailey why the Co-op's reported "lack of reserves" came as a surprise in December 2012 to Lloyds, when regulators were supposed to be aware of shortfalls.

Bailey said regulators discovered in 2011 that the Co-op was suffering from poor leadership and governance, coupled with a shortage of capital and liquidity. He said the Co-op was made aware of its concerns and he understood that Lloyds was informed.

The collapse of the deal proved an embarrassment to the Treasury, which had trumpeted it as part of wider reforms of the banking sector to make it more competitive.

Tyrie said there was a discrepancy between the testimony of Lloyds chiefs and the regulator.

"The chairman of Lloyds, Sir Win Bischoff, told the Treasury committee that Lloyds became aware of a potential capital shortfall at the Co-operative Group in December 2012. Andrew Bailey today said that he told the Co-op's board that it should inform Lloyds of the regulator's concerns, including over its capital levels, more than a year beforehand.

"[Bailey] also told us he has evidence to suggest his requests were complied with. The Treasury committee will want to look at whether the regulator's message got through, how it was conveyed and what, if any, action was taken."

Article Source : http://www.guardian.co.uk

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Mark Carney urged to kick start lending to small businesses

BBC ask Carney, who takes over from Sir Mervyn King today, to help sustain economic recovery by supporting small enterprises 

Business leaders urged Mark Carney on Sunday to back a £1bn investment bank at his first meeting as governor of the Bank of England to kickstart lending to small businesses.

The British Chamber of Commerce (BCC) also called on Carney, who takes over from Sir Mervyn Kingon Monday, to inject further funds into the economy as part of its quantitative easing (QE) programme to maintain the UK's fragile recovery.

BCC director general, John Longworth, said Carney needed to find ways to channel money to manufacturers and smaller enterprises or risk the recovery running out of steam.

"While we are seeing signs of a stronger recovery across the business community, we have no illusions about the challenges ahead for the UK economy," he said.

NEF spokesman Tony Greenham says Mark Carney’s arrival is the perfect opportunity to review the remit of our central bank.The Bank of England's interest rate setting committee is expected to reject boosting QE beyond its current £375bn level at its monthly meeting on Thursday, despite the arrival of Carney amid a welter of expectations that he will spur his colleagues into action.

City analysts agree that the monetary policy committee will hold its fire until the publication of a review in August of its policies, which will broaden its remit and encourage committee members to adopt a more radical mix of initiatives.

A report by the Bank's officials into the prospects for rising prices is also likely to show inflation falling over the next two years, giving the MPC more leeway to boost QE.

The chancellor wants the committee to take a more active role in encouraging lenders to promote borrowing to the wider economy. He has already allowed the committee to adopt a more flexible view of how to meet the 2% inflation target.

A report by the CBI and the accountants Price water house Coopers into the health of the financial services industry appeared to support the view that the banking sector is returning to health. It found that banks recovered strongly in the three months to the end of June after long period of cost cutting following the 2008 crash, though with lower profits and further cuts in employment.

However, the BoE's own figures show that RBS and Lloyds have reduced the amount of money they lend to households and businesses, while Barclays has threatened to cut back following demands from the main City regulator that it must bolster its reserves. Meanwhile the Co-op, which until earlier this year planned to take over 600 Lloyds branches, is in trouble after discovering a large shortfall in its capital reserves.

A funding for lending scheme designed to cut the cost of borrowing has pushed down the cost of mortgages since it was launched last year, but has so far had little effect on business lending.

A leading thinktank called on Carney to bypass the main banks with a direct intervention into the housing industry to support the building of 60,000 homes.

The New Economics Foundation said that instead of using quantitative easing to buy government bonds, the BoE should buy assets that will directly support the economy, which would mean purchasing bonds to support home building and energy efficiency, infrastructure projects and small business lending.

A foundation spokesman, Tony Greenham, said: "It's time for the Old Lady of Threadneedle St to get some new clothes. Mark Carney's arrival at the Bank of England is the perfect opportunity to review the remit of our central bank.

"Measures like QE and funding for lending are not providing the investment boost our economy clearly needs. Strategic QE can enable the Bank of England to maintain independence and control over inflation whilst more effectively supporting the government's economic objectives."

Greenham said Carney should adopt a new monetary allocation committee that would redirect central bank funds for investment in green projects and house building.

Like the BCC, the thinktank also backed funding for an investment bank.

"The funding for lending scheme uses public money to give cheap loans to banks to persuade them to lend to small businesses. Strategic QE could make loans to a British Business Bank, set up specifically to support lending to SMEs.

"Capitalising the green investment bank and British business bank so they could reach a scale similar to the investment banks of our major competitors like Germany, Brazil and Scandinavia would be a good place to start," Greenham said.

Article Source : http://www.guardian.co.uk

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