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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Margaret Hodge attacks 'voluntary' tax policies for rich

Hodge has led the cross-party committee through a wide-ranging investigation into how multinational firms pay UK tax

The chair of parliament's public accounts committee, Margaret Hodge, has delivered her most outspoken attack to date on the coalition's tax policies, describing the tax system for corporations and the super-rich as "increasingly voluntary".

She also criticised the "growing gap between rhetoric and reality" coming from David Cameron on tax reform.

Speaking at an event organised by tax campaigning charities in London, Hodge said: "They [ministers] believe we should engage fully in the global race to the bottom … I now believe David Cameron doesn't mean what he says when he says multinational companies should 'wake up and smell the coffee'."

Despite tough language on combating tax avoidance, the coalition government has been acknowledged among tax professionals as accelerating the pace of tax competition in a drive to lure in foreign investment. Measures such as new rules for overseas finance subsidiaries, tax breaks for groups owning patents in the UK, and the plunging corporation tax rate, have been cited by critics of Cameron's approach to tax reform.

Hodge's attack on Cameron harked back to a speech he gave at the World Economic Forum in Davos in January, shortly after the use of aggressive tax avoidance strategies at Starbucks' UK operations had been exposed by a Reuters investigation. The coffee chain had taken £3bn of sales in the UK over 14 years, but paid only £8.6m in tax.

Cameron told the audience of business leaders in the luxury Swiss resort: "When some businesses aren't seen to pay their taxes, that's corrosive to the public trust … Some forms of avoidance have become so aggressive that I think it is right to say these are ethical issues and it is time to call for more responsibility."

In a blunt jibe at Starbucks, he urged multinationals to "wake up and smell the coffee".

Hodge has spent the last two years leading the cross-party committee of MPs through a wide-ranging investigation into how multinational firms pay UK tax. Her tough questioning of company executives, big-four accountancy partners and HMRC bosses has played a major role in keeping tax reform high on the political agenda.

After firms such as Google and Amazon were subjected to a barrage of angry questioning from Hodge's committee, George Osborne responded a year ago by issuing a joint statement with his German counterpart Wolfgang Schäuble, calling for urgent reform of the international tax rules. "Some multinational businesses are able to shift the taxation of their profits away from the jurisdictions where they are being generated, thus minimising their tax payments compared to smaller, less international companies," they said. "We want global companies to pay those taxes."

Since then, however, Schäuble has dramatically switched his view of Britain's commitment to shoring up the integrity of international tax regimes, attacking Osborne's "patent box" tax break. "That's no European spirit," he said. "You could get the idea they are doing it just to attract companies."

Behind the scenes, a growing number of fellow G8 nations have also become increasingly irritated at the apparent gap between Cameron's use, on the one hand, of a language of ethics on tax reform, and, on the other, what some see as begger-thy-neighbour measures to poach business activity from rival economies.

Article Source : http://www.guardian.co.uk
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HMRC confirms Google investigation during committee hearing

Officials are examining whistleblower's evidence but what effect, if any, it will have on firm's tax structuring remains unclear

Top HMRC officials effectively confirmed they were investigating the UK tax affairs of Google on Monday, giving evidence to the indomitable Margaret Hodge and her public accounts committee. Away from the Palace of Westminster, meanwhile, Google privately confirmed to the Guardian that an HMRC review of its intra-company dealings between operations in the UK, where many sales staff are employed, and Ireland, where UK sales are booked, was ongoing. In fact, it has been ongoing since at least 2010, or 2009 according to the recollection of Google's northern European boss Matt Brittin.

Not only is the investigation still live, but HMRC bosses on Monday confirmed their inquiries had been assisted by piles of documents received, via Hodge and her committee, from an ex-Google staffer turned whistleblower. "We have taken evidence from him and we took it very seriously," said Jim Harra, HMRC head of business tax. Without referring directly to Google, he added: "We always act upon it if there is evidence of non-compliance."

Harra's tone was in contrast to previous commentary from HMRC chief executive Lin Homer, who was unable to appear before MPs. At a hearing in May, however, she had bristled at suggestions from Hodge that the MPs were better able to get to the truth of Google's tax affairs than HMRC. "We see – but sometimes understand more fully – some of the issues that to the general public can look surprising," she told MPs through gritted teeth in May. "That is probably why some of what appears in public, while being known to us, may not lead to the same results that you would expect it to."

On Monday night, Google was still insisting privately that there was nothing in the whistleblower's evidence to suggest the search firm had underpaid UK tax.

Meanwhile, HMRC have clearly decided they want to be seen to be using this new information – but it remains to be seen if it can really help torpedo Google's tax structuring. Don't hold your breath.

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Starbucks pays corporation tax in UK for first time in five years

Starbucks says customers 'should not have to wait for us to become profitable' before corporation tax is paid

Starbucks, one of the companies exhorted by the prime minister to "wake up and smell the coffee" over tax, has handed over £5m to HM Revenue and Customs – its first payment in five years.

But the cash has only gone some way towards assuaging critics, one of whom complained that companies should not be able to "pick and choose" how much tax they wanted to pay.

The coffee shop chain said on Sunday it had made the contribution to please its customers and would be paying a second £5m instalment in the last half of the year despite claiming the business overall continued to make a financial loss in Britain.

"Six months ago, we felt that our customers should not have to wait for us to become profitable before we started paying UK corporation tax," the company explained in a written statement.

"We listened to our customers in December and so decided to forgo certain deductions which would make us liable to pay £10m in corporation tax this year and a further £10m in 2014. We have now paid £5m and will pay the remaining £5m later this year," Starbucks added.

Starbucks has paid £5m corporation tax this year with a further £5m to come. It says it will pay another £10m in 2014  The move follows a barrage of criticism, including a comment from David Cameron at the World Economic Forum in Davos in January when he attacked low tax payers using the coffee reference – though not specifically naming Starbucks, Google or Amazon .

A spokeswoman for Starbucks declined to say how many customers it had lost following the high profile row which started with demonstrations outside some of the outlets by the campaign group, UK Uncut and ended with scorching criticism from parliament's public accounts committee.

Margaret Hodge, MP and chair of the PAC, said on Sunday she welcomed the first payment by Starbucks but added: "Companies should not be able to pick and choose how much tax they pay. We need a system which ensures that everybody pays a fair share of tax on the profits they gain from the economic activity they undertake."

The initial row followed revelations that Starbucks had paid £8.6m in corporation tax in its 15 years of trading in Britain, and nothing in the last three years despite overall sales of £3bn.

Amazon, which had book and CD sales in Britain of £3.35bn in 2011, only reported a "tax expense" of £1.8m while Google's British business paid £6m to the Treasury in 2011 on UK sales of £395m.

During a period of austerity, the issue has turned into a major political storm with the prime minister making tax avoidance one of the key issues at last week's G8 summit of leading economies at Lough Erne, Northern Ireland.

Campaigners claimed that various licensing and supply agreements with Dutch and Swiss arms of the Starbucks empire were being used to allow it to switch profits from Britain to other countries.

UK shops are able to buy their coffee from Switzerland at a 20% premium and yet the foreign business is charged corporation tax there of 12% compared with Britain's level of 25%.

Kris Engskov, managing director of Starbucks UK, responded last December by promising to pay £20m within two years.

Accounts filed by Starbucks UK with Companies House this week will show the British side of the business still not formally profitable. Starbucks is expected to close up to 30 of its shops around the country this year. A similar number were shut last year amid tough competition from Costa and other brands.

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'Big four' accountants 'use knowledge of Treasury to help rich avoid tax'

Experts offering advice on legislation they helped to create is 'ridiculous conflict of interest', says select committee chair Margaret Hodge

The so-called "big four" accountancy firms are using knowledge gained from staff seconded to the Treasury to help wealthy clients avoid paying UK taxes, a report by the influential Commons public accounts committee says.

Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers have provided the government with expert accountants to draw up tax laws. But the firms went on to advise multinationals and individuals on how to exploit loopholes around legislation they had helped to write, the public accounts committee (PAC) found.

Margaret Hodge MP has called on the Teasury to stop accepting staff from the 'big four' accountancy firms when drawing up new laws.

 Margaret Hodge, the PAC's chair, said the actions of the accountancy firms were tantamount to a scam and represented a "ridiculous conflict of interest" which must be stopped. "The large accountancy firms are in a powerful position in the tax world and have an unhealthily cosy relationship with government," she said, calling for the Treasury to stop accepting their staff to draw up new tax laws.

The report comes after David Cameron on Thursday set out plans to use Britain's chairmanship of the G8 to tackle what he described as staggering worldwide levels of tax evasion and avoidance.

The PAC claims HM Revenue and Customs had to seek outside help because it was engaged in a "battle it cannot win" in seeking to stem the losses to the exchequer from tax avoidance.

The accountancy giants employed almost 9,000 staff and earned £2bn a year from their tax work in the UK, and £25bn globally, the report claims. MPs found that Revenue and Customs had far fewer resources, particularly in the area of transfer pricing: complex transactions deployed by multinational companies in order to shift taxable profits to low tax jurisdictions. "In the area of transfer pricing alone, there are four times as many staff working for the four firms than for HMRC," the report says.

The committee highlights the way the firms seconded staff to the Treasury to advise on issues in the drafting of legislation. "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.

One example in the report is that 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 tax and that KPMG could help clients in the "preparation of defendable expense allocation".

The committee is "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", the report adds.

The report was welcomed by Prem Sikka, professor of accounting at University of Essex. "They [the big four] are the epicentre of a global tax avoidance industry and the loss of tax revenues is directly responsible for the current economic crisis. The Treasury should follow the US authorities and prosecute and fine the firms. The habitual offenders should be shut down," he said.

Officials from HMRC rejected criticisms that tax officers were not making progress in tackling avoidance. "The facts show that we are not only aggressively fighting battles against tax avoidance, but we are winning them," a spokesman said.

KPMG said in a statement: "When requested to by government departments we do provide individuals on secondment. Their role is to provide tax technical input and commercial experience so that the authorities can make informed choices on tax policy. Our secondees do not write legislation or make policy decisions."

Bill Dodwell, head of tax policy at Deloitte, said: "We do not believe that there has ever been any conflict of interest but would want to help ensure that there is no perception of conflict." Kevin Nicholson, head of tax at PwC, said: "We provide technical insight to government but only when asked and are never involved in deciding tax policy which is a matter for the government."

In evidence to the committee, John Dixon, Ernst and Young's head of tax, said: "I think there are benefits in the work we do with government ... benefits to the country at large. If you look at the quality of the legislation that we now have ... it is a lot better than it was 10 years ago.

"Why is that? Because we are actively working with government, at our cost, to make sure that the legislative footprint we are working with is as clear and concise as it can possibly be."

An HMRC spokesman said: "HMRC gives careful consideration to the potential risks, as well as how to mitigate any potential conflicts of interest, before any such secondments are agreed. On balance, the carefully targeted use of secondees is beneficial for the development of tax policy and improving the effectiveness of the tax system."

Cameron, who hopes to use an EU summit in May as a stepping stone to a wider agreement at the G8, wrote to all EU leaders proposing:

• Rapid movement to a global system of information exchange to help tackle tax evasion including through the use of offshore trusts.

• Action plans by G8 countries to produce full transparency, breaking through walls of corporate secrecy and establishing central public company registries.

• Voluntary deals for multinational firms to make clear the tax they pay in every country they operate in.

• Implementation of the EU accounting directive so developing countries can access information on payments to governments made from the oil, gas and mining industries.

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