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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