Tax avoidance schemes: HMRC should name and shame

• Report: Tax avoidance: tackling marketed avoidance schemes (HTML)
• Report: Tax avoidance: tackling marketed avoidance schemes (PDF)
• Public Accounts Committee

Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

“Promoters of ‘boutique’ tax avoidance schemes like the one brought to our attention by the case of Jimmy Carr, are running rings around HMRC.

"They create schemes which exploit loopholes in legislation or abuse available tax reliefs such as those intended to encourage investment in British films, and then sign up as many clients as possible, knowing that it will take time for HMRC to change the law and shut the scheme down.

"Their clients can then take advantage of this window of opportunity to make a lot of money at the expense of the taxpayer, while the promoter simply moves on to a new a scheme and repeats the process. It is a game of cat and mouse and HMRC is losing.

"It has allowed a system to evolve where the die are loaded in favour of the promoters of tax avoidance schemes. The complexity of tax law creates opportunities for avoidance, there are no penalties to stop people promoting these schemes, and HMRC is ineffective in challenging promoters who are deliberately obstructive or deliberately sell schemes they know do not work. Promoters pocket their fees whether their schemes work or not.

"There is also a lack of transparency that makes it very hard to find out who is involved in marketing or using these schemes. HMRC publicizes details of schemes that do not work but does not name the promoters or the clients. We have seen how public anger and consumer pressure can influence large companies, such as Starbucks, to behave more responsibly.  

"HMRC should publically name and shame those who sell or use tax avoidance schemes in order to discourage such activity.
 With at least £5 billion lost to tax avoidance each year, HMRC has got to get much more robust in its approach.

"The requirement that promoters give early notification to HMRC of new schemes has resulted in the swift closure of some. But the Department does not know how many promoters simply choose to ignore the requirement.
We are also alarmed to hear that promoters are getting off paying fines for not disclosing their schemes by pleading that, in the opinion of a QC, they have a ‘reasonable excuse’ for non-disclosure. HMRC is right to explore how to make it more difficult for this tactic to work.

"The number of cases HMRC takes to court is tiny compared to the overall caseload. It must make use of the additional resources it has been given to act much more urgently to investigate and close down new schemes and to bring more cases to court.

"Since our hearing, the Government has announced that it is consulting on draft rules designed to allow departments to ban tax-avoiding businesses from being awarded government contracts. This is a welcome move but we will want to monitor closely how any such rules are applied in practice.”

Margaret Hodge was speaking as the Committee published its 29th Report of this Session which, on the basis of evidence from HM Revenue & Customs, Tax Trade, Future Capital Partners and Ingenious Media, examined marketed tax avoidance schemes.

Tax avoidance

Tax avoidance—using tax law to gain a tax advantage not intended by Parliament—reduces the money available to fund public services and is completely unfair to the majority who pay the tax due. HM Revenue & Customs (HMRC) estimates that in 2010-11 the tax gap due to avoidance was £5 billion. HMRC further estimates that the present total tax at risk from avoidance over time is £10.2 billion.

There is a proliferation of contrived schemes which exploit loopholes in legislation and abuse available tax relief schemes. Promoters are currently winning what appears to be a game of cat and mouse with HMRC and deliberately taking advantage of the time lag between the launch of a scheme and the closure of the scheme by HMRC.

Promoters and providers sign up as many clients as possible before HMRC changes the law and shuts the scheme. They then move on to a new scheme and repeat the process. Far too much public money is lost through avoidance and HMRC needs a much more robust approach.

HMRC has allowed a system to evolve where the die are loaded in favour of the promoters of tax avoidance schemes. The complexity of tax law creates opportunities for avoidance, there is no effective deterrent to stop people from promoting avoidance schemes, and HMRC is ineffective in challenging promoters who obstruct its attempts to investigate.

Scheme creations

All too often Government introduces new policies through tax incentives to stimulate economic activity and the design of these policies become an opportunity for tax avoidance providers and promoters to create a new set of schemes. Promoters collect their fees even when the schemes are found not to deliver a tax advantage.  Few schemes are covered by mis-selling regulations, even though people might be put off buying them if they fully understood the risks. We welcome HMRC’s consultation on applying the model of financial services mis-selling to tax avoidance.

Those who promote a tax avoidance scheme are required to notify HMRC of the scheme to comply with its disclosure regime. This has allowed HMRC to act quickly to close some schemes down. However, HMRC does not know how much avoidance is not disclosed but should be and has only issued 11 penalties for non-disclosure of a scheme.

A small number of promoters appear determined to avoid disclosure and refuse to engage with HMRC. It is alarming that some QCs’ opinions are being used by promoters as a “reasonable excuse” for non-disclosure which prevents HMRC from applying a penalty.  

Measures used elsewhere

HMRC could learn from the variety of measures used in other counties to deter and tackle tax avoidance. In Australia, promoters have to get clearance for schemes before they introduce them. An advance ruling system of this type could deter contrived avoidance schemes and increase certainty in the tax system. Australia has also introduced powers to fine those who promote schemes that could not reasonably be expected to work or comply with the advance ruling system. We encourage HMRC to look seriously at whether these and other measures could be effective in the UK.

Government influence

Government needs to use its influence wherever possible to deter tax avoidance. HMRC needs to consider whether by naming and shaming those who promote tax avoidance schemes, it could harness public opinion and reduce the appetite of companies to promote or use avoidance schemes. Major banks, accountancy firms and leading lawyers all play their part in supporting and advising on tax avoidance schemes.

The Government should examine ways to combat this. Government can influence behaviour by refusing to do business with those who promote tax avoidance or fail to pay their fair share of tax. We welcome the announcement that HMRC and the Cabinet Office will be consulting on how Government should change its procurement rules to deter tax avoidance and evasion, and will watch the outcome closely.

HMRC

HMRC has a lot more work to do to successfully tackle tax avoidance. It needs to know how much it spends on anti-avoidance work and properly evaluate the effectiveness of its strategy. It needs to get a stronger grip on the large number of avoidance cases it is investigating and find a way to reduce them. The number of cases it litigates is tiny compared to the number of enquiries.

HMRC needs to build its capacity and capability to take on avoidance in the courts, especially as we heard from one company that in light of previous successes, having taken and won two cases in the courts, it makes sense for scheme users to litigate. HMRC also needs to investigate cases quickly to deter more people from using them and reduce the advantage to those who do.