An interesting and at times combative hearing of the House of Commons Treasury Committee’s sub-committee took place on Wednesday of this week, looking at the ‘tax gap’ and corporate tax avoidance.
For those not familiar with it, the Treasury Committee is a group of 13 MPs (6 Conservative, 5 Labour, 1 Lib Dem, 1 SNP) tasked with examining the expenditure, administration and policy of the Treasury, HMRC and associated public bodies such as the Bank of England. To do this it holds hearings with witnesses (frequently including the CIOT) with a range of different perspectives on the issue in hand and produces reports with recommendations for government action, which the Government must respond to (though not necessarily adopt!) It is one of about 30 such committees covering the full range of government activity.
Those giving evidence on this occasion were Graham Black of the Association of Revenue and Customs, Richard Murphy of Taxresearch LLP, Professor Judith Freedman of Oxford University’s Centre for Business Taxation and David Sproul, Chief Executive Officer of Deloitte UK. A fairly thin turnout of MPs (I only counted five) meant there were nearly as many witnesses as interrogators.
You can watch the hearing from yourself here, but if you don’t have two hours to spare, and can’t wait for the transcript to be published here are a few of the main issues raised. Not all in the order it happened – I’ve tried to put comments on the same topic together so it jumps about a little less.
I understand the committee are planning another hearing on this topic in the next few weeks, and the Government announced this week that they will be publishing their Measuring Tax Gaps 2011 paper on 21 September. It is clear this issue is going to remain high on the political agenda.
On the tax gap
Everyone agreed that measuring the tax gap is very difficult.
Murphy criticised the approach used by the Government for estimating the tax gap for direct taxes, saying the top-down approach used to calculate it for indirect taxes should be used for direct taxes too.
Freedman said that while evasion and avoidance both needed to be tackled she did not think the tax gap was a useful tool. She took issue with the definition of the tax gap in last year’s government document, as it referred to the spirit of the law, which she felt was an unhelpful concept. She did not believe that a single ‘proper amount of tax’ for a company to pay could always be determined. Sometimes the legal situation would be unclear and it would require the courts (not HMRC) to decide, she said. She suggested that where the Government identified avoidance that showed there was a problem with the law and the law needed to be changed in response.
On tackling the tax gap
Asked whether the Government’s objective of raising an extra £7 billion from £900 million of investment over the course of this Parliament was achievable, Sproul said it would be achievable, Black said it was achievable but would be a stretch, while Murphy said not only was it achievable but it was too modest a target (though the amount being allocated to achieving the target was also too modest).
Asked whether there was a misallocation of resources towards avoidance given that most of the tax gap is evasion/criminal activity, Murphy said it was appropriate to bring forward high profile cases of avoidance but anyway, on the ground work was going to focus more heavily on evasion than avoidance in any case. Black said that while the £900 million was allowing HMRC to seriously tackle evasion they were not putting enough into tackling avoidance and so would not make inroads into this area as much as they should do. Asked the same question, Sproul said he saw effort going into tackling both avoidance and illegal activity, citing efforts against carousel fraud as an example of the latter.
Black also noted that 15 per cent of tax gap is legal interpretation and said that HMRC need more tax professionals to argue these cases – that resource, he argued, is being squeezed out.
Black and Murphy agreed that HMRC has insufficient resources and that it is illogical to cut HMRC staff at the present time.
Part of the tax gap is the result of error by taxpayers. Asked if the tax system was too complicated Freedman agreed, and said that the complexity made it very hard for small businesses to comply precisely on areas such as employee expenses where there was lengthy guidance to take into account.
On agreements between HMRC and big corporates
There was considerable debate around HMRC’s approach to major corporates and allegations in the media of ‘sweetheart deals’, especially in relation to Vodafone.
Murphy described the timing of HMRC’s agreement with Vodafone – one week before the Chancellor helped launch a new Vodafone product in India – as ‘extraordinary’. He said he was not convinced that some political influence had not been brought to bear, but, in lengthy exchanges, pressed by Andrew Tyrie, he clarified that he was not suggesting any impropriety had taken place, simply that the process could have been better handled so that this was clearer. He stressed that he had no way of knowing himself whether the amount of tax paid by Vodafone had been adequate.
Sproul praised the work of HMRC’s large business service which, he said, showed good satisfaction and was improving the service to businesses it dealt with. Freedman agreed it appeared to be working well.
Black said that while HMRC have a specialist section looking at international and corporate tax issues and ‘horizon scanning’, they sometimes may see a risk but do not have enough people on the ground to act, meaning they have to ‘pick and choose’.
John Thurso asked whether the premise of ‘negotiations’ between HMRC and companies – with the implication that it is horsetrading to reach some sort of compromise between two figures – was wrong and in fact what took place was discussion around two interpretations of the law. Both Freedman and Sproul suggested they thought this was the case, much of the time at least. Freedman pointed out that there could sometimes be case law going through the courts which threatens to change the legal situation. It may be, she said, that there is genuine uncertainty about what will happen if the matter is litigated and it is in the interests of both sides to settle as litigation is very expensive.
On giving the public confidence in the corporate tax system
There was broad agreement that it was not only important that HMRC does the right things but that they are done in a way which gives the public confidence.
Sproul acknowledged the difficulty of making the process of dealing with individual companies’ tax affairs public. However, he said it was his understanding that two HMRC commissioners have to approve every deal and there is also written HMRC guidance on procedures which could potentially be put in the public domain to provide evidence that there is a rigorous process in place.
There was discussion of whether the current system of scrutiny is adequate to ensure people are assured that negotiations between HMRC representatives and a company are handled appropriately. Murphy said there was a need for a clearer role for HMRC’s non exec directors. Sproul noted that the National Audit Office has a role in this area and is currently producing a report on how HMRC deals with large cases. Freedman noted that there is a position in the US of ‘Inspector General for Tax Administration’ who and said this could be worth considering.
Black said that the objective had to be to change corporate behaviour in relation to avoidance. While the jury was out on whether behaviour has actually been changed, he said the Government’s approach was ‘certainly bringing the money in’.
Freedman said it was hard to stop innovative tax planning as a behaviour pattern. Some businesses want to be low risk and have modified their behaviour, for example by deciding not to engage in schemes which have to be disclosed under DOTAS, she said. Sproul said there were fewer packaged tax schemes around now.
When the full transcript is published it will be available here.
CIOT External Relations Manager
Friday 1 July 2011