HMRC needs to be more effective in challenging tax avoidance by multinationals, say MPs

MPs were investigating why Google paid the equivalent of US $16 million of UK corporation taxes between 2006 and 2011 despite generating US $18 billion revenue from the UK in this period.

A report on tax avoidance and Google by the Public Accounts Committee (PAC) said that HMRC has not done enough to tackle corporate tax avoidance. In the case of Google the PAC "could not understand how a few journalists, whistleblowers and MPs have uncovered what the Department [HMRC] had not."

In her evidence to the committee last month, HMRC chief executive Lin Homer had pointed out that the problems around transfer pricing and permanent establishments arise from out-dated international principles. She said that in terms of tax law there is a "gap between what people what like to be the case and what actually is the case". She told MPs: "what we can't do unless and until you change the law is we can't collect the tax that people would like us to collect".

"The Public Accounts Committee may feel that the conclusion they have reached over corporate taxation is obvious, but the reality is not as simple as their report paints it," said Heather Self, a tax expert at Pinsent Masons, the law firm behind Out-law.com.

"Tax is very complex and politicians, who largely escape criticism from the report, must accept that continual changes to the rules have left us in a situation where few understand the key principles of the system they have enacted." she said. "It is particularly important that senior politicians trust what they are being told by HMRC - otherwise the system will become unworkable."

The report criticised Google, saying that public confidence in the company will only be restored when it "establishes a corporate structure that ensures Google pays tax where it generates profit".

Google said that its sales of advertising space to UK customers take place in Ireland. The PAC said it found this argument "deeply unconvincing" because of evidence that "despite sales being billed from Ireland, most sales revenue is generated by staff in the UK". It said "the processing of sales through Google Ireland has no purpose other than to avoid UK corporation tax".

"Google complies with all the tax rules in the UK, and it is the politicians who make those rules," the company said in a statement responding to the report. "It's clear from this report that the Public Accounts Committee wants to see international companies paying more tax where their customers are located, but that's not how the rules operate today."

Heather Self said that companies could do more to explain their tax bills, for example by following the CBI key principles. "However, we need to start rebuilding trust and believing that factual answers may be correct." she said.

The report follows appearances before the PAC last month by Google's vice president for Northern and Central Europe Mark Brittin; Ernst & Young's head of tax John Dixon; and Lin Homer and Jim Harra of HMRC. The PAC is investigating tax avoidance and the role of multinational companies.