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Promoters of tax avoidance schemes for wealthy "running rings" around HMRC, say MPs


Firms promoting 'boutique' tax avoidance schemes to wealthy individuals are "running rings" around the UK tax authorities, the House of Commons' Public Accounts Committee (PAC) has claimed.

In a highly critical report, the PAC called on HM Revenue and Customs (HMRC) to "publically name and shame" those who sell or use tax avoidance schemes. The 'tax gap' between what should have been collected and what was actually collected by HMRC was £5 billion in 2010-11, according to the report, while HMRC has identified a further £10.2 billion worth of tax at risk from avoidance by companies and individuals.

Committee chair Margaret Hodge said that firms were "exploiting loopholes in legislation" or abusing legitimate tax reliefs, knowing that it would take time for HMRC to act to change the law and close the scheme.

"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 scheme and repeats the process," she said. "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."

The report called on HMRC to "get a stronger grip" on the number of cases it was investigating, and to "properly evaluate the effectiveness of its strategy" for tackling tax avoidance compared to how much it was spending on anti-avoidance work. It recommended that HMRC should increase its capacity to litigate cases through the courts, noting that HMRC had succeeded in 51 out of 60 recent cases but still had 1,000 cases awaiting investigation.

Tax expert Jason Collins of Pinsent Masons, the law firm behind Out-Law.com, said that the figures cited by the report showed that "tax avoidance is still big business". However, he said that the report did not reflect some of HMRC's recent anti-avoidance work.

"The criticism is a little unfair because HMRC is now only beginning to spend the extra money given to it recently and the PAC fails to acknowledge some of HMRC's recent innovation, such as the settlement opportunity launched before Christmas for users of many of the schemes identified in the report," he said. "These new measures will take time to work through."

"It shouldn't be lost that HMRC has the data relied on by the PAC precisely because of earlier innovations like the Disclosure of Tax Avoidance Schemes (DOTAS) regime itself. A constant barrage of often unwarranted criticism of HMRC, without some acknowledgement of the good work done, risks undermining the morale of the organisation at a time when the country needs HMRC to be at the top of its game," he said.

The DOTAS regime requires a 'promoter' of certain types of tax avoidance schemes to disclose that scheme to HMRC. This information enables HMRC to introduce legislation to block schemes that they believe are allowing taxpayers to gain an advantage that the Government never intended. In its report, the PAC said that although the rules allowed HMRC to "act quickly", the department had no way of knowing how much avoidance was not disclosed but should be. Additionally, it had to date only issued 11 penalties for non-disclosure.

The PAC said that HMRC should learn from the Australian system, where firms have to submit schemes for approval before they can market them and promoters can be financially penalised if there was no reasonable expectation that a scheme will work. It noted that in the UK, scheme promoters made money even when schemes failed to achieve the intended effect.

"The perception that a small minority of promoters continue to strut around like peacocks whilst outfoxing HMRC appears to have really gotten under the skin of the PAC," Collins said. "The PAC is recommending that HMRC comes up with more strategies for hitting promoters where it really hurts – in the wallet."

HMRC were also encouraged to do more to use "public opinion" and government influence to tackle the avoidance industry by the PAC. The committee noted that "public anger and consumer pressure" had impacted on multinational companies, such as Starbucks, that had been accused of unethical tax practices. It added that it would watch with interest recent proposals by the Cabinet Office to vet the tax compliance of bidders for Government work.

"HNWI avoidance is really now the preserve of boutique firms that do not do government work and are not in the public eye, so the PAC appears to be advocating a strategy to 'strong arm' those working with them who may be concerned about reputation," Collins said. "The PAC's language is very emotive, but thankfully it looks like it has stopped short of suggesting that the public should camp outside the offices and chambers of the country's leading banks and tax advisers."

"It is true that HMRC is overstretched and cases and enquiries could be processed more quickly. However, the reference to '1,000 live cases' may be misleading because many have similar facts, so not all cases will need to be tried. The number may also reduce as we see the effect of the settlement opportunity offered late last year and the extra money made available. HMRC should be judged once these recent changes have worked through the system," he said.

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