The government's record on tax avoidance is awful. We need an independent alternative.
Earlier this month, a report by the All Party Parliament Group on Tax accused the UK government on looking both ways on tax avoidance.
It likes to give the impression of acting tough on tax avoidance, but takes little effective taxation because the UK lacks political will, effective institutional structures and the world of tax enforcement is too close to big business.
The same is evident from the latest policy proposal that could see accountants, tax planners, advisers and other enablers, promoters and designers of tax avoidance schemes pay fines of up to 100 per cent of the tax avoided through the use of unlawful schemes.
Any pressure on the tax avoidance industry to curb its pernicious trade is welcome, but the proposed government policy is unlikely to worry the tax avoidance industry.
We have heard tough talk on tax avoidance before. A good example is the Promoting Tax Compliance and Procurement policy announced in April 2013.
Under this, organisations engaged in tax avoidance/evasion are to be barred from securing public contracts worth £5 billion or more from central government departments.
The rules require bidders to self-certify whether during the previous six years they have submitted an incorrect tax return because of their engagement in tax evasion.
To date, despite considerable media exposure of tax avoidance no bidder has been barred from securing taxpayer funded contracts.
The task of prosecuting tax avoiders falls on HMRC, but it is unfit to chase wealthy individuals and big corporations.
Its headcount has declined from over 100,000 in 2004 to 59,857 in 2016. In 2005, it had budget of £4.4 billion compared to £3.2 billion in 2016, representing a significant cut in real terms.
The resource-starved HMRC has the capacity to investigate only about 35 wealthy tax evaders a year. In February 2016, HMRC had 81 specialists for investigating transfer pricing arrangements, a key technique for shifting profits to offshore havens and avoiding UK taxes.
An investigation into just one major company used up between 10 and 30 specialists, leaving little time for others.
HMRC’s effectiveness is compromised by its closeness to corporate interests. HMRC’s board is populated with individuals with links to big corporations, law and accountancy firms.
They are too close to big business and have shown no desire to craft cases or rules which might come back to haunt them. Despite critical parliamentary reports there is a dearth of test cases involving multinational corporations.
HMRC Executive Chair Edward Troup once said that ‘taxation is legalised extortion’. Between 2010 and 2015, there have been only 11 prosecutions in relation to offshore tax evasion and unsurprisingly the House of Commons Public Accounts Committee (PAC) described HMRC’s efforts as ‘woefully inadequate’.
Parliamentary committees have not been able to fully probe HMRC’s sweetheart deals with large corporations.
A former HSBC employee provided HMRC with inside information showing that the bank’s Swiss operations turned a blind eye to illegal activities of arms dealers and helped wealthy people evade taxes.
Only one individual from the list of some 3,600 potential UK tax evaders has been prosecuted. In January 2016, HMRC told the PAC that it had abandoned its investigation into the role of HSBC in alleged illegal activities.
Of course, some tax cases by HMRC and taxpayers are brought to the courts, but the UK lacks institutional structures for a swift conclusion. A complex tax case with possibility of appeals to the Supreme Court can drag on for a decade or more.
By 2015, nearly 30,000 cases were awaiting to be heard. The lack of judicial capacity is unlikely to lead to any timely fines on peddlers of tax dodging schemes.
On occasions, courts have declared avoidance schemes marketed by big accounting firms to be unlawful.
In the case of Revenue and Customs v Pendragon plc & Ors (Rev 1)  UKSC 37), the UK Supreme Court rejected a tax avoidance scheme designed by KPMG and the presiding judge said: ‘In my opinion the KPMG scheme was an abuse of law.’
Of course, the abuse is not new. In 2005, the Court of Appeal threw out an avoidance scheme designed by Ernst & Young. It was used by Debenhams and 70 other major high street retailers and sought to deprive HM Treasury of about £300 million of tax revenues.
A Treasury spokesperson said:
‘This was one of the most blatantly abusive avoidance scams of recent years, and the court’s decision to quash it is very welcome.’
Despite these and other judgements no accountancy firm has ever been fined or disciplined by any professional body or government agency for peddling unlawful schemes.
Four years later, he is still awaiting a decision. Yet the government’s latest policy proposals will rely on professional accountancy bodies who have been very adept at sweeping things under their dust-laden carpets.
There is an urgent need to take action against the tax avoidance industry, but this requires independent, effective, publicly accountable and well-resourced institutional structures.
Sadly, the UK lacks such structures and the latest proposals are unlikely to worry the tax avoidance industry.
Prem Sikka is Professor of Accounting at Essex Business School’s Centre for Global Accountability
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