It's time to close the loopholes - and give HMRC the resources it needs, Prof Prem Sikka writes.
It is good to see that HMRC is investigating the tax affairs of AirBnb. This week the tax office’s director of customer compliance told the Treasury Select Committee that it will double its efforts to shackle the tax avoidance industry.
All positive, but Britain’s history of curbing tax avoidance by giant corporations and shackling the tax avoidance industry is poor.
There is a vast leakage of tax revenues. HMRC estimates that due to avoidance, evasion and arrears, it fails to collect around £34bn-£35bn each year. Other studies estimate the amounts to be between £58.6bn and £122bn a year.
A well-resourced and publicly accountable HMRC is a key requirement in the war against organised tax dodging but government has systematically disabled it.
Investigation of complex tax matters is a labour intensive task, but staffing numbers have declined. In 2009, HMRC had 76,381 staff. Today that figure is 63,575. Its budget in 2010 was £4.2bn, compared to £4bn in 2019 – a massive real-terms cut.
Prolonged wage freezes have also caused problems in recruitment and retention of skilled staff and affected HMRC’s capacity to investigate or prosecute major cases. In 2019, the body had only 120 open investigations into individuals for offshore tax evasion (there were 140 in 2018).
Secrecy is a necessary requirement for tax avoidance and that space needs to be eroded. Citizens can be empowered by requiring large companies to publish their tax returns and related documents so that we can all see how giant corporations pay little/no corporation tax and mobilise public opprobrium.
The secrecy and power of the tax avoidance industry, mainly operated by accountants, lawyers and finance experts, needs to be challenged. Tax dodging exercises the ultimate veto on democratic choices by ensuring that elected governments cannot have the resources to deliver the investment and redistribution mandated through the ballot-box.
Challenging the tax dodging industry
One aspect of secrecy relates to the long-established concept of legal advice privilege (LAP) which assumes that communications between lawyers and their clients for the purpose of seeking or giving legal advice are confidential. This provides a basis for non-cooperation with HMRC and hinders investigations and possible prosecutions.
Historically, accountants have not enjoyed LAP, but argued that tax advice is legal advice and that their position is no different from that of lawyers who also offer tax advice and sell tax avoidance schemes. Accountants claim that the absence of LAP puts them at a competitive disadvantage.
The matters were dealt with by the UK Supreme Court in 2013. The background is that PricewaterhouseCoopers (PwC) marketed a tax avoidance scheme. In accordance with the requirements of Part 7 of the Finance Act 2004, it disclosed the scheme to HMRC. Prudential Plc sought PwC’s advice on a series of transactions necessary for implementing the scheme.
HMRC then asked Prudential to disclose selected documents containing the advice given by PwC. Prudential declined to comply with HMRC’s request and argued that the matter was covered by LAP.
The dispute provided an opportunity for accountants to expand their privileges. A win for accountants would have diluted the powers enjoyed by lawyers. Accountancy and law trade associations joined the turf war, with the Institute of Accountants in England and Wales (ICAEW) campaigning for accountants to secure LAP and the Law Society arguing that only lawyers should continue to enjoy LAP.
It is bad enough for HMRC to be deprived of tax avoidance information from lawyers, but by awarding LAP to accountants as well, the courts would have further handicapped HMRC’s ability to combat tax avoidance.
The Supreme Court judges, with a majority of five to two, sided with HMRC and denied LAP to accountants. The judges also said that the courts could not extend LAP and that its reform was a matter for parliament.
Of course, big accounting firms also sell legal services (e.g. PwC Legal) and in principle could sell tax avoidance through their legal arms and deprive HMRC of crucial documents. The proper way of dealing with that is for Parliament to enact legislation and deprive lawyers of LAP for tax matters as well.
Unsurprisingly, the law industry opposes reforms and claims that erosion of LAP threatens human rights. However, it is silent on the erosion of human rights of the masses as tax avoidance schemes deprive people of education, healthcare, pensions, welfare rights, security and other public goods.
The coming election
Tax avoidance should be a major issue for the next general election. Only the Labour Party has shown commitment to major reforms. Its 2017 manifesto promised to make additional investment in HMRC and require all large companies to publicly file their tax returns and related documents at Companies House.
In recent months, Labour has also indicated that it will reform legal privilege and levy heavy civil and criminal penalties on enablers of tax avoidance. All these are vital steps to closing the tax gap.
Prem Sikka is Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. He is a Contributing Editor to LFF and tweets here.
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