HMRC has come under fire again from the House of Commons Public Accounts Committee for failing to block tax avoidance schemes worth billions of pounds.
In what is becoming an almost weekly ritual, PAC chair Margaret Hodge grabbed headlines by lambasting the tax department, this time for its dozy response to tax scheme devisers who are draining more than £5bn away from the Exchequer a year.
Hodge sourced the £5bn figure from a recent NAO report on HMRC’s efforts to tackle marketed avoidance schemes, which also estimated a backlog of 41,000 cases meant that up to £10.2bn could be at stake.
The PAC report also draws on written evidence presented to the committee and oral evidence presented in December from HMRC officials, accountants and even companies that have been subjected to litigation against their film partnership schemes.
The PAC report makes it clear that the complexity of tax law creates opportunities for avoidance, but criticised HMRC for not challenging promoters effectively.
When the government brings forward tax incentives to stimulate economic activity, tax avoidance specialists get to work on creating and marketing new schemes to exploit them. Promoters collect their fees even when the schemes are found not to deliver a tax advantage, the PAC noted.
“It is a game of cat and mouse and HMRC is losing,” commented Hodge.
“The number of cases HMRC takes to court is tiny compared to the overall caseload. It must make use of the additional resources it has been given to act much more urgently to investigate and close down new schemes and to bring more cases to court.”
In addition to tighter enforcement under existing law, the committee’s main recommendation were to tighten the law around the current disclosure of tax avoidance schemes (DOTAS) and for HMRC to “name and shame” those who sell or use tax avoidance schemes to discourage further activity.
DOTAS has helped HMRC to close some schemes down, but the department has no idea how much avoidance is not disclosed that should be, the committee found. So far, it has only issued 11 penalties for non-disclosure of a scheme.
HMRC director general for business tax Jim Harra took to Radio 4’s Today programme to dispute the committee’s findings.
“We have brought forward legislation - and in some cases have squashed schemes within weeks,” he said. “Our experience is schemes don’t work; we can take them on and defeat them,” he said, mentioning eight tribunal victories against artificial film schemes, including one that went to the Supreme Court that Harra claimed protected up to £1.8bn in tax revenue.
Using DOTAS, he added, HMRC has topped thousands of schemes in the past few years through legislation.
While addressing the committee’s criticisms, Hanna said, “We welcome the spotlight on what we’re up against. We’ve reduced the market to the hard core and now we need legislation to drive them away.”
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