Early in September the U.K. Labour Party issued a report prepared on its behalf by a group of left-leaning academics and tax experts that called for the U.K. tax authority to be overhauled.
The paper, titled Reforming HMRC: Making it fit for the twenty-first century, claims that HM Revenues and Customs (HMRC) is under-resourced, too close to big business, and is therefore not fit for its purpose. To change this, the authors suggest that the regulator should have a supervisory board consisting of stakeholders rather than just tax experts to oversee its executive board and that it should be subject to more public and Parliamentary scrutiny.
The paper recommends that there should be greater support and protection for tax whistleblowers—a nod to HSBC whistleblower Herve Falciani, who was indicted in absentia by the Swiss federal government for industrial espionage and for violating the country’s bank secrecy laws. The paper also recommends that HMRC should have a well-resourced internal investigation and prosecution unit that would also scale back its reliance on the likes of the Big Four accountancy firms and city law firms that advise large corporates on tax issues. The authors also say that large companies must make their tax returns and “related computations and documents” public.
The panel was led by Prem Sikka, professor of accounting at the University of Essex, and included representatives from campaign groups such as the Tax Justice Network and the High Pay Centre.
The report—written in the wake of a series of high-profile scandals whereby large corporates such as Google, Microsoft, Amazon, Apple, and Starbucks have paid little tax—intends to inform official Labour proposals expected in spring 2017. HMRC has made no public comment on the issue.
“HMRC is in thrall of big business.”
Prem Sikka, Author, HMRC Report
Labour has been keen to reform HMRC for some time, critical of its tendency to steer clear of large corporations that have failed to pay their fair share of tax, preferring instead to prosecute softer targets. For example, evasion of tobacco duty accounted for just 13 percent of all tax fraud risks, but was the subject of nearly a third of all HMRC prosecutions during 2014 to 2015, as the agency focused on less complex cases to meet its target of increasing prosecutions by 1,000 a year.
Meanwhile, only one individual from the Falciani list of some 3,600 potential U.K. tax evaders has been prosecuted. HMRC’s criminal investigation into HSBC’s alleged illegal tax planning activities has been dropped. And the likelihood that any prosecutions will occur from the leaks relating to Panama law firm Mossack Fonseca’s involvement in a mass tax avoidance and evasion scheme is slight, given that just 70 staff are tasked with looking at some 11.5 million documents and 2.6 terabytes of information relating to over 300,000 companies.
Critics have suggested that HMRC’s focus has been wrong: While the revenue agency believes that the U.K. tax gap is £34bn (which is 6.4 percent of the total theoretical tax liabilities that the HMRC says is owed), tax specialist Richard Murphy estimates that the U.K. tax gap could be anything up to around £120bn a year because HMRC has underestimated the scale of aggressive tax avoidance, or profit shifting, carried out by multinational companies.
One of the key problems is that HMRC simply does not have the resources or level of in-house expertise to proceed with complex cases quickly. For the current financial year, HMRC has a budget of £3.2bn. A decade ago, its budget was £4.4bn. As of February 2016, the U.K.’s tax investigatory body had 81 specialists capable of looking at “transfer pricing” arrangements, which shift profits from the United Kingdom to low/no tax jurisdictions. But an investigation into just one major company like Google or Amazon uses up between 10 and 30 specialists, leaving little time for others.
KEY PROPOSALS FOR REFORM
Below is an excerpt from the University of Strathclyde Glasgow report, “Reforming HMRC: Making it fit for the twenty-first century,” regarding reform proposals.
1. There should be a supervisory board consisting of stakeholders to watch over the HMRC executive board to give it direction and enhance its public accountability. No stakeholder group shall be in a majority, thus ensuring that dialogue and consensus would be necessary to reach decisions. Board minutes and background papers must be publicly available.
2. The supervisory board develop a policy to protect whistleblowers (both inside and outside of HMRC), and should be the statutory point of contact for whistleblowers releasing information about tax avoidance and evasion.
3. HMRC should have a well-resourced internal investigation and prosecution unit. Unlike the present reliance on external advisers, this would enable HMRC to retain the knowledge in-house and build on it.
4. The tax returns, related computations and documents of all large companies must be made publicly available. The public availability of information will help to increase the threat of naming and shaming and associated pressures on company boards not to use aggressive tax avoidance strategies, and thus increase tax revenues.
5. Confidentiality should not obstruct parliamentary scrutiny of HMRC’s practices. It would be up to the relevant parliamentary committee to decide whether scrutiny of any documents and practices should be conducted in private or closed meetings.
6. HMRC’s capacity to challenge abusive practices needs to be strengthened by a rewrite of the General Anti Abuse Rule (GAAR), introduced in 2013. The current GAAR does not apply to any tax arrangements entered into before the legislation came into effect – even though the impact of those arrangements may continue for many years. To investigate abuses of GAAR, HMRC must seek guidance from the Department of Justice and/or a panel of retired judges specifically appointed to guide it. To be effective HMRC must have complete independence from all business interests: in common with other stakeholders, they can be part of an open consultation process, but must not write laws or enforce them, or be in a position to shackle HMRC’s capacity to pursue abusive practices.
Source: University of Strathclyde Glasgow
The time commitment for an-depth investigation is also a drain on resources. This March, HMRC executives told the Public Accounts Committee—a key select committee of Members of Parliament—that its investigations into transfer pricing arrangements take 22 months on average and that only about 35 wealthy individuals are investigated for tax evasion each year. Consequently, it is unable to maximise tax revenues by checking tax avoidance and evasion and instead settles cases rather than prosecutes them. Good examples of this are the dispute settlements with Vodafone, Goldman Sachs, and Google—though it appears that the companies got the upper hand.
This year Google settled approximately 10 years’ disputed U.K. tax liabilities based on £4.6bn of sales to U.K. advertisers (routed through its Irish headquarters) with a £130m payment (£117m in back taxes and £13m in interest), amounting to an effective tax rate of less than 3 percent. One of the requirements of the deal was for the details to remain confidential.
Other companies have also negotiated “sweetheart” deals where the details have remained confidential. The case of U.K. Uncut Legal Action Ltd v HM Revenue and Customs & Anor  EWHC 1283 (Admin) (16 May 2013) showed that in November 2010 investment bank Goldman Sachs had secured concessions—including a waived tax bill for £20m—from HMRC. Furthermore, to prevent HMRC from renegotiating or backing away from the deal, the bank threatened to withdraw from the U.K.’s voluntary Code of Practice on Taxation for Banks. Then head of the HMRC, Dave Hartnett, said such an outcome “would have embarrassed the [then] chancellor” George Osborne, who had only set the Code up the week before.
There have been no prosecutions by HMRC or HM Treasury against the designers of tax avoidance schemes, which means that there is very little case law to judge what would make a prosecution successful. However, there have been a number of court cases in which the judges have declared the schemes designed, marketed, and implemented by the Big Four accountancy firms to be unlawful. In the case of Revenue and Customs v Pendragon plc & Ors (Rev 1)  U.K.SC 37 (10 June 2015), the U.K. Supreme Court rejected a tax avoidance scheme designed by KPMG, with the presiding judge calling the scheme “an abuse of law.”
Principal report author Sikka believes that HMRC is “in thrall of big business” and so is unlikely to ever tackle the problem, especially when representatives of large businesses are permitted to design tax laws that could advance their interests. For example, a working group consisting entirely of representatives from GlaxoSmithKline, Rolls-Royce, Eisai pharmaceuticals, Syngenta, Shell, Dyson, Arm, Vectura, Technology Research, and KPMG drafted what eventually became known as the “Patent Box” legislation, which enabled them to secure a special tax concession worth over £1bn a year for large corporations.
Sikka also points out that HMRC’s non-executive directors come entirely from big business, with previous connections to KPMG; the tax committee of the Confederation of British Industry (CBI), the U.K.’s most prominent pro-business lobby group; Smith & Nephew; Brunner investment trust; Aviva; PwC; British Airways; Anglo-American; and Cadbury Schweppes—to name just a few. Therefore, effective, and more importantly, independent, challenge may be curtailed on some issues at least.
Corporate representatives are also in charge of the decision as to whether HMRC investigates any individual or company for infringement of the General Anti-Abuse Rule (GAAR, the U.K.’s main anti-avoidance measure introduced in 2013.) One of the initial appointees to the GAAR Panel was David Heaton, a former partner in accountancy firm Baker Tilly and a recent chairman of the Tax Faculty of the Institute of Chartered Accountants in England and Wales (ICAEW). In September 2013 a BBC documentary crew secretly filmed Heaton offering tips on how to keep money “out of the chancellor's grubby mitts.” He also advised an audience on how they could exploit maternity pay rules “to get the government to pay your bonuses.” He subsequently resigned from the panel.
Whether Labour will adopt any or all of the proposals as set out in the paper remains to be seen. The appetite for holding corporates to account may have waned as news of Sterling’s biggest drop in 31 years dominates U.K. headlines once again following the government’s announcement that a “hard Brexit” will be triggered next March. In the current climate, the need to secure jobs—rather than taxes—may win the argument.