Taxation: MPs accuse HMRC of ‘losing its nerve’ when pursuing large companies

Margaret Hodge MP, chair of the Commons Public Accounts Committee.

Margaret Hodge MP, chair of the Commons Public Accounts Committee. - Credit: PA

Tax authorities have been holding back on using sanctions against multinational companies, while pursuing small businesses and individuals, according to a new parliamentary report.

HM Revenue and Customs seems to “lose its nerve” when faced with the prospect of taking legal action against global giants, and has fallen short on the unpaid tax it hoped to extract from Swiss bank accounts - collecting just £440 million so far this financial year, rather than the £3.12 billion forecast after a bilateral agreement - said the House of Commons Public Accounts Committee.

Changes in “controlled foreign company” rules and the failure to close a loophole relating to Eurobonds have made it “easier for the companies to avoid tax while ordinary people continue to pay their share,” said the committee’s chairman Margaret Hodge.

In comments which will raise questions over the Treasury’s intention of using a clampdown on tax evasion and avoidance to plug holes in the public finances, the committee noted that the planned income from the Swiss accounts were written into Chancellor George Osborne’s budget estimates in last year’s Autumn Statement and said it was “astonished” at HMRC’s failure to account for the shortfall.

HMRC brought in £475.6 billion in revenue for the Government in 2012/13, an increase of £1.4 billion or 0.3% in cash terms over the previous year, the report found. But in real terms, after inflation was taken into account, tax income actually fell last year, compared to 2011/12, while the “tax gap” between the amount owed to the Exchequer and the amount actually collected grew by £1 billion to £35 billion in 2011/12.

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Launching the report, Ms Hodge said: “In pursuing unpaid tax, HMRC has not clearly demonstrated that it is on the side of the majority of taxpayers who pay their taxes in full.

“Last year the department collected less tax in real terms than it managed to collect in 2011/12. This was despite the stated ambition to crack down on tax avoidance.

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“The tax gap as defined by HMRC did not shrink, but in 2011/12 grew to £35 billion. Yet that measure does not capture all the tax government should be collecting. For instance, this figure does not include all the tax revenue lost to aggressive tax avoidance schemes.

“HMRC holds back from using the full range of sanctions at its disposal. It pursues tax owed by the smaller businesses but seems to lose its nerve when it comes to mounting prosecutions against multinational corporations. It predicted that it would collect £3.12 billion unpaid tax from UK holders of Swiss bank accounts and this figure was built into budget estimates, but in 2013-14 it has so far secured just £440 million. We were astonished that HMRC could not give any reasons for such a shortfall.”

The report said that HMRC needed to show that it was dealing “robustly” with individuals and companies who deliberately mislead it. It noted that just one individual on the so-called Lagarde list of Swiss account holders with potential UK tax liabilities had been successfully prosecuted.

“While HMRC told us that it is committed to collecting the tax that the law provides for, the lack of prosecutions against multinational corporations seems at odds with HMRC’s stance on pursuing tax debt from small and medium-sized businesses in the UK,” said the committee, adding: “HMRC has yet to test how existing tax law impacts on global internet-based companies.”

Ms Hodge said: “HMRC aims to make the UK more attractive to business but the incentives to international corporations may also enable them to avoid tax.

“Changes in the controlled foreign company rules and the failure to close the loophole created by Eurobonds are two examples showing where it has become easier for companies to avoid tax while ordinary people continue to pay their share. If that is HMRC’s real intent, then it should be open about it. When designing the tax regime for businesses, HMRC needs to strike the right balance between support and enforcement.”

The report also raised concerns about HMRC’s Real Time Information system for PAYE payments, warning that, while its introduction had “gone well so far”, some smaller businesses continue to experiences difficulties just months ahead of the April 2014 deadline after which fines will be imposed for non-compliance.

The lack of full disaster recovery arrangements in the RTI system also creates a risk that system failures will result in delays and errors in payments of Universal Credit to welfare claimants, the committee warned.

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