The Commons Public Accounts Committee has defended its ‘robust’ scrutiny of tax issues and denied exceeding its remit, following reports that a senior HM Treasury figure warned in an off-record media briefing that the PAC’s work was having an ‘impact’ on inward investment.
The briefing drew an angry response from committee members, including the Conservative MP Stewart Jackson, who told The Guardian: ‘I don’t think there is any evidence that any of our inquiries have had any influence on hard-headed businessmen considering whether they should come to Britain.’
Giving evidence to a recent hearing of the House of Lords Economic Affairs Finance Bill Sub-committee, Chris Sanger, global head of tax policy at EY and a member of the government’s tax policy forum, said tax was ‘normally sixth or seventh on the agenda over decision-making’ for companies coming to the UK. Sanger was responding to a question about reasons for structuring a business as a partnership rather than a company. He added: ‘I do think commercial [considerations are] the primary part, but then you will find tax decisions taken into account at the margin.’
PAC chairman Margaret Hodge attended a meeting of the OECD parliamentary group in Paris earlier this month. In an interview with the Financial Times, she accused the UK government of ‘talking tough against tax-avoiding corporations but failing to take effective action to reform the tax system’.
The PAC now plans to take evidence on UK tax reliefs in the spring, once the National Audit Office has completed a review of ‘controls to develop, monitor and evaluate’ the use of reliefs. The NAO will consider how HM Treasury and HMRC monitor and assess the cost of tax reliefs and evaluate their outcomes, and what the departments do to prevent ‘excessive leakage through abuse and error’. Hodge told the Harvard Political Review last month that the existence of more than 1,000 tax reliefs in the UK tax code was ‘just mad’.
Tax Journal asked the PAC whether members accepted that its report HMRC tax collection: Annual report & accounts 2012/13 of 19 December 2013 (see lexisurl.com/cnjoe) was unfair on HMRC to the extent that it dealt with ‘base erosion and profit shifting’ (BEPS) – a policy issue being tackled at international level. ‘HMRC has not tested the limits of its power to address aggressive tax avoidance,’ the report said.
HMRC had ‘strongly’ disputed the PAC’s conclusions and challenged its ‘selective and misleading’ use of figures. ‘HMRC can only bring in the tax that is due under the law and we cannot collect what is not legally due, however much the committee might want us to,’ the department said.
But the PAC spokesperson pointed out that ‘other countries are tackling this at a national level, such as in France, where Margaret Hodge recently met parliamentarians from across the OECD who are themselves tackling tax avoidance at a national and transnational level’. She added: ‘So we don’t accept that HMRC can’t do more. But we do agree that additionally international action is required to tackle the issue effectively.’
Some commentators have warned that ‘unilateral’ measures to address BEPS issues carry the risk of double taxation and increased complexity. The OECD said 12 months ago that ‘unilateral and uncoordinated actions by governments responding in isolation could result in the risk of double – and possibly multiple – taxation’. This would have ‘a negative impact on investment, and thus on growth and employment globally’.
Asked how the PAC’s report on HMRC, and the inquiry into tax reliefs, squared with the PAC’s own statement that it ‘does not consider the formulation or merits of policy’, the spokesperson said: ‘The PAC is all about securing value for money for the taxpayer. We are fully able to scrutinise the value for money effectiveness of HMRC in its operations within our remit. The focus of the 19 December report, for example, was on how HMRC can maximise tax collection within the existing policy and legislative framework.’
Tax reliefs can be used in good faith and they can be abused, said David Quentin, a tax barrister and a senior adviser to the pressure group Tax Justice Network. He told Tax Journal: ‘The existence of reliefs opens up opportunities for the deliberate creation of exchequer risk, and this is something that needs to be vigorously policed. In addition, so-called “reliefs” – which are in fact invitations to erode the tax bases of other jurisdictions – are an abuse of the global tax system by the jurisdictions that enact them. Increased scrutiny of tax reliefs, and in particular scrutiny of their actual impact, is therefore to be welcomed.’
Quentin also backed Hodge on the BEPS issue: ‘There is much that can be done unilaterally to combat BEPS, and the fact that the OECD is working on this problem does not absolve states and tax authorities of responsibility for addressing it,’ he said.
Chas Roy-Chowdhury, head of taxation at ACCA, told Tax Journal that the Commons Treasury Committee rather than the PAC should be looking at ‘the area of tax in general’. But he added: ‘I would have no problem with the PAC looking at tax if it were better technically advised and less politically driven.’ He suggested that the Lords Economic Affairs Finance Bill Sub-committee had adopted a balanced approach ‘and yet gets fully to the heart of the policy and issues’. A global solution to the BEPS issue was needed, Roy-Chowdhury added.
Heather Self, a partner at the law firm Pinsent Masons, said the PAC had made a broadly positive contribution to the debate on taxing multinationals, ‘especially around the need to update transfer pricing rules to deal with the digital economy – although I am strongly of the view that this needs to be done multilaterally and not by the UK alone’.
But Self had two concerns. ‘The first is the tone of the debate,’ she said. ‘At times, it resembles the court of the Queen of Hearts, with cries of “sentence first, verdict afterwards”. A more measured attempt to listen as well as lecture would be welcome. The second is the need to distinguish between those advisers who are responsibly advising clients on how to claim reliefs within the policy set out by parliament, and those who are aggressively promoting “egregious” schemes. The blurring of the lines between reasonable tax planning – such as the claiming of interest relief, or using the patent box – and highly contrived arrangements is not helpful.’
Bill Dodwell, head of tax policy at Deloitte, told Tax Journal: ‘The PAC’s work has helped bring taxation to wider public interest and may be part of the background to the political impetus behind the BEPS project. However, there have clearly been occasions when the PAC appears not to have understood UK and international tax law and thus not helped public understanding. Going forward, the challenge for the PAC will be how to support international tax reform and help ensure that HMRC has the necessary resources.’
Dodwell pointed out that the vast majority of the UK’s tax reliefs are ‘simply part of a normal, functioning tax system’. He added: ‘Where would we be without tax relief for individuals on business travel, or capital allowances to cover the cost of business assets? Every government has chosen to introduce new reliefs to incentivise desired behaviours. The challenge is to evaluate whether the implementation of those new reliefs has actually achieved the desired policy outcome. It’s probably fair to say that the UK has not carried out much post-implementation review.’
Dodwell suggested that business also had a part to play. ‘Every so often there are complaints that politicians don’t understand a wide range of technical issues – not just in taxation, but generally. The combative nature of political debate is also sometimes criticised. Clearly, we do need our politicians to take time to understand the issues – but professionals and business people equally have a duty to communicate and stand up for what they do. Business in the UK has a great story to tell and much of our tax system supports business growth in the UK.’
Jane McCormick, head of tax at KPMG in the UK, told Tax Journal that ‘while a combative style is effective in making headlines, the negative consequence is that it creates misunderstanding and results in polarisation’. International tax is a complex area, she added. ‘Whilst business needs to be better at explaining it to the layman, it is difficult to do this without knowing what questions will be asked, or when you can only answer in sound-bites.’
Margaret Hodge will be the subject of a forthcoming One minute with... feature in Tax Journal. Many of the recent weekly interviews have seen tax professionals express concerns about the impact of the public debate.
Graham Aaronson, partner at Joseph Hage Aaronson and chairman of the interim GAAR advisory panel, told Tax Journal last month that the PAC was ‘to be congratulated for helping put the issues surrounding tax avoidance and the taxation of multinationals at the forefront of debate’, but said it was ‘to be heavily criticised for making some very foolish and irresponsible statements in the process’. Earlier this month, Brenda Coleman, a partner at the law firm Ropes & Gray, said the debate on paying the ‘right’ amount of tax was ‘undermining confidence in the UK as a place to do business by suggesting that companies have avoided tax where they pay tax on their profits properly computed in accordance with UK tax principles’.
But when Susan Ball, a partner at the accountants and business advisers Crowe Clark Whitehill, was asked whom in tax she most admired, she said: ‘Right now I’d have to say Margaret Hodge. She is asking some good questions and has raised people’s awareness of tax issues. I can’t think of another time in my career to date when tax has been so hotly discussed outside of those of us who practise in the area.’
Quentin told Tax Journal that the work of the PAC ‘benefits hugely from Margaret Hodge’s willingness to confront the complacent tax technocracy, rather than docilely accepting that the system has to be inequitable for reasons she doesn’t understand’.
Has the PAC has made a broadly positive contribution to the debate on taxation of multinationals? Take part in our survey of tax professionals.
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