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Finance Bill: Revenue loss 'was allowed to grow’

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The loss of revenue from tax avoidance via disguised remuneration was ‘allowed to grow’, the Chairman of the Economic Affairs Finance Bill Sub-Committee claimed last night. HMRC should review why action was not taken earlier and learn lessons for the future, Lord MacGregor of Pulham Market told peers during a debate on the Finance Bill.

Lord MacGregor, the former Conservative MP who was Chief Secretary to the Treasury in the mid eighties, said: ‘I was somewhat astonished when I saw the proposals in the Budget to discover that the loss of revenue from disguised remuneration was calculated at £750 million a year.

Lord MacGregor: '[Witnesses] complained of frequent changes of personnel, a general lack of tax and business knowledge, especially in the Treasury.’

‘Many of our witnesses thought that it was probably a good deal higher than that because disguised remuneration had become a very well marketed process which many were taking up. Clearly, that had been allowed to grow.’

Lord Sassoon, the Commercial Secretary to the Treasury, observed that Schedule 2 to the Bill (employment income provided through third parties) ‘tackles the practice whereby well-paid individuals disguise their remuneration as loans which are never repaid’.

The measure was ‘the first substantial piece’ of anti-avoidance legislation introduced under the new approach to tax policy-making. But Sassoon admitted that ‘there are valuable lessons to learn from the experience’.

MacGregor said the complexity of the measure, which runs to 68 pages, could have been addressed had there been consultation at an earlier stage.

‘Some argued that this was the worst legislation that they had ever seen. So clearly, the new approach to tax policy-making fell down in this case. All our witnesses agreed that this avoidance had to be tackled, but their concerns were about the way in which the legislation to tackle it had been framed.’

Sassoon said HMRC had indicated through their Spotlights pages ‘that these schemes were generally not effective’.

He added: ‘The government decided to publish draft legislation for consultation at the same time as introducing proportionate anti-forestalling rules, with effect from 9 December 2010, because we saw that as the best way of combining the necessary tackling of an exceptional situation … with an ability to consult on the rules.’

Responding to the Economic Affairs Committee's report on the Bill, Sassoon said the Government is committed to greater consultation on tax policy changes. ‘However, it will not always be appropriate or proportionate to consult at all five stages for each tax policy change, as set out in the tax consultation framework.’


The committee said the government should publish an anti-evasion strategy to complement its anti-avoidance strategy. MacGregor said: ‘According to the HMRC figures, I understand that the tax loss from all forms of evasion is £22 billion compared with £7.5 billion for avoidance.’

HMRC recognise the significant risk to the Exchequer of tax lost through evasion, Sassoon said. The department’s business strategy will allow it to develop a ‘thorough understanding of its customers’.

‘This approach helps HMRC ensure that compliance efforts and interventions are focused where they will have the greatest effect. The government have underlined their commitment to tackling tax avoidance and evasion with a £900 million reinvestment in HMRC over the spending review period.

‘This will transform HMRC compliance activities and bring in additional revenues of £7 billion a year by 2014/15, on top of the £13 billion additional revenues to which HMRC was already committed.’

Tax academy

MacGregor said many witnesses were ‘concerned about the quality’ of some of the teams working on tax policy in the Treasury and HMRC. ‘They complained of frequent changes of personnel, a general lack of tax and business knowledge, especially in the Treasury.’ The committee recommended a comprehensive skills audit.

Sassoon replied: ‘There is a senior governance group in place between the departments to oversee and monitor allocation of resources to policy work in the partnership.

‘This new governance group is also looking at how best to raise the level and effective use of skills and experience across the partnership … The establishment of a new tax academy in HMRC will improve the focus on raising skills standards. That academy will engage with stakeholders to identify shortcomings and put in place measures to address them. It will use and build on the existing range of tax training available to improve skills across the board.’