Taxing multinationals: Are MPs expecting too much of HMRC?

Today’s Commons public accounts committee report criticises HMRC’s record on taxation of multinationals, but a key element of the report is really addressing an important issue of tax policy that is being tackled at international level.

The PAC suggested in October that HMRC should estimate the tax that would be payable if the international system for taxing the profits of multinationals was reformed.

HMRC defines the UK tax gap (which it estimates each year) by reference to the tax that would be paid if everyone complied with the letter of the law and HMRC’s interpretation of Parliament’s intention in setting the law. Responding to today’s report, HMRC insisted that it can only measure non-compliance with existing law.

Jim Harra, giving evidence for HMRC at a PAC hearing in October, said:

“[HMRC’s estimate of the tax gap] does not include a measure of how much additional tax might be collected if you changed the policy.”

HMRC can and does advise ministers on tax policy, but policy objectives are set by ministers and MPs vote on new tax law and changes to existing law.

Today’s report appears to understate the importance of the current OECD-led initiative to close gaps in the international tax system.

The OECD said last February that such gaps give multinationals an unfair competitive advantage over smaller businesses and “hurt investment, growth and employment”.

Its action plan to tackle “base erosion and profit shifting”, approved by G20 ministers in the summer, listed 15 specific actions to “give governments the domestic and international instruments to prevent corporations from paying little or no taxes”.

One area being addressed is “excessive deductible payments such as interest” – and it is widely recognised that the UK’s tax relief for interest is relatively generous.

The PAC report claimed that HMRC’s tax gap estimate “represents only a fraction of the amount that the public might expect to be payable”.

But what does the public expect? If the OECD’s ambitious project works, some multinationals may well pay more UK corporation tax, but others may pay less.

Now, at least, the PAC seems to have recognised that HMRC can do little at this stage to assess the impact of what may be a major reform of international corporate tax:

“When there are firm plans to change international tax laws to tackle avoidance, HMRC should use this intelligence to assess how much additional tax revenue the changes would generate within the UK.”

These are important issues. But is the PAC the right forum? Its own statement describing its role says this:

“The committee does not consider the formulation or merits of policy (which fall within the scope of departmental select committees); rather it focuses on value-for-money criteria which are based on economy, effectiveness and efficiency.”

IR35: Peers hear evidence from business groups

I wonder where the House of Lords inquiry into IR35 is heading. Peers on the personal service companies committee have now heard from HMRC and representatives of business groups, professional bodies and the Office of Tax Simplification.

Yesterday Martin Hesketh of Brookson, an accountancy firm providing services to contractors and freelancers, suggested that the IR35 legislation should be left alone. Where there was uncertainty, case law was providing the answers.

But representatives of the Federation of Small Businesses and PCG told peers that IR35 was unnecessary. Chris Bryce, chief executive at PCG, said the legislation was now “redundant” and should be abolished.

It is difficult to see IR35 being abolished without a major change in the tax and NIC rules. The continued absence of an NIC charge on dividends provides a major financial incentive for “freelancers” to operate via a company. But in recent years many engagers or “end user clients” have insisted on the arrangement in order to save employer NICs and eliminate the risk of a PAYE enquiry.

My report for AccountingWEB on the committee’s first evidence session last month is here.

My short Storify account of key points from yesterday’s session is here.

The Lords committee’s call for evidence (written evidence is invited by 31 December) is here.

See also Finance Bill 2014: New focus on control to tackle false self-employment.

Double counting in the UK tax gap debate

Last June the National Fraud Authority estimated fraud against the public sector at £20bn a year, including £14bn lost to tax fraud (see page 8).

This was based (see page 14) on HMRC’s estimate of the 2010/11 tax gap. The NFA said at page 53:

“For calculating an estimate of tax fraud it is assumed that the underlying behaviours described as ‘evasion’, ‘the hidden economy’ and ‘criminal attacks’ represent fraud. It is estimated that these behaviours accounted for £14bn [of the estimated tax gap of £32bn] in 2010/11.”

Clearly, the NFA’s £14bn is included in the tax gap figure.

Two months ago HMRC estimated the tax gap for 2011/12 at £35bn and revised its estimate for 2010/11 to £34bn.

This week the Commons public accounts committee reported that: “[Taxpayer] losses due to fraud and error are worryingly high. It is staggering that, in one year, the public sector was defrauded of over £20bn and the tax gap rose to £35bn.”

Can you see the problem here? When the committee puts it like that, are you inclined to add the two figures together? Well, yesterday this happened …

The Times had this:

Watchdog: taxpayers losing out on £55bn

Sky News had this:

Govt Losing A ‘Staggering’ £55bn A Year In Taxes

The tax fraud figure has been counted twice, as Heather Self and others have pointed out.

Calum Fuller at Accountancy Age took this up with the PAC, whose response was that “three sets of figures are prepared for different audiences at different times with different bases, including both actuals and estimates and there is a degree of overlap between all three with no single figure currently prepared to present a unified view”.

The PAC report called on the Treasury to come up with a better way to present “cross-government figures” within the Whole of Government Accounts, which can be used “to show the impact of the government’s counter-loss activities”.

The tax debate would benefit from more light and less heat. This sort of confusion doesn’t help, and the PAC’s report and press release could have been much clearer.