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.”
“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.”