U.K. Has Unwinnable Battle on Tax Avoidance, Panel Says

The U.K. government is fighting an unwinnable battle against tax avoidance, lawmakers warned, as they called for greater transparency from companies and more resources to police compliance.

The imbalance between the four biggest accountancy firms and staff at the tax agency, Her Majesty’s Revenue and Customs, means the government is unable to challenge avoidance, according to a report published in London today by the House of Commons Public Accounts Committee.

“HMRC is engaged in a never-ending game of cat and mouse,” committee chairwoman Margaret Hodge said in an e-mailed statement. “Among those ranged against it are the big four accountancy firms who employ nearly 9,000 people just to provide tax advice to companies and wealthy individuals,” she said. “Between them they boast 250 transfer-pricing specialists, whereas HMRC has only 65 people working in this area.”

PricewaterhouseCoopers LLP, Deloitte & Touche LLP, Ernst & Young LLP and KPMG LLP earned 1.85 billion pounds ($2.86 billion) from tax practice in the U.K. in the financial year ending April 2012, the committee said. They advised companies including Google Inc., Starbucks Corp. and Amazon.com Inc., which were also called to testify to the panel after public and media anger about the amount of corporation tax they pay.

‘Fair Share’

Increased transparency about companies’ tax affairs would build pressure on multinational businesses to “pay a fair share” of tax in the countries where they operate, and the U.K. should push for international agreement on standards of transparency, the committee said.

There should also be a simplification of tax law and international rules should be overhauled to reflect ways of doing business, the report said. Modern communications have made it too easy for companies to register in tax havens rather than paying tax where their business takes place, the lawmakers said.

“We believe that simplicity is key to fighting tax avoidance. The four firms agreed with us that tax law is too complex and a simpler system is in everybody’s interests,” the committee said. “It is disappointing that HM Treasury’s Office of Tax Simplification is working with fewer than six full-time staff.”

The committee also called for an end to the practice of accountancy firms seconding staff to the Treasury to advise on tax legislation.

‘Inside Knowledge’

“When those staff return to their firms, they have the very inside knowledge and insight to be able to identify loopholes in the new legislation and advise their clients on how to take advantage of them,” Hodge said. “This is a ridiculous conflict of interest which should be banned in a code of conduct for tax advisers.”

The accountancy firms told the committee that they no longer sell the aggressive tax-avoidance packages they did 10 years ago, though the report said they have moved on to helping clients utilize the lowest international tax rates. HMRC does not have the resources to challenge some of these in court, the committee said.

“The four firms have developed internal guidelines on where the line between tax planning and aggressive avoidance lies, but these principles do not stop them selling schemes with as little as a 50 percent chance of succeeding if challenged in court,” according to the report. “Clearly HMRC has to consider the risk to the taxpayer of a protracted legal battle.”

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