PAC broadside against HMRC is self-defeating
Criticism of slow prosecution of tax avoidance schemes ignores HMRC’s impressive success in closing down the aggressive tax avoidance industry in recent years
Tuesday’s Public Accounts Committee (PAC) report and the associated media drive, which accuses HMRC of being ‘unacceptably slow’ in pursuing tax avoidance schemes, is the latest in a series of public and humiliating broadsides aimed at the tax authorities. We are all aware of HMRC’s flaws and its record on this particular issue may not be perfect, however on this occasion the volume and tone of the criticism appears rather harsh.
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Anyone who has been watching closely will know that HMRC has become considerably more effective in pursuing promoters of tax avoidance schemes in recent years. In fact, as a result of new legislative measures, harsher deterrents and improved enforcement the tax avoidance industry has all but been killed dead. In the last decade Disclosure of Tax Avoidance Schemes (DOTAS) registrations have dropped from more than 500 a year to a negligible amount.
In the past, under a different climate, there was a confidence among certain clients and advisers that tax avoidance schemes were a sound way to gain a tax advantage. Even though there was a risk that HMRC might defeat the scheme in court, resulting in the repayment of all tax owed plus interest, this was seen as a risk worth taking. Clients judged that investment returns on the sum in dispute could comfortably exceed the interest suffered. The perception was that even in the worst-case scenario, that of the scheme being defeated in court, HMRC would effectively become a cheap banking facility. Those days are well and truly over.
We now have accelerated payment notices (APNs) which came into force this year. Controversially, these require that tax in dispute is paid up front. While the PAC report rightly pointed out that there is a huge backlog of tax cases, HMRC can now hold on to the disputed sums in question while the case progresses – which sometimes takes years. This has been very effective in removing one of the main financial incentives of tax avoidance schemes.
The political and legislative environment has also changed completely, in response to a real hardening of public opinion against tax avoidance. For example, the advent of the General Anti-Abuse Rule (GAAR), which came into force in July 2013, means that tax planning structures seen as ‘abusive’ are likely to be countered at an early stage.
This brings us to the question of appetite. Among clients nowadays, there is very little desire for any tax planning that could attract the attention of HMRC – let alone the media. The last thing they want to see is their names splashed across the front pages.
Indeed, many individuals have had their fingers burnt in recent years. Clients believed the professional advice on the efficacy of the schemes they entered, only to find out later that they were on the wrong side of HMRC. While one might justifiably argue that HMRC has moved the goalposts, it has done so very successfully and most clients are simply no longer prepared to take any risks.
All of this adds up to a real victory for both HMRC and the government in terms of their own stated priorities. Set against this, it is strange that the PAC has launched this savage attack. Yes, there is a backlog of unresolved cases, but the tax avoidance taps have now been turned off.
Finger pointing at HMRC is easy, but the government should consider its own role in all of this. While the targets imposed on HMRC get ever tougher, it has had to make cost savings of almost £1bn since 2010, and has also reduced staffing levels by 12,000. As a sign that they are trying hard to do more with less, HMRC have deliberately invested in the specialists who can deal with the tax avoidance cases.
The government is piling on the pressure on HMRC whilst reducing the resources for the department to do what is demanded of it. With the successes that HMRC has had on tax avoidance it is little wonder that recent comments contribute to HMRC being one of the most demoralised departments of government.
