Publishing the report, chairwoman Hodge described the “ridiculous conflict of interest” whereby employees of the Big Four accountancy firms are seconded to HM Revenue & Customs to help formulate tax legislation.
“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,” said Hodge. “The poacher, turned gamekeeper for a time, returns to poaching.
“This is a ridiculous conflict of interest which should be banned in a code of conduct for tax advisers, as we have recommended to the Treasury and HMRC.”
One of the overriding themes of the 56 page report (which you can view here) is the considerable challenge faced by HMRC in tackling tax avoidance.
According to the report, the four firms – Deloitte, Ernst & Young, KPMG and PwC – employ nearly 9,000 people and earn £2bn from their tax work in the UK, and around £25bn from this work globally. In contrast, the report said HMRC has “far fewer resources” and draws on the area of transfer pricing as an example, where it said “there are four times as many staff working for the four firms than for HMRC”.
In the report’s conclusions and recommendations, it said there needs to be greater simplification of tax laws and that international tax rules are out of date – a point the PAC said it was “pleased the four firms agreed with it on”.
The report also said simplicity is “key to fighting tax avoidance”, another point on which it said the four firms agreed. However, the PAC said it was disappointed that HM Treasury’s Office of Tax Simplification is working with fewer than six full time staff and has therefore so far focused on abolishing unused tax reliefs, “rather than being able to take a more radical approach to simplifying tax law”.
“Removing unused reliefs may be good housekeeping, but it does little to tackle the problem of complexity and does not prevent the continued abuse of some tax reliefs, such as those to encourage investment in films or donations to charity,” said the report.
The PAC said it would examine those tax reliefs that are widely used and may be subject to abuse at a future hearing.
The report also noted that the four firms all insisted they no longer sell the very aggressive tax avoidance schemes they sold a decade ago and have developed internal guidelines on where the “line between tax planning and aggressive avoidance lies”. Despite this, the Public Accounts Committee said this did not stop them selling schemes “with as little as 50% chance of succeeding if challenged in court”.
Miles Dean, the founding partner of Milestone International Tax Partners was critical of the report.
“Hodge's attack on HMRC is insulting to the many thousands of well trained tax inspectors whose job it is to administer the law – particularly given the controversy surrounding her own relationship with Stemcor,” he said.
“Pillorying multi-national companies for operating within the domestic and international tax rules is not helpful or in line with the argument that the UK is open for business.”
Hodge has been vociferous in her criticism of those who aggressively avoid tax, particularly large multi-national companies, and those who advise them which she believes have an unfair advantage over governments and smaller companies.