Evidence to House of Lords Select Committee on Economic Affairs:
Reforming Corporate Taxation
The Association of Revenue and Customs (ARC) is both an independent trade union and the HMRC section of the FDA, the trade union for senior managers and professionals in public service. ARC represents around 2,600 members in HMRC, at grade 7 and above, as well as trainees in grade 7 entry schemes. Our members are senior officials, lawyers and tax professionals, collectively taking responsibility for the collection of UK taxes, and tackling corporate tax evasion and avoidance, at the highest and most complex level.
ARC is pleased to take up the Committee’s request to provide evidence on corporate tax. As the Committee suggests, we are focussing on whether a new approach is needed to taxing corporations in a global economy. Most of the suggested questions relate to areas where we would not claim any particular expertise (e.g. Q1 and who bears the burden of corporation tax) or are matters of policy where we, as a non-political union, do not make any public comments.
The complex nature of cross border transactions, along with the complicated structures of multinational groups, and the current rules, makes ensuring the correct tax treatment of those transactions among the most difficult work of HMRC’s professionals. As the union representing those professionals ARC has views on a number of the questions raised by the Committee.
On question 7 – regards reforming the basis of the international allocation of multinational profits – ARC believes the current taxation system is extremely problematic and may be driving aggressive tax planning in cross border transactions. However there is little scope in unilateral action. It is work at the international level that should provide a focus for concerted action. ARC therefore urge the Prime Minister to use his Presidency of the G8 not only to drive forward the debate regards tax evasion and avoidance but to mark a tipping point in co-ordinated and strenuous policy reform and cross border co-operation to increase the collection of corporation taxes owed.
On question 11 – How successful is the HMRC in dealing with large international business? – ARC point out that HMRC is remarkably efficient in tackling non-compliance and is pleased that the Government has recognised, both in word and in deed, that further investment in front line compliance activity provides a return on invest of more than 20 to 1. ARC’s fully costed Budget submission showed that further investment of £312m into HMRC would deliver additional revenues to UK plc of £8billion – see http://www.fda.org.uk/nmsruntime/saveasdialog.aspx?lID=5551&sID=7617
Whilst the autumn statement gave HMRC some additional expertise, that will be nowhere near enough to match that available to corporates. There are just over 1,100 staff in the Large Business Service dealing with the tax affairs of the UK’s largest 770 businesses. Further investment is needed to recruit specialists, improve staff engagement, reduce pay disparities with the private sector and plan for the demographic challenge given that 35% of staff are already aged over 50.
On question 12 – Has the use of aggressive tax avoidance schemes increased or decreased over the last decade? – our members do not report any reduction in the scale of avoidance, either notified or discovered. Meanwhile the DOTAS scheme has been of value, with numerous changes to the law and successful enquiries although it should be noted that recent figures show that this process only accounted for 46% of all avoidance HMRC detected. ARC is not sure of the basis on which promoters would be “named and shamed” however we welcome a public debate on this proposal.
On question 13 – Is there a need for greater transparency by multinational companies in declaring taxes paid in different countries? – ARC believes that any additional transparency is welcome but we are not convinced that it will be easy to achieve. We suggest it would be better to focus on the root causes ie promote the wider use of automatic information exchange and having sufficient trained staff (across all participating countries) to review information and able to challenge when necessary.
RESPONSES TO SPECIFIC QUESTIONS
Q7. Is there a need to reform the basis of the international allocation of multinational profits between countries? If so, should this be based on the existing conventions, as recently suggested by the OECD, or is there a need for more fundamental reform? What other feasible alternatives are there, consistent with international law?
- Like many others ARC firmly believes that the current corporate taxation system is extremely problematic and may actually be driving aggressive tax planning in cross-border transactions. The UK may be losing its ability to match tax revenues with the economic substance of trading and investment activity. New forms of technology, the capacity of businesses to incorporate in a choice of jurisdictions and the growing use of offshore intermediaries threatens to erode the UK corporate tax base.
- ARC doubts if there is any real scope for unilateral action in tackling tax avoidance via international companies. Along with other fiscal authorities, commentators have pointed out that the current rules are based on political and economic conditions nearly 100 years ago.
- International companies who operate within these rules are able to plan their incidence and rate of tax in advantageous ways, often in ways unavailable to domestic businesses. As the OECD summarises, the result is tax base erosion and profit shifting (BEPS).
- However, alternatives to the current system will not be easy to introduce, especially given the number of international treaties and fiscs that exist Furthermore, moving to any fundamentally new system is, in our view, not likely to guarantee any automatic increase in tax yields. Based on our members’ experience of the ingenuity of tax planners it may serve to offer new, or even unintended, opportunities for tax avoidance.
- We consider that the work already underway in the OECD provides a single point of focus for a collective approach that builds on the existing infrastructure of treaties, exchanges of information, mutual assistance, double taxation, etc. In mid-April the OECD reported to the G20 Finance Ministers on the progress of its work on the BEPS project, with the aim of producing an Action Plan by the summer.
- As well as a Tax Gap, there is a policy gap. Bringing international tax rules into the 21st century will not be easy but we support this work. Issues such as limits to interest deductions, worldwide debt caps, excess leverage, the treatment of intangibles, potential re-badging of activities, and e-commerce are all in scope.
- But ARC also believes that the UK can do more to assist in this work. Already the UK chairs a committee set up by the OECD looking at “transfer pricing”.The Chancellor and Prime Minister have repeated their commitments to tackling “aggressive” tax avoidance. After the February meeting of the G20 the Chancellor declared there was scope to go further. He said that this year, the UK hosts the meeting of G8 leaders and that the UK was determined to use the Presidency to drive a serious debate on tax evasion and tax avoidance.
- ARC would urge the Prime Minister to press for more automatic data exchange, increasing the UK’s technical support in areas such as the OECD technical committees, more practical tax support and building capacity in developing nations. But at the end of the day it will require cross-border co-operation to prevent the use of aggressive international tax planning.
Q11. How successful is the HMRC in dealing with large international business?
- By any standards HMRC is remarkably efficient in tackling non-compliance across all areas of risk. ARC members are engaged in tackling the biggest tax risks, whether as tax professionals, policy makers, lawyers, accountants or managers.
Their work brings in the lion’s share of the nearly £13bn tax gap closure delivered by HMRC in 10/11; £16.6bn in 11/12. At the top end of this work the yield can exceed 180 times the costs of the staff employed that recoup these sums.
10. As part of CSR 2010 ARC welcomed the decision to re-invest £917mn of the cuts HMRC will make into front line compliance activity. David Gauke (Exchequer Secretary to the Treasury) recently confirmed this investment was working: “HMRC
results have shown that it can deliver the additional yield. As the hon. Member for Newcastle upon Tyne North (Catherine McKinnell) noted, in 2011-12, it delivered £16.6 billion against its targeted increased yield of £15 billion, and is on course to deliver an additional £17 billion this year.” In 2012/13 this was £21 billion.
11. Indeed, Ministers have already accepted the logic of this argument and made further reinvestments in HMRC. We also welcomed the decision to spare HMRC further cuts in the 2012 Autumn Statement. But the Government should reconsider the scale of the proposed reductions in HMRC staffing, retain experienced staff, and increase recruitment of both trainees and skilled tax professionals. Tackling the difficult work on international taxation relies on a properly trained, skilled, developed and properly rewarded, cadre of senior professional staff.
12. ARC members work incredibly hard and are seen as world class, but they cannot deal with everything. ARC’s best estimate is that Transfer Pricing expert resource available in HMRC is barely four times that of a single multinational corporate – and HMRC deals with hundreds of such multi-nationals. In addition, when dealing with HMRC enquires these companies can, and do, boost their resources with additional specialist skills from the legal profession and the Big 4 accountancy firms.
13. HMRC’s ability to bring in additional resources is severely constrained by lack of resources. Mike Truman, in Taxation, recently noted that “Treating the department just like any other when it comes to staffing ignores the fact that these are the people who bring in the money to pay for everything else.”
14. Whilst the autumn statement gave HMRC some additional expertise, that will be nowhere near enough to match that available to corporates. There are just over 1,100 staff in the Large Business Service dealing with the tax affairs of the UK’s largest 770 businesses. Our members report that the relationships developed with these businesses (e.g. via dedicated Customer Relationship Managers) help promote voluntary tax compliance. The numbers dealing with the 11,000 large businesses are proportionately even less, and much less than one tax professional per large corporate. We consider that a significant increase in HMRC resources dedicated to the tax affairs of large corporate would generate yield of around 50 times salary costs through tax gap closure and improved voluntary compliance.
15. There are signs that HMRC is finding it harder to recruit specialists and staff engagement is still low. Regrettably, HMRC is still near the bottom of the Civil Service Engagement table. And low engagement and morale is not just an issue for junior staff. A recent FDA survey of SCS members showed 24% would like to leave their jobs as soon as possible. Even using the Government’s own figures 20% would like to leave within 12 months – 5% as soon as possible and 15% within 12 months. HMRC and the unions are working to improve on that, but it will take some time to address the legacy of trust and engagement issues.
16. Accountancy firms and large corporates seek out senior expertise. As pay, pensions and conditions continue to be eroded in HMRC there is a real fear that we will lose this precious resource over the next few years. Quite apart from the recent pay freeze and current 1% pay cap, the Hay Group reported last December to Cabinet Office on pay comparisons, as part of the review of Market Facing pay. This shows serious disparities at the level of ARC grades. A qualified international specialist who left to work in the private sector could expect an initial remuneration package of double that paid by HMRC.
17. ARC urges the Government to act now to address these pay disparities and with-draw changes to terms and conditions that are currently being proposed. If allowed to continue we believe HMRC risks a rerun of the damaging loss of resources seen in the 1980s when the Inland Revenue was losing 10% of its trained and experienced senior tax professionals each year. This exodus of talent was a direct consequence of huge disparities between the remuneration packages on offer from the ‘Big 4’ accountancy firms compared with those on offer in Inland Revenue.
18. The current disparities between public and private sector remuneration are at least as large as those that existed in the 1980s. The haemorrhaging of talent was only stemmed when significant pay increases were agreed for senior tax professionals working in Inland Revenue. But severe damage had already been done and these losses are still being felt today.
19. HMRC has recognised the dangers and is engaged in very substantial recruitment at graduate level. But things will get worse before they get better. Given current systemic shortages and the demographic profile, where 13% of HMRC staff are below 30 and 35% above 50, a repeat of the 1980s exodus would have a disastrous impact on HMRC’s ability to tackle tax avoidance. History sends us a warning.
Q12. Has the use of aggressive tax avoidance schemes increased or decreased over the last decade? Why? How successful has the DOTAS scheme been? Should promoters of tax avoidance scheme be named and shamed?
20. Our members do not report any reduction in the scale of avoidance, either notified or discovered. Nor have they noticed any reduction in the number of tax professionals engaged in tax advice and planning . Instead, they report a shift away from “off the shelf” products to more personalised and bespoke schemes, such as ones that make use of techniques associated with transfer pricing.
21. This is substantiated by last November’s Report from the NAO. They noted that “Over 100 new avoidance schemes have been disclosed under DOTAS in each of the last four years, many of them involving variations on themes as promoters respond to changes in tax law. There is no evidence that the use of such schemes is reducing.”
22. The DOTAS scheme has been of value, with numerous changes to the law and successful enquiries. But recent figures show that this process only accounted for 46% of all avoidance HMRC detected, even so HMRC calculates that the DOTAS disclosures have yielded c£12.5bn. ARC members will be involved in the risk assessing and review work that helps detect the balance of the cases. Any increase in the numbers of HMRC tax professionals will produce very significant yields.
23. ARC is not sure of the basis on which promoters would be “named and shamed”. We do not think this is the same as managing deliberate defaulters as avoidance is not defined in the same terms as evasion of tax. Clearly, if there are legal challenges on any specific avoidance case that is taken before Tribunal or Courts then those hearings are a matter of public record.
24. However, we are very conscious of the need for taxpayer confidentiality in such areas and do not see how this can be maintained if naming and shaming were introduced. But we would welcome a public debate on this proposal and any associated measures needed to give effect to it. We are aware of some evidence that suggests the current consensus amongst politicians and the media of deploring and denouncing aggressive tax avoidance is showing results in shifting taxpayers’ behaviour due to fears of reputational damage.
Q13. Is there a need for greater transparency by multinational companies in declaring taxes paid in different countries?
25. ARC believes that any additional transparency is welcome, such as more public information on key business data like the group structure. But we are not convinced that it will be easy to achieve (e.g. agreeing a definition that would apply across all countries and in identical transactions) or easy to monitor (how would any lack of transparency be visible). Indeed, the veil of alleged “transparency” could be used to conceal avoidance. Furthermore, the idea may founder on the practical issues that would have to be considered, such as the way in which tax authorities will be able to monitor adherence to any rules on transparency, the consequences of failures, in which country any lack of adherence occurred, possible sanctions and consequent appeals.
26. We suggest it would be better to focus on the root causes (as in Q7), promote the wider use of automatic information exchange, having sufficient trained staff (across all participating countries) to review information and able to challenge when necessary. Tax authorities still need tax professionals to do the detailed work needed to establish the facts, apply the law and challenge avoidance.
 “a radical new set of rules would create winners and losers, both of which must agree to any new deal. Countries want to protect their own interests. Tax is at the heart of national sovereignty – and is thus fiercely defended.” Vanessa Houlder, Financial Times, 3 May 2013.
 For example, HMRC reports a 40% increase in tax revenue collection in Ethiopia since 2010 when it began technical assistance, http://www.guardian.co.uk/politics/2013/may/07/hmrc-help-ethiopia-tanzania-taxes
“It was decided that we would exempt HMRC from cuts imposed on other Departments in the 2012 autumn statement”. http://www.publications.parliament.uk/pa/cm201213/cmhansrd/cm130205/halltext/130205h0001.htm#13020531000001, p20
 See, for example, comments from John Dixon, Head of Tax Policy, Ernst and Young. “I think, with respect, you are underestimating the skills and quality of HMRC representatives”. Q145, http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/uc870-i/uc87001.htm
 “While I completely understand the point about charging for them, one of the difficulties that that does not deal with is the actual use of experienced HMRC officers who may be diverted from enforcing the tax law to the more complex question of giving a clearance. They have not got so many free high-quality inspectors.” Bill Dodwell, Head of Tax Policy, Deloittes, evidence, 21 January 2013, to the House of Lords Sub-Committee on the Finance Bill, 2013, p86.
 Over half HMRC’s staff are over 45 and 18% aged over 55, with around 30% of Grade 6 and above over 55, http://www.hmrc.gov.uk/about/eqact2010-workforce.pdf
 See the recent report from the Public Accounts Committee on the scale of the Big 4; 8,897 employees and a turnover of £1.853bn. Tax avoidance: the role of large accountancy firms, 15 April 2013,
 Tax avoidance: tackling marketed avoidance schemes, 21 November 2012, conclusion 7
http://www.nao.org.uk/wp-content/uploads/2012/11/1213730es.pdf. See also The Disclosure of Tax Avoidance Schemes Regime, Oxford University Centre for Business Taxation, 3 December 2012, http://www.sbs.ox.ac.uk/centres/tax/Documents/reports/DOTAS_3_12_12.pdf
 Jim Harra, Q291,Evidence, 6 Dec 2012, Public Accounts Committee, http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/788/788.pdf and http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/writev/tax/m6.htm