Tax Avoidance: UK Missing Out On Billions

Tax Avoidance Report Is Damning

Updated: 2:47pm UK, Wednesday 21 November 2012

By Ursula Errington, Business Reporter

The National Audit Office's report on tackling marketed tax avoidance schemes is absolutely damning in its assessment of HM Revenue and Custom's effectiveness.

It is estimated that in 2010/11 the difference between the amount of tax that was collected and the amount of tax that should have been collected amounted to £32bn - £5bn of that attributable to tax avoidance.

The report makes it clear that HMRC is not doing enough to claw back that money and is not really tackling the 41,000 businesses and individuals using marketed tax avoidance schemes.

Much of the criticism is not even around the actual implementation of powers or investigative ability, it is about basic departmental management.

Apparently, HMRC does not collect information on the resources it commits to specifically tackling avoidance, it does not monitor costs of its anti-avoidance work and has not identified how to evaluate its overall anti-avoidance strategy.

When it comes to actually doing the job of identifying tax avoiders and making them pay up, the report does not get any better.

Perhaps the most brutal accusation that the National Audit Office (NAO) levels is that "HMRC has not sought to build a detailed picture of the way the market operates".

The implication being that HMRC has not done its homework and that it cannot effectively police a system it does not fully understand.

In HMRC's defence, tax avoidance - by the very nature of the fact that it is not illegal -  is devilishly difficult to combat. Schemes are sophisticated and highly contrived.

Picking through them and pursuing loopholes takes years and is extremely expensive.

The key tool HMRC has to take on marketed tax avoidance programmes is "Disclosure Of Tax Avoidance Schemes" (DOTAS), a regime requiring those that design and sell certain types of tax avoidance structures to tell HMRC about each new scheme they introduce.

HMRC say this system has enabled it to make 98 changes to tax law in the last eight years, to close loopholes.

The problem is only a few schemes have to be disclosed.

If determined promoters want to avoid disclosing a scheme, they get a lawyer to confirm that it does not need to be declared, making them immune to penalty.

Since September 2007, there were 365 enquiries into instances where it was thought a promoter had not complied with disclosure rules. Most of those concluded there was "no failure to comply".

The NAO suggests the Government needs to step up and raise the hurdle for what constitutes a "reasonable excuse" not to comply with disclosure rules.

HMRC says things are about to get better.

In Prime Minister's Questions on Wednesday, David Cameron repeated his boast that the Government is investing £900m to tackle tax avoidance and evasion - although they have not been specific about the timescale over which that money will be released to HMRC.

He also promised that tackling tax dodgers will be a priority for his chairmanship of the G8 from January next year.

Also, next year a new anti-avoidance rule that has been years in development will be introduced.

Tax investigators hope it will give them the ability to categorically assess and pursue schemes quickly and aggressively.

But the reality is those who design tax avoidance schemes have probably already worked out how to bend the rule and get around its wording for financial gain.

Experts argue what is needed is a "principle" rather than a "rule" - something a bit more flexible to encompass all activity where the result is fundamentally to avoid paying tax. 

HMRC is understandably on the defensive in the wake of the latest report.

A spokesman said: "HMRC has successfully challenged over 40 tax avoidance schemes through the courts in the last two years alone, successfully disrupting the avoidance industry through a combination of legal challenge and improved intelligence on new schemes, and protecting around £4bn.

"But as the avoidance landscape changes, so must our approach. The Government is building on DOTAS to give HMRC stronger powers to obtain information.

"These, together with the introduction of an anti-abuse rule in 2013 will further strengthen our anti avoidance work."

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