Will the British government target tax dodging enablers at last?

Margaret Hodge

There has been much talk in Britain of new government proposals that tax advisors giving advice on tax avoidance could face large fines of up to 100% of the tax lost if their schemes are defeated in courts.  We warmly welcome the principle of the thing: these players have been getting away with impunity when they market tax-cheat schemes to multinational corporations and wealthy individuals. In the case of the so-called Luxleaks scandal, where PwC was caught out marketing an astonishing array of socially abusive tax schemes to the world’s multinationals, the only two people to face any sanction were the whistleblowers who exposed the scheme. In 2013 UK Public Accounts Committee (PAC) heard that from one Big Four accounting firm officials that their company would flog schemes even if they thought there was only a 25 percent chance of surviving a court challenge.

In the words of Margaret Hodge, the PAC’s chair:

“What really depresses me is you could contribute so much to society and the public good and you all choose to focus on working in an area which reduces the available resources for us to build schools, hospitals, infrastructure.”

In this context, this new measure is potentially good news. But – and there’s always a but – there are two big questions for now. First, would these specific measures be likely to make a real difference? Second, more importantly, is this announcement just a cosmetic sop to the public — or a sign of a real change in political will under the new British government under Prime Minister Theresa May, which might see further measures such as an end to the degradation of resources and staff at HMRC, the UK tax authority? We put out the following comment (picked up in the Financial Times (here and here), The Guardian, Independent and elsewhere:

“The government’s proposal is broadly positive, but it will only be effective to the extent that HMRC are resourced and politically backed to be able to take major cases to court. Without that, major multinationals and their big 4 advisers will remain largely free to pursue the marketing of schemes that pose a significant revenue risk.

The major step forward is that the proposal reflects the growing awareness in government of the systemic nature of much tax abuse. By and large, the threats do not come from individuals or individual companies deciding unilaterally to take a punt. Instead, the threats stem from schemes which are marketed widely – from the central role of major banks in setting up their clients’ anonymous companies, as uncovered in the Panama Papers, to the mass marketing of corporate avoidance schemes by the big 4 accounting firms that were revealed in the LuxLeaks.

The proposal implies that a successful HMRC challenge against a scheme may have costs for the marketers of such schemes, and not only their clients. Aside from any questions over the level of penalties, the major weakness here reflects the persistent failure to take multinational companies and their big 4 advisers to court. The proposal to go after enablers of schemes that have been successfully challenged will have little impact on this major area of tax losses, unless the government is finally willing to take on multinationals and the big 4 in court. That means reversing cuts to HMRC – which will more than pay for itself – and giving it the political support that has been sadly lacking.”

So, while we applaud the sentiment behind the UK government’s proposals, we have serious reservations based on what we know happens currently with enforcement of the tax avoidance industry. In particular, the Big Four accountancy firms seem to continue to fly beneath the radar while they are in fact “the world’s most powerful oligopoly.”

Professor of Accounting Prem Sikka said:

“The resource-starved HMRC has the capacity to investigate only about 35 wealthy tax evaders a year. In February 2016, HMRC had 81 specialists for investigating transfer pricing arrangements, a key technique for shifting profits to offshore havens and avoiding UK taxes. An investigation into just one major company used up between 10 and 30 specialists, leaving little time for others.”

“There is an urgent need to take action against the tax avoidance industry, but this requires independent, effective, publicly accountable and well-resourced institutional structures. Sadly, the UK lacks such structures.”

George Rozvany, a senior former Big Four insider who has become a vociferous critic of the industry, sent us this via email:

“While such measures are introduced with much political fanfare, international experience has shown that they are rarely used except in extreme cases of tax avoidance due to the limited resources of the Revenue.

Cases tend to be chosen on the basis of virtual certainty which means the Big 4, the architects of the mainstream tax avoidance structures which cause by far the most damage to Revenue, are simply never prosecuted due to the “beyond reasonable doubt”standard required under the criminal law. Let us face reality, the Big 4 will always have a “reasonable argument” backed by the best legal brains in that jurisdiction”.

Without decent investment the UK government isn’t in a strong position to be making such additional demands of HMRC in terms of enforcement. We’ve seen dismal records on enforcement from past UK governments under Blair, Brown, Cameron and Osborne. Is this more of the same: a quest for positive newspaper headlines, rather than a sea change in political will?

We hope this new government will be different, and this is a good first step. So now, let’s start resourcing HMRC properly. Let’s also remember the corporate tax scandals that came to light only because of the courageous, public-spirited Luxleaks whistleblowers and that the only people to go to court so far have been the whistleblowers, not the architects of schemes that have been found to breach EU competion and state aid rules. That must change.