The government is losing billions each year from tax avoidance. It is time to crack down on it, says Margaret Hodge

IN my two and a half years as chair of the public accounts committee, the issue that has most strongly captured the public mood has undoubtedly been that of tax avoidance. This is an issue for the left. We believe in the importance of public expenditure to transform people’s life chances. So ensuring that everybody pays their fair share is essential.

The subject is more important than ever in an age of austerity when our public services are under threat and the poorest in our society are facing deep cuts to their income. Every pound of tax we fail to get means less money for the services on which the most vulnerable depend.

The numbers are staggering. HMRC admits that the tax gap between what they collect and what they believe is due stands at £32.2bn. Other experts calculate the gap as being at least twice that amount. Last year the government wrote off £5bn of tax, and it admitted that a further £10bn was at risk of never being collected. Just think how many teachers and nurses that could pay for.

HMRC tell us that the amount lost to the Treasury through tax avoidance is around £5bn each year. I think the real figure is much higher, because this estimate does not take account of the many wheezes used by companies like Amazon and Starbucks.

The public accounts committee has been able to shine a light onto unacceptable practices that have been going on for years. I have been shocked by the sheer range and complexity of the devices used by corporations and wealthy individuals to avoid paying their fair share of tax.

Companies like Starbucks, Amazon and Google manipulate tax laws to move offshore profits that are clearly generated from economic activity in the UK. Starbucks buys its coffee beans through Switzerland and charges its UK business a 20 per cent mark-up as a way of getting money offshore. Amazon told us that the books we buy are from a company called Amazon EU Sarl, based in Luxembourg. Yet its UK customers buy from, we are invoiced from the UK, the book comes from a warehouse in the UK, and, mostly, it comes in a parcel with a UK stamp in a Post Office van.

We also looked at the so-called ‘boutique’ tax avoidance schemes used by rich individuals and celebrities, designed to exploit loopholes in legislation or abuse available tax reliefs – such as the film tax relief brought in by Labour to encourage investment in British cinema. By the time HMRC has closed the loopholes, the promoters of these schemes have moved on to the next wheeze while they have earned massive fees and their clients have saved money at the expense of the exchequer. One promoter shamelessly admitted to the committee that the main purpose of his business was tax avoidance and that every scheme he had come up with had been shut down by HMRC.

We have also questioned the ‘big four’ accountancy firms – PwC, KPMG, Ernst and Young and Deloitte. These firms both advise government on tax law and devise ways for companies and individuals to get around it. The Treasury recently brought in a ‘patent box’ tax relief designed to encourage innovation. A tax partner at KPMG was the lead adviser writing the rules for government, and immediately went back to KMPG and marketed the scheme to his wealthy clients as a way to avoid tax.

Often companies and individuals try to hide behind the concept of ‘tax efficiency’ to justify their behaviour. Of course everyone should only pay their fair share, but creating artificial structures to move profits offshore, exploit loopholes or abuse tax reliefs to gain a tax advantage that was never intended, is not about ‘efficiency’, it is about getting out of paying the taxes you owe.

The behaviour we have uncovered has offended the basic sense of fairness of the British people. People are furious that, while families who are struggling with the cost of living continue to pay their taxes unquestioningly, the rich get away with gaming the system. It was fear of what that outpouring of public anger would do to their bottom line that forced Starbucks to cave in and offer a £20m cheque to the taxman.

Barclays appears to have sensed the public mood and announced the closure of its tax avoidance division. The government, too, appears finally to be catching on. Last month the prime minister made a speech in which he rightly attacked ‘aggressive’ tax avoidance as morally equivalent to illegal tax evasion, while the chancellor announced plans to work with other G8 members in the run-up to the summit in July to come up with firm measures to tackle tax avoidance by multinational companies.

There appears to be a general recognition by all governments that they have been too slow to respond to the changing nature of the global economy and the dominance of large corporations that operate across tax jurisdictions. That failure is partly due to a lack of courage by governments to take on these companies for fear of a mass exodus of businesses and rich individuals. But I do not believe that companies like Starbucks will simply up sticks and go elsewhere. Online businesses like Amazon and Google are hardly likely to close down their UK operations. They need us as much as we need them.

We will have to wait and see whether the government delivers on its commitments at the G8. But while that international cooperation is vital, there are a number of things the government could and should do now.

First, transparency is crucial. It was public anger that forced Starbucks to change its ways. ‘Naming and shaming’ companies and individuals engaged in tax avoidance would both have a powerful deterrent effect and help to change the culture among those people who see tax avoidance as legitimate and desirable rather than the abrogation of civic duty that it really is.

We should also look at opening up the tax affairs of large quoted companies, starting with the FTSE 100, and require companies to be much more transparent about their businesses and profits in the accounts they file with Companies House. This government has made much of its commitment to transparency and it should put its money where its mouth is.

Second, HMRC has got to get a grip and start policing the system much more aggressively and assertively. That includes challenging the tax arrangements of multinational companies to ensure that they are a true and fair reflection of their economic activity in this country. And it means getting tougher on tax avoiders by mounting more prosecutions.

The third step is to ensure HMRC has the right staff with the right skills. At the moment it is losing a ‘David and Goliath’ battle with large companies and their armies of highly paid lawyers and advisers. There needs to be the expertise within HMRC to keep up with those who devise and market these schemes.

Fourth, there should be a code of conduct to prevent conflicts of interest where the same individuals working for large accountancy firms who advise government on tax law go on to create new ways of getting round it. Government should also deny public sector contracts to any company engaged in aggressive tax avoidance.

Finally, those who point out that tax law is the responsibility of government are right. Tax legislation in this country is ridiculously complex and ripe for abuse. Yet the Office of Tax Simplification has just six civil servants working for it. It needs to be beefed up and have a much greater sense of urgency injected into the work it is doing.

Until the government delivers on its promises to tackle avoidance, people will not have confidence in the fairness of our tax system. This is a matter of morality as well as economics. Public anger at immoral behaviour by companies and individuals is a powerful tool for government in the fight against tax avoidance; it should also be a spur for it to get on and act.


Margaret Hodge MP is chair of the public accounts committee


Photo: Todd Stadler