The National Audit Office Criticises HMRC for Handling of Alleged Tax Avoidance Cases – And Says It Needs to Do More!

The National Audit Office (NAO) scrutinises public spending on behalf of Parliament.

Its audit of central government has two main aims.

According to the NAO website:-

“By reporting the results of our audits to Parliament, we hold government departments and bodies to account for the way they use public money, thereby safeguarding the interests of taxpayers. In addition, our work aims to help public service managers improve performance and service delivery.”

The NAO itself was one of the Thatcher Government’s creations in 1983, as part of her “war” with the Civil Service. Whilst the National Audit Act started as a Private Member’s Bill, it was seen as being a device by Mrs Thatcher to try to wrest some control of Government Departments back into the hands of politicians, rather than having the reins held by the real-life Sir Humphrey Applebys who manned (and it usually was “manned”) the Civil Service.

The Act also created the Public Accounts Commission, to oversee the NAO, perhaps to ensure that the undoubted independence of the NAO was not taken too far.

Yesterday the NAO released a new report which can be found here.

The Comptroller and Auditor-General, Amyas Morse, was quoted saying:-

Mr Amyas Morse, Edinburgh-born Comptroller and Auditor-General

“HMRC must push harder to find an effective way to tackle the promoters and users of the most aggressive tax avoidance schemes. Though its disclosure regime has helped to change the market, it has had little impact on the persistent use of highly contrived schemes which deprives the public purse of billions of pounds.

“It is inherently difficult to stop tax avoidance as it is not illegal. But HMRC needs to demonstrate how it is going to reduce the 41,000 avoidance cases it currently has open.”

The report summary goes on to say:-

The tax avoidance disclosure regime introduced in 2004 by HMRC has helped the department make some important headway in reducing the opportunities for avoidance. However, there is little evidence that HMRC is making progress in preventing the sale of highly contrived tax avoidance schemes to a large number of taxpayers.

In each of the last four years, over 100 new avoidance schemes have been disclosed. While HMRC believes most of these would be defeated if tested in the courts, there is no evidence that their usage is reducing.

Today’s National Audit Office report recognizes, however, that DOTAS has helped HMRC to change tax law and prevent some types of avoidance activity. Since the introduction of the regime, HMRC has initiated 93 changes to tax law designed to reduce avoidance. DOTAS has also helped to change the market of tax avoidance schemes, and the larger accountancy firms are now less active in this area.

Tax avoidance is not illegal and is therefore inherently difficult to stop. A potential avoider can use a scheme to gain a tax advantage until HMRC can prove that the arrangement is not consistent with tax law. This is a resource-intensive process which can take many years and often requires litigation.

HMRC has increased its focus on the tax affairs of high net worth and affluent individuals. While its high net worth unit set up in 2009 brought in £200 million of revenue that would otherwise have been lost in 2011-12, there are still 41,000 open avoidance cases relating to marketed schemes used by individuals and small businesses, and HMRC has yet to demonstrate how this number will be reduced.

The large number of users of mass-marketed schemes presents a challenge to HMRC. It has identified around 30,000 users of ‘partnership loss’ schemes and disguised remuneration schemes. It has sought to tackle such schemes by litigating a few ‘lead cases’ to demonstrate to other users that the scheme will not succeed in the courts. While HMRC has a good success rate when it litigates, its investigations can take many years to resolve and it cannot always successfully apply the rulings in lead cases to other cases.

HMRC has an anti-avoidance strategy, but does not monitor its costs and has not yet identified how it will evaluate its effectiveness. This limits its ability to make informed decisions about where to direct its avoidance activity.

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Let’s make a quick checklist of the main points, shall we?

• HMRC must push harder to find an effective way to tackle the promoters and users of the most aggressive tax avoidance schemes.
• Highly contrived schemes which deprive the public purse of billions of pounds.
• Little evidence that HMRC is making progress in preventing the sale of highly contrived tax avoidance schemes.
• A potential avoider can use a scheme to gain a tax advantage until HMRC can prove that the arrangement is not consistent with tax law.
• This process can take many years.
• It often requires litigation.
• There are still 41,000 open avoidance cases relating to marketed schemes used by individuals and small businesses.
• HMRC has identified around 30,000 users of ‘partnership loss’ schemes and disguised remuneration schemes.
• It has sought to tackle such schemes by litigating a few ‘lead cases’ to demonstrate to other users that the scheme will not succeed in the courts.
• HMRC has a good success rate when it litigates.
• But its investigations can take many years to resolve.
• HMRC cannot always successfully apply the rulings in lead cases to other cases.

That report and the undoubted criticism that HMRC will get for not doing enough to bring in the billions of pounds of tax income to which this report relates are likely to have an effect on how the tax recovery strategies framed by the taxman are revised.

I suspect that this is probably the worst time for a high-profile and high-value case relating to allegedly artificially constructed disguised remuneration schemes to have been decided against HMRC by a split First Tier Tribunal, especially where there are reputed to be many thousands of those cases still open, with billions of pounds at stake.

It would seem to place a great deal of pressure on HMRC to take such a case, should there be one, to appeal, even if only “pour encourager les autres”.

However, I can’t immediately think of such a case off the top of my head.

If there was, then the allegedly delinquent taxpayer might have to put his celebratory champagne back on ice for a few weeks until time for appeal has come and gone.

But we don’t know of anyone in that position, do we…

Posted by Paul McConville