"This is a ridiculous conflict of interest which should be banned"

Margaret Hodge on "unhealthily cosy" Big Four/Treasury staff relationships.

The Big Four’s relationship with government is "unhealthily cosy" and detrimental to the public good, according to a damning report into tax avoidance from the Public Affairs Committee.

The PAC conclusions paint a picture of an HMRC that is too woefully under-resourced to tackle tax avoidance, and a group of the largest accountancy firms that are looking to exploit the Revenue's weaknesses to help reduce their clients’ tax payments.

The report says HMRC cannot hope to compete with the resources the Big Four has and says in the example of transfer pricing alone, there are four times as many staff working for the four firms then in the Revenue. This imbalance of resources means HMRC is “not able to defend the public interest effectively”, says the PAC.

The report is particularly critical of Big Four staff being placed on secondment at the Revenue, saying it is not acceptable that tax experts help government devise tax law while at the same time advise clients on how to avoid paying these taxes. It says, “the four firms appear to use their insider knowledge of legislation to sell clients advice on how to use those rules to pay less tax.” The cross-party committee of MPs call up the example of KPMG, which it says seconded staff to advise government on tax legislation including the development of Patent Box rules, and then produced marketing brochures relating to these rules and suggesting it is a business opportunity to reduce UK tax.

The report is also very critical of the Big Four willingness to create schemes for clients, which HMRC will likely disagree with.

The Revenue is portrayed as being overwhelmed by tax avoidance in the report, and is engaged in a ‘cat and mouse game’ with tax avoiders. The Big Four accountancy firms, which earned over £2bn from tax work in the UK last year, are heavily criticised for seconding experts to government to advise on tax making, before then advising their clients on how to avoid those same tax rules.

“We have seen what look like cases of poacher, turned gamekeeper, turned poacher again, whereby individuals who advise government go back to their firms and advise their clients on how they can use those laws to reduce the amount of tax they pay,” the report reads.

"The large accountancy firms are in a powerful position in the tax world and have an unhealthily cosy relationship with government," said PAC chair Margaret Hodge. "They second staff to the Treasury to advise on formulating tax legislation. When those staff return to their firms, they have the very inside knowledge and insight to be able to identify loopholes in the new legislation, and advise their clients on how to take advantage of them.

"This is a ridiculous conflict of interest which should be banned."

The report goes on to suggest the Treasury should introduce a code of conduct for tax advisors, “setting out what it and HMRC consider acceptable in terms of tax planning”. Compliance with this code could determine whether or not the firms are able to work on government or other public sector work.

The report says that although the four firms insisted they no longer sell the very aggressive avoidance schemes that they sold ten years ago, “we believe they have simply move on to advising on other forms of tax avoidance that are profitable for their clients.”

“The firms declare that their focus is now on acceptable tax planning and not aggressive tax avoidance,” PAC chair Margaret Hodge said. “These protestations of innocence fly in the face of the fact that the firms continue to sell complex tax avoidance schemes with as little as 50% chance of succeeding if challenged in court.”

The UK’s tax system overall is too complex and outdated, and should be radically simplified, the PAC concludes. “HMRC appears to be fighting a battle it cannot win in tackling tax avoidance,” says the report. “There is a large market for advising companies on how to take advantage of international tax law, and on the tax implications of different global structures."

The report calls for clarity over the line between acceptable tax planning and aggressive tax avoidance.

The Office of Tax Simplification is held up as a useful step in the right direction, but the PAC says it is "disappointing" that the department has fewer than six full time staff, and has therefore been unable to take a “radical approach to simplifying tax law.”

The PAC also urges the UK to take the lead in demanding urgent reform of international tax law.

The PAC held a series of committee hearings in November and December 2012 with representatives from the big accounting firms, government and different companies to assess the challenges of tax avoidance. The investigation into tax payments came about in response to controversially low tax payments from several high-profile companies, including Starbucks, Google and Amazon.

“All four firms said they discussed reputational risks with their clients, and that there was no longer any appetite for schemes where the sole purpose was to reduce tax. It is difficult to square this with some companies’ tax practices, for example those we heard about in our hearing with Google, Amazon and Starbucks,” today's report concludes.

However, HMRC has insisted it is "winning the battle against tax avoidance" and the numbers of secondees within the department is very small.

This story originally appeared on economia

Photograph: Getty Images

Helen Roxburgh is the online editor of Economia

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Who will win in Copeland? The Labour heartland hangs in the balance

The knife-edge by-election could end 82 years of Labour rule on the West Cumbrian coast.

Fine, relentless drizzle shrouds Whitehaven, a harbour town exposed on the outer edge of Copeland, West Cumbria. It is the most populous part of the coastal north-western constituency, which takes in everything from this old fishing port to Sellafield nuclear power station to England’s tallest mountain Scafell Pike. Sprawling and remote, it protrudes from the heart of the Lake District out into the Irish Sea.

Billy, a 72-year-old Whitehaven resident, is out for a morning walk along the marina with two friends, his woolly-hatted head held high against the whipping rain. He worked down the pit at the Haig Colliery for 27 years until it closed, and now works at Sellafield on contract, where he’s been since the age of 42.

“Whatever happens, a change has got to happen,” he says, hands stuffed into the pockets of his thick fleece. “If I do vote, the Bootle lass talks well for the Tories. They’re the favourites. If me mam heard me saying this now, she’d have battered us!” he laughs. “We were a big Labour family. But their vote has gone. Jeremy Corbyn – what is he?”

The Conservatives have their sights on traditional Labour voters like Billy, who have been returning Labour MPs for 82 years, to make the first government gain in a by-election since 1982.

Copeland has become increasingly marginal, held with just 2,564 votes by former frontbencher Jamie Reed, who resigned from Parliament last December to take a job at the nuclear plant. He triggered a by-election now regarded by all sides as too close to call. “I wouldn’t put a penny on it,” is how one local activist sums up the mood.

There are 10,000 people employed at the Sellafield site, and 21,000 jobs are promised for nearby Moorside – a project to build Europe’s largest nuclear power station now thrown into doubt, with Japanese company Toshiba likely to pull out.

Tories believe Jeremy Corbyn’s stance on nuclear power (he limply conceded it could be part of the “energy mix” recently, but his long prevarication betrayed his scepticism) and opposition to Trident, which is hosted in the neighbouring constituency of Barrow-in-Furness, could put off local employees who usually stick to Labour.

But it’s not that simple. The constituency may rely on nuclear for jobs, but I found a notable lack of affection for the industry. While most see the employment benefits, there is less enthusiasm for Sellafield being part of their home’s identity – particularly in Whitehaven, which houses the majority of employees in the constituency. Also, unions representing Sellafield workers have been in a dispute for months with ministers over pension cut plans.

“I worked at Sellafield for 30 years, and I’m against it,” growls Fred, Billy’s friend, a retiree of the same age who also used to work at the colliery. “Can you see nuclear power as safer than coal?” he asks, wild wiry eyebrows raised. “I’m a pit man; there was just nowhere else to work [when the colliery closed]. The pension scheme used to be second-to-none, now they’re trying to cut it, changing the terms.”

Derek Bone, a 51-year-old who has been a storeman at the plant for 15 years, is equally unconvinced. I meet him walking his dog along the seafront. “This county, Cumbria, Copeland, has always been a nuclear area – whether we like it or don’t,” he says, over the impatient barks of his Yorkshire terrier Milo. “But people say it’s only to do with Copeland. It ain’t. It employs a lot of people in the UK, outside the county – then they’re spending the money back where they’re from, not here.”

Such views might be just enough of a buffer against the damage caused by Corbyn’s nuclear reluctance. But the problem for Labour is that neither Fred nor Derek are particularly bothered about the result. While awareness of the by-election is high, many tell me that they won’t be voting this time. “Jeremy Corbyn says he’s against it [nuclear], now he’s not, and he could change his mind – I don’t believe any of them,” says Malcolm Campbell, a 55-year-old lorry driver who is part of the nuclear supply chain.

Also worrying for Labour is the deprivation in Copeland. Everyone I speak to complains about poor infrastructure, shoddy roads, derelict buildings, and lack of investment. This could punish the party that has been in power locally for so long.

The Tory candidate Trudy Harrison, who grew up in the coastal village of Seascale and now lives in Bootle, at the southern end of the constituency, claims local Labour rule has been ineffective. “We’re isolated, we’re remote, we’ve been forgotten and ignored by Labour for far too long,” she says.

I meet her in the town of Millom, at the southern tip of the constituency – the opposite end to Whitehaven. It centres on a small market square dominated by a smart 19th-century town hall with a mint-green domed clock tower. This is good Tory door-knocking territory; Millom has a Conservative-led town council.

While Harrison’s Labour opponents are relying on their legacy vote to turn out, Harrison is hoping that the same people think it’s time for a change, and can be combined with the existing Tory vote in places like Millom. “After 82 years of Labour rule, this is a huge ask,” she admits.

Another challenge for Harrison is the threat to services at Whitehaven’s West Cumberland Hospital. It has been proposed for a downgrade, which would mean those seeking urgent care – including children, stroke sufferers, and those in need of major trauma treatment and maternity care beyond midwifery – would have to travel the 40-mile journey to Carlisle on the notoriously bad A595 road.

Labour is blaming this on Conservative cuts to health spending, and indeed, Theresa May dodged calls to rescue the hospital in her campaign visit last week. “The Lady’s Not For Talking,” was one local paper front page. It also helps that Labour’s candidate, Gillian Troughton, is a St John Ambulance driver, who has driven the dangerous journey on a blue light.

“Seeing the health service having services taken away in the name of centralisation and saving money is just heart-breaking,” she tells me. “People are genuinely frightened . . . If we have a Tory MP, that essentially gives them the green light to say ‘this is OK’.”

But Harrison believes she would be best-placed to reverse the hospital downgrade. “[I] will have the ear of government,” she insists. “I stand the very best chance of making sure we save those essential services.”

Voters are concerned about the hospital, but divided on the idea that a Tory MP would have more power to save it.

“What the Conservatives are doing with the hospitals is disgusting,” a 44-year-old carer from Copeland’s second most-populated town of Egremont tells me. Her partner, Shaun Grant, who works as a labourer, agrees. “You have to travel to Carlisle – it could take one hour 40 minutes; the road is unpredictable.” They will both vote Labour.

Ken, a Conservative voter, counters: “People will lose their lives over it – we need someone in the circle, who can influence the government, to change it. I think the government would reward us for voting Tory.”

Fog engulfs the jagged coastline and rolling hills of Copeland as the sun begins to set on Sunday evening. But for most voters and campaigners here, the dense grey horizon is far clearer than what the result will be after going to the polls on Thursday.

Anoosh Chakelian is senior writer at the New Statesman.