"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

Photo: Getty
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Here's what Theresa May could say to save the Brexit talks

The best option would be to invent a time machine, but unfortunately that's not on the table. 

One of my favourite types of joke is the logical impossibility: a statement that seems plausible but, on closer examination, is simply impossible and contradictory. “If you break both legs, don’t come running to me” is one. The most famous concerns a hapless tourist popping into a pub to ask for directions to London, or Manchester, or Belfast or wherever. “Well,” the barman replies, “I wouldn’t have started from here.”

That’s the trouble, too, with assessing what the government should do next in its approach to the Brexit talks: I wouldn’t have started from here.

I wouldn’t have started from a transient Leave campaign that offered a series of promises that can’t be reconciled with one another, but that’s the nature of a referendum in which the government isn’t supporting the change proposition. It’s always in the interest of the change proposition to be at best flexible and at worst outright disregarding of the truth.

Britain would be better off if it were leaving the European Union after a vote in which a pro-Brexit government had already had to prepare a white paper and an exit strategy before seeking popular consent. Now the government is tasked with negotiating the terms of Britain’s exit from the European Union with a mandate that is contradictory and unclear. (Take immigration. It’s clear that a majority of people who voted to leave want control over Britain’s borders. But it’s also clear that a minority did not and if you take that minority away, there’s no majority for a Leave vote.

Does that then mean that the “democratic” option is a Brexit that prioritises minimising economic harm at the cost of continuing free movement of people? That option might command more support than the 52 per cent that Leave got but it also runs roughshod over the concerns that really drove Britain’s Leave vote.

You wouldn’t, having had a referendum in inauspicious circumstances, have a government that neglected to make a big and genuinely generous offer on the rights of the three million citizens of the European Union currently living in the United Kingdom.

In fact the government would have immediately done all it could to show that it wanted to approach exit in a constructive and co-operative manner. Why? Because the more difficult it looks like the departing nation is going to be, the greater the incentive the remaining nations of the European Union have to insist that you leave via Article 50. Why? Because the Article 50 process is designed to reduce the leverage of the departing state through its strict timetable. Its architect, British diplomat John Kerr, envisaged it being used after an increasingly authoritarian state on the bloc’s eastern periphery found its voting rights suspended and quit “in high dudgeon”.

The strict timeframe also hurts the European Union, as it increases the chances of an unsatisfactory or incomplete deal. The only incentive to use it is if the departing nation is going to behave in a unconstructive way.

Then if you were going to have to exit via the Article 50 process, you’d wait until the elections in France and Germany were over, and restructure Whitehall and the rest of the British state so it was fit to face the challenges of Brexit. And you wouldn’t behave so shabbily towards the heads of the devolved administrations that Nicola Sturgeon of the SNP and Carwyn Jones of the Welsh Labour Party have not become political allies.

So having neglected to do all of that, it’s hard to say: here’s what Theresa May should say in Florence, short of inventing time travel and starting the whole process again from scratch.

What she could do, though, is show flexibility on the question of British contributions to the European budget after we leave, and present a serious solution to the problem of how you ensure that the rights of three million EU citizens living in Britain have a legal backdrop that can’t simply be unpicked by 325 MPs in the House of Commons, and show some engagement in the question of what happens to the Irish border after Brexit.

There are solutions to all of these problems – but the trouble is that all of them are unacceptable to at least part of the Conservative Party. A reminder that, as far as the trouble with Brexit goes, Theresa May is the name of the monster – not the doctor. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.