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

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

Photograph: Getty Images

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