"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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Is defeat in Stoke the beginning of the end for Paul Nuttall?

The Ukip leader was his party's unity candidate. But after his defeat in Stoke, the old divisions are beginning to show again

In a speech to Ukip’s spring conference in Bolton on February 17, the party’s once and probably future leader Nigel Farage laid down the gauntlet for his successor, Paul Nuttall. Stoke’s by-election was “fundamental” to the future of the party – and Nuttall had to win.
 
One week on, Nuttall has failed that test miserably and thrown the fundamental questions hanging over Ukip’s future into harsh relief. 

For all his bullish talk of supplanting Labour in its industrial heartlands, the Ukip leader only managed to increase the party’s vote share by 2.2 percentage points on 2015. This paltry increase came despite Stoke’s 70 per cent Brexit majority, and a media narrative that was, until the revelations around Nuttall and Hillsborough, talking the party’s chances up.
 
So what now for Nuttall? There is, for the time being, little chance of him resigning – and, in truth, few inside Ukip expected him to win. Nuttall was relying on two well-rehearsed lines as get-out-of-jail free cards very early on in the campaign. 

The first was that the seat was a lowly 72 on Ukip’s target list. The second was that he had been leader of party whose image had been tarnished by infighting both figurative and literal for all of 12 weeks – the real work of his project had yet to begin. 

The chances of that project ever succeeding were modest at the very best. After yesterday’s defeat, it looks even more unlikely. Nuttall had originally stated his intention to run in the likely by-election in Leigh, Greater Manchester, when Andy Burnham wins the Greater Manchester metro mayoralty as is expected in May (Wigan, the borough of which Leigh is part, voted 64 per cent for Brexit).

If he goes ahead and stands – which he may well do – he will have to overturn a Labour majority of over 14,000. That, even before the unedifying row over the veracity of his Hillsborough recollections, was always going to be a big challenge. If he goes for it and loses, his leadership – predicated as it is on his supposed ability to win votes in the north - will be dead in the water. 

Nuttall is not entirely to blame, but he is a big part of Ukip’s problem. I visited Stoke the day before The Guardian published its initial report on Nuttall’s Hillsborough claims, and even then Nuttall’s campaign manager admitted that he was unlikely to convince the “hard core” of Conservative voters to back him. 

There are manifold reasons for this, but chief among them is that Nuttall, despite his newfound love of tweed, is no Nigel Farage. Not only does he lack his name recognition and box office appeal, but the sad truth is that the Tory voters Ukip need to attract are much less likely to vote for a party led by a Scouser whose platform consists of reassuring working-class voters their NHS and benefits are safe.
 
It is Farage and his allies – most notably the party’s main donor Arron Banks – who hold the most power over Nuttall’s future. Banks, who Nuttall publicly disowned as a non-member after he said he was “sick to death” of people “milking” the Hillsborough disaster, said on the eve of the Stoke poll that Ukip had to “remain radical” if it wanted to keep receiving his money. Farage himself has said the party’s campaign ought to have been “clearer” on immigration. 

Senior party figures are already briefing against Nuttall and his team in the Telegraph, whose proprietors are chummy with the beer-swilling Farage-Banks axis. They deride him for his efforts to turn Ukip into “NiceKip” or “Nukip” in order to appeal to more women voters, and for the heavy-handedness of his pitch to Labour voters (“There were times when I wondered whether I’ve got a purple rosette or a red one on”, one told the paper). 

It is Nuttall’s policy advisers - the anti-Farage awkward squad of Suzanne Evans, MEP Patrick O’Flynn (who famously branded Farage "snarling, thin-skinned and aggressive") and former leadership candidate Lisa Duffy – come in for the harshest criticism. Herein lies the leader's almost impossible task. Despite having pitched to members as a unity candidate, the two sides’ visions for Ukip are irreconcilable – one urges him to emulate Trump (who Nuttall says he would not have voted for), and the other urges a more moderate tack. 

Endorsing his leader on Question Time last night, Ukip’s sole MP Douglas Carswell blamed the legacy of the party’s Tea Party-inspired 2015 general election campaign, which saw Farage complain about foreigners with HIV using the NHS in ITV’s leaders debate, for the party’s poor performance in Stoke. Others, such as MEP Bill Etheridge, say precisely the opposite – that Nuttall must be more like Farage. 

Neither side has yet called for Nuttall’s head. He insists he is “not going anywhere”. With his febrile party no stranger to abortive coup and counter-coup, he is unlikely to be the one who has the final say.