Whilst a National Audit Office “(NAO”) report has found some flaws in HMRC processes for dealing with large scale tax settlements, UK Uncut, the tax avoidance campagning organisation, has been given permission to challenge one of those settlements by way of judicial review. This matter therefore looks unlikely to go away in a hurry, so what issues does it raise for HMRC and taxpayers at large?
HMRC’s problems on the surface appear largely to be a matter of internal communications, in a number of areas:
1. Erroneous advice to senior HMRC officials about HMRC’s legal entitlement to charge interest on a tax settlement.
2. Failure to consult HMRC solicitors before dropping tax litigation.
3. Weak internal communications breeding a climate of suspicion within HMRC.
4. A relatively inflexible strategy for settlement of potential litigation cases.
This all looks to me like a senior HMRC official seeking to progress lengthy and complex tax negotiations in the interests of reaching a settlement, and to some extent cutting corners in the process. With my concerns about large organisations and their bureaucracy, I think I can well understand his frustrations, but equally given the sums involved some degree of independent oversight of his actions was required, and appears to have possibly been lacking. Still, the conclusion is that the settlements reached were reasonable in the circumstances.
So why is UK Uncut so exercised about the Goklman Sachs case in particular? This stems in large part from a concern that there is ‘one law for them and another for us’ when it comes to big multinational businesses. There is no doubt that many such businesses take a leading role in undertaking artificial tax avoidance schemes, as they have the resources to plan and undertake these and the global presence to structure arrangements so that profits arise in low-tax jurisdictions.
The concern is that in addition to these structural advantages, multinationals are also in a favourable position because of the desire of government to encourage them to base their activities in the UK, and that they are therefore sometimes subject to less than the full rigour of the tax law.
There are also issues associated with HMRC resources and risk management here; to take a large scale and complex tax avoidance case through the UK and European Court systems uses up siognificasnt resources both in staff time and money, as well as offering no certainty of success. And again, HMRC is up against well-resourced taxpayers who will not hesitate to follow the appeals procedure to the ultimate. Thus it is easy to see why a negotiated settlement appeals to HMRC, even if that involves sacrificing significant amounts of tax that could potentially be collected if litigation were ultimately successful.
In order to resolve legitimate public concern in this respect, I favour tax legislation requiring large organisations (there are existing EU definitions of what such an organisation is, based on turnover, assets and employees) to pay a minimum rate of corporation tax based on their accounting profits.
Given that the main incentive for tax avoidance activity is to boost accounting profits, and that the share price of large organisations is largely driven by profit performance, this would place them in something of a dilemma when considering avoidance activity, which might in fact prove unsuccessful on the basis of such a system. Far too much time and ingenuity is spent on devising artificial tax avoidance arrangements.
It may of course be that the proposed General Anti-Abuse Rule will play a significant role in combatting large scale tax avoidance (I think this is largely what it is for), so let us hope that this avoids emasculation as a result of the consultation process, and begins to play its long-anticipated role in protecting the UK tax base. I think the taxpaying public will then have greater confidence that it is operating on a level playing field.