Committee accuses advisers of devising tax avoidance schemes which ‘chaotic’ tax department is failing to stop
Financial advisers who specialise in devising complex tax-break schemes for investors have been accused of being part of an “utterly immoral” industry by a committee of MPs.
Up to 100 boutique tax advice firms were “running rings” around Her Majesty’s Revenue & Customs, members of the public accounts committee said.
Officials who were supposed to be clamping down on tax avoidance were told by MPs that their department was in chaos, allowing the easy exploitation of the public pound.
The hearing in parliament took place on Thursday as tax avoidance and tax management becomes an increasingly politically charged issue. George Osborne announced a £77m boost for HMRC inspectors investigating suspected tax scams in the autumn statement on Wednesday, while Starbucks has caved into pressure and said it will pay £10m in corporation tax in each of the next two years.
In sometimes angry exchanges, the committee’s chair, Margaret Hodge, said tax schemes were being used for a purpose not intended by the government.
“There are a lot of ordinary people who are being scammed,” she said.
The public would consider such schemes “completely and utterly and totally immoral” and those involved in devising and marketing them were “running rings around” tax officials, she said.
The National Audit Office (NAO) has found that HMRC has taken only 11 tax avoidance schemes to court, despite hundreds of them arising over the last four years.
Under the disclosure of tax avoidance schemes legislation (Dotas), any new scheme had to be reported to HMRC, which then issued that scheme with a number. Tax advisers then had up to two weeks in which to attract investment and make money before the scheme was eventually declared illegal and shut down, the committee heard.
Since Dotas was introduced in 2004, the tax authorities have initiated dozens of changes to tax law. At least 100 such schemes have sprung up over the past few years, NAO says.
Aiden James, director of Tax Trade Advisors, a firm that markets tax avoidance schemes to clients, told the committee that “tax law is very complex and tax planning is a grey area”.
Firms such as his looked for loopholes in tax law to gain an advantage for their clients, he said.
He claimed that every scheme his firm promoted had been cleared by HMRC, but admitted that all of them had since been declared illegal and shut down.
Tim Levy, the director of Future Capital Partners, a firm specialising in film investment schemes, admitted that more than half of the firm’s 255 investments had been investigated by HMRC. One scheme, called Terra Nova, was shut down in 2007.
In these “sale-and-leaseback” schemes, clients were encouraged to invest money, supposedly to support the UK film industry, and were then loaned money back, exploiting government tax relief rules on investment in new British films. But a fifth of the films, such as Pirates of the Caribbean I and II, had already been made and investors were merely buying a share of the rights, the committee heard. About half the films by value were made in the US, Levy said.
Hodge engaged in tense exchanges with Patrick McKenna, the chief executive of Ingenious Media, another firm specialising in film investment.
“I can tell you categorically that we are not in the business of tax avoidance,” McKenna said.
Hodge replied: “People like you used this legislation for a purpose not intended by parliament”; a claim McKenna strenuously denied.
Hodge also questioned Lin Homer, the head of HMRC, over why it had failed to stop such schemes. She said that, according to the NAO report, there were a number of major problems within HMRC.
Reading from the report, she said: “You can’t measure success, you have no performance indicators, you don’t know how much tax is at risk, you don’t know how much of your resources are deployed, you don’t know the trend or the number of avoidance cases. It is chaos, isnt it?”
Homer denied the department was in chaos, but said there was ample room for improvement: “We absolutely accept that there is a lot more to do.”