PAC critical of HMRC’s approach to abuse of tax reliefs

HMRC’s approach to monitoring potential abuse of tax reliefs has come under fire from the Public Accounts Committee (PAC) which said the department should act much more quickly to assess how different tax expenditures change taxpayer behaviour

The PAC was hearing evidence as part of its investigation into a National Audit Office (NAO) report which said HMRC lacked sufficient information about the effectiveness, cost and unintended consequences of particular reliefs, including potential for tax avoidance.

PAC chair Margaret Hodge said that ‘not testing the effectiveness of policy is of huge concern, particularly where you are talking about literally billions and billions of pounds’.

Hodge was particularly critical of the way in which film tax relief, originally introduced in 1997 and subsequently amended, had been used as a vehicle for tax avoidance schemes. At the time of its introduction, it was estimated the scheme would cost £30m, but data showed a sharp rise in claims for the relief with the result that the actual figure for 2005-06 was £700m.

Although HMRC did take action to address potential cases of misuse, PAC heard that the overall loss of tax revenue was put at £2bn for the period between 1997 and when the relief was revised in 2007, with committee members saying HMRC was too slow to react to signs of misuse.

PAC member Liberal Democrat MP Ian Swales said: ‘It is okay saying, “People saw a big hole and ran through,” but shouldn’t your unit have been making sure it was only being used for what it was intended?’

In her evidence to the committee HMRC’s chief executive Lin Homer admitted that the film tax relief had had ‘a difficult birth’. She said there were 43,000 cases outstanding at tribunal over issues of tax avoidance, of which 17,000 related to use of the old film scheme relief.

It is okay saying, “People saw a big hole and ran through,” but shouldn’t your unit have been making sure it was only being used for what it was intended?’

Homer told PAC that HMRC expect many of these cases to be settled upfront, following the introduction of new rules in the Budget which require accelerated payment in disputed cases.

‘One of the reasons for shifting to taking the tax at the point where we have made our inquiries is to alter the balance of that cost, and to make it in the interests of the person who is participating in the scheme to come to a conclusion, because we think there was cost - both of time and money - in the delay that the old system created,’ Homer said.

Homer also said that HMRC was aware that some advisers advocating high risk tax avoidance schemes ‘have traditionally required some of those people not to settle with us’. She said that some ‘particularly make money from fees, not from the success of their scheme.’

‘We have introduced that as one of the triggers that would make a promoter a high-risk promoter now, if you require a fighting fund and someone not to settle. This is a cat and mouse game. It is mainly productive for promoters. I don’t think it is as productive for the people who are trying to avoid tax,’ Homer said.  



Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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