HMRC's compliance strategy
Speech by Judith Knott at HMRC"s first annual stakeholder conference on 18 July 2013.
[Slide: Tax planning vs tax avoidance]
Similarly, our strategy for tackling tax avoidance is to ensure that wealthy individuals and large businesses pay their fair share too.
Tax avoidance is where someone bends the rules of the tax system to gain an advantage that wasn’t intended by Parliament.
It’s following the letter, not the spirit of the law.
Tax planning is very different.
There are tax reliefs that are intended to encourage certain behaviour, for example, promoting business investment and growth through capital allowances.
Making proper use of these tax relief schemes, in the way they were intended, is not tax avoidance.
But bending the rules to reduce your tax bill, exploiting reliefs in a way that wasn’t intended, creating or participating in contrived avoidance schemes and aggressive tax planning through international profit and loss shifting – these are not how our tax system is supposed to work.
Like the promote, prevent and respond compliance approach that Jennie set out, our anti-avoidance strategy also has three planks: preventing, detecting and countering avoidance schemes.
We want to stop the tiny minority who are tempted by tax avoidance from using or promoting schemes in the first place, and the best way to do that is to explain the consequences.
We aim to deter avoidance by ensuring that people are aware of the consequences and the risks.
We publish our litigation wins and warn people about schemes that don’t work through “Spotlights” on our website, helping people to understand that if a scheme looks too good to be true it probably is.
We also develop intelligence about how the avoidance market is working, find out who the participants are and put direct pressure on them to reduce the supply.
This includes promoters, intermediaries such as tax agents, accountants, lawyers and financial advisers who act on customers’ behalf.
We believe that this transparency has a deterrent effect.
And we welcome the increased focus that the media and Parliament have put on tax avoidance.
And while I can’t mention any individuals and companies, we are in little doubt that the light that The Times and other media have shone on tax avoidance by some high-profile celebrities has surely made others think twice.
And the scrutiny of the Public Accounts Committee will also have caused multinationals to consider their behaviour.
But changing behaviour is only part of the picture.
We are also working to improve legislation, as this is one of the main tools we use to tackle avoidance.
Tax avoiders exploit legal loopholes, using contrived, artificial transactions that have an unintended tax advantage.
Since 2010, we’ve made 30 changes to the law and Government has been willing to speed up changes to legislation to prevent tax avoidance.
In extreme cases, as with stamp duty land tax, changes to the law have been applied retrospectively.
We work hard to make our legislation watertight.
In the last two years, we’ve reviewed the high-risk areas of the tax system and reformed legislation to make it more robust against future attack.
The 2013 Finance Act, for example, introduces the General Anti-Abuse Rule – a significant change to UK tax law, which is effective as from yesterday’s Royal Assent.
The GAAR will work both as a deterrent and as a valuable tool to help us tackle the most abusive avoidance schemes.
[Slide: Changing the market]
In 2004, the UK took a major leap forward by introducing a disclosure regime which gives us early information about how avoidance schemes work, who is promoting them and who is using them.
Essentially, promoters have to tell us about any avoidance scheme that they create, which gives us the chance to investigate it and act quickly if necessary.
The regime – known as DOTAS – is our first line of defence against tax avoidance schemes and it has had a major impact on the market for these schemes.
At the time, back in 2004, mainstream accountancy and other firms were selling aggressive avoidance schemes on a large scale.
They no longer do so and the type of aggressive marketed schemes that were so prevalent then are in decline.
This is partly due to the speed at which we take action.
For example, last December we closed down a scheme exploiting property and trading deductions within a week of finding out about it through DOTAS.
This brought in £50 million of additional revenue and protected hundreds of millions more.
We’re constantly updating DOTAS to keep it cutting-edge and to deal with the hard core of promoters who don’t comply with their disclosure obligations.
High-risk promoters typically create and sell schemes with a negligible probability of working, with the intention of collecting as many fees as they can before they are challenged and the scheme is shut down.
They refuse to co-operate with HMRC with the information we require and their schemes frequently rely on concealment and mis-description.
A consultation was announced at this year’s Budget on measures to tackle their behaviour and this will be published soon.
[Slide: Multinational businesses]
Much of the current debate on tax avoidance is really about how multinational companies are taxed and how the international tax system operates.
The obligation of businesses and individuals to pay what they owe in line with the law is unchanged.
But the tax system we work within was designed in the 1930s for a model of international trade that has long since been superseded.
The tax system doesn’t fit with modern business practice.
So multinationals can choose to structure their affairs with the specific intention of reducing their tax bills.
The rules that HMRC applies are based on a commonly-agreed set of international standards.
So we can’t rewrite the international tax framework on our own.
That requires multilateral action, and we are pleased to see that this is now a matter of international governmental concern.
We are playing a leading part in the OECD’s work to address aggressive tax planning by multinationals, and an action plan will be presented to G20 Finance Ministers at their meeting in Moscow tomorrow.
[Slide: Man-marking large business]
But within the current system, there is a lot we do to manage the risk posed by big business, through our network of customer relationship managers.
These are compliance tax experts who man-mark our largest 2,000 companies.
This approach has enabled HMRC to recover £8billion additional tax from large businesses in 2012/13 alone.
Our approach is to build professional, open and where necessary robust relationships with large businesses, which help us to resolve issues as quickly as possible.
Some of our most significant cases are managed under our High Risk Corporates Programme.
This involves intensive investigation on the complex and technical issues under consideration, face-to-face with the Department’s most senior tax specialists.
For the banking sector – which historically has given rise to some of the most significant tax risk – the Government has introduced a Code of Practice requiring banks to be open and transparent, and to refrain from tax avoidance schemes.
[Slide: Litigation and settlement strategy]
Whether we’re challenging a wealthy individual or a business, or indeed any taxpayer, our approach is to give them the opportunity to come forward and settle their affairs before we resort to litigation.
This is not about “doing a deal”, because, in accordance with our Litigation and Settlement Strategy, we only ever settle for what we believe is the correct amount payable under the law.
We prefer to resolve disputes by settlement, without litigation.
It’s quicker and cheaper and, because we only settle for what is owed, it is also very effective.
But we also have a very strong avoidance litigation record.
When we litigate, we expect to win and we are currently winning more than eight out of ten avoidance cases that we take to court.
So, for the minority of taxpayers who seek to avoid their taxes, evade them, commit fraud or operate in the hidden economy, HMRC has a strategy for dealing with them.
A strategy that last year brought in an extra £20.7 billion of revenues that otherwise would have been lost to the Exchequer and unavailable to fund essential services.
[Slide: Funding public services]
And to put that into context, I want to leave you with what this essential work we do in HMRC means for public services: the compliance revenues that we secured in 2012/13 are roughly equivalent to that year’s funding of the whole of the UK’s primary health care.