NAO warns HMRC must do more to tackle ‘aggressive’ tax avoidance

HMRC Letter 480

The National Audit Office is urging HM Revenue and Customs to do more to tackle “aggressive” tax avoidance schemes which it says are costing the UK billions of pounds a year.

HMRC currently has 41,000 open avoidance cases against individuals and smaller companies, representing an estimated £10.2bn tax at risk.

In a report published today, the National Audit Office says it recognises certain avoidance schemes available to taxpayers are inherently difficult to stop since lengthy litigation is often required to prove the arrangements are not consistent with tax law.

HMRC’s approach is often to litigate a few ‘lead cases’ in order to demonstrate to other participants that their arrangement will not succeed should it come to court.

But National Audit Office head Amyas Morse says more needs to be done. He says: “HMRC must push harder to find an effective way to tackle the promoters and users of the most aggressive tax avoidance schemes. Though its disclosure regime has helped to change the market, it has had little impact on the persistent use of highly contrived schemes which deprives the public purse of billions of pounds.

“It is inherently difficult to stop tax avoidance as it is not illegal. But HMRC needs to demonstrate how it is going to reduce the 41,000 avoidance cases it currently has open.”

The tax avoidance disclosure regime (DOTAS) was introduced by HMRC in 2004 in order to try and reduce the availability of these schemes. The regime requires manufacturers of tax avoidance arrangements to to tell HMRC about every new scheme introduced.

Although over 100 new arrangements have come to light since DOTAS, NAO says there is little evidence their usage is being reduced, despite the fact HMRC believes most would be defeated in the courts.

HMRC had an 86 per cent success rate at court in avoidance cases in 2011-12.

In the report, the NAO says HMRC is increasingly focused on high net worth individuals, those with assets of more than £20m, in response to what it says is a perceived higher risk. It estimates £200m of revenue, which would otherwise have been lost, was achieved in 2011-12 after a high net worth unit of 390 staff was established in 2009.

The Government is currently considering legislation change which may help to reduce tax avoidance but the NAO says it is too early to say what impact this might have.

A HMRC spokesman says: “HMRC has successfully challenged over 40 tax avoidance schemes through the courts in the last two years alone, successfully disrupting the avoidance industry through a combination of legal challenge and improved intelligence on new schemes, and protecting around £4 billion.

“But as the avoidance landscape changes, so must our approach. The Government is building on DOTAS to give HMRC stronger powers to obtain information. These, together with the introduction of an anti abuse rule in 2013 will further strengthen our anti-avoidance work.”