parliament

TaxWatch give evidence at Treasury Select Committee

28th December 2022 by Alex Dunnagan

TaxWatch Acting Director Alex Dunnagan gave evidence to the Treasury Select Committee (TSC) on Monday 19th December highlighting the abuse of tax reliefs.

Written evidence

In November we submitted written evidence to the TSC for their inquiry on tax reliefs, focussing on both Creative Sector reliefs and the R&D reliefs.

TaxWatch’s evidence pointed out that Creative Sector reliefs are costing far more than anticipated, with the vast majority of these reliefs going to large multinational corporations. These multinationals are developing entertainment products that would likely have been produced regardless of whether or not the relief was available.

We also highlighted that companies claiming hundreds of millions of pounds in reliefs are engaging in profit shifting. These multinationals are producing games and films in the UK while claiming relief, then selling the taxpayer subsidised intellectual product at effectively cost price to overseas parent companies. It is these overseas companies, usually US based, which then distribute the product, generating significant profits, and with that, significant Corporation Tax bills outside the UK.

As for R&D reliefs, we pointed out that HMRC’s estimate of fraud and error with R&D relief (£469m in 2021-22) is likely a significant underestimate. While the true scale of abuse with R&D reliefs is not known, it could well costs billions of pounds every year. Without adequate compliance checks, we will simply never know the true scale of fraud and error.

Our evidence also pointed out that there are tax advisers boasting of 100% success rates in applying for R&D relief. There are companies that offer software which auto-generates relief claims, and accountants stating that it is the government intent to provide R&D relief for things such as cocktails and menu updates. This clearly is not the intent of Parliament.

Treasury Select Committee session

In addition to the facts presented in the written evidence, during the oral evidence session, Alex was able to highlight the lack of scrutiny these reliefs receive. There are close to 1,200 reliefs, the majority of which receive little to no government scrutiny. Even the smaller reliefs can have expenditures larger than government departments. Video Games Tax Relief, originally forecast to cost £35m a year, cost £197m in the year ending March 2022. The Serious Fraud Office by comparison had a budget of £74m last year.

The session was attended by Harriett Baldwin (Chair); Rushanara Ali; Anthony Browne; Dame Angela Eagle; Danny Kruger and Siobhain McDonagh. The panel consisted of Alex Dunnagan, Acting Director, TaxWatch; Dr Hosam Al Kaddour, Head of Teaching and Learning, Accounting Department, University of Southampton; Anita Monteith, Head of Taxation Policy, Institute of Chartered Accountants in England and Wales; and Dr Jo Twist OBE, CEO at UK Interactive Entertainment.

TaxWatch welcomes any opportunity to present further evidence on tax reliefs.

The full transcript for the evidence session is available here.

HMRC’s record on covid support and tax fraud under the microscope

14th February 2022 by George Turner

HMRC’s record on tax fraud has been questioned by two select committees and in several parliamentary debates in recent weeks
The last select committee inquiry on Tax Fraud was in 2015

Recent weeks have seen HMRC being put under intense scrutiny on their record on tackling tax fraud.

Part of the trigger for this was the revelation that on current estimates, the department would only recover 25% of the £5.8bn paid out in fraud and error via the Covid relief schemes, furlough, Eat Out To Help Out and the Self-Employment Income Support Scheme.

This figure is arrived at if you take the amount HMRC has already managed to recover from overpayments, added to the £800m-£1bn that HMRC says they hope to get back with their Taxpayer Protection Task Force.

HMRC’s estimate of how much the new Taxpayer Protection Taskforce would seek to recover has been around for a while,^[1]Richard Partington, HMRC boosts efforts to recoup £1bn in suspect Covid payouts, The Guardian, 16 November 2021, … Continue reading however, HMRC had previously suggested that they could recover substantially more. Notably, when Jim Harra gave an interview to the Financial Times late last year, he said that they would struggle to recoup more than 50% of the funds lost (£2.9bn)^[2]Emma Agyemang, HMRC expects to recover less than half £5.8bn lost in Covid fraud and errors, Financial Times, 21 November 2021, https://www.ft.com/content/3991505c-8311-401e-aece-55342f2b07df.

In January, HMRC put out a myth-buster which appeared to disclose for the first time that £1bn is the total of the department’s current ambition in Covid support scheme fraud and error recovery given the resources they currently have to deal with the problem.^[3]HMRC responses to inaccurate claims, HMRC, 12 January 2022, https://www.gov.uk/government/news/hmrc-responses-to-inaccurate-claims

TaxWatch picked up on this, noting the apparent revision down from Jim Harra’s 50% remarks to the FT, and tipped off The Times, which ran the story the following week.^[4]David Byers, Treasury writes off £4.3bn in Covid payments lost to fraud, The Times, 17 January 2022, … Continue reading

On the day the article was published, Jim Harra was asked about the story at his appearance before the Public Accounts Committee,^[5]Public Accounts Committee, Oral Evidence: HMRC’s management of tax debt, HC 953, House of Commons, 17 January 2022, https://committees.parliament.uk/oralevidence/3288/default/ and on Friday 11th February, the committee published a highly critical report, stating that HMRC’s current plans “risks rewarding the unscrupulous and sending a message that HMRC is soft on fraud.”^[6]https://committees.parliament.uk/committee/127/public-accounts-committee/news/160942/hmrc-ignorance-and-inaction-rewarding-the-unscrupulous-and-looks-soft-on-fraud/

After HMRC’s grilling before the PAC, next, it was the turn of Treasury Ministers when Labour’s Pat McFadden put down an Urgent Question forcing the Government to make a statement on the issue.

In that statement, the Government argued that the speed with which the Covid support systems were designed and implemented meant that a greater amount of fraud was inevitable. If the government put in place more checks that would have led to delays in getting cash into the hands of businesses that were in crisis, leading to far worse outcomes.^[7]Coronavirus Grant Schemes: Fraud, Hansard vol. 707, Tuesday 18 January 2022

That is undoubtedly true, and it is worth noting that the furlough scheme has an estimated fraud and error rate of 8.7%, not wildly above the normal fraud and error rate in the tax system of around 5%.^[8]Public Accounts Committee, HMRC Performance in 2020-21, House of Commons, https://publications.parliament.uk/pa/cm5802/cmselect/cmpubacc/641/report.html It is trite but true to say that the vast majority of claims were validly made by people entitled to them.

However, now that the money has gone, with billions currently sitting in the bank accounts of crooks, why are we not spending more to go after it?

This was a point made by Lord Agnew, the Government Minister responsible for counter fraud, in dramatic style later in the week when he resigned from the front bench when responding to a question from Labour on the £4.3bn tax fraud write off, stating that “a combination of arrogance, indolence and ignorance” was freezing the government machine.^[9]Conservative minister resigns in anger over Covid fraud, BBC News, 24 January 2022, https://www.bbc.co.uk/news/uk-politics-60117513

Treasury ministers are now keen to stress that the £4.3bn which HMRC has said will, on current estimates, be unlikely to be recovered has not been written off. This point was made by the Chancellor himself in a tweet thread,^[10]Rishi Sunak, Tweet Thread on Covid support measures fraud, Twitter, 26 January 2022, https://twitter.com/RishiSunak/status/1486332699337973763?s=20&t=AjAVwWPkHymzw2I7kcfPMw and again by Treasury ministers during an opposition day debate on fraud in the House of Commons.^[11]Tackling Fraud and Preventing Government Waste, Hansard Vol. 708, Tuesday 1 February 2022, … Continue reading. The response by the Government that it would not be writing off the fraud prompted Lord Agnew to say that his resignation had at least “achieved something”.^[12]Alice Thomson, Lord Agnew: ‘Billions were written off and no one seemed to care but me’, The Times, 28 January 2022, … Continue reading

However, the determination from Ministers to say that they will continue to chase down the missing £4.3bn has not yet been matched with any announcement of more money.

As TaxWatch has pointed out, the Treasury is investing far more money in going after the rise in benefits fraud coming out of the pandemic, giving the DWP a cash injection of £613m to tackle the problem.^[13]Funding to fight covid related tax and benefits fraud, TaxWatch, 29 December 2021, http://13.40.187.124/covid_fraud_spending_dwp_vs_hmrc/

HMRC on the other hand appears to be funding their £100m taxpayer protection task force from their own resources. The staff are all being recruited internally, as was recently confirmed by HMRC.^[14]Treasury Committee, Oral evidence: The work of HMRC, HC 1095 Q25, House of Commons, 2 February 2022, https://committees.parliament.uk/oralevidence/3394/pdf/

The growing disquiet about HMRC’s plans to recover losses to fraud and error in Covid relief schemes has also led to MPs raising questions about HMRC’s broader approach to tax fraud.

At a recent Treasury Select Committee hearing, Kevin Hollinrake MP began questioning HMRC officials on why levels of both criminal investigations and civil fraud investigations under Code of Practice 9 had been declining since 2016.

In response, HMRC said that they had taken a policy decision to do fewer fraud prosecutions and only concentrate on more serious and complex cases.

Hollinrake seemed unimpressed, saying that it sent the message that some crime doesn’t matter and comparing HMRC’s policy to telling a burglar, “ok so you stole the stuff out the house, give us it back, and a bit extra and you can carry on.”

Mr Hollinrake also questioned why there had been no successful prosecutions for promoters of disguised remuneration schemes, and called on HMRC to bring forward some cases in this area.

This is not the first time MPs have raised concerns about HMRC’s approach to tax fraud in recent years. In 2015, the Public Accounts Committee’s annual report on HMRC’s performance described the number of criminal prosecutions for offshore evasion as “woefully inadequate”^[15]HM Revenue & Customs Performance 2014-15, Public Accounts Committee, 28 October 2015, https://publications.parliament.uk/pa/cm201516/cmselect/cmpubacc/393/393.pdf.

The following year, the Committee completed a short inquiry into tax fraud which found that HMRC had “no strategy for tackling tax fraud” and that there was a “perception that HMRC does not tackle tax fraud by the wealthy”, which needed to be addressed.^[16]Public Accounts Committee, Tackling Tax Fraud, House of Commons, 23 March 2016, https://publications.parliament.uk/pa/cm201516/cmselect/cmpubacc/674/674.pdf

At the time, HMRC told the committee that it was seeking funding to enable it to prosecute more cases of serious and complex tax fraud. This became a target to increase the number of prosecutions of “serious and complex” tax fraud to 100 a year by 2020.

As our recent State of Tax Administration report has found, HMRC appears to have quietly dropped that target, with progress against the target no longer appearing in HMRC’s Annual Report.^[17]State of Tax Administration 2022, TaxWatch, 11 February 2022, http://13.40.187.124/state_of_tax_administration/

Given the growing concern about tax fraud, and indeed all types of fraud, falling levels of civil fraud investigations and criminal prosecutions, and a clear demand from both the public and Parliament for Government to do more in this area, perhaps this is the right time for Parliament to revisit the issue with another inquiry into HMRC’s approach to tax fraud.

References[+]

References
↑1	Richard Partington, HMRC boosts efforts to recoup £1bn in suspect Covid payouts, The Guardian, 16 November 2021, https://www.theguardian.com/world/2021/nov/16/hmrc-boosts-efforts-to-recoup-1bn-in-potentially-fraudulent-covid-payouts
↑2	Emma Agyemang, HMRC expects to recover less than half £5.8bn lost in Covid fraud and errors, Financial Times, 21 November 2021, https://www.ft.com/content/3991505c-8311-401e-aece-55342f2b07df
↑3	HMRC responses to inaccurate claims, HMRC, 12 January 2022, https://www.gov.uk/government/news/hmrc-responses-to-inaccurate-claims
↑4	David Byers, Treasury writes off £4.3bn in Covid payments lost to fraud, The Times, 17 January 2022, https://www.thetimes.co.uk/article/treasury-writes-off-4-3bn-in-covid-payments-lost-to-fraud-dfkxt5fr7
↑5	Public Accounts Committee, Oral Evidence: HMRC’s management of tax debt, HC 953, House of Commons, 17 January 2022, https://committees.parliament.uk/oralevidence/3288/default/
↑6	https://committees.parliament.uk/committee/127/public-accounts-committee/news/160942/hmrc-ignorance-and-inaction-rewarding-the-unscrupulous-and-looks-soft-on-fraud/
↑7	Coronavirus Grant Schemes: Fraud, Hansard vol. 707, Tuesday 18 January 2022
↑8	Public Accounts Committee, HMRC Performance in 2020-21, House of Commons, https://publications.parliament.uk/pa/cm5802/cmselect/cmpubacc/641/report.html
↑9	Conservative minister resigns in anger over Covid fraud, BBC News, 24 January 2022, https://www.bbc.co.uk/news/uk-politics-60117513
↑10	Rishi Sunak, Tweet Thread on Covid support measures fraud, Twitter, 26 January 2022, https://twitter.com/RishiSunak/status/1486332699337973763?s=20&t=AjAVwWPkHymzw2I7kcfPMw
↑11	Tackling Fraud and Preventing Government Waste, Hansard Vol. 708, Tuesday 1 February 2022, https://hansard.parliament.uk/Commons/2022-02-01/debates/151F8D55-94D6-408A-88CC-970D350C6F9D/TacklingFraudAndPreventingGovernmentWaste#main-content
↑12	Alice Thomson, Lord Agnew: ‘Billions were written off and no one seemed to care but me’, The Times, 28 January 2022, https://www.thetimes.co.uk/article/lord-agnew-billions-were-written-off-and-no-one-seemed-to-care-but-me-cvnsqjbzp
↑13	Funding to fight covid related tax and benefits fraud, TaxWatch, 29 December 2021, http://13.40.187.124/covid_fraud_spending_dwp_vs_hmrc/
↑14	Treasury Committee, Oral evidence: The work of HMRC, HC 1095 Q25, House of Commons, 2 February 2022, https://committees.parliament.uk/oralevidence/3394/pdf/
↑15	HM Revenue & Customs Performance 2014-15, Public Accounts Committee, 28 October 2015, https://publications.parliament.uk/pa/cm201516/cmselect/cmpubacc/393/393.pdf
↑16	Public Accounts Committee, Tackling Tax Fraud, House of Commons, 23 March 2016, https://publications.parliament.uk/pa/cm201516/cmselect/cmpubacc/674/674.pdf
↑17	State of Tax Administration 2022, TaxWatch, 11 February 2022, http://13.40.187.124/state_of_tax_administration/

Tax avoidance can be tax fraud – says government and MPs

29th April 2021 by George Turner

In response to critics that have questioned why HMRC has not done more to bring criminal prosecutions against the enablers and promoters of tax avoidance schemes, the government’s standard response has been to state that “there is no criminal offence of promoting or marketing tax avoidance schemes.”

Now, a recent debate in the House of Commons has confirmed a significant shift, with MPs and Ministers recognising that the promotion of tax avoidance often involves fraudulent conduct which can leave promoters liable for several criminal offences.

Tax avoidance and tax fraud

That the promotion of tax avoidance is often linked to fraud is a position that TaxWatch has been advocating for some time.

Speaking at the FS tax conference in November 2020, our Executive Director set out that

“many, and in my opinion the majority of tax avoidance schemes could easily fall foul of the law on cheating. Where there has been an active attempt to conceal the scheme, or a failure to disclose information relating to a scheme, that is clearly fraud.”

It was at this conference that the Director of HMRC’s Fraud Investigation Service revealed, in response to the comments by our Executive Director, that HMRC is conducting multiple criminal investigations into the tax avoidance schemes used by an undisclosed number of multinational companies to avoid tax. This was reported by the FT in January 2021.²

TaxWatch was invited to give oral evidence to the House of Lords Economic Affairs Finance Bill Sub Committee, which published its report on 19th December 2020. This report backed TaxWatch’s calls for HMRC to start more criminal investigations into the promoters of disguised remuneration tax avoidance schemes, including looking at historic cases.

Our Executive Director also responded to the Government’s call for evidence on tackling disguised remuneration tax avoidance, which ran from 21 July to 30 September 2020, In its response the government reflect the views of TaxWatch and others by stating:

“A number of respondents felt that promoters of schemes are not deterred by financial penalties and sanctions. They supported greater use of existing criminal powers including prosecuting promoters for fraudulent conduct.”³

The Government’s response accepted TaxWatch’s analysis on the legal position with regards to the promotion of tax avoidance schemes and marked a fundamental shift from the position that “there is no criminal offence of promoting or marketing tax avoidance schemes”:

“The Government recognises that the design of arrangements that are sold as avoidance schemes may in fact enable fraud.”⁴

The Finance Bill debate

On Tuesday 20 April 2012 MPs met to scrutinise the detailed provisions of the Finance (No. 2) Bill in a Committee of the Whole House.⁵

The most substantive amendment of the day,⁶ in the name of members of the All-Party Group on Anti-Corruption and Responsible Tax, sought to amend schedule 29 of the bill so that anyone subject to the Promoters of Tax Avoidance Schemes (POTAS) regime, and promoting or enabling abusive tax arrangements, should be deemed to have been acting dishonestly unless they can show that they acted in good faith and believed the arrangements to be reasonable.

This would mean, in respect of the criminal offence of cheating the public revenue, that a person would automatically be treated as dishonest where it had been demonstrated that they had promoted abusive tax arrangements as defined in the General Anti-Abuse Rule (GAAR) and there would be no requirement for any prosecution to prove dishonest conduct.

While opposing the amendment on a technicality, the Government re-emphasised it’s recognition “that the design of arrangements that are sold as avoidance schemes may in fact enable fraud.”

According to the Financial Secretary to the Treasury – Jesse Norman PM:

“I fully agree that promoters who break the law should face the consequences of their actions. That is why the Government are putting so much emphasis on anti-avoidance measures and measures against promoters of tax avoidance in the Bill and elsewhere. We should be under no illusions about this. It is not honest to market tax schemes or arrangements that are known not to work and that at their heart feature false statements.

However, cheating the public revenue is the most serious tax offence, carrying a potential sentence of life imprisonment. It is therefore right that the prosecution should have to prove its case beyond a reasonable doubt—the usual standard of proof in a criminal case—and to demonstrate that the person has been dishonest in order to secure a conviction of cheating the public revenue. We all want fraudulent operators to be brought to book, but shifting the burden of proof for such a serious crime on to the defendant to prove their innocence is at odds with the principles of our criminal justice system and would undermine the right of a defendant to remain silent. The burden should be on the prosecution to prove dishonesty to the criminal standard of proof. That is fundamental to the rule of law.”⁷

We believe that tax avoidance schemes “at their heart feature false statements” as a matter of course.

The Shadow Financial Secretary to the Treasure, James Murray MP , welcomed the amendment, stating ([c.896]:

“This kind of change is crucial if we are to shift towards more criminal prosecutions for the promoters of tax avoidance schemes, and to shift the gear of the Government’s approach.

At the moment, where tax avoidance has occurred, the system lands liabilities on the tax payers, who are usually not tax experts and may have been falsely told that a tax avoidance scheme is lawful.

In contrast, the promoters of tax avoidance schemes are allowed far too often to get away with it. We therefore welcome any efforts to strengthen penalties for the promoters of failed tax avoidance schemes.

But we have seen nothing from the Government today to raise the stakes and to make greater use of the powers HMRC already has to bring criminal prosecutions against the promoters of fraudulent tax schemes.”

“We know that HMRC recognises its power to use criminal investigation approaches to tackle the promotion and enabling of tax avoidance schemes, but in a letter the Financial Secretary sent me in January this year, he admitted that, since the formation of HMRC’s fraud investigation service in 2016, only 20 individuals have been convicted for offences relating to arrangements that have been promoted as tax avoidance. An average of around four people a year does not feel like a concerted effort.”

The principles behind the amendment attracted cross party-support on the back benches.

Andrew Mitchell, co-chair of the all-party group on anti-corruption and responsible tax [c.898] stated:

“Advisers who set up these schemes often have an aura of authority, because they are lawyers, accountants and professional people, which those whom they advise may not be.

I want more to be done to ensure that, where these bad schemes of tax evasion are put together by professional advisers, they do not get off scot-free while the people they put into these devices, or talk into going into them, take the rap. It is not right that they should just lose the fees that they earn, which I think is currently the position: we should toughen the financial penalties.”

Dame Margaret Hodge, co-chair of the all-party group on anti-corruption and responsible tax [c899-900]

“I simply say this to the Minister: he may have reservations about the technicalities of our proposals, but he should at the very least accept the principle that underpins them and say so today.

Big corporations and high net-worth individuals who engage in tax avoidance schemes and financial crime do not dream up these schemes on their own; they are invented and developed by the huge army of tax professionals—accountants, lawyers, banks and advisers—who spend their working life trying to identify loopholes and wheezes. The schemes they devise do not just help but actively encourage people not to pay their rightful contribution through tax to the common purse for the common good….

If advisers and promoters involved in a scheme know that the scheme does not work, they are committing the criminal offence—mentioned by the Minister—of cheating the public revenue. They are breaking the law, so they should be pursued, charged and convicted with a criminal charge. That does not happen now”.

Kevin Hollinrake, the Member of Parliament from Thirsk and Malton talked about his own experience of being approached by tax avoidance merchants during his career in business. He went onto say that reputable accountants would not market schemes if they were aware that their activities might end up with jail time. [c903-904]:

“It was probably 15 years after we set up our business that our own accountants came to us—we were making reasonable profits by then—and suggested that we take advantage of a tax avoidance measure, and a pretty aggressive one in our view. This was not a particularly unusual accountants—it had a decent reputation locally – but so much money potentially runs through these schemes that some promoters inevitably see an opportunity for themselves.

I must tell the House that we told our adviser that we did not want to take part in such a scheme, and there were two reasons: we believed that people should pay their tax—that we should all pay a fair amount of tax—but also that any person who takes up such measures should be afraid that HMRC will one day come along and say, “Those measures were not appropriate.” By that time, a lot of the money that they think they have saved has gone out in costs to promoters and the rest of it, and they are left with a huge bill.

Had the person who promoted that scheme to us—our accountant—thought that he would potentially end up on jail, I do not think he would have come to us and told us about it. This was a reputable local person, and perhaps he did not even think that tax avoidance at that point was fraud. Nevertheless, it certainly can be fraud, and in many cases it is. If we are willing to hold people to account, ultimately through a criminal prosecution—as HMRC can, of course, as the Minister pointed out earlier—there would be a lot less of this kind of promotion and a lot fewer of these activities.”

Catherine West, the MP for Hornsey and Wood Green cited TaxWatch’s recent report into criminal prosecutions for tax crimes, as compared to criminal prosecutions for benefits crime [c 908]:

“The scale of tax offences is clear, with a recent TaxWatch report finding that between 2009 and 2019, the UK prosecuted 23 times as many people for benefits offences as for tax offences—that theme has been echoed in today’s speeches—despite the fact that the value of tax fraud is nine times higher than that of benefit fraud. …

We know that a lot of this work is about priorities, and we need to prioritise criminal prosecutions so that there is not a decrease in taxation, as there has been of 39% since 2015. We need to look at the balance of the DWP employing 3.5 times more staff in compliance than HMRC. We know that we have to improve that balance, because quite simply there is much more money to be found in illicit finance and among tax avoiders than from those eking out a living on universal credit or personal independence payments.”

Ruth Cadbury, one of the co-chairs of the APPG on the loan charge, criticised the government for not doing enough to hold loan scheme promoters to account [c 910]:

“We need an effective tax avoidance policy that criminalises those promoting tax avoidance, rather than going for the workers inadvertently caught up in them, as this Government and HMRC have been doing with the loan charge in particular. That is the wrong target. While ordinary people who are victims of mis-selling are facing ruin and bankruptcy, the Government have done too little, too late to go after those who promoted the schemes.”

The whole debate can be seen here: https://parliamentlive.tv/event/index/79ba64da-407e-49d9-b8d7-ed56d11ab6ff?in=10:36:31&out=10:43:21

Too good to be true?

In seeking to warn people against using tax avoidance schemes, the government has frequently said that “if it looks too good to be true it probably is”. The increasing recognition from the Government that the “design of arrangements that are sold as avoidance schemes may in fact enable fraud” is a much more powerful message. It tells the public why tax avoidance schemes are “too good to be true”.

Photo credit: Parliament by James Newcombe

1 @LCAG_2019, Twitter, 19 July 2019, https://twitter.com/i/status/1152149052097585153

2 ‘HMRC pursues multiple criminal investigations in corporate tax disputes’, Financial Times, 11 January 2021 https://www.ft.com/content/e7ef0ec3-f4de-40f9-ad95-0e7587ac7e2d

3 Call for evidence: tackling disguised remuneration tax avoidance, Summary of Responses, HMRC, March 2021, paragraph 2.34 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972080/Call_for_evidence_tackling_disguised_remuneration_tax_avoidance_-_summary_of_responses.pdf

4 Ibid, paragraph 2.34. Emphasis supplied.

5 https://hansard.parliament.uk/commons/2021-04-20/debates/D1535D18-E261-4112-8739-964CE7F5F994/Finance(No2)Bill

6 Amendment 77.

7 Column 896. Emphasis supplied.

Parliament forces Netflix to respond to TaxWatch research

24th September 2020 by Alex Dunnagan

Netflix has agreed to respond to TaxWatch’s investigation into the company’s tax affairs after a request from the Digital, Culture, Media and Sport (DCMS) Committee. Our report revealed that the TV giant had streamed up to $430m of profits into offshore tax havens in 2018 (we have since published a follow up bl og post taking into account 2019 figures). This research into Netflix’s tax affairs has previously been the subject of an adjournment debate in the House of Commons.

The DCMS are currently holding an inquiry into ‘The future of public service broadcasting’, and on Tuesday 15 September held a formal meeting in which senior Netflix executives Benjamin King, Director of Public Policy UK and Ireland, and Anne Mensah, Vice President of Original series, participated.

During the oral evidence session the Labour MP for Cardiff West, Kevin Brennan, put our report to Mr King, in saying:

“the revenues from subscribers in the UK in 2018 for Netflix was £860 million, yet Netflix pays very little tax in the UK because that money is credited to a Dutch company….What is your response to that issue about the way in which Netflix is structured allegedly to avoid paying tax in the UK?”

Mr King responded:

“I would like to start by emphasising that we do pay all the tax that is required of us under UK law and every other jurisdiction that we operate in. Our accounts from 2018, which is our most recently published set, showed that the operating profit we made across our entities at that time was offset under HMRC’s group relief regime rules by the losses that we made on certain of our productions.”

Mr King went on to say that because Netflix’s European Headquarters is in the Netherlands, profits from the UK “are taxed in the Netherlands, which is completely in accordance with international norms”.

Mr Brennan asked if there was any truth to the allegation that Netflix is intending to take advantage of High End TV Tax Relief in the UK while not paying any profit here. Mr King responded that there were “a great many inaccuracies” and “false assertions in the TaxWatch report that we noted at the time of publication”, to which Mr Brennan questioned why Netflix did not respond to TaxWatch’s initial request for comment prior to publication.

Mr King stated that “we were not consulted on the detail of the calculations”.

As TaxWatch has now set out in a letter to Mr King, this is incorrect. TaxWatch contacted Netflix posing a number of questions that arose out of our investigation, while setting out in detail our calculations and research in advance of the publication of our first report in January 2020. We made it clear that we were contacting Netflix to allow for the opportunity to raise any factual issues and to provide a comment in advance of publication.

In a subsequent phone call with a representative of Netflix, TaxWatch’s Executive Director George Turner made it clear that we would be happy to correct any inaccuracies in advance of publication if Netflix provided us with the disputed details.

We were assured we would receive a full response to our request for comment, however, after several days of no further contact, Netflix told us that the company had decided not to respond.

For that reason we were surprised to see the claims made about our research at the committee hearing.

Mr Brennan pointed out that Netflix were given an opportunity to respond, and asked if Mr King wished to make a comment during the committee proceedings. Mr King stated that he did not have TaxWatch’s report in front of him, and repeated the claim that there are “certainly a great many inaccuracies in the report”. When pressed further he agreed that Netflix would provide a written response.

We have since re-sent our report and initial correspondence to King in order to assist with Netflix’s response to the DCMS.

A transcript of the session is available here, with video footage is available here. Reference to TaxWatch’s research begins at 1059hrs.

This story was reported in Deadline.

Photo by cottonbro from Pexels.

Loan Charge Parliamentary Debate

20th March 2020 by Alex Dunnagan

A debate was held in the House of Commons yesterday on the Government Response to the Sir Amyas Morse Review of the Loan Charge. Ahead of this we published an explainer on what disguised remuneration is here, and a more detailed briefing here. David Davis, Ruth Cadbury, and Julian Lewis were able to secure the debate on the motion “That this House believes that the Loan Charge is an unjust and retrospective tax; notes that the law on the Loan Charge was not settled until 2017; and calls on HMRC to cease action on loans paid before 2017.”

The Loan Charge is an anti-tax avoidance measure introduced in the 2016 budget to address tax lost to the Treasury from loan based disguised remuneration schemes.

These schemes involved employees and contractors being paid in loans. As loans do not incur income tax, those using the schemes ended up getting their earnings tax free. The only cost to using a loan scheme was the fees charged by the operators of around about 13%.

As a result, loan scheme users ended up keeping far more of their income than those who paid tax in the usual way.

David Simmonds MP lays out the issue in that “the schemes themselves were lawful because it was lawful to receive a loan, but the money the constituent received was tax-free only if it was genuinely a loan”. Simmonds goes on to say that as 20 years have since elapsed, that there was no evidence that these were genuine loans, hence HMRC’s interest in the schemes. He then goes on to say that taxpayers raised the issue with him that they find it hard to believe that anybody thought that they could describe their pay on a tax return as a “loan”, and because of this never have to pay any income tax on it.

HMRC argues that these loans should really be classed as income because no one had any expectation that they should be paid back, and as such should always have been liable to income tax.

The Financial Secretary to the Treasury, Jesse Norman, described these schemes as “contrived tax avoidance in which people are paid in the form of a loan with no interest and no intention or requirement to pay the loan back.” Many of the schemes saw money routed through offshore companies and trusts.

Norman summarised the case for the charge in saying “it has cost the Exchequer hundreds of millions of pounds a year, and that, of course has two effects. It deprives public services of the money they need to operate, and it forces other taxpayers to pay more in order to make up the shortfall.”

The charge has become one of the most controversial pieces of tax legislation in recent times. A cross-party group of MPs, the Loan Charge All-Party Parliamentary Group has led the fight in campaigning against the Charge. In January of last year the Treasury was forced to agree to review the loan charge proposals, following an amendment to the Finance Act tabled by the Liberal Democrats MP Ed Davey. The former Comptroller and Auditor General Sir Amyas Morse was tasked to lead the independent review

A number of recommendations from Sir Amyas’ report were accepted last December, including halving the time period in which the loan charge would apply, from 20 years to ten. However, many campaigners and Members of Parliament do not believe these measures go far enough. MP’s have argued that the law was not agreed upon until 2017, and are urging the government to go further, with one of the key criticisms being the retrospective nature of the charge.

Adam Smith was frequently quoted in the debate, given that the Financial Secretary to the Treasury had written a book on the economist. The Conservative MP for New Forest West, Sir Desmond Swayne, said that following the principals of taxation put forward by Smith, tax should not be retrospective.

The Financial Secretary to the Treasury disagreed with the characterisation of the tax as retrospective. Mr Norman said of the Loan Charge “it taxes a loan outstanding at a future date. It does not change any law previously on the statute book.”

Peter Dowd MP, speaking on behalf of HM Opposition, stated that Smith also argued to “Take from the taxpayer only that which is needed for the public realm”, and that if people do not pay their taxes, everyone else has to pay more.

Dowd went on to frame the loan charge within the conditions HMRC is facing, referencing that “A third of its staff have gone since cuts in 2005 and later in 2010. Any increases in the cash amounts available to HMRC for its running have, in effect, been blocked”.

While Christian Matheson MP argued “nobody in this House disputes the fact that it was tax avoidance”. This does not appear to be a view shared by all, with Paul Holmes MP stating “the people this affects are not tax avoiders”, and Bob Stewart MP describing his constituents who entered into these schemes as “decent and honest”.

Kevin Hollinrake MP said that those people using such schemes should have been aware that entering into a scheme where you can lower or eradicate your tax bill was wrong. In an intervention during the speech of David Davis, Hollinrake said “If something looks too good to be true, it usually is? In my business, we have been brought this kind of scheme a number of times by our advisers over the last 30 years, maybe with a barrister’s letter saying, “Don’t worry. It’ll be fine. You can reduce your tax bill hugely by adopting this scheme.” We have always rejected them because we knew the risk.”

Both the advisers who ran the schemes and HMRC came in for criticism during the debate. It was argued that instead of charging the individuals that took out these loans, that HMRC should instead be pursuing the advisers who sold them. Paul Holmes MP stated, “many people were advised by financial advisers and are now being penalised because of the late realisation and intransigence of HMRC”. David Davis went further, in calling the advisers and employers who facilitated the loans “villains”.

In Norman’s final remarks, he summarised the argument as thus “If one asks the average man or woman in this country, I think they would say, “Everyone should pay their fair share of taxes. People are responsible for their own tax affairs. Real loans get repaid; if someone offered you a loan for which no repayment, no tax and no interest was due, it would probably be too good to be true.” And so it is.”

Despite this – the motion from the Back Bench committee asking that the loan charge only applies to loans taken out after 2017 was agreed to. Where this leaves the government is unclear.

The debate is available on Parliament Live here.

Photo by The New York Public Library on Unsplash

Netflix tax affairs debated in the House of Commons

4th February 2020 by Alex Dunnagan

An adjournment debate on Netflix’s tax affairs was held in the House of Commons last night in response to research conducted by TaxWatch. Rt Hon Dame Margaret Hodge, Labour MP for Barking and chair of the All Party Parliamentary Group on Responsible Tax, called Netflix’s tax structure “scandalous, intolerable, and unfair.”

Dame Margaret called for video streaming services to be included in the government’s new Digital Services Tax. Currently, the DST excludes companies like Netflix from the charge.

She went on to say that as a great deal of Netflix’s intellectual property is developed in the UK, with the aid of creative tax reliefs, it is only right that the profits generated are subjected to UK corporation tax. Dame Margaret questioned why the eligibility criteria for creative industry tax relief cannot be adjusted to insist that any company receiving credits must declare their revenue earned in the UK via a UK company.

Dame Margaret gives Brazil as an example of a country that successfully taxes Netflix – by using a withholding tax – asking “If Brazil can tax Netflix, why can’t we?”

Financial Secretary to the Treasury, Rt Hon Jesse Norman MP, thanked Dame Margaret for raising the issue, calling it an “interesting and important topic that is of great public import”. In response to the points raised he said: “The Government does recognise that some multinational businesses have sought to avoid paying their fair share of tax in the UK by entering into contrived arrangements to divert profits to low tax jurisdictions.” However, he stressed that by law, ministers are “never privy to information about the tax affairs of specific companies or individuals.”

In response to the suggestion that Netflix is paying no UK tax while receiving creative reliefs, Mr Norman stated that businesses should be “incentivised” to invest in the UK’s creative economy.

Mr Norman went on to say “It is equally right that HMRC should subject large businesses to an appropriate level of scrutiny and my understanding is they are actively investigating around half of the UK’s large businesses at any given time.”

Responding to the point regarding the DST, Mr Norman stated that in order to include Netflix, tax rules would have to be rewritten, as the DST is currently aimed at search engines and social media, and that “the DST is intended to be a temporary measure pending agreement of a long-term global solution”. This is in reference to the OECD’s digital tax plans for multinationals, which are not yet set in stone.

With regard to taxing intellectual property, Mr Norman said “under international tax rules, the UK is entitled to tax the shares of a company’s profits that relate to those production activities…so she should not have concern on that front”

In response to the example of Brazil, Mr Norman makes reference to a tax charge on offshore receipts in respect of intangible property. While this has the potential to be an important tool in stopping multi-nationals from shifting profits offshore, as we pointed out last year, the fact that it is restricted to non-treaty jurisdictions is a severe limitation.

Our recent research revealed that despite having 11.62 million subscribers in the UK last year, generating an estimated £1bn in revenues and £68.5 million profit, Netflix Services UK is unlikely to have faced any tax liability because revenues from UK subscribers are booked in the Netherlands and the company in the UK receives tax credits under the creative industry tax relief scheme.

However, as disclosed by the company, Netflix’s 2018 UK tax return is currently under examination by HMRC.