UK Treasury insiders accused of complicity in tax-dodging schemes

The ‘Big Four’ UK accountancy firms have been accused of wielding “undue influence” over UK tax law, and of using insider knowledge from the UK Treasury to circumvent the complexities of the country’s tax laws and helping their clients do the same.

Margaret Hodge MP, chair of the Public Accounts committee (PAC), said there was a “ridiculous conflict of interest,” criticizing the involvement of the companies in shaping UK tax law.

Firms have been seconding staff to the Treasury to work as advisers on technical issues relating to legislation. The staffers then return to their respective companies with a trove of insider information.

“We are concerned that the very people who provide this advice then go on to advise their clients how to use those laws to avoid tax,” criticized the 56-page expose, titled ‘Tax avoidance: The role of large accountancy firms,’ which was released on Friday. It demonstrated deep concern over the close connection between the companies and Her Majesty’s Revenue and Customs (HMRC).

The ‘Big Four’ companies involved are Pricewaterhouse Coopers, Deloitte, KPMG and Ernst & Young. Pricewaterhouse Coopers and KPMG alone control some 50 percent of the audit market for the world’s multinational companies, and the combined 2012 revenues of the four firms rose to an all-time high of $110 billion, up 6 percent from 2011, according to a ‘Big Four’ firm performance report published this January.

KPMG’s advertises its services in a document titled ‘Patent Box: What’s in it for You?’ that boasts of the company’s ability to help clients reduce tax payments, and saying that they “enjoy a very strong working relationship with HMRC officials responsible for implementing and operating the regime.”

The company reiterates later in the document that “Members of our team have worked closely with the UK Treasury and HMRC as the proposals have developed.”

The PAC was highly critical of the practices that allowed stakeholders to be so involved in the writing of a law, “that they know how to exploit it as a tax avoidance scheme.”

Numerous flaws in the UK tax system were detailed in the report, including its complexity. The report also emphasized that there is no clear line drawn between acceptable tax planning and calculated tax avoidance.

“They are still devising complex schemes that look artificial and their appetite for risk appears high – selling schemes that they consider only have a 50 percent chance of being upheld in court,” the report said.

The insider knowledge of the ‘Big Four’ gives them an advantage, fueling additional criticism in the report that it is “inappropriate for individuals from firms to advise on tax law and then devise ways to avoid the tax.”

HMRC has also been criticized for being at the mercy of the four companies itself: “HMRC is not able to defend the public interest effectively when its resources are more limited than those enjoyed by the big four firms,” the report stated, adding that it was not just financial resources that the government tax-collection body lacked.  

“In the area of transfer pricing alone, there are four times as many staff working for the four firms than for HMRC,” the report said.

HMRC has repeatedly been caught up in scandals surrounding its weakness in the face of large corporations. In 2010, phone company Vodafone reached a deal with HMRC, exempting it from its avoidance of a £6 billion tax bill in 2010, for which it was previously targeted by protesters. The company was later found to have paid no corporate tax in 2011.

The committee warned that HMRC was engaged in a “battle it cannot win.”