HMRC has a cosy relationship with the tax avoidance industry

MPs have criticised the agency but remained silent on its links with the big accounting firms that help companies avoid tax

Prem Sikka

The public accounts committee report on the operations of Her Majesty's Revenue and Customs (HMRC) is a damning indictment of the Treasury and tax officials. Some £25.5bn remains uncollected from disputes with 2,700 companies. The amounts are bigger than the budget for the secondary education or transport.

HMRC has entered into sweetheart deals that let multinational corporations off the hook, but there is little public accountability. Two deals have made newspaper headlines. The tax dispute with Vodafone was rumoured to be for around £6bn. HMRC and Vodafone denied this amount, but the committee noted that the company's accounts set aside around £2.2bn to meet its liability. It eventually settled for about £1.25bn. The second deal with Goldman Sachs related to unpaid tax on complex transactions and the company was not required to pay interest which had been expected to amount between £8m and £20m.

A major problem is that all deals are shrouded in secrecy, and therefore it is difficult to judge the efficiency and effectiveness of HMRC. The committee draws attention to numerous potential conflicts of interests and lunch/dinner meetings between the HMRC officials and corporate advisers to agree deals. Many of these meetings were not minuted, and where the minutes existed they were often not available. In the face of persistent questions from the committee, HMRC officials often sought refuge in confidentiality. The committee concluded that "there is a question about whether HMRC acted within the law and within its protocols" and that the government procedures lack the independence and transparency needed to provide sufficient assurance to parliament. Despite, this the National Audit Office has generally given a good write-up to HMRC.

The committee's report raises three broad questions. First, in common with other parliamentary hearings, the public accounts committee hearings made good theatre, but were not really effective. Leading witnesses, often briefed by lawyers, declined to provide the requisite information. This should be countered by forcing witnesses to provide evidence on oath. Rather than relying on goodwill the committee should insist on the evidence.

Second, the committee's report is short on meaningful reforms. Instead of the so-called independent review of sweetheart deals, or bureaucrats reviewing the work of other bureaucrats, it should have empowered the people. Thus the tax returns of all companies and related correspondence should be made publicly available. The disclosures will enable the people to make their judgment on complex avoidance schemes and secret deals reached with tax officials. Norway, Sweden and Finland already publish corporate tax returns in various forms and the same should be adopted by the UK too.

Third, the committee laments HMRC's cosy relationship with large companies, but is silent on the cosiness with the tax avoidance industry. It notes that HMRC officials attended numerous lunches, dinners and receptions organised by PricewaterhouseCoopers (PwC), KPMG, Deloitte and Ernst & Young. The lavish hospitality is organised to promote private interests rather than enhance HMRC accountability.

Many former ministers act as advisers to big accounting firms. For example, Labour grandee Lord Peter Mandelson has been an adviser to Ernst & Young. Former ministers Lord Digby Jones and Lord Norman Warner of Brockley have been advisers to Deloitte. Former Labour home secretary Jacqui Smith is a consultant for KPMG. Former Conservative minister Sir Malcolm Rifkind has been an adviser to PwC. Do such political links skew the relationship between government departments and the private sector?

The links between the big accountancy firms and the Treasury attract no comments from the committee. For example, former PwC staffer Mark Hoban is the current financial secretary to the Treasury. Sir Nicholas Montagu, one-time chief of the Inland Revenue, joined PricewaterhouseCoopers in 2004 before moving on to other lucrative commercial appointments. PwC partner Richard Abadie has been the head of private finance initiative policy at the Treasury. In June 2009, former PwC partner Amyas Morse was appointed UK comptroller and auditor general and became responsible for directing the National Audit Office. Former PwC tax partner John Whiting is the director of the newly established Office of Tax Simplification, advising the government on simplification of tax laws. Chris Tailby, one-time tax partner at PricewaterhouseCoopers became head (until 2009) of anti-avoidance at HMRC. In July 2010, partners from KPMG, Ernst & Young, Grant Thornton and BDO became members of the government appointed Tax Professionals Forum and help shape the UK tax laws.

Unsurprisingly, little progress is made on curtailing tax avoidance. The revolving doors must raise questions about the cosiness with the tax avoidance industry and HMRC's willingness to do secretive deals. Yet the committee raises no questions.

This article first appeared on Guardian Comment is Free