According to the report, in each of the last four years, more than 100 new avoidance schemes have been disclosed to HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) regime, with tax avoidance schemes estimated to have contributed around £5bn to the £32bn tax gap in the last year – 2010-2011.
The report found, despite the introduction of DOTAS in 2004, HMRC still struggles to control the promoters of tax avoidance schemes, of which HMRC believes there are between 50 and 100 operating in the UK. The particular problem is that, while many promoters comply with DOTAS, some do not and, according to the report, “will go to some lengths to avoid disclosing a scheme if they perceive an advantage in doing so”.
The financial advantage seems to be quite clear. The NAO report found that, since September 2007, HMRC has opened 365 enquiries where it suspected a promoter had not complied with disclosure rules, in most cases finding there had been no failure to comply. Even when HMRC did find fault and applied a penalty, as happened in 11 cases, the fine was only £5,000.
It was noted though, that DOTAS had enabled HMRC to close legal loopholes more quickly and to initiate 93 changes to tax law designed to reduce avoidance. The NAO added that DOTAS had also helped to “change the market of tax avoidance schemes, and the larger accountancy firms are now less active in this area”.
‘Inherently difficult to stop’
The NAO acknowledged that one of the inherent problems is that tax avoidance is not illegal and is therefore difficult to stop, the principle currently being that a potential avoider can use a scheme to gain a tax advantage until HMRC can prove the arrangement is not consistent with tax law. A process the NAO notes is resource-intensive, can take many years and often requires litigation.
This is not helped by the large scale of the problem. For example, HMRC estimates there are around 30,000 users of partnership loss schemes and employment intermediary schemes – one of a few mass marketed avoidance schemes.
To address this, HMRC has increased its focus on the tax affairs of high net worth and affluent individuals over the past few years, setting up a high net worth unit looking at individuals with more than £20m and more recently setting up another unit to deal with those in the higher rate tax bracket or with assets of at least £2m.
Amyas Morse, head of the National Audit Office, said today: “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.”
To read a copy of the National Audit Office report click here.
