Insider Business Club: tax avoidance

Is HMRC on course to meet its target of making tax avoidance not
worthwhile by 2008?

Chris Tailby, director, anti-avoidance group, HMRC

I think we are doing pretty well on that. Certainly recent research we have
received indicates that a large number of businesses think that doing tax
avoidance is much more risky.

There is also evidence we have come across that shows the disclosure regime
is affecting the way businesses do their tax planning and I think that is good
as well.

What this is all driving at is affecting the behaviours of companies and
trying to move them away from the outrageous tax avoidance that we come across
to commercial tax mitigation of a kind which is within the spirit and purpose of
the law.

The work we are doing is actually taming that problem, so I’m pretty
encouraged by this shift we are now seeing and the steps that we are taking to
improve behaviours.

There has been a significant shift over the last couple of years. Obviously,
there are a lot of old issues that still need to be dealt with. But we are
making it very clear now – certainly to the larger businesses – that we won’t
accept this kind of behaviour and they need to change.

There is plenty of room for legitimate tax planning. I was in the profession
myself for 16 years and I always maintained that there is plenty of work out
there for accountancy firms and tax advisers to do. A lot of growth has been on
the back of Enron, Sarbox and issues like that. Obviously that will tail off,
and I have seen some warnings that that work will move away, but other
opportunities will open up.

Where we have concerns is with transactions and arrangements that are entered
into contrary to the spirit and purpose of the law. That is the kind of thing we
challenge.

I think we are continuing to try and be as business-friendly as we possibly
can and to reduce administrative burdens, reduce complexity. Nobody wants
complex legislation. I think we are exploring every avenue to make life simpler
for everybody.

We don’t want it complex – there is no mileage in it for us. So every time we
see an opportunity to make changes to make it simpler we are going to explore
it.

I think we have got very much better at consultation and we do consult on a
huge range of issues. It used to be said that anti-avoidance legislation was a
sort of no-go area. That is not true any more and we do consult on that.

The consultation we did around disclosure last summer was applauded by the
House of Lords economic affairs committee. I think we are doing a lot in that
direction.

How easy is it to control the avoidance debate when tax is no longer a
national issue?

Diane Hay, deputy director, international corporation tax,
HMRC

I’m not sure that we ever controlled the debate in that sense but what we do
do is work very closely with our partners through the OECD and through bilateral
arrangements with others. A lot of our attention now goes into trying to get the
international rules right here so that there is agreement between countries as
to what is a fair share of the taxing rights. We make strenuous efforts to
ensure that companies that trade internationally don’t suffer from double
taxation. We can’t do it all on our own – we haven’t been able to do that for a
long time. We have been participating in OECD for 20 years now on transfer
pricing guidelines for instance. That work is critical to having a set of
international rules that work for everybody.

We do try and understand the way that businesses operate and certainly there
are many needs a company will have for offshore treasury functions. We start to
get a bit upset about these when we find that they aren’t really carrying out
real treasury functions, that there aren’t, possibly, real people there or very
few people there and very few facilities for them to do this work. That is when
we get into arguments as to whether or not it is a genuinely commercial function
of the group or whether or not it is some sort of tax mitigation or tax
planning.

Treasury functions are always a difficult part of looking at international
tax planning. We understand the commercial need for them but obviously there are
many other uses of them as well. When we design rules like the controlled
foreign company rule, or other rules like that, we have to think very carefully
about how we deal with treasury companies because they do have many uses.

Transfer pricing is a large area of activity now for HMRC. We live in a world
now where 50% of world trade goes into corporate, into group, so we have to put
a lot of our resource into looking at transfer pricing. Again we understand that
there are many genuine commercial arrangements that are made within groups. On
the other hand there are some which aren’t and some which are motivated by tax
planning.

What should groups do? Well, there is plenty of documentation out there about
how you should apply the arm’s length principle. There is a lot of guidance we
give and that the OECD gives about documentation requirements. We expect
companies with changing behaviour to be far more open and transparent about
their transfer pricing polices and we also encourage companies to come and talk
to us in advance of pricing arrangements.

Chaired by Damian Wild