Tax investiagtions backlog

There may be some £10.2bn at risk of being lost to the Treasury unless HMRC manages to successfully investigate its backlog of 41,000 cases of avoidance by private individuals and companies.

The stark figure was revealed by the National Audit Office (NAO) today in its report, Tax Avoidance: tackling marketed avoidance schemes by the National Audit Office, which looked at the effectiveness of the scheme that the government introduced in 2004.

The NAO revealed that more than 100 schemes had been disclosed under DOTAS but could not find evidence that the scheme has discouraged aggressive promoters or individuals from pursuing extremely complicated methods of avoiding paying their tax in full.

HMRC was also criticised for failing to monitor the costs of its work to tackle avoidance, as its approach is to identify and respond to all the risks it identifies to the effective collection of tax.

The report said:

‘Investigations into suspected non-compliance may or may not reveal that avoidance has taken place, or may uncover evidence of illegal tax evasion rather than avoidance. HMRC therefore does not collect management information on the resources it commits to tackling avoidance specifically. This limits its ability to make informed decisions about how it should best allocate resources to maximise its impact.’

In addition, the NAO has said that HMRC has been unable to enforce compliance with DOTAS on promoters determined to avoid disclosure as some promoters go to some lengths to avoid disclosing a scheme if they perceive an advantage in doing so.

The NAO stated:

‘Where a promoter has obtained a legal opinion that a scheme does not require disclosure, it can claim this represents ‘reasonable excuse’ and no penalty is applicable. Since September 2007, HMRC has opened 365 enquiries where it suspected a promoter had not complied with the disclosure rules, in most cases concluding that there had been no failure to comply. It has applied 11 penalties over that time, each of £5,000.’

The report does however recognised that DOTAS has helped HMRC to change tax law and prevent some types of avoidance activity, evidenced by 93 changes to tax law designed to reduce avoidance.

The NAO said that DOTAS had also helped to change the market of tax avoidance schemes, with the result that the larger accountancy firms are now less active in this area.

NAO head Amyas Morse has urged HMRC to ‘push harder to find an effective way’ to tackle the promoters and users of the most aggressive tax avoidance schemes.

Morse said:

‘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.’

The report is available from the NAO.