Evidence submitted by KPMG LLP (tav0015)

 

KPMG LLP’s response to the Treasury Sub-Committee’s Inquiry into Tax Avoidance and Evasion

Introduction and summary

  1. KPMG LLP is a UK limited liability partnership which operates from 22 offices across the UK with approximately 14,500 partners and staff.  KPMG LLP is a member of the KPMG global network of professional firms providing Audit, Tax, and Advisory services. It operates in 154 countries and territories and has 200,000 people working in member firms around the world.
  2. We welcome the opportunity to provide evidence to the Treasury Sub-Committee’s inquiry.
  3. The tax environment has changed significantly over recent years.  Some of this change is due to an increasing awareness of tax as a societal responsibility but it is also due to legislation that has been enacted in the UK and internationally to combat both avoidance and evasion.  
  4. In relation to avoidance, new tax laws in the UK have made the tax code more robust (for example, the General Anti-Abuse rule) making avoidance more difficult.  Other new law has been designed to promote good behaviour amongst both tax payers and advisers.
  5. The combination of these two factors has shifted attitudes and created an environment where most taxpayers and their advisers are focussed on meeting compliance obligations.  We understand that there are still a number of smaller tax firms that promote aggressive tax planning but we believe that HMRC has a full set of powers to enable it to effectively combat this.
  6. In relation to evasion we believe that most responsible taxpayers and advisers have always had a zero tolerance with regard to tax evasion and its facilitation.  Inevitably there will always be a small proportion of taxpayers who evade their taxes.  Over recent years there have been significant developments in laws requiring transparency between tax authorities across borders. This has meant that many offshore locations are now compliant with international transparency requirements reducing significantly the opportunities for tax evasion as information is more widely shared.

Q1.  To what extent has there been a shift in tax avoidance and offshore evasion since 2010? Have HMRC efforts to reduce avoidance and evasion been successful?

  1. Tax Avoidance
  2. We consider that HMRC have been successful in their efforts to reduce avoidance.  The HMRC tax gap figures for 2015/16 attributed £1.7bn of the total estimated tax gap of £34bn to avoidance.   By behaviour, this was the smallest component of the tax gap (the largest was £6.1bn for ‘failure to take reasonable care’).  This reduction has been achieved through a combination of legislative measures and cultural changes.
  3. A significant step was made in 2004 with the introduction of the Disclosure of Tax Avoidance Scheme (‘DoTAS’) regime.  This required the upfront disclosure of certain types of tax planning and provided HMRC with early intelligence, allowing them to pre-empt tax planning with changes to the tax law and also to target enquiry efforts.  The scope of the regime has been extended over this period to great effect and has acted as a deterrent to taxpayers as well as providing early notice to HMRC.
  4. The introduction of accelerated payments in 2014 further reduced the attractiveness of entering into tax avoidance arrangements.  Previously, the anticipated tax saving was held by the taxpayer pending resolution of any dispute.  As tax cases can take many years to conclude this provided a considerable cash flow benefit.  The accelerated payments legislation has reversed this situation as it allows HMRC to collect disputed tax in advance while the matter is resolved. 
  5. Another landmark piece of legislation was the introduction of the General Anti-Abuse Rule (“GAAR”) in 2013.  There have been few instances where the GAAR panel has found planning to be egregious; however, the primary intention of the GAAR is to act as a deterrent.  
  6. The positive impact of these measures on behaviours and tax take can be evidenced by the reduction in schemes disclosed (under DoTAS) from approximately 600 in 2005/6 to 15 in 2016/17 and the level of tax collected through accelerated payments (£3 billion).  This behavioural change and awareness has also been reinforced by the introduction by HMRC of initiatives such as the Senior Accounting Officer regime, the Banking Code of Conduct and Publication of Tax Strategy.
  7. There has also been an increasing awareness across business, individual taxpayers and the public of the payment of tax as a social responsibility.  This wider societal change has supplemented and supported the impact of the regulatory changes.  We believe that the vast majority of taxpayers now accept the need to take a responsible approach to tax. 
  8. Other recent legislative changes aimed at promoters such as Promoters of Tax Avoidance Schemes and Enablers of Tax Avoidance Schemes regimes provide HMRC with powers to change the behaviour of those who do not do so voluntarily.
  9. Lastly, the Professional Conduct in Relation to Taxation (‘PCRT’) which applies to ICAEW and CIOT members (and other professionals) has increasingly become the recognised standard for most tax agents particularly since it was reissued in March 2017. 
  10. Tax Evasion
  11. Tax evasion is illegal behaviour and we believe that most reputable taxpayers (be it businesses, or individuals) have had, and have always had, a zero tolerance approach in relation to tax evasion.   Similarly reputable advisers have always had a zero tolerance approach in relation to tax evasion or the facilitation thereof and fully support efforts of Government and HMRC to eradicate such behaviour.
  12. We believe HMRC have made substantial progress in this respect since 2010.  One cornerstone of HMRC’s strategy has been disclosure facilities (a form of ‘amnesty’) that have allowed people to come forward and regularise their tax affairs without fear of prosecution.  The Liechtenstein Disclosure Facility in particular was important and in our view HMRC should be given credit for entering into this agreement.   At the time it was introduced it was difficult for HMRC to access any information from overseas jurisdictions.
  13. Another significant development has been a series of fundamental and wide-ranging international developments triggering greater tax transparency and sharing of information.  As of 31 July 2017, over 130 countries had committed to automatically exchange information under the US Foreign Account Tax Compliance Act and the Common Reporting Standard.  The UK has agreed to the automatic exchange of information with its Crown Dependencies and Overseas Territories.
  14. The introduction of the Requirement to Correct (‘RTC’) in 2017 with a final reporting deadline of 30 September 2018 is the latest development in addressing offshore inaccuracies and covers a range of issues from evasion through to non-deliberate offshore non-compliance.    This should allow further progress on reducing offshore tax evasion although there is a concern that the level of penalties proposed are such that they may deter disclosure.

Q2.  Is HMRC adequately resourced and sufficiently skilled to identify, challenge and counteract existing and new avoidance schemes and ways of evading tax? What progress has it made since 2010 in promoting compliance in this area and preventing and responding to non-compliance?

  1. We believe that HRMC have a complete set of powers available and have a dedicated team, the Counter-Avoidance Directorate, focused on the application of these powers.
  2. As has been stated by HMRC in oral evidence in this inquiry, the main issue in relation to new tax avoidance schemes are small firms of promoters that still devise such schemes.  HMRC have powers under the Promoters of Tax Avoidance Scheme regime to monitor promoters and impose business changing sanctions where applicable.
  3. We believe that whilst HMRC have been effective in communicating success in court cases involving avoidance, more could be done to deter taxpayers from entering into such schemes.  In particular, some taxpayers may not appreciate the aggressiveness of the planning or the risks involved due to receiving an insufficient briefing from the promoter.  We believe HMRC could look at more effective communication strategies warning of the dangers of such schemes to prevent taxpayers entering them in the first place.  HMRC’s successful complaint to the Advertising Standards Agency was a welcome step in the right direction in this regard.
  4. In terms of HMRC compliance activities and, in particular, tax evasion, from 1 October 2018 onwards it is important that HMRC are seen to be using the information (whether through more enquiries, more civil fraud investigations or more criminal investigations) they will receive from CRS as this has a direct impact on taxpayer behaviour.

Q3.  What types of avoidance and evasion have been stopped and where do threats to the UK tax base remain?

  1. We believe that the measures taken by HMRC have had a significant impact on tax avoidance schemes.  There are still a small number of tax promoters that sell aggressive tax planning strategies which are unlikely to withstand technical challenge. HMRC has a strong set of legislative measures to combat such behaviour and we believe they should use their powers.  However, we also think that HMRC should consider doing more to communicate to taxpayers the dangers of such schemes.
  2. As regards remaining threats to the UK tax base, the use of cash in the economy and its link to the hidden economy increases the risk of tax evasion.  The increase in credit or debit card transactions coupled with the merchant acquirer data held by HMRC, has reduced the scope for this type of evasion.  As cash gradually disappears from the economy, technological developments potentially make it more and more difficult for ‘untraceable’ transactions to exist.
  3. The largest revenue contributions to the Treasury are from employment related taxes including NIC and indirect taxes and these remain the largest potential for loss of tax.  The implementation of Making Tax Digital and other technology enabled initiatives should help mitigate any potential losses.

Q4.  What part do the UK’s Crown Dependencies and Overseas Territories play in the avoidance or evasion of tax? What more needs to be done to address their use in tax avoidance or tax evasion?

  1. Crown Dependencies and Overseas Territories (‘CD&OT’) are a focus of the ongoing public tax debate.  Often these countries are described as facilitating tax avoidance and evasion by virtue of their low tax rates and their high levels of secrecy.  We think that these are two separate issues.
  2. We believe that transparency is a key factor in stopping tax evasion.  There has been a focus over the last ten years or so on increasing the transparency of “offshore” locations due to concerns that lack of transparency might aid or enable tax evasion.  Mostly this transparency has been undertaken by financial institutions who are required to provide data on certain accounts to the tax authorities; the tax authorities then exchange this information with each other.  Initiatives such as US Foreign Account Tax Compliance Act (‘FATCA’) and the Common Reporting Standard (‘CRS’) are well subscribed; many “offshore” locations have signed multilateral agreements to automatically exchange information as part of FATCA and the CRS. 
  3. This has resulted in many of the CD&OT having very strong transparency regimes.  All CD&OT territories have signed up to the CRS which HMRC has recently described as the ‘Holy Grail’ in relation to combatting tax evasion.  The territories are also in the process of compiling beneficial interest registers.
  4. In addition, recent reviews by both the OECD and the EU included a list of non-cooperative jurisdictions – the OECD currently has no countries on that list and the EU has nine jurisdictions on its list and has concluded that all of the Crown Dependencies and Overseas Territories meet its international standards.
  5. The other criticism levelled at CD&OT is that they often have low or zero tax rates and that this facilitates avoidance. 
  6. Such jurisdictions are often the locations of international finance centres and are ‘tax neutral’, meaning that the authorities have elected not to tax certain profits or income.  As such the tax regimes are intended to facilitate cross border investment flows.  In an increasingly global world complex cross-border investment flows are part and parcel of commercial life.  Investments will often involve the bringing together of participants across a number of countries and with a wide variety of tax profiles (eg pension funds, corporate investors, individual investors etc).  By facilitating investment flows through a tax neutral jurisdiction it ensures that income or profit is not subject to an extra layer of tax on its repatriation to the investor.  At the same time it does not limit the tax authorities in the locations of the investment or the investor (ie at the top and bottom of the chain) from taxing income and profits in the normal ways.  
  7. For many investment funds this is an important feature that enables them to maximise their ability to be competitive and attract investment.  Minimising tax on the flow of funds from the investment out to the investor means returns to the investor are maximised.   It is important to note that many investors are pension funds (or overseas equivalents) that will normally benefit from some form of statutory tax exemption.  For such investors tax on financial flows from the investment can significantly affect returns and investment decisions. 
  8. Another concern raised is whether low or zero effective tax rates have the potential to encourage ‘profit shifting’ from higher tax jurisdictions.   Many of those higher tax jurisdictions will have sufficient legislative provisions in terms of, for example, withholding taxes, transfer pricing and controlled foreign company rules to protect their own tax base.  The UK has strong rules in each of these areas.  In addition, many territories have strengthened their international tax rules as a result of the OECD Base Erosion and Profits Shifting project.  More recently the US Tax Reform is expected produce similar outcomes. 
  9. In summary, whilst the CD&OT are often regarded as facilitators of tax evasion and avoidance we believe that this is a significant over-simplification and needs to be considered more objectively.

Q5.  How has the tax profession responded to concerns about its role in aiding tax avoidance and evasion? Where does it see the boundary between acceptable and unacceptable practice lie?

  1. As a large professional firm we have always had a zero tolerance approach in relation to tax evasion and the facilitation thereof.  We believe that similar views would be held by all reputable tax advisers. 
  2. In relation to tax avoidance, the profession codified the expected standards of tax advisers in the Professional Conduct in Relation to Tax in 2017.  This set out the profession’s ‘Standards of tax planning’.  This was in response to a challenge from the government that the profession take a lead in setting and enforcing clear professional standards around the facilitation and promotion of tax avoidance. 
  3. At KPMG we have had both global and UK principles covering the tax advice that we provide.  The UK principles were first introduced in 2004.  These principles are mandatory for all professional partners and staff and set out our expected standards in relation to tax advice.  These principles are regularly reviewed and updated to make sure that they reflect the environment in which we operate and the relevant expectations of our stakeholders.     We believe that it is important that there is public trust in the tax system and that it operates in a proper manner.  Key to this is a sustained, inclusive and coherent discussion around tax.  In 2014 KPMG UK sponsored a project to facilitate a dialogue across all stakeholders that examined the meaning and purpose of responsible tax.  The initiative has now been taken up by the KPMG global network.
  4. In terms of the boundary between acceptable and unacceptable practice, the best guidance is to look to those professional standards.  The Professional Conduct in Relation to Tax states that

“Members must not create, encourage or promote tax planning arrangements or structures that: (i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant structures; and/or (ii) are highly artificial or highly contrived or seek to exploit shortcomings within the relevant legislation”

  1. KPMG UK’s own tax principles have a similar statement:

“We will interpret legislation in a purposive way in line with the courts. We will not advise clients to enter into transactions with the main purpose of securing a tax advantage clearly contrary to the intention of Parliament in enacting the relevant legislation.

We do not act as mere advocates of tax planning structures or arrangements. We shall only promote transactions or structures that have both substance and business purpose.”

 

KPMG LLP

May 2018