The PAC’s report into the Big Four’s role in shaping tax policy is misguided and misses the point

Although I am one of eight independent members of the Treasury tax professionals forum, I am not currently a tax partner in a Big Four firm. But as I was for over 13 years, I am able to comment on the Public Accounts Committee’s (PAC) report.

Almost all senior corporate executives and tax advisers I have spoken to about this ongoing debate have been appalled by the blend of misinformation and accusation provided to the public, often promulgated by those who should know better. The public deserves better communication about tax issues, free from innuendo.

I will suggest a way forward but it is necessary to dispel some myths. First, I have known many tax professionals (Big Four and others) whom have been seconded to the Treasury (HMT) or HMRC over the years. I have always been impressed how diligently and independently they carry out their assignments and, in particular, their care in maintaining the appropriate level of confidentiality required.

Secondly, the Big Four do not have a monopoly on the provision of tax services to FTSE 350 and multinational companies but it has to be accepted that these four firms provide well over half of the total tax advice provided to such companies.

Thirdly, the corporation tax system is overwhelmingly based upon self-assessment so it is totally unsurprising (except to the PAC) that large accounting firms employ far more tax specialists than HMRC.

Indeed, the example quoted in PAC’s April 2013 report that HMRC only has 65 transfer pricing specialists in comparison to the 250 employed by the Big Four does not seem surprising as there are specific requirements in the UK’s tax legislation for companies to maintain adequate transfer pricing documentation whether they are asked by HMRC to provide it or not.

Finally, it is entirely inappropriate for individual companies to be referred to in the report when there has been no decided case determining that they are avoiding tax liabilities. Hopefully the Transport Committee would not consider publicising a list of motorists thought to have been speeding until they were convicted of such an offence.

Many companies have a substantial turnover but pay no corporation tax because their accumulated profits have been inadequate (for example, to recover start-up or expansion costs) or they obtain significant capital allowances for qualifying expenditure on plant, machinery, fixtures and fittings.

The report’s opening conclusions and recommendations are somewhat more nuanced and appropriate than its remaining 40 pages of commentary and evidence. Most would agree that the UK’s tax legislation is excessively complex and needs far more radical simplification than the Office of Tax Simplification has recommended.

Similarly, there would be a lot to be gained from a guidance note, provided it were jointly issued by HMT/HMRC and the taxation representative bodies, discussing what might be considered, on the one hand, to be aggressive tax avoidance and, on the other, authentic tax planning.

For example, entering into non-commercial based transactions to eliminate a tax liability which had already arisen on a previous transaction might be within the former, but deciding upon the lowest tax cost route to implement a transaction ought clearly to be within the latter.

So far as HMT/HMRC obtaining assistance from the private sector on tax proposals, it cannot be sensible to remove this source of assistance. No government department ought to deprive itself of access to knowledge and experience in the private sector. However, they should look for a wider group of potential secondees.

Transparency The final recommendation concerns transparency. I am unconvinced there will be much progress in this decade from recommending that ‘HMRC and HMT should push (...within the OECD) for an international commitment to improve transparency’.

This issue is too complex and too judgmental at the international level to produce an agreed and workable solution on a shorter timescale. Nevertheless, there are some simpler and less bureaucratic approaches which could be tested such as a requirement to include a fuller qualitative description of the main reconciling items between the pro-forma UK taxable profits and the projected corporation tax actually payable on the year’s profits.

Let’s hope that the debate can now move on from political positioning on taxation matters towards some genuine initiatives which promote informed public understanding of the tax debate.

Stephen Herring, senior tax partner, BDO