Big accountancy firms are using “insider knowledge” gained from staff seconded to the Treasury to help companies and wealthy individuals avoid paying UK taxes.
MPs on the Commons Public Accounts Committee said they were “very concerned” at the way the “big four” firms – Deloitte, Ernst and Young, KPMG and PwC – were able to exploit loopholes in tax laws.
Committee chairman Margaret Hodge said the practice represented a “ridiculous conflict of interest” which should be banned.
“The large accountancy firms are in a powerful position in the tax world and have an unhealthily cosy relationship with government,” she said.
The committee warned HM Revenue & Customs (HMRC) was engaged in a “battle it cannot win” in seeking to stem the losses to the Exchequer from tax avoidance.
It had far fewer resources than the big four firms which employed almost 9,000 staff and earned £2 billion a year from their tax work in the UK.
The committee particularly highlighted the way the firms seconded staff to the Treasury to advise on technical issues in the drafting of legislation only for the individuals concerned to return to advise clients on how to use those laws to avoid tax.
“Through their work in advising government on changes to legislation they have a detailed knowledge of UK tax law, and the insight to identify loopholes in new legislation quickly,” it said.
It gave the example of KPMG whose staff advised on the development of “controlled foreign company” and “patent box” rules, and then issued marketing brochures highlighting the role they had played.
The brochure “Patent Box: what’s in it for you” had, it said, suggested the legislation represented a business opportunity to reduce UK tax and that KPMG could help clients in the “preparation of defendable expense allocation”.
The committee said it was “inappropriate” for individuals from firms to advise on tax law and then devise ways to avoid the tax.
“We have seen what look like cases of poacher, turned gamekeeper, turned poacher again, whereby individuals who advise government go back to their firms and advise their clients on how they can use those laws to reduce the amount of tax they pay,” it said.
“We are ... very concerned by the way that the four firms appear to use their insider knowledge of legislation to sell clients advice on how to use those rules to pay less tax.”
While the firms insisted they no longer sold the “very aggressive” avoidance schemes on offer 10 years ago, the committee said they had simply moved on to offering other forms of tax avoidance advice.
It said they still offered schemes with as little as a 50% chance of succeeding if challenged – suggesting a willingness to take advantage of HMRC’s need to weigh the risks of becoming involved in protracted legal battles.
Matthew Sinclair, chief executive of the TaxPayers’ Alliance, said: “Our hideously complex tax code makes it easier for well-paid accountants to run rings around a taxman who is reliant on the external help of the big four.
“The power to make our tax system simpler and fairer lies squarely in the hands of politicians. They must stop pontificating about individual cases and actually do something to reform the system which they designed and have been tinkering with ever since.
“The committee is right to say that radical action is needed to simplify the tax system. Strategic reforms are needed to get rid of redundant double taxes and end the need for countless complicated reliefs. Then taxpayers could have confidence that everyone was paying their fair share.”
The Treasury strongly rejected the committee’s findings.
“The analysis and conclusions in the PAC report bear almost no resemblance to reality of what Government is doing or what is happening,” a spokesman said.
“In particular, as a matter of principle, the suggestion that Government shouldn’t work with business and indeed anyone affected by its policies is totally absurd.”
Jim Harra, the director-general of business tax at HMRC, told the BBC Radio 4 Today programme that the taxman was “getting better all the time'' at tackling aggressive tax avoidance, and said there was evidence that avoidance by large businesses had declined over recent years.
Total tax avoidance in the UK was estimated at around £5 billion a year, representing about 1% of all tax liabilities, he said.
Mr Harra said he did not “recognise” the problem identified by the committee of accountants working on secondments within HMRC on the development of tax rules, only to go back to their companies and advise clients on how to beat the rules.
“That’s something we would be very vigilant about and something I don’t recognise that we see,” he said.
“Clearly they do go back out with some expertise and they do advise on how to use the legislation. We watch very carefully what advice accountants are giving to their clients.
“Provided that advice is how to use the legislation in accordance with the way Parliament intended it to be used, we have no problems with that.”
Mr Harra added: “We do use secondments as part of our way of consulting on the design of tax legislation. The people who we bring in, in very small numbers, are closely directed by senior officials, so they are not in the lead on any of this.”