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Tax Avoidance: UK Missing Out On Billions

(c) Sky News 2012

The Treasury is losing billions in revenue because officials are failing to clamp down effectively on aggressive tax avoidance, according to Whitehall's spending watchdog.

The National Audit Office (NAO) revealed that HM Revenue and Customs (HMRC) has a backlog of 41,000 cases worth £10.2bn in tax revenue.

They relate to schemes aimed at small businesses and individuals, in what has been described by MPs (BSE: MPSLTD.BO - news) as "eye-watering" potential avoidance.

The NAO said officials are struggling to cope with the volume of schemes being "mass-marketed", often by small specialist tax advisers.

HMRC believes most of the schemes are not valid and would be "defeated" if tested in court but closing them down can take years of legal wrangling.

Margaret Hodge, the chair of the Commons Public Accounts Committee which oversees the NAO's work, called on HMRC to get a grip on the problem.

"People who pay their taxes promptly and in full will be dismayed to discover that the enormous level of tax avoidance taking place is overwhelming HMRC's efforts to combat it. The scale of the problem is staggering," she said.

"Without a credible plan to resolve these cases and to stamp out future avoidance, the public will lose confidence in the tax system's ability to collect even-handedly what is due from all individuals and companies."

She (SNP: ^SHEY - news) urged officials to step up enforcement and impose more fines so that they act as a deterrent.

Experts who design and sell such schemes have to notify HMRC under a regime known as Disclosure of Tax Avoidance Schemes (Dotas).

The NAO said this had helped target legal loopholes but that it had little effect on the overall scale of tax avoidance activity.

"There is little evidence that HMRC is making progress in addressing this problem and it must now be vigorous in seeking more effective counter-measures, proposing legislative change where necessary," it said.

Between 2004 and 2011, around 2,300 avoidance schemes were disclosed to HMRC, with over 100 new schemes emerging in each of the past four years.

Since April 2010, litigation has been opened in 110 avoidance cases. Of the 60 cases where judgments have been reached, HMRC was successful in 51.

The NAO said there was no evidence that this level of litigation was proving an effective deterrent.

Its (Euronext: ALITS.NX - news) chief, Amyas Morse, said: "HMRC must push harder to find an effective way to tackle the promoters and users of the most aggressive tax avoidance schemes.

"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."

HMRC said it had successfully challenged more than 40 avoidance schemes in the courts over the last two years, protecting around £4bn, but admitted it had to stay vigilant.

"As the avoidance landscape changes, so must our approach. The Government is building on Dotas to give HMRC stronger powers to obtain information," a spokesman said.

"These, together with the introduction of an anti-abuse rule in 2013, will further strengthen our anti-avoidance work."