The UK revenue and customs authorities are failing to take prosecutions against multinational firms over aggressive tax avoidance, MPs said today.
The decision by major firms such as Google and Facebook to cut their UK tax bills by establishing headquarters in Ireland has become increasingly controversial in Britain.
"The lack of prosecutions against multinational corporations seems at odds with HMRC's stance on pursuing tax debt from small and medium-sized businesses in the UK," said Margaret Hodge MP.
The chair of the House of Commons public accounts committee today insisted HMRC “needs to demonstrate that it deals robustly” with companies misleading it.
The tax authorities have “struggled to devise rules that struck the right balance between taxing business profits in the UK and not driving business overseas”, the committee reported.
During hearings, tax officials told MPs that taxing UK profits in the UK while stopping business from moving overseas is “impossible to reconcile, and that some degree of tax leakage was inevitable”.
However, MPs complained that not enough efforts had been made to discover how much tax is lost through aggressive tax avoidance, so it could not put a figure on the losses, the MPs found.
HMRC collected £475.6 billion in all types of taxes in 2012-2013, a rise of 0.3 per cent on the previous year, but it marks a fall in real terms after inflation is taken into account.
Putting forward a series of recommendations, MPs said HMRC should “be explicit about the limitations” of its ability to measure how much tax is avoided.
Meanwhile, the committee said HMRC “should be more willing to pursue prosecutions against individuals and large businesses to test the boundaries of the law”.
MPs raised concerns about changes made to tax laws by chancellor of the exchequer George Osborne in a bid to encourage companies to pay taxes in the UK.
“In seeking to make the UK more attractive to business, HMRC has not considered adequately the impact that changes to the tax regime will have on the behaviour of large businesses,” the committee said.
“UK-based companies may reduce their tax liability by borrowing money in the UK to invest in an offshore subsidiary and then offsetting the borrowing cost against their UK profits.”
The chancellor’s changes to the UK’s controlled foreign companies rules – made to protect UK tax revenue – have, in fact, weakened the rules.
Companies are now able to move their finance operations offshore to reduce their tax liability, thus cutting individual companies’ corporation tax bill to just 5 per cent of profits.
Multinational companies are also lending money to their UK operations from subsidiaries based in low-tax jurisdictions and then legally offsetting interest payments against UK profits.