Peers condemn profit shifting abuse

Peers have attacked the taxman for being "unaware" of the scale of company profit shifting and raised concerns about the amount of tax that has been lost as a result.

The Government plans to crack down on profit shifting by firms
The Government plans to crack down on profit shifting by firms

HM Revenue and Customs allowed the tax minimising practice to become "embedded as acceptable tax planning", according to the House of Lords Economic Affairs Committee.

It backed Government plans to crackdown on abuse of the system but called for reforms to end another potential tax dodge over employment status to be put on hold so they can be strengthened .

Ministers should delay measures in the Draft Finance Bill aimed at stopping companies and individuals using limited liability partnerships (LLPs), introduced in 2000, as a tax avoidance mechanism until April 2015.

The committee said nearly all the evidence it had gathered showed that the tests being introduced to stop abuse of the system - which can see employees disguised as partners to reduce income tax and national insurance - would fail. Extra time would allow improvements to be made and give businesses time to adapt to the reforms, it added.

Plans to stop the alternative investment fund management sector, mainly hedge funds, shifting profits should go ahead but must be more tightly drafted, it said.

Peers said revisions to how much the measure would reap for the Treasury - put at an extra £1.92 billion between 2015 and 2019 in last year's Autumn Statement - raised concerns about the inaccuracy of the Government's originals estimates. They also rounded on HMRC for being "unwilling to provide" details about how the figure had been worked out and called on the organisation to be "more open".

Committee chairman Lord MacGregor said: "Given that defects in the 2000 legislation have led to the present problems, it would be a mistake to run the risk again of not getting the legislation right.

"Nearly all of our witnesses felt that the tests in the proposed legislation would not meet the policy objectives.

"There is also the practical problem for many firms that the start date of April 2014 does not accord with their accounting periods and would take effect when the Bill will not yet have had its parliamentary scrutiny.

"That is why we have proposed delaying this part of the Bill until April 2015 in order to resolve the difficulties to which our witnesses have drawn attention."

He added: "We are also concerned at the amount of tax lost from the practice of profit shifting, and that HMRC was apparently unaware of its scale and had allowed it to become embedded as acceptable tax planning."