MPs call for better targeting of corporate tax

21 October 2008

HM Revenue and Customs (HMRC) has been told that it must improve its efforts in making sure that large companies pay their corporate tax.

In its report, the House of Commons Public Accounts Committee said that HMRC needs to be more robust in its pursuit of those companies that fail to meet their tax obligations, speedier in its investigations of corporate tax avoidance and more efficient in its targeting of corporation tax enquiries.

The Committee highlighted the significant discrepancy between those large companies that pay tax and those that do not.

According to the Committee, HMRC collected £23.8 billion in corporation tax in 2006/07, but that, of the UK's biggest 700 companies, just 50 accounted for two-thirds of the total.

It was estimated that in 2005/06, 181 large firms, or a quarter, paid no corporation tax at all. Companies paid little or no tax because of losses made in previous years, tax relief or tax avoidance.

The Committee proposed that HMRC compile a report annually analysing and explaining discrepancies and trends in tax collection.

Although HMRC secured £2.7 billion in payments following enquiries into large businesses in 2006/07, the Committee criticised the investigations as badly targeted. Almost 60 per cent of the enquiries produced just 1 per cent of the additional taxes raised.

HMRC was urged to accelerate the rate at which enquiries are carried out. In January 2008, some four out of ten investigations were already two years old. The Committee recommended that a minimum of 95 per cent of enquiries should be completed within 18 months.

Edward Leigh, the Committee's chairman, said: "The fact that nearly 60 per cent of the department's inquiries into compliance turn out to produce less than 1 per cent of the additional tax raised constitutes very poor targeting. It is extraordinary that there is no correlation between the resources HMRC commits to each inquiry and the amount of corporation tax in question."

Mr Leigh added: "The department has introduced a new approach in which high-risk businesses will be singled out for investigation. It must publicise this new approach. It should also robustly apply new penalties for those companies engaged in serious tax avoidance activities."

A HMRC spokesman said: "We have cut the number of open inquiries by over 50 per cent since April 2007 and the number of cases focused purely on low-risk issues is down by nearly 90 per cent."