A lack of transparency makes it "impossible to judge" whether HM Revenue and Customs' tax deal with search giant Google represented a fair deal for taxpayers, MPs on the public accounts committee have concluded, as they urged the department to "lead the way" on international efforts to toughen up tax laws.
Google announced in January that it had agreed to pay HMRC an additional £130m in corporation tax, covering the ten-year period from January 2005 to June 2015. The deal followed a six-year investigation by HMRC and was hailed as a "major success" by chancellor George Osborne because the organisation had previously "paid no tax".
But the size of the payment attracted fierce criticism from Labour, who argued that it fell well short of what the company would be expected to pay if it were charged the full corporation tax rate of 20%.
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In a report published following a marathon evidence session with Google's Matt Brittin and senior HMRC officials including chief executive Lin Homer, the public accounts committee said taxpayers "still do not know if Google paid the right amount of tax", and urged HMRC to "address this if it is to protect the integrity of the tax system".
"Taxpayers’ legal right to con dentiality means that HMRC cannot explain how it has arrived at this or other settlements, or demonstrate that the rules have been applied correctly," the committee said.
"In most cases corporation tax settlements only come to light because companies make a public statement or are required to disclose information about them in their financial statements. As a result, we only ever see partial information.
"More details of tax settlements can be made available if companies agree to the information being released. While Google provided some information it was insufficient to understand the basis for settlement and how it was reached. Google would not commit to providing further information at the evidence session.
"Tax settlements are not precise or scienti fic: judgement is needed to agree how much value is created by Google’s activities in the UK, for example. Th e small amount of tax paid in proportion to the scale of Google’s UK activities means that there are legitimate questions about this settlement; we still do not know if Google paid the right amount of tax."
The MPs urge the tax authority to "push for an international commitment to improve tax transparency", saying HMRC should be prepared "to go it alone if necessary".
And the committee also says HMRC took "far too long" to reach the settlement, calling on the department to "devote sufficient resources, and seek new powers if required" to ensure future tax investigations are carried out "in a timely manner".
"HMRC needs to be clearer about the costs and benefi ts of its investigations," PAC's report says. "It should also seek the power to impose penalties on companies which do not cooperate fully with its investigations when tax is in dispute."
"A step in the right direction"
However, the MPs acknowledge that HMRC officials are required to work within the rules laid down by ministers, and says it is "diffi cult for HMRC to penalise multinational companies for tax avoidance due to the scope for diff erent interpretations of complex tax rules".
During the PAC hearing that led to the report, HMRC's business tax director Jim Harra said the current legislation giving the tax authority the power to penalise firms for incorrect tax returns "does not work in relation to large businesses in the way that it should", and the department has promised to tighten up the rules to make it easier to issue a penalty.
The committee agrees that it is currently "very difficult to establish" that a firm has taken insufficient care in producing a self-assessment, something which must currently be demonstrated by HMRC if it is to levy a fine – rules which the tax authority has promised to change.
PAC says plans to remove that requirement are "a step in the right direction", and says HMRC should "implement these changes as soon as possible and enforce them rigorously".
HMRC is also urged to keep an eye on settlements reached between Google and tax authorities in other countries, amid reports – which PAC says it "cannot verify" – that French and Italian authorities are expected to reach more substantial settlements.
"We expect HMRC to monitor the outcome of other tax authorities’ investigations into Google, and re-open its settlement with Google if relevant new evidence becomes available," the report says.
"HMRC should also examine the approach adopted by other tax authorities to see what lessons it can learn, should they succeed in securing larger tax settlements from Google."
Launching her committee's report, PAC chair Meg Hillier said public anger had been "palpable" since the deal was announced.
"Whether you call it secrecy or confidentiality, this lack of transparency does nothing to build confidence that big corporations are paying their fair share of tax," she said.
"Google has been keen to parade its enthusiasm for simplicity in the tax system but the fact remains the company has chosen to set up a complicated tax strategy specifically designed to minimise its tax bill.
"At the same time, HMRC itself has identified that the current penalty regime treats corporations differently from individual taxpayers.
"That is why we are calling on HMRC to take a lead in reforming international tax rules. The bigger prize after a costly six-year investigation would have been to develop a new approach to the activities of internet-based companies."
Civil Service World is awaiting a response from HMRC to the committee's report.