Britain’s tax authorities are accused by Parliament today of not being “on the side” of individuals and small firms who pay their fair share of money to the Government.

In a highly critical report, Westminster's spending watchdog claims officials are "holding back" from using legal sanctions to recover money from large companies which use aggressive schemes to minimise their tax bills.

As a result the public at large is being forced to shoulder more of the burden of paying for public services while it has become "easier" for companies to avoid paying their way. The Public Accounts Committee said that despite countless pledges to crack down on tax avoidance, HMRC actually collected less tax in real terms last year than it did in 2011-12. At the same time the "tax gap" between what HMRC estimated it was owed last year and what it actually collected rose by £1bn to £35bn.

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The committee urged HMRC to be much more willing to pursue prosecutions against large businesses and rich individuals who use loopholes illegitimately to minimise their tax bill, or who knowingly mislead HMRC or withhold information.

And it strongly criticised the organisation for overestimating by £2.5bn the amount of money it expected to collect from a deal with the Swiss authorities to tackle offshore tax evasion.

"We were astonished that HMRC could not give any reasons for such a shortfall," the committee's chairman Margaret Hodge said.

But in a scathing response to the report, HMRC rejected the PAC's findings and accused it of "selective and misleading use of figures". It said it could not collect tax that was not legally due "however much the committee might want us to".

"The committee's unjustified criticism risks undermining the confidence that the compliant majority of UK taxpayers have in the excellent work [that HMRC] does," said a spokesman.

The PAC report comes after a series of public hearings with senior tax officials who were accused of failing aggressively to pursue large businesses with legal firepower in the way in which they went after small businesses and individuals. During the hearings, senior HMRC officials admitted they had not attempted to estimate how much tax revenue was lost through aggressive tax avoidance schemes such as those employed by multinational companies such as Google, Starbucks and Amazon.

"HMRC holds back from using the full range of sanctions at its disposal," said Ms Hodge. "It pursues tax owed by the smaller businesses but seems to lose its nerve when it comes to mounting prosecutions against multinational corporations."

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The committee also warned that in seeking to make the UK more attractive to business, HMRC has not considered what impact changes to the tax regime would have on the behaviour of large businesses in the future.

It suggested that UK-based companies might choose to 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, a practice exposed by The Independent in a recent investigation of the so-called "quoted Eurobond exemption".

HMRC brought in £475.6bn for the Government in 2012-13, an increase of £1.4bn or 0.3 per cent in cash terms over the previous year. But in real terms, after inflation was taken into account, tax income actually fell compared to 2011-12.

Part of the shortfall was due to a vast overestimate of the amount of income the Government would get from a deal with the Swiss authorities to hand over details of UK citizens with offshore bank accounts.



In last year's Autumn Statement George Osborne predicted that HMRC would collect £3.12bn of unpaid tax from these individuals and the figure was built into budget estimates. However, so far only £440m of additional revenue has been collected by HMRC.

"We were astonished that HMRC could not give any reasons for such a shortfall," said Ms Hodge.

Jonathan Isaby, political director of the TaxPayers' Alliance, said the sad part of the problem was Britain's "hideously complex tax code".

"This makes it easy for those with well-paid accountants to run rings around the tax man," he said. "But politicians should stop pontificating about individual cases and blaming HMRC for inaction, because the power to make our tax system simpler and fairer lies squarely in their hands."

Shabana Mahmood, Labour's shadow Exchequer Secretary to the Treasury, said at a time when ordinary people were facing a squeeze on incomes, the failure to collect tax owed was "inexcusable".

"Ministers need to explain why the amount of uncollected tax rose last year, why the Swiss tax deal has raised a fraction of the revenues promised," she said.

But an HMRC spokesman rejected the claims made by the report. "HMRC can only bring in the tax that is due under the law and we cannot collect what is not legally due, however much the Committee might want us to," a spokesman said.

"The Public Accounts Committee knows we cannot prosecute multinational companies for activities that are lawful within the international tax framework and has itself acknowledged that the kinds of international tax planning by large businesses that it has reviewed are lawful. The committee's criticism is not a fair reflection of the dedication of our staff, whose work has helped the UK achieve one of the best levels of tax compliance in the world."

Vodafone paid no corporation tax for third year

Vodafone has paid no UK corporation tax for the third year in a row and paid 19 per cent less in direct taxation this year than in 2012, according to accounts published yesterday.

The company said its profit for the year was £294m, down from about £400m the previous year. But this was eclipsed by interest payments totalling more than £600m a year on loans taken out to buy 4G and other licences in the UK, and £1bn in capital expenditure.

Bosses said the Government wanted to see more investment in the UK's infrastructure and so had allowed companies to claim tax relief when doing this.

"Vodafone is no different to any other UK business, whatever its size: if a self-employed trader buys a new computer or a large UK business borrows money to build a new warehouse, exactly the same rules apply," a spokesman said.

"These allowances and reliefs are intentional, long-established and carefully considered: they reflect deliberate policy decisions by successive UK governments and are a cornerstone of UK taxation policy."

It said the UK was "an expensive and highly competitive country in which to do business" and had "one of the least-profitable mobile markets anywhere in the world".

Ian Johnston