Cuts and closures leave taxman in unequal battle with army of accountants

One tax expert compares it to the chaotic passport queues at Heathrow. “Sooner or later they’re going to give in and just let people through,” he says.

Britain’s tax system is straining under the weight of thousands of unresolved disputes between companies, rich individuals and Revenue & Customs (HMRC).

More than 20,000 cases are piled up in the tribunals and will take at least 38 years to clear at the current rate, resulting in billions of pounds in potential revenue sitting uncollected. The backlog is one of the starkest examples of how the Government’s crackdown on tax avoidance is being threatened by a lack of resources.

Staff cuts, office closures and poor morale stemming from pay freezes and pension cuts are also biting, several people with inside knowledge of HMRC told The Times.

The backlog of cases is a direct result of a tougher approach to disagreements with taxpayers in recent years. Few people outside the tax business would recall Dawn Primarolo’s statement to the Commons on December 2, 2004. Within the industry, though, the impact was seismic. Tax avoidance, the Paymaster General declared, was out of control: the Treasury was losing billions of pounds a year.

Yet the Government was determined to fight back. “We cannot allow avoidance on this scale to continue,” Ms Primarolo said. From that moment, the Government would use legislation to shut down schemes it considered too aggressive and impose retrospective tax bills on the users. The big accountants howled in protest, describing the move as unfair — possibly even unlawful.

HMRC introduced new rules requiring accountants to notify them as soon as tax avoidance schemes were created, making it easier and quicker to shut them down. The taxman also won a series of big cases against scheme providers in the courts. Behind the scenes, the Government put pressure on the big firms to stop mass-marketing their tax schemes. There is still a huge appetite among a significant minority of rich taxpayers to enter complex, risky arrangements in the hope of reducing their liabilities.

Estimates of the amount of tax lost each year to aggressive avoidance arrangements vary wildly and are fiercely contested. Judging by the Government’s increasingly heated rhetoric, tax dodging by the rich is still a huge concern. Senior HMRC figures estimate that the loss to the exchequer is about £4.5 billion a year.

In the Budget, George Osborne launched a scathing attack on tax avoiders, describing them as “morally repugnant”. The Chancellor had been presented with anonymised tax returns relating to three wealthy individuals, who earned between £10 million and £20 million each. According to the briefing, by structuring their financial affairs to take advantage of tax reliefs on charitable donations, losses and loan interest, two of the unnamed millionaires had paid no tax and the other had paid 15 per cent.

The analysis, obtained by The Times under the Freedom of Information Act, claimed that 10,000 rich individuals had collectively reduced their tax bills by £1.1½billion by taking advantage of these uncapped reliefs. The 20 biggest users reduced their tax bills by an average of £7.25 million, with loss relief accounting for 65 per cent of the reductions, reliefs for charitable donations 20 per cent and reliefs on loan interest 15 per cent. The people in this group of 20 paid an average of less than 10 per cent of their income, the analysis claimed.

HMRC opened 189 investigations into avoidance schemes last year. In March, it shut down one highly aggressive scheme relating to loss reliefs on property transactions that would have sheltered £1.5 billion in tax alone.

“People will still do it, you just don’t talk about it now,” one senior accountant at a big firm told The Times.

There is still an army of hundreds, possibly thousands, of tax boutiques which specialise in finding loopholes in the tax code. These firms put together products, often with catchy names, and market them through accountants, banks and law firms with access to large numbers of wealthy clients, in return for a commission. The schemes are usually backed by opinions from highly paid barristers. Participants are often required to contribute additional fees into a “fighting fund”, to pay any legal costs in the event that the scheme is challenged in court by HMRC.

The boutiques tend to keep a low profile, avoiding the media and insisting that their clients sign non-disclosure agreements. They protect their intellectual property fiercely.

Some experts said that even the sweeping anti-avoidance measures floated by the Chancellor at the Budget would be circumvented by clever accountants and lawyers .

“I do genuinely think it’s still a big problem,” one former senior HMRC policy adviser said. “Some accountants make a very good living out of this ... and some of those people have brains the size of planets.”

In 2007, HMRC introduced a strategy under which it vowed to take legal action in any dispute where it felt it had a better than even chance of winning.

The approach was adopted because rich taxpayers had tried to make their tax affairs deliberately complicated in the hope that HMRC, to save time and money, would accept a smaller sum. But the tougher approach resulted in a deluge of cases that overwhelmed the HMRC legal teams and tax tribunals.

Figures from the Ministry of Justice show there were 22,100 unheard cases at the end of last year, up from 15,600 two years earlier. A record 3,400 cases were lodged in the last three months of 2011 alone, figures obtained by the law firm Pinsent Masons show.

Most businesses and individuals regard the delays as a huge inconvenience, as it typically takes years for disputes to be resolved — but others are using it to their advantage.

“A lot of people are saying, ‘We’ll see you in court’,” a tax expert at one big accountancy firm said. “If you know there’s a massive backlog, what do you do? You play hardball.”

HMRC is now experimenting in some cases with mediation in an attempt to clear the backlog. This has been welcomed by some staff and tax advisers, but others say it sends a confusing message as it appears to conflict with the strategy of refusing to do deals.