David Cameron to be questioned in Parliament on Government's failure to close tax loophole

David Cameron will be interrogated over his Government’s failure to close a legal tax loophole that The Independent has revealed is losing the public purse at least £500m.

Labour is planning to ask the Prime Minister why HMRC did not act on last year’s proposals to close the quoted Eurobond exemption after intense lobbying from the financial sector, a party inside said last night.

A joint investigation by Corporate Watch and The Independent is revealing more than 30 companies using the loophole over the course of this week.

Those already named in the paper as benefiting from the legal tax avoidance scheme include nine major care providers with Government contracts, National Lottery operators Camelot, and a raft of high street chains.

MPs and campaigners demanded last night that ministers explain their continued failure to deal with the issue. HMRC will face a grilling by the Public Accounts Committee on Monday over their failure to tackle the legal loophole.

Ian Swale, a Liberal Democrat MP on the Public Accounts Committee, said: “These blatant tax avoidance methods that are now in common use are robbing the UK tax payer of hundreds of millions of pounds. It’s disappointing that, even where there are clear loopholes, the Government is not moving as quickly as it should do.”

Speaking about Monday’s meeting with HMRC, he said: “One concern we’ll be pressing HMRC on is where they get their advice from and what makes them decide to go after a particular loophole or not.

“There’s a real concern that the Government and HMRC take most of their advice from tax avoiders or their advisers.”

“The idea of having the most competitive tax system in the developed world, which is what the Government says it wants to have, should not involve having tax loopholes.

“When these loopholes are used by high street firms it makes it much more difficult for smaller shops and regional chains of shops to compete with them because the tax avoiding company has an inside track.”

Shabana Mahmood MP, shadow Exchequer Secretary to the Treasury, demanded an explanation from the Government of their continued failure to shut down the loophole.

She said: “Ministers must explain why they decided not to close this loophole which could be losing the exchequer over £500m a year. And this revelation comes after official figures showed the amount of uncollected tax went up to £35bn last year.

“At a time when millions are struggling with the rising cost of living and the deficit is high, it’s even more vital that we clamp down on tax avoidance. But this Government is totally failing to do so.”

Murray Worthy, a tax campaigner with War on Want, said: “It’s very clear that this is a completely artificial abuse system that’s just allowing these companies to avoid their contribution to the public services that they rely on.”

An HMRC spokesman said he did not recognise that £500m was being lost to the loophole.

“Companies can pay interest on loans from group companies, but where the special relationship between the companies has increased the amount of loan or the interest rate transfer pricing will restrict how much interest is recognised for tax purposes,” he said. “HMRC robustly polices such transactions.”

“Last year we consulted on the taxation of interest, including the exemption from withholding tax on quoted Eurobonds.

“Serious concerns were expressed about the impact on inward investment and it was decided to keep this complex area of tax law under review.”

“The rules on cross-border withholding tax are being looked at as part of a package of work on the international tax rules being led by the OECD.”

What could we get for £500m?

The £500m that HMRC is estimated to have lost through the Eurobond loophole could play a crucial role in other state services. Here are some of the more recent policy proposals that have cited a similar figure:

Health

Health Secretary Jeremy Hunt said yesterday that £500m would pay for the annual services of 4,000 doctors or 8,500 nurses. It is also the sum designated for a potential two-year rescue deal for A&E services in 50 hospitals that struggled most last winter.

Defence

The sum is also the figure cited by Phillip Hammond to launch Britain’s new cyber defence unit. According to the government’s plans, the £500m unit would effectively protect the country against hackers as well as disabling enemy communications, nuclear and chemical weapons, planes, ships and other hardware.

Education

The £500m figure would subsidise the majority of Nick Clegg’s proposed policy to give every five-to-seven-year-old a free school meal. To be extended to all primary school children, the policy will save families an average of £437 per child per year at a time when people are struggling.