The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I am grateful to my noble friend Lord Dykes for giving us an opportunity to discuss the important issue of tax avoidance and to remind the House of what the Government are doing to clamp down on it. However, we should put the whole subject into perspective. It is an important topic. There have been few speakers, but a considerable degree of heat has been thrown at the topic that may occasionally have obscured the light.
We must remember what we need to achieve in this area, particularly in the current economic situation, when we are faced with reducing the largest peacetime deficit on record. It is of course more important than ever and fair that everyone, whether businesses or individuals, pays their fair share of tax, but we have to remember that we must keep this country competitive. We are competing in a global economy, so we have to have a tax regime that is competitive for businesses, is fair for individuals and incentivises individuals to get off benefits and into work. Yes, the tax-avoidance question is critical, but we have to remember the wider context in which it operates.
A fair tax system means closing the tax gap and ensuring, as I have said, that businesses and individuals pay in full what they owe. My noble friend Lord Dykes asked questions about the size of the tax gap and whether we really understand its make-up. The figures for 2009-10 are that the tax gap was estimated at 7.9 per cent of liabilities, £35 billion in cash terms, which means that HMRC collects over 90 per cent of all the tax that is theoretically due. We have to do better. HMRC has to do better and it is working on that—I shall come on to that shortly—but, if someone heard this debate in isolation, they might think that the performance of HMRC was much worse. It collects over 90 per cent of all the tax that is theoretically due, or £468.9 billion in revenue in 2010-11. We should also remind ourselves that the latest figures show an overall decrease in the overall net tax gap of £7 billion from 2008-09 to 2009-10.
We should therefore be cautious about the methodology, but the 8 per cent tax gap in the UK compares well with other economies. For example, the USA’s tax gap is 14 per cent and, to take a country in Europe that is widely regarded as a model of fiscal rectitude, in Sweden the tax gap is 10 per cent.
The Government’s approach to tackling avoidance builds on HMRC’s anti-avoidance strategy. There are three core elements to that approach: prevention, detection and counteraction, with a clear focus on preventing avoidance before it can occur. I say “avoidance”; I do not of course share my noble friend Lord Phillips of Sudbury’s contention. I know that it is nothing new that he feels strongly that avoidance and evasion are the same thing.
Over the past 20 months we have demonstrated real progress. In answer to the challenge from the noble Lord, Lord Eatwell, about the concrete actions that we are taking, in the most recent Finance Act we closed down a range of avoidance schemes to bring in yields of around £1 billion a year over the course of this Parliament. Only this month, we acted quickly to stop a particularly significant avoidance scheme aimed at artificially exploiting an income tax relief. That scheme posed a significant risk to the Exchequer, and our quick action ensured that this risk did not materialise. That is the sort of concrete action that we will take.
In answer to the questions about whether HMRC has the capacity to deal with the threat of avoidance, the Government have underlined our commitment to tackling avoidance with the reinvestment in HMRC, which I am sure noble Lords are aware of, of over £900 million, which should bring in around £7 billion each year by 2014-15 in additional tax—again, concrete additional targeted action.
Lord Phillips of Sudbury
Can my noble friend then reassure the House on the figure about which I asked earlier and say that the reduction in staffing of 12,000 will not affect the front-line effort to reduce tax avoidance/evasion?
Lord Sassoon
My Lords, as I am sure my noble friend would recognise, all government departments are having to tighten their belts; otherwise, the deficit is not going to be tackled. I hope to reassure him by explaining where HMRC is focusing its efforts. The recruitment of over 1,200 staff in new posts to tackle non-compliance is significantly upping HMRC’s efforts in this area and will bring in significant additional revenue in each tax year, so the answer to his question is yes.
The customer relationship model that HMRC uses has considerably improved its ability to identify risk and to handle these issues. The report by the National Audit Office on HMRC’s 2010-11 accounts, which underlay one of the reports referred to by the noble Lord, Lord Eatwell, noted that HMRC’s high-risk corporate programme has brought in a yield of over £9 billion and that it contributed to reduced avoidance activity by major companies. The investment is there. On another point made by my noble friend Lord Dykes, we do not forget the cash economy in those efforts.
I am grateful to the noble Lord, Lord Eatwell, for drawing attention to the question of the general anti-avoidance rule, the GAAR. We are exploring that option to see whether such a rule could help to deter and counter tax avoidance in a fair way. Attention has been drawn to the work of Graham Aaronson and his colleagues and their report. We received the report in November last year. We will be considering it and are actively discussing its implications with businesses and tax professionals. We will respond to the report at the Budget and set out our plans if appropriate. We have said clearly that we would not introduce a GAAR without a further formal round of public consultation, so that is very much work in progress.
I am also grateful to the noble Lord, Lord Eatwell, for applauding the introduction and the work of the Office of Tax Simplification. The complexity of the tax system has been much remarked on, and I can echo many of the remarks made by noble Lords on that. The OTS has started its work and published recommendations on tax relief, avoidance legislation and IR35, as well as an interim report on small business tax. More is coming down the pipeline and this ongoing work will be an important part of what we all want to see: a simpler tax system that is easier for individuals to comply with. I may disagree with the emphasis of my noble friend Lord Phillips of Sudbury on some things, but I certainly agree that this is fundamentally about individuals doing what they are required by the law to do.
Another critical component of preventing avoidance is the way in which HMRC engages with the largest taxpayers proactively to identify and tackle avoidance. We do not have the time to go into the detail of this but, in response to some of the somewhat one-sided interpretation and selective quoting of the recent Public Accounts Committee report, I draw the attention of the House to HMRC’s detailed rebuttal on many factual points in the conclusion of that report. In brief, to be clear, this effort with large businesses is not in any way HMRC being soft on large business or on those with complex tax affairs. HMRC treats all taxpayers even-handedly and does not allow them to settle for anything less than the full amount due. It is through its engaged and intelligent approach to tax avoidance that the additional revenue to which I have already referred is coming in.
Lord Eatwell
The noble Lord referred to erroneous statements in the PAC report. Did they include the observation that senior HMRC officials had had lunch and dinner with the companies that then had a reduced tax burden?
Lord Sassoon
My Lords, the substance of the issues to which HMRC takes exception is to do with the size of unresolved tax bills and some of the details of cases in which errors were found that HMRC disputes. That is the substance, rather than the question of who met whom with what refreshments laid on. We should stick to the substance.
Other noble Lords have been scrupulous in keeping to their time. I am conscious that, with the interventions, I risk going over my time, so I will press on. I want to answer just one more question, raised by my noble friend Lord Dykes, about the tax treatment of overseas companies. I just confirm that we are reforming the controlled foreign company rules very much to protect against the artificial diversion of profits to low-tax jurisdictions, just as our general reforms are being made to make the UK a good place for global corporates to have their headquarters. Having said that this is a matter for individuals, I will not comment on the affairs of any individuals.
In conclusion, I have very briefly explained our strategy for tackling tax avoidance to ensure that everyone pays their fair share. This is an important topic and I am glad that we have had this debate. The Government are taking real, decisive, concrete action to close the tax gap. We are making good progress, but there is much more to do. We will ensure that every sector of society pulls in the same direction to tackle the deficit and the woeful economic legacy left to us by our predecessors.