Lord Newby
My Lords, I begin by thanking the noble Lord, Lord Foulkes, for initiating this debate. It is a very important subject and this is a timely point at which to be discussing it. I reassure noble Lords that despite the tenor of the debate, the vast majority of UK taxpayers do not avoid or evade tax. They pay the tax that is due and they pay it on time. However, some do not, and that is what we have been discussing today. The economic and social consequences of tax avoidance and evasion are not insignificant. A number of noble Lords referred to the tax gap, which is estimated to be around £32 billion, in total of which the amount due to avoidance and evasion was estimated in 2010-11 at £19 billion. This tax gap exists everywhere, and it is rather lower in the UK than it is in most other countries. Furthermore, it has been falling over a period both before and since this Government came to office, but it is still significant and too big.
As a number of noble Lords have said, the money that we are not collecting in taxes is money that we could be spending on services, something that I am sure we all wish we were able to do. The social consequences of failure to collect the right amount of tax are in many ways as significant as the economic ones. Many individuals and companies up and down the country are honest and pay the tax they owe on time, and it is not right that they should shoulder the burden for those who dodge or completely evade their responsibilities. It generates a huge sense of unfairness and anger, and erodes confidence in the tax system. At a time when the Government are facing tough spending decisions, it is even more important that the right amount is collected.
I agree that this issue has a moral dimension. Failure to pay tax that is reasonably due weakens the bonds that hold society together. I also accept that while there is a moral element to this, there are some companies whose moral compass is, by common consent, lacking. This has been attacked in a number of ways. The Companies Act 2006 lays on directors a range of duties that go beyond fiduciary ones. It is a statutory obligation for directors to have regard to the impact of their company on society as a whole. In my view, sometimes they put less emphasis on that than they do on some of their other duties. However, they already have this requirement.
The question is how we translate our moral outrage into effective action. Before coming on to what the Government are doing, I will take up a comment made by my noble friend Lady Kramer about a potential kite mark, and the remarks made by a number of noble Lords about the effect of consumers. There are some things that consumers can do more effectively and quickly than government, and it seems that some of the actions that have been taken against some well-known companies have had more of an impact in a matter of days or weeks than anything that government, with the best will in the world, could do in the same length of time. I do not have a suggested kite certification body, and I do not think that such a body should come from government, but it is a good idea that should be pursued.
We believe that this Government have a strong track record on tackling both tax avoidance and evasion. That is demonstrated, for example, in the 33 changes to tax law that have been made since 2010 to close down numerous tax avoidance loopholes, and illustrated by the 1,560 individuals who have been prosecuted for tax crimes by HMRC since then. We have shown a similar willingness to confront those who try to hide their money offshore. Some 50,000 taxpayers have already come forward in response to all the offshore disclosure facilities, of which Liechtenstein disclosure facility was the first. To date, these have generated over £1 billion of tax in penalties and interest, and in the years to come there are many billions more to come from that relatively narrow source. That activity reflects a wider transformation in the way HMRC now tackles avoidance and evasion.
Since 2010, some 1,000 additional staff have been deployed to tackle avoidance, evasion and criminal attack, and to cut back on tax debt. I shall deal head-on with the issue of how cuts to the overall HMRC budget have reduced the focus and effort being put into this area. Nothing could be further from the truth. One of the main reasons it has been possible to cut both the budget and the staff at HMRC while increasing effort and resource in this area is that the way people pay their taxes has changed. A huge number of companies and individuals used to pay their taxes using paper tax forms, but now virtually no one does. That has enabled HMRC greatly to reduce the number of people whose job was essentially to manage bits of paper. I do not know if there is a figure for it, but the amount of paper that goes through HMRC is a very small fraction of what it used to be. It means that we have already been able to allocate around an extra £1 billion to this area. So in answer to the first of the questions the noble Lord put to me, I can say that I am pretty confident, indeed very confident, that HMRC has the resources to tackle this issue more effectively than it did in the past, and we have said that we shall look at whether there is scope for putting more resource into it in the future. However, there is something to consider with regard to further resource: you cannot do it too quickly because we are talking about highly trained staff if they are going to be effective. We have put in a lot more and we are keeping the position under review.
In connection with HMRC, the noble Lord asked about it cutting deals with big business. He was concerned about that. The settlements he referred to were reviewed independently by a judge and found to be satisfactory. However, HMRC has put in place robust new assurance and governance rules for settling large cases, so I think that some lessons might have been learnt.
In the Budget, we vowed to do more to tackle avoidance and evasion. We announced the signing of major new automatic exchange agreements and disclosure facilities with the Isle of Man, Jersey and Guernsey, and I shall come back to that later. We also announced the introduction of the first general anti-abuse rule, which will shortly be legislated for through the Finance Bill. This will target effectively the most abusive forms of avoidance and provide a strong deterrent against using such schemes in the first place. Is it strong enough? We shall see when we review it. Is it something against which the last Government set their face? Yes, it is. I would not want to get into too much retrospection, so let us leave it at this: having made the case in your Lordships’ House for an anti-abuse and an anti-avoidance rule for many years, I am very pleased that at long last it is now happening.
For those who choose to contrive complex mechanisms to disguise their employment status and thus avoid employment taxes, we have published a consultation to review two areas of the partnership tax rules, while just last week we published a consultation on the use of offshore employment intermediaries. Our focus on tackling avoidance and evasion will continue, but as a result of the investment that we have already made, HMRC is now set to raise total additional compliance revenues of £22 billion per year by 2014-15.
The noble Lord, Lord Foulkes, asked me three questions, the second of which had to do with beneficial ownership. The Financial Action Task Force on Money Laundering sets standards on anti-money laundering and these issues. The FATF standards are at a high level and are implemented at EU level. EU action is driven by the money laundering directives, a new one of which will be negotiated this year. The standards on beneficial ownership place the requirement on countries to ensure that there is adequate, accurate and timely information on the beneficial ownership of companies, which can be obtained or accessed by competent authorities. Member states are now implementing those standards. The Treasury is working with BIS, and BIS is currently drafting a discussion paper on corporate transparency, which includes beneficial ownership. This will be published over the summer. The measures agreed to through the G8 in this area will, as I say, be implemented in the UK through the EU money laundering directive, as well as by UK money laundering regulations and changes to the Companies Act.
Those concerned with these matters have been promoting the multilateral information exchange for a long time. There has been the most extraordinary acceleration of activity in this area in recent months. The key starting point—the stone, if you like, that started the avalanche—was, as noble Lords have pointed out, the US Foreign Account Tax Compliance Act, which requires non-US financial institutions to report extensive information on US customers with accounts overseas to the US authorities. The US is saying, “We want to know from you what our companies and citizens have in your back accounts”. This has been in operation for only a relatively short time.
As an example of how that standard has really become an international norm, I will go through the following year. In June last year, the UK, France, Germany, Italy and Spain agreed a model information exchange agreement with the US to implement FATCA. In September, the UK and the US signed an agreement on that model. In December, the UK announced that we saw it as a new standard and would look to build on it ourselves and internationally. In January, the Prime Minister announced that tax transparency, including this, would be a priority for the G8. I confirm that it is. In February, the Isle of Man agreed to a FATCA-type regime with the UK. In March, Jersey and Guernsey agreed to the same thing. In April, France, Germany, Italy, Spain and the UK agreed to develop and pilot multinational tax information exchange based on the FATCA model and we made it clear that that was our priority for the May council. Last month, the overseas territories and Crown dependencies made a commitment to join the pilot: that is, to join the FATCA approach.
That is hugely significant. It means that, for the first time, places that have become a byword for tax avoidance will be required to make information available to other tax authorities. Also in May, another 12 European member states agreed to join the same process, while the European Council supported the creation of what it calls a new global standard for automatic exchange of information: that is, a FATCA-type approach. All this has happened in a year. It is an extraordinary acceleration of events but is all to the good. It is our intention that it should be pursued even more rigorously in the future.
The noble Lord, Lord Browne of Ladyton, asked about developing countries and the problems that they face in not being able to collect the tax revenues that they are due. There are two elements to how you deal with that. One is that we do our bit to make clear what is happening in those countries in relation to multinational companies. That is why we support the extractive industry transparency initiative and why the EU accounting directive will require country-by-country reporting for the extractive industries, so that at least you can see what is happening in those places.
We have also realised, in recent years, that we can play a major part by helping those countries themselves improve the efficiency of their tax collection. HMRC has been putting money into support for the tax administrations in those countries. In Ethiopia, where we have been doing it for a number of years, tax revenues have risen by as much as 40% in a year. In Zambia, to which the noble Lord referred, although we are committed to spending £235 million between 2011 and 2015 on reducing poverty, we are also committed to building their tax collection capacity, and HMRC has been supporting the Zambia Revenue Authority to build its own tax collection. Obviously, the quicker they can raise their own proportion of tax, the less reliant they will be on aid. In the Budget, we announced a programme of capacity building, which DfID and HMRC were going to promote in many of those countries. I think that is a very important move.
The noble Lord also referred to the future of tax havens and what they are going to do if they do not have a financial services sector. That is an extremely pressing issue but it must not be the principal issue. We cannot delay action in this area because some tax accountants in the Cayman Islands might find themselves slightly shorter of work.
My noble friend Lady Kramer and the noble Lord, Lord Haskel, in particular, talked about the problem of multinationals not paying tax and asked what we were going to do about it. There is a major push via the OECD, in which we have taken a lead, to change the rules. A lot of the accounting rules have been in place for nearly a century, so it is not surprising that they do not deal very well with the current situation. I assure the noble Lord, Lord Davies, that the Prime Minister will take a lead and will push this very hard at the G8 later this month. Next month, the OECD will present proposals to the G20 on how exactly it proposes to revise the rules. There is a huge amount of work going on in this area—I gather there are 15 work streams—so we should not think that this is being taken at all lightly.
The noble Lord, Lord Haskel, asked whether the Government would deny contracts to tax avoiders. In the Budget, the Government announced that businesses must certify their tax compliance if they want to bid for government contracts. That is new, and we hope and think that it will be effective.
The noble Lord, Lord Watson, questioned whether employees of accountancy firms should be able to spend time on secondment with HMRC. We realise that there can be perceived conflicts of interest. At the moment, secondees have to sign an agreement with the host department and their permanent employer to ensure that there is no conflict of interest when they return. On balance, we value such secondments and think that HMRC gains an advantage by taking employees from the big accountancy companies to help with its work and to help bridge what used to be a complete silo between the accountancy firms and the department. It is a bit of a caricature to think that all accountants are necessarily evil-minded and are going to use the information they get to their clients’ advantage. My experience of accountants is that they are part of a very fine profession and are often unjustly criticised.
The noble Lord, Lord Brooke, asked a specific question on the charity tax. I assure him that HMRC is working closely with the Charity Commission to make sure that charities comply. It conducted 10 joint inquiries with the Charity Commission in 2012-13. There are about 20 exchanges of information every month about charities where it appears that there might be a problem. To go back to an earlier point, HMRC has doubled the staff working on charity compliance since 2012.
I hope I have gone some way to answering the points that have been made in the debate this afternoon and to reassuring noble Lords that tax compliance is an issue that the Government take extremely seriously and will continue to prioritise, both domestically and internationally.