Tackling Corporate Tax Avoidance: EAC Report
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Lord Newby (LD)
My Lords, it is a great pleasure to respond to this debate. I start by thanking the committee for its work and for the characteristically thoughtful way in which the noble Lord, Lord MacGregor of Pulham Market, introduced the debate. I congratulate the noble Lord, Lord Leigh of Hurley, on his maiden speech. I hope that his understanding of the advantage of brevity does not diminish with the passing of the years as, sadly, it sometimes does among other Members of your Lordships’ House. His speech was extremely thoughtful, in a House that prides itself on its expertise but which in fact has relatively few experts on financial affairs. Those we have are extremely distinguished. Compared to, say, debates on anti-social behaviour, in debates on any aspect of the economy or finances, we are pretty short on people with real current or past expertise, so I am doubly pleased to welcome the noble Lord to your Lordships’ House and look forward to taking part in many more debates with him.
I start with a confession. I am an alumnus of the lamentable side of Customs and Excise. I worked for a number of years in that part of Customs and Excise that provided tax policy advice to the Treasury at a time when it had virtually no tax officials of its own. Although things have changed, I like to think that we were at least able to match our colleagues in the Inland Revenue, with whom we had an extremely friendly rivalry at the time. I do not want to go into detail about the way in which tax policy is currently organised, but say simply that both departments have a clear remit. HMRC has a strong operational tax policy role, whereas the Treasury is responsible for strategic tax policy, but they work very closely together—literally as well as figuratively. When I worked in Customs and Excise my office was several miles away from the Treasury, which meant that even if I wanted to have a quick chat with somebody it was quite difficult. There is a common and regular movement of staff between HMRC and the Treasury, so there is quite a lot of joined-up working.
I shall deal with the complaint from all sides of the House that the Government are complacent about the issues. We are not complacent in respect of three aspects of the problem that we are facing. First, we accept and completely understand the level of public discontent. Secondly, we believe that that discontent is realistic and soundly based, and thirdly, we are dealing with a major problem. We are far from complacent about the need to do more. I hope to explain both what we are doing and why we will be doing more. One thing that I must say, having been a Treasury spokesman for the Liberal Democrats in your Lordships’ House for nearly 15 years, is that for the first part of that 15 years there was never any movement on the issues that we are talking about today. Pressure groups came year after year, asking why we were not doing this or that. Many of the things that we argued for to no avail for a decade have now been implemented, and a whole raft of other initiatives that have been started very recently have the ability to make fundamental improvements in how we deal with this problem. We are now in the middle of a rapidly moving series of national and international activities, which definitely goes in the direction that the committee wants, and I shall attempt to set that out.
I should perhaps state the blindingly obvious—that the Government’s view on corporation tax is that while we are keen to drive forward tax competitiveness, such a policy does not mean that we should be soft on tackling tax avoidance. We are determined to rebalance the tax regime to ensure that it supports growth and investment, and we want a corporate tax regime that improves our business environment, helps to attract multinational companies and encourages investment. That is why, alongside other reforms, we have reduced the headline rate of corporation tax. Having created a competitive tax regime, we expect companies to play by the rules and to pay the tax that is due. I completely agree with the noble Lord, Lord Hollick, that companies have wider duties than simply to minimise the amount of tax they pay. The Companies Act 2006 lays out clear directors’ duties as well as duties for the company as a whole in terms of having regard to the impact of its activities on society, which was a new and welcome initiative by the previous Government. It means that the two-dimensional view that anything that increases profit is good and anything else is bad is no longer acceptable and no longer recognised in law.
I shall deal with the question of whether corporation tax has had its day. Corporation tax at the moment raises 8.7% of HMRC revenue, as the noble Lord, Lord Bilimoria, pointed out. It is not as much as the top three but it is far above any other in that middle league. As I said earlier today, from a pragmatic point of view, a tax that raises 8.7% of revenue is one that should be made to work better but not, in my view, replaced. The Government have a credible record to date in dealing with companies avoiding tax. That has been demonstrated both through the legislative and operational changes we have made since 2010 and by HMRC’s success in litigating through the courts. The number of cases has not only dramatically increased manyfold; the proportion of cases heard in 2012-13 resulted in a more than 80% success rate for HMRC. So far, we have made 33 changes to tax laws to close down numerous avoidance loopholes.
As noble Lords mentioned, we have introduced the first general anti-abuse rule, which is designed to tackle abusive tax avoidance schemes and is a key part of our plans to drive down tax avoidance. Now that it is happening it is put to one side as though it is a little tick in the box, but we campaigned for years to get some movement on a general anti-avoidance law. At long last it has happened, and while I accept that, as the law beds in, we might over time want to strengthen it, it is a major shift for the better. We have updated the public procurement rules so that any potential government suppliers bidding for large contracts must now declare occasions of significant tax non-compliance. The noble Lord, Lord MacGregor, specifically asked me about this point. These rules were introduced on 1 April this year. It is not so much a case of naming and shaming suppliers who avoid tax but of suppliers disclosing occasions of significant non-compliance so that departments can have a number of remedies at their disposal, up to and including contract termination.
On top of our domestic action, we have taken a lead in the international field. Indeed, a lot of the debate today has been around the international initiative that is now being carried forward through the OECD. The noble Lord, Lord Lawson, said that the Government should accept that corporation tax was not fit for purpose. Indeed, that is why the Government have taken the lead in pressing for international action. A number of noble Lords said that it is about time the Government took a lead. They made it clear that in their chairmanship of the G8, tackling tax avoidance was their top priority. The OECD initiative has come about largely because this Government have taken an international lead. I strongly agree with the noble Lord, Lord Brennan, that the OECD is a body that is capable of getting to grips with this. There is a key component that will be absolutely crucial in determining whether the good work that has started comes to a satisfactory conclusion, which is whether Governments keep their eye on the ball. If it is just left to the OECD and it is not being pressured by Governments to make quicker progress it will not.
We are seeing now a recognition, not just by this Government but by a number of Governments internationally, that they have to take firmer action and keep the pressure on. That is why we have agreed to fund the OECD to the tune of another €400,000, to make sure that it keeps up with the pace and produces what is an extremely ambitious work plan, and ensures that it has effect.
The noble Lord, Lord MacGregor, asked how that was going. The OECD has established 15 actions needed to deal with base erosion and profit-shifting, which include a specific task force to look into the tax challenges of the digital economy—what might be called the “Google and Apple Task Force”—and a review of transfer pricing rules, the “Starbucks Task Force”. This is being carried forward by a number of OECD working parties, which will report back next year and the following year.
Closer to home, as a number of noble Lords have said and as the committee pointed out, it is obviously key that HMRC is fit for purpose in tackling a very difficult issue and dealing with companies that have considerable resources at their disposal. That is why the Government are investing almost £1 billion over this spending review period, specifically to tackle tax avoidance and evasion and to reduce losses from fraud, error and debt. That will bring in an extra £9 billion a year by 2014-15.
The additional money is spent largely on people. There has been an increase in the number of graduate-level trainees and a significant increase in the amount of technical training inside the department, in part with the Association of Accounting Technicians and Manchester Metropolitan University. An increased number of people are working on transfer pricing, as the rules already allow us to deal with some aspects at least of egregious transfer pricing. That requires highly skilled people, and there are now more of them. As I said earlier today in your Lordships’ House, the Treasury will look at any request it receives from HMRC for additional resources in the run-up to the spending review.
We have also seen—and been actively participating in—a sea change in the way that tax information is exchanged between jurisdictions. Another major campaigning issue has been about the automatic disclosure of tax information between the UK and tax havens—between the UK and our Crown dependencies and overseas territories. That is now happening. Some have signed, while the others have agreed. That will make a huge difference to transparency, which a number of noble Lords mentioned and which we are keen to see promoted.
I will deal with a number of specific points, some from the committee and others raised de novo today. Staff are seconded from the big four to HMRC or the Treasury only when the Treasury or HMRC identifies a lack of expertise and knowledge. The number of people involved here is not huge. We believe that effective safeguards are in place to ensure that official information is treated confidentially. Although there is quite a lot of general talk about people going in and nicking lots of ideas from the Treasury and telling their clients about them when they get back to the private sector, I have yet to see any concrete evidence of that.
The noble Lords, Lord Lawson and Lord Hollick, talked about the rules on interest deductibility, which they felt were too generous. This is one of the areas being looked at currently by the OECD. A number of rules are already in place to limit how much interest a company can deduct from its tax liability, but I was rather depressed to hear from the noble Lord, Lord Leigh, quite how much of a bonanza that was proving for the professionals and tax experts.
On harmonising the treatment of debt and equity finance, I am afraid that I can only repeat what we have already said: we are reviewing the wider case for an allowance for corporate equity. Again, the challenge here is one of cost, because it would be very expensive to do it on a large scale. Would undertaking a comprehensive review of the operation of corporation tax add value at this point? As we are in the middle of the OECD process and of ramping up the number of people working in the area, we seem to have a process in place which, if successful, will meet the requirements of the committee. To have a major review of it in midstream would divert effort in the wrong direction.
A number of noble Lords raised the point about a joint committee. Perhaps this is because I was a taxman, but I personally find it extraordinary to think that we should be establishing a committee of politicians to review the way in which the tax authorities look at individual taxpayers’ concerns. If the Government had proposed it, there would have been absolute outrage. I believe that the way forward is for the NAO to undertake rigorous investigation in this area. If the Public Accounts Committee in another place feels that not enough resources are being devoted to it by the NAO, we hope it will discuss that with the NAO and we will get more resources devoted to it.
The increase in the tax gap from £34 billion to £35 billion, which the noble Lord, Lord Browne of Ladyton, was very keen to hear about, was largely due to an increase in the VAT gap of 1.5%, caused by the rise in the standard rate of VAT from 17.5% to 20%. It had nothing to do with the issue that we are discussing today.
The noble Lord, Lord Shipley, asked a very specific question, which I will need to write to him about. In terms of what the Government are doing, bilaterally and through the OECD, to ensure that developing countries have a say in the renegotiation of global tax rules, we are, first, doing quite a lot with capacity-building via a joint HMRC-DfID programme, so that these countries are more capable of doing the job themselves. They are involved in various aspects of the task force work. A number of noble Lords raised the problem of mispricing. The extractive industry transparency initiative and the EU accounting directive now mean that there is a lot more country-by-country accounting in those areas and a lot more transparency, which will yield results over time.
The noble Lord, Lord Hollick, asked whether HMRC looks at intra-year tax avoidance schemes. Yes, it does. Corporation tax is calculated on the end of year accounts, and where a scheme to reduce taxable profits takes place during the year but has ended before the end of the year, HMRC will investigate. The DOTAS regime requires companies to disclose tax avoidance schemes when they are undertaken.
The noble Lord, Lord McFall, made a very powerful case about establishing a register for beneficial ownership. Such a register is being set up, and the case for making that public is currently under active consideration by Ministers. As I have always said, as a Leeds United fan, I would very much like to have known whether Ken Bates really did own Leeds United—that is the side of the argument on which my vote comes down.
I hope that I have gone some way to answering the points that have been made and reassured noble Lords that the Government are not in the slightest bit complacent. This is an area that we take extremely seriously and on which we will continue to focus.