Tax: Avoidance and Evasion
Lord Leigh of Hurley
To ask Her Majesty’s Government what steps they are taking to mitigate tax avoidance and eliminate tax evasion in the United Kingdom.
Lord Leigh of Hurley (Con)
My Lords, I am grateful to have the opportunity to debate this topic here. As is customary, I declare my interests. First, more than 30 years ago, to my amazement and that of many others, I qualified as an associate of the Chartered Institute of Taxation, and remain a somewhat passive member. Secondly, I am sure I pay my fair share of tax. I believe that all in your Lordships’ House also pay their fair share, as I am told that, before being elevated to the peerage, HMRC gives a nod to the powers that be that we are up to date in our tax affairs. Personally, I am delighted that this task is undertaken by HMRC, and it sets the tone for this debate, which is predicated on my belief that all of us in this House are keen to see greater fairness in the tax system.
One reason for my interest in this area stems from my late father showing me his personal tax computations in the early 1970s which, thanks to one relatively modest property transaction, had him paying tax at some 92%. It really shocked me. In 1976, when the Government were forced to seek a bailout—of $17 billion in today’s money—from the IMF, corporation tax stood at 52%, or more than half of a company’s profits.
Two things have happened since then. First, capital has become infinitely more mobile. Companies and people based here do not have to stay here. Secondly, the idea that the Government are not always the best actor when it comes to spending money has become mainstream. Business is recognised as a more effective driver of sustainable economic growth, and there is general global recognition that lower tax is essential for that.
I know that not all in this House share my view on taxation, which is that it needs to be simple, fair and as low as possible, but those of us who do have a duty to make the regime more effective. This means that when rates are set low, they must be paid in full, and when laws are set to ensure compliance, they must be observed in spirit as well as letter. Failure to achieve this leaves business and the whole free-market capitalist system at threat from an increasingly cynical public who have genuine cause for concern. In a way that few anticipated, mobile capital has led not only to tax competition between nations but to widespread avoidance and abuse by businesses operating in multiple jurisdictions. Those of us who want to defend low taxes must address ourselves to this.
In 2015-16, corporation tax brought in £44.1 billion, the fourth largest contributor to the Exchequer. This was after the Government had reduced the corporation tax rate from 28% in 2010 to 20% in that year. This was to be welcomed, but only if—to use the common vernacular—20% means 20%. Economic activity carried out in the UK must be taxed accordingly.
In a global economy, making tax fit for purpose means sound policy at home and leadership abroad. From this Government we have seen both, but I would like to highlight some areas where we have been successful and, in turn, where more work is required. At home we have seen much progress. For example, private equity has a system of remuneration from which the rest of the financial services sector could learn much. However, there was no material reason why carried interest was taxed as capital and not as income, and this has now been rectified. Similarly, on interest deductibility, it is a sound principle that companies can deduct interest payments from their tax bill as a business expense, but not when it leads to abusive structures. Interest deductions are now capped at 30%—a middle way that should allow legitimate deductions to continue without unduly increasing the cost of capital. The days of a private equity executive paying less tax than their cleaner are hopefully behind us.
The previous Parliament also saw the introduction of the general anti-avoidance rule, or GAAR. Before its introduction, the so-called targeted approach was simply encouraging tax advisers to concoct ever more nefarious schemes that flagrantly violated the intended spirit of our tax legislation, while hewing just close enough to its letter to be technically compliant. The GAAR means that, irrespective of the letter of the law, companies should concentrate their innovative energy on their business rather than their tax planning. I understand that HMRC is considering applying a GAAR more generally. This too is to be welcomed.
When I started my somewhat short-lived career as a tax adviser, the idea of any immorality in avoiding tax would have been risible. However, these days responsible corporations have to consider seriously how far they should go. One very senior executive of a global bank told me that they look at their tax liability and do not let it fall below around 29%, so that they are in step with their peers. He explained that they felt they could easily concoct schemes to reduce the rate but had decided that this was not in their long-term interests as a respected institution. Regretfully, others clearly had no such concerns, and some international conglomerates have essentially ducked and dived their way around international tax treaties and devised complex transfer pricing agreements to negate any tax liability in certain jurisdictions.
It is now clear that the general public will not tolerate this. I was amazed, and perhaps a little proud, to see protests in Boots by people objecting to its aggressive tax planning. One solution suggested is a corporate tax based on revenues not profits. It sounds good, but some organisations have very different types of revenue, often computing a meaningless headline number. It has to be remembered that many invest heavily in the UK, knowing full well that they will not make profits for very many years. Should they pay taxes for this when it is clear that they are genuinely not making profits here?
What are the alternatives? Our former Prime Minister used his leadership of the G20 to put global tax avoidance on the diplomatic map. This led directly to the commission of the base erosion and profit shifting—BEPS—work from the OECD, and in October 2015 the endorsement of 15 proposed action points by the G20 Finance Ministers. The focus has been rightly on transfer pricing rules which, as it happens, was the subject of my maiden speech in 2013, so I am pleased to say that it is a subject on which the Government have acted—noting, for example, the profits diversion tax.
However, the G20 process is not binding. It relies on individual countries showing leadership at home to enact real reform. The Finance Bill will update the UK’s own transfer pricing rules to match those agreed at the G20. However, it is clear that more work at the OECD and elsewhere is required to prevent even those updated rules from being abused. Instinctively, I like the Government’s new approach to apply the GAAR where it is clear that a multinational is simply using devices, such as offshore debt instruments, to reduce tax. Where actual tax is paid—I am not talking about the amounts in the accounts, which include things like deferred tax—but cash paid is less than 20% of profit, they should be allowed to consider whether a corporation should be required to pay more.
I hope that it is appreciated how radical this idea really is. This House and the other place have for centuries operated on the principle that taxpayers have certainty and pay only the minimum amount that the law dictates. But as the learned judge Lord Denning said,
“The avoidance of tax may be lawful, but it is not yet a virtue”.
We will need to see more virtuous behaviour if we are to avoid applying rigorous GAAR, which some will argue is retrospective tax, the idea of which could send some in this House, and libertarians, into apoplexy. There will be great resistance; government has to take a lead on it, and corporations will have to act responsibly.
Lastly, we must do more to tackle VAT evasion, particularly when international businesses are gaining an unfair advantage over UK businesses. The issue at hand is international businesses on Amazon and elsewhere selling goods on the internet without accounting for VAT. As highlighted in this Chamber by my noble friend Lord Lucas, of Crudwell and Dingwall, that is illegal evasion and we must take action.
In short, we are on the right track. Global tax avoidance is still ahead of any plan to tackle it, but tackle it we must. Capitalism and the free market is a model that is often harder to defend than one based on higher taxes and higher public spending, but defending it will become next to impossible if we do not come together—businesses and Governments alike—and enact meaningful and lasting reform. It is that reform that we should set our minds to now—Government, Opposition and responsible business.
Lord Tugendhat (Con)
My Lords, I begin by congratulating my noble friend on his constructive and imaginative suggestions. One great virtue of the House of Lords is that it brings to bear expert opinion on a variety of complex subjects. The speech that we have just heard by my noble friend is a very good example of what somebody who has spent a lifetime in a particular field can bring to the legislative process. I look forward to hearing what my noble friend the Minister has to say in response.
I cannot resist pointing out that in this discussion about what steps the Government are taking to mitigate tax avoidance and eliminate tax evasion in the United Kingdom, not a single Back-Bencher in the Labour Party or the Liberal Democrats has chosen to contribute. It is only Conservative speakers—apart from the Front-Benchers, of course—who have anything to say on that subject. That is something worthy of note.
Baroness Kramer (LD)
I point out to the noble Lord that we have just had a debate on the Finance Bill in which not a single Conservative Back-Bencher spoke. I suggest that he is a little more careful when he decides that finger-pointing is appropriate.
Lord Tugendhat
That is a very good riposte, on which I congratulate the noble Baroness, but the two subjects are quite different. My point simply is that we have this very interesting subject for debate, and her colleagues—and she has a great many of them; the Liberal Democrat Party is absurdly overrepresented—do not seem to find it of particular interest. That was my only point, but I accept her earlier criticism.
From a Conservative point of view, we feel that if the Prime Minister’s comments and undertakings about creating a society fairer for all are to carry conviction, it is very important that the issue of tax evasion and tax avoidance should receive a very high priority. It is something on which the last Prime Minister and the previous Chancellor of the Exchequer had strong words to say, but not enough action was taken—and I hope very much that in the May Government we will see more action more quickly on this front.
The introduction of a criminal offence for firms which do not stop staff facilitating tax evasion will certainly be a good place to start. Evasion can arise not just because a company wishes to evade tax but also because executives want to earn bonuses. Their bosses see the beneficial result of their imaginative actions and do not look too closely at what is happening, with the result that the company’s tax burden is reduced without anybody having taken responsibility at the highest level. The aim must be to deter not just companies but also individual executives from seeking to evade tax or avoid it beyond a reasonable level, as my noble friend was discussing.
The House will be aware of the charges currently being brought against former senior Tesco executives for fraud by abuse of position and false accounting. It is very hard for the authorities to go for Tesco itself unless the former CEO himself is charged. Will the Minister say what the position would be in an analogous case involving tax evasion, so far as the Government’s plans are concerned? Once those plans have been published, would individual executives find themselves at risk, as well as a company?
I have another question for the Minister. Will he give us an indication of the Government’s view of the European Commission’s demand that Apple should repay the Irish Government some €13 billion in uncollected taxes? I know that the Commission’s action raises many delicate issues of international law and state aid, as well as tax. I am also aware that the Government may well be reluctant to take up a position or intervene in an issue that involves the European Commission on the one hand and the Irish Government on the other. However, whatever else the Commission’s action does, it shows how a large multinational corporation can set up arrangements that enable it to avoid paying vast sums of tax. I say, “avoid”, because there was nothing illegal in Ireland about what Apple was doing. It is the Commission which is challenging it on the grounds of state aid, rather than tax.
Apple is, of course, only one of a great many companies that have shown similar imagination, not just in Ireland but elsewhere. The Commission’s move may or may not be the best way of tackling this problem; I am not an expert and I have no idea whether it is or not. However, I applaud the Commission because, whether or not it is the best way, it does actually seek to tackle a long-standing scandal that Governments, including our own, have so far evaded. The Commission has, as it were, thrown the ball into the line-out and it is now for Governments to determine how best to handle it. It is very important that we get an idea of what the British Government’s view on this matter is. The Commission has also demonstrated that there comes a point at which evasion and avoidance become virtually indistinguishable. The line between them has become so blurred because there does not seem to be any liability on the part of Apple to pay tax anywhere at all.
Finally, I point out that, whether or not we are in the European Union, this is a problem that can only be tackled by Governments on a co-ordinated basis. The United States is not going to lead on this issue because its own multinational companies can bring pressure to bear in Washington, as Apple has very effectively demonstrated and as the American Government’s response to the Commission’s actions shows. Therefore, in the countries where multinational companies operate, only the EU can effectively challenge these companies. The individual member states—or individual states, as we will not be a member for much longer—do not have the clout to do so. I hope the Minister can assure the House that, as we negotiate our way out of the European Union, this is an issue on which we will work as closely as possible with the EU institutions and other member states. It is in our national interest to do so and it will be a test of whether we put our national interest or dogma first.
Lord Borwick (Con)
My Lords, I thank my noble friend for calling this important debate. His timing is, as always, impeccable. That we should debate this subject when we have just passed the Finance Bill is a remarkable coincidence.
I thought I would start to research for this debate by reading the Finance Bill—I am known as an unhinged optimist on these Benches. Here it is—all 644 pages of it, and unnumbered pages of notes. I must confess that I did not get the whole way through it. To me, that is part of a bigger and extremely serious problem—our Houses pass new, complicated legislation every single year in the Finance Bill, yet we do not fully understand what is in it, let alone what impact it will have on millions of families and businesses. That is because it is too difficult to fully understand, and it gets more and more complex each year. This is despite every Chancellor in memory pledging to make taxes simpler and fairer.
The length of the Finance Acts from 1965 to 1990 rarely topped 200 pages; in fact, they only twice surpassed this benchmark. Since then, the length of the Finance Act has soared. The 1990s saw it touch 500 pages on a few occasions, and in the 2000s it passed the 600-page mark twice. However, it has been well over 600 pages every single year since 2012, except for the election year of 2015. This recent and exponential growth in the length of the Finance Act has occurred even after the creation of the Office of Tax Simplification. This body was set up with good intentions, and I held out a lot of hope for it. No doubt its staff work hard and do wish to simplify taxes. However, it is disappointing that taxes are not being simplified—quite the opposite. Have we simplified taxes as a result of this year’s Finance Bill? The Office of Tax Simplification has published interesting work on aligning national insurance and income tax, for instance, but no real action has been taken on this issue. What we have heard less about from it, and the Government, is on reforming corporation taxes. After all, the subject of this debate is mitigating tax avoidance and eliminating evasion. At present, the popular villains in this debate are corporations. Corporation tax itself was concocted in the 1960s, when, for the large part, things were made in set locations, and sold to somebody specific. You could see where the value was added, the profit generated, so it was that bit easier to apply corporation tax. The world has changed somewhat, with different products being made and assets being less tangible. Therefore, to truly address these issues, I urge the Treasury to ask the Office of Tax Simplification to be bolder, then listen to what it has to say, with an intention to take action.
If I may make a humble suggestion to the Office of Tax Simplification, it would be to review the work done on abolishing corporation tax and replacing it with a tax on distributed profits. This would be a much simpler more effective way of taxing the activity of companies. It has been recommended by several organisations, most recently by the Institute of Economic Affairs. In a report released just last month, its researchers found that of all the ways to reform corporate taxes, a tax on the income distributed to company shareholders is the most desirable. Past work has been done on this by the 2020 Tax Commission, too, in its final report The Single Income Tax. Both reports conclude that this kind of reform would reduce incentives and opportunities for avoidance, and raise revenue in the most pro-growth way.
The last point is essential as we disentangle ourselves from the EU. It is crucial that our economy becomes more liberal and competitive. That can happen if we make corporate taxes simpler and fit for the modern economy. It is this kind of thinking that must now be taken on by civil servants and politicians in both Houses, because, if we want to mitigate avoidance and eliminate evasion, we need simpler, flatter taxes that do not take a tax accountant to understand them. The answer of simpler taxes addresses the two crucial questions of how to improve tax compliance and how to boost economic growth. It seems to be a win-win.
The previous Chancellor said that he was a low-tax Conservative. He even established a commission while in opposition to explore tax simplification and flattening taxes. Perhaps circumstances never allowed him to live out his dream. So now my right honourable friend in the other place, the Chancellor of the Exchequer, has the opportunity to change things for the better. He is a businessman and knows the fundamental waste of money involved in training inspectors to collect complex taxes and in training HMRC to keep up with the latest Budget wheezes. Instead of continuing with structures that drive corporations to order a “double Irish”, he should seek to simplify taxes. He has the chance in the next Autumn Statement to be radical, and I trust that he will be.
Lord Lupton (Con)
My Lords, I congratulate my noble friend Lord Leigh of Hurley on again exposing to some healthy, fresh scrutiny the question of tax avoidance and evasion in the UK. First, I declare my interest as the European chairman of a financial services firm. We advise corporations—large and small, national and international—on their strategic moves. But we are not, and do not hold ourselves out to be, tax advisers. Despite that, I have noticed recently that our large clients are showing a willingness to engage in a private debate with us about the philosophy of international corporate taxation.
As a modern, centrist Conservative, I am encouraged by what I detect is a clear shift by the more forward-looking corporations from an ethos where legal tax avoidance and the minimisation of tax were a badge of honour to one which at least acknowledges that there are growing influences that may direct boards of companies to consider more carefully what all their stakeholders expect them to contribute to society.
My noble friend Lord Leigh of Hurley focused, with characteristic attention to detail, on some of the important changes made by the Government in the past six years. I will look at this canvas through a more wide-angle lens. Noble Lords will recall that in 2012 the Public Accounts Committee concluded its investigation into the tax affairs of Google, Amazon and Starbucks by saying that,
“we were not convinced that their actions, in using the letter of tax laws both nationally and internationally to immorally minimise their tax obligations, are defensible”.
In so doing, the committee combined what I believe to be the increasingly complex conundrum of the law with the morality of tax. Since then, the European Commission, as my noble friend Lord Tugendhat said, has required Ireland to recover the staggering sum of $13 billion in additional taxes from Apple because of illegal state aid.
So what has happened in recent years to tackle the issue of overaggressive tax avoidance? First, let us look at what the Government have done. There has been an attempt to curtail the practice of transfer pricing from a high-tax regime to a low-tax or no-tax regime, governed by OECD guidance that states that,
“transactions between national parts of a multinational company should be priced for tax purposes as though with independent third parties”.
This was well intended but, as the IFS said, there is no “observable market” between different parts of a multinational corporation, which has made it easier to shift profits to lower-tax jurisdictions.
Secondly, the controlled foreign company rules focus on “passive income” to prevent profits liable to UK tax being shifted to overseas tax havens. This leaves some leeway for continued avoidance. Thirdly, the interest deductibility limits now cap the deduction of interest and bite particularly on instruments that are debt in form but equity in substance. Fourthly, the general anti-avoidance rule introduced in 2013, to which my noble friend Lord Leigh referred, codifies some case law to prevent behaviour deemed to be abusive in intent, regardless of whether it is technically compliant in a narrow legal sense. Finally, the UK Government, through the G20 and the OECD, have shown real leadership in forcing this debate up the international agenda.
These steps are all admirable, but they are not enough. As a believer in our free-market capitalist system—where in principle, the less government interference, the better—I say that some of the slack needs to be taken up by the stakeholders in companies. Take the instance of Starbucks in 2012. It is in that instance very easy for customers to voice their displeasure with such a consumer company, which pursues what they believe to be overaggressive tax avoidance, by crossing the street to Costa Coffee for their daily shot. Costa is of course a subsidiary of Whitbread plc and so far as I know it pays a fair rate of tax. Indeed, Costa Coffee’s turnover figures in late 2012 and 2013, as published by Whitbread, showed that this seemed to happen to a certain extent, consistent with a YouGov poll published in early 2013, which showed that Starbucks as a first choice for a cappuccino dropped from 23% before the tax row to 15% afterwards, while Costa’s rose by an equivalent amount, from 32% to 39%.
I give this example because I suspect that a potentially powerful cosh waits to hit consumer-facing companies which overstep the line of publicly perceived fairness in their tax affairs. As justifiable concern over this issue increases, I hope that companies will be more motivated to beware of reaching a tipping point where their customers suddenly revolt and it is difficult to row back. How, by the way, did Starbucks react to all this? It has now agreed to move its UK tax headquarters to the UK and pay tax. Meanwhile, other household names such as Barclays, Vodafone and Topshop have been thrust into the public limelight for related reasons.
I come back to stakeholders exercising their influence. It surely must be obvious that if a company’s sales, and above all reputation and brand value, begin to suffer as a result of consumer revulsion at its tax planning, shareholders—if only because of enlightened self-interest —should and will sit up and pay attention. I therefore find myself in the peculiar position, as a free-market Conservative, of hoping that pressure groups will continue to hold companies to account to pay a fair rate of tax—after all, ours is one of the lowest in the western world—through the medium of where it hurts most: the top line; that is, sales or turnover. I would rather have a bit of benign shock treatment from the market now than a far-reaching political backlash later.
Sometimes I feel that the huge, short-term pressures bearing down on companies from what have become known as “impatient” capital providers can lead management down the path of taking short-term measures, such as aggressive but legal tax planning, which can provide a short-term sticking plaster to a profits shortfall but damage the business long term. It is a function of our age: of activist investors, event-driven hedge funds—short-termists in general. Some directors claim that legally minimising tax is their fiduciary duty, but it is not as simple as that. The Companies Act 2006 requires them to promote the success of their company based on six factors: the long-term consequences of their actions; the interests of employees; relationships with suppliers and customers; the impact of corporate activities on the community; the company’s reputation for high standards of business conduct; and the need for fairness between different members of the company. Shareholders, especially the large institutional shareholders, must hold to account their investee companies over these principles. Responsible and fair tax policy should form part of a company’s corporate and social responsibility programme, and investors should insist on it. I will understand if noble Lords find these thoughts honourable but somewhat naive, so in conclusion I will try to explain why they are rooted in reality rather than idealism.
Those of us who believe in free-market capitalism need support, not only from the companies themselves in pursuing responsible and fair business practices but—in a democratic system—from the electorate. We all have our own views on the surprise result of the Brexit vote on 23 June, and I stand by my own views as expressed in an email to all my firm’s employees across the world. I wrote the email three hours after knowing the result, at 8.30 am on the Friday, and it was designed to help them contextualise the result to enable them better to advise our international clientele. It said as follows:
“In general terms, this vote will send political tremors across the world. It is a sign that globalisation, when poorly executed or communicated, can leave behind the domestic working population. A key feature of this result, which I view with total dismay for the next generation, is that it underlines the gulf between the governing political class and the people: not least, the Labour Party in the UK failed to persuade much of its core supporters in the North of England to vote Remain. Nationalist parties will flourish in Europe, and people like Trump and Marine Le Pen in France will be delighted by the result”.
Anti-business populist parties are already in power in Spain and Greece. In other countries, parties on both the far left and far right are gaining ground. Here, Labour has already pledged to put up corporation tax, back to 28%. That is bad for business, bad for Britain and bad for working people.
My plea to those inclined to listen is simple. If, as businesspeople, you do not modify your behaviour and pay what you know as a business judgment to be a fair rate of tax, you risk driving the electorate through the tipping point, where those who are poorly educated or low-skilled, whether or not they are in work, will not benefit from the improperly distributed fruits of globalisation and economic success. They will then vote in an Administration that will destroy wealth and damage your business. Long-term investors—pension funds, life companies and the like—should all encourage our Government to keep on pursuing their leadership role on this subject on the world stage. Sometimes, not only here but across the world, even free-market capitalists need to be protected from themselves.
Lord Flight (Con)
My Lords, I congratulate my noble friend Lord Leigh of Hurley on his speech. I very much agree with what he had to say. It seems to me that we are talking today about a mixture of law, morality and tax revenues. To some extent, tax revenues are perhaps the most important.
For starters, I object to people muddling evasion and avoidance. For better or worse, evasion is a criminal offence and avoidance can be harmless or can be dangerously over-clever. Within the range of avoidance, there is the whole area of government tax incentives, such as pensions, the EIS, ISA investments and capital allowances. These are a form of tax avoidance; people are attracted to doing particular things because of the tax benefits they are given. At the other end of the spectrum, there are what I would describe as ridiculous fancy inventions that rarely work—but sometimes over-clever lawyers and accountants think that they are too clever.
It is the area in the middle that is the problem, and that is the exploitation of what the law says. Therefore, people are not committing a crime, which evasion amounts to, but their actions have excessive effects on tax revenues. There is sometimes some hypocrisy about this, in that few people actually want to pay more tax than they are obliged to, especially in high tax rate areas. I remember that when I was working in Hong Kong, both personal tax and corporate tax were sufficiently low that it was not worth anyone bothering with tax evasion. The UK Government have very much gone in the right direction in reducing corporation tax to one of the lowest rates in the world. This is a fair quid pro quo for ending what I would call “clever cuts” legal avoidance.
Turning back to evasion, my observation is that there still is a significant black economy problem in the UK. It is probably not as bad as it is in many other European economies, but it should not be forgotten about. As for companies engaging in tax evasion, my view is that it is extremely unlikely. For wealthy individuals, it is certainly a lot fewer people than it was and will become much more difficult to do following the reporting rules that have been imposed on Switzerland and other such places. In a way, the recent legislation dealing with beneficial ownership will not develop and will not produce any material additional tax revenues. It is about getting businesses and companies to pay a fair rate of tax in the areas in which they operate.
I was interested to note that one of the big areas that has enabled what I would call excessive and offensive tax avoidance has been Luxembourg. When Juncker was Prime Minister, Luxembourg brought in laws that meant that royalties were free of tax. That was a huge incentive to companies for which royalties were important to their business to very easily channel profits from one country to another and to Luxembourg subsidiaries that owned the royalty rights. That sort of thing is nonsense and if we cannot get international agreement, individual countries should enact legislation themselves.
I am surprised that HMRC has not used its transfer pricing powers more. I remember when they came in in the 1990s, I worked with the Revenue briefly on them and they seem to be both fair and to work pretty well. They could be used to give a sort of bespoke appraisal of particular businesses; they were reasonably flexible. But the question whether this will be done by international co-operation or by passing domestic legislation, as this country has started to do, is the big issue in terms of tax revenues. I do not know whether anyone has estimated the total, but the potential tax revenues from chasing up tax evasion as though it were a criminal offence are minimal compared with those relating to legal tax avoidance.
Baroness Kramer (LD)
My Lords, at the bottom of all this is surely the issue of fairness. If individuals pay their taxes because they wish to pay for living in a civilised society, surely that is the obligation of businesses as well. That is at the heart of what we are discussing today. We have often seen in recent years businesses failing to recognise the importance of that contribution to the society in which they thrive, employ and make their money. Some small local businesses that many of us know can find themselves paying, through business rates and taxes, money to support public services and other parts of our society knowing that a business rival in the same activity—a small bookshop may regard Amazon as its major rival—could be a multinational or global company that can use a whole variety of mechanisms to eliminate, essentially, most of its tax bill. Clearly, that has to be grossly unfair.
We must recognise that the structure of our businesses today is tending in a direction that enables and facilitates moving profits around the globe in a way that is extremely difficult to constrain. That particularly accrues now to things such as brand name and intellectual property and not to physical assets, which if we look back just a few years would have been far more typical. As we move into a world where artificial intelligence and machine learning will increase the capacity to set intellectual property anywhere in the world, even though manufacturing or services are delivered quite separately, this capacity to manoeuvre profits around becomes a problem that we must tackle.
I was heartened by the speech by the noble Lord, Lord Lupton, and his talk of shareholder responsibility because that has to be key to the future. He is right that where there is the possibility of bringing consumer pressure—the Starbucks case being the obvious example—a company can be persuaded that it is necessary to change its behaviour or it will lose its sales. But many of our companies are not consumer facing. They are somewhere in a chain that covers a whole variety of activities, whether in manufacturing or services, and we have to tackle them as well. They cannot be allowed to take the view that they can enjoy all the benefits of being in the UK, or in any other society, and not pay their fair share.
That brings me to a couple of points. There was a time some years ago when this issue was ripe and I proposed then that we really need something that would allow for the naming and shaming of companies that are not necessarily paying their fair share of profits, perhaps through a not-for-profit organisation or a website with a kite mark. We need to get the message out to the consumer and the general public, and indeed it would be something that shareholders would take significant notice of.
There has been quite a lot of talk about the GAAR. In the very early days it was extremely limited, but I think that the Government are now becoming much more willing to extend their use of it, which has to be a move in the right direction. However, we need to recognise that the GAAR is about anti-abuse. Many people think that it is an anti-avoidance measure; it is not. Picking up on the point made by the noble Lord, Lord Flight, we are dealing with some very grey areas in which companies now focus their tax minimisation strategies. It would be worth taking another look at the GAAR to see whether it could be expanded to cover some of those grey areas, because the line between avoidance and abuse is a fine and difficult one. I believe that we ought to be on the front foot in terms of trying to tackle that issue.
Obviously the work being done by the OECD and the G20 with BEPS is making a significant difference. This country is playing an important role in that, in particular on transfer pricing policy. It has been agreed in the Finance Bill that HMRC will be given the power to require companies to report both their level of sales or activity in the UK and the taxes that they pay in different countries. That is a significant step forward.
But for a lot of the time when we talk about tax policy, we do not discuss what can sometimes be the trade-off between tax avoidance and tax levels. There is an assumption that if taxes are high, avoidance will be greater, but we need to recognise that it can work in the other direction as well. When we focus on trying to row to the bottom and have the lowest taxes in the developing world, we naturally end up becoming a tax haven. That is what has happened with Luxembourg, Ireland and a number of other countries. The goal of very low taxes for what people would describe as reasons that make up part of the domestic framework has consequences, and I believe that Christine Lagarde is right to say that if we end up in a race to the bottom, we will all end up at the bottom. It is a short-term strategy and we need to recognise that constant tax cutting can itself generate tax avoidance.
I would also like us to pay attention to developing countries, which are often the greatest victims of tax avoidance. They do not have the capacity that we do to enforce against large multinationals, which can easily move from one country to another, so we need to make sure that we lend them our support. To that effect, I would ask the Government to take a look at our own UK tax treaties with a number of developing countries—an issue I was talking about with representatives from ActionAid. Many of our tax treaties with developing countries were signed during the colonial era and they are very restrictive about the taxes that can be levied on UK companies. That is an area where we could be leading by example. Indeed, developing countries, while they are invited to comment on the BEPS process and the work being done by the OECD and the G20, are not at the centre of it. If we look to the future, these countries will be vital to the overall global economy, so anything we can do to draw them much more actively into that process would be very good.
In closing, I would ask the Government to consider a process that we as Liberal Democrats are taking on. Business taxes as they have been in the recent past are not really fit for purpose for business as it is today and for how it is shaping for the future. As I said earlier, value is very much now attached to intellectual property and brand. Those are extremely mobile and can be moved from one country to another. Many companies, even quite small ones, are global in their reach. It is not just vast multinationals; small companies are genuinely global. That is part of the structure that makes sense for them.
Many companies are now part of what is called the sharing economy—Uber might be a good example. Distortions come into the picture because, in a sense, you have what looks like a very small company. For example, Uber does not own a single taxi or have a single driver as an employee, just as Airbnb, which is essentially a global hotelier business, does not own a single hotel room or employ a single hotel manager or cleaner. These new kinds of structures do not lend themselves to the traditional shape of business tax. It is time to look at this. As I said, we asked Vince Cable and an expert panel to go back to the beginning and start again with a blank piece of paper, looking at how you would structure taxes on business today so that we achieve what I think everybody here asked for—genuine fairness.
Only with that does business have the moral authority to speak to consumers, to its neighbours and to individuals, and to drive forward our economies in the future.
Lord Tunnicliffe (Lab)
My Lords, I thank the noble Lord, Lord Leigh of Hurley, for introducing this subject. I have a confession to make: I rather like paying tax. I pay a great deal of it. I like paying tax because it means I have a good income, it allows me to repay the enormous investment the state has made in me, providing me with a very pleasant life as a result, and I believe in redistribution. The taxation system is a sensible and essential part of any wealth redistribution system. But in paying tax, I want it to be fair.
I have also been privileged to work most of my career in the public sector. That is a wonderful thing because your objective is the general good. As such, I have not been particularly involved in taxation issues. When I look at the private sector, where most economic activity takes place, I see the vast majority of individuals paying their tax somewhat grudgingly but fairly. However, when you look at companies, you see aggressive tax avoidance, with companies claiming a fiduciary duty to minimise tax. You have a new group of individuals running these companies who have an objection to either the companies or themselves paying tax. This has all created a massive tax avoidance industry. Indeed, it has created a tax gap according to HMRC in its report of 22 October last year of 6.4%, or £34 billion. Many believe that that is an understatement.
The Labour Opposition have long believed that an important target of policy must be to try to reduce this gap. Many talked about different ways of doing that but I am talking about the direct effort to reduce that gap. The Labour Opposition proposed many amendments to the Finance Bill and I think a couple were agreed. We thank the Government for that but it is does not go nearly far enough. The Opposition set out the first of their policies on taxation in April, putting forward 10 points of a tax transparency enforcement programme. I will not go over all 10 points but we called for: a public inquiry to examine the loss of tax revenues; increased powers for HMRC; the introduction of a general anti-avoidance principle; cracking down on accounting tricks; and the introduction of minimum standards of transparency for Crown dependencies and overseas territories.
More recently—in fact, last week—the Labour Party published a report on Her Majesty’s Revenue & Customs, titled Reforming HMRC: Making It Fit for the Twenty-First Century. The report was done by a group of 14 experts, led by Prem Sikka, and was designed to inform official Labour proposals expected in spring 2017. It made 13 recommendations under three general headings: resources, governance and transparency.
First, the resources of HMRC have been seriously cut back over the past nine years. When it was formed—in 2005, I believe—there were 91,000-plus employees. In 2014, the last year for which I have figures, there were 61,370. Amazing evidence was presented to the Public Accounts Committee when it was discussing the Google issue, when Jim Harra, the director-general for business tax, said that there was a 75:1 yield ratio—every pound invested in HMRC on large business investigations would generate £75 of profit. In other statements, HMRC has said that when it comes to the local application of tax the ratio is 18:1; for high net worth individuals it is the same. More recently it has said that when it comes to large corporations the yield is something like 97:1. So one of the report’s key recommendations was:
“Additional investment in HMRC resources and staffing”.
I believe that that would create a better yield—to reduce that tax gap—and, complementary to many things that have been said in this debate, an increase in the quality of advice from HMRC in improving tax policy development.
Secondly, the report said that HMRC’s board is dominated by,
“individuals previously connected with major corporations”,
and with large accountancy firms known for marketing avoidance schemes. It has no members representing small businesses, ordinary taxpayers, HMRC’s own staff or claimants of benefits. As a result, the panel’s recommendation was for:
“The formation of a Supervisory Board, consisting of stakeholders, to watch over HMRC Board to give it direction and enhance its public accountability. The Board shall act as a bulwark against corporate capture and inertia and be accountable to parliamentary committees”.
Thirdly, the report touches on transparency. Over and again, scrutiny of tax affairs is obstructed by a general statement about taxpayers’ confidentiality. On 24 February the PAC said about the Google matter:
“The lack of transparency about tax settlements makes it impossible to judge whether HMRC has settled this case for the right amount of tax. Taxpayers’ legal right to confidentiality means that HMRC cannot explain how it has arrived at this or other settlements, or demonstrate that the rules have been applied correctly”.
In relation to that, the panel recommended:
“The tax returns, related computations and documents of all large companies must be made publicly available. The public availability of corporate tax information will improve the quality of information available to parliamentary committees to scrutinise the effectiveness of HMRC in meeting its objectives”.
It further recommended:
“Parliamentary committees should be empowered to examine any tax information, no matter how sensitive. It would be up to the relevant parliamentary committee to decide whether scrutiny of any documents and practices should be conducted in private or closed meetings”.
In summary, I believe that HMRC should be more dynamic and better resourced and governed. It should be much more open and available to scrutiny. I accept that it may be some time before a Labour Government will be able to introduce these reforms, but in the meantime I hope the Government will pick up some of our ideas, close the tax gap and create fairness for taxpayers such as me.
Lord Berkeley of Knighton (CB)
Before the noble Lord sits down, perhaps I might give a brief example which demonstrates exactly what he was saying and which the Minister might care to reply to. A couple of years ago, my family attempted to give the Revenue a considerable amount of money for something that we realised was a benefit in kind which we owed. It took it over a year to answer, let alone to deal with it. It occurs to me that if the Revenue has that much difficulty in dealing with people who are trying to give it money, how much more difficulty must it have with people who are trying to avoid giving it money?
Lord Tunnicliffe
I thank the noble Lord for that intervention but I hand it on to the Minister.
Lord Young of Cookham (Con)
My Lords, I join others in thanking my noble friend Lord Leigh for initiating this important debate, and for his powerful and knowledgeable speech. He made the case for lower taxation underpinned by proper anti-avoidance measures. Throughout the debate there has been a helpful range of suggestions as to how we might do better in this area and a unanimity of objective from all speakers that we have to promote a fairer society. I will come on to that in a moment.
For me, this is bit like Groundhog Day. Over 20 years ago, I was Financial Secretary to the Treasury and responsible for what is now HMRC. Noble Lords may recall a more memorable figure than me, Hector the Inspector, who helped launch self-assessment. That is one of my legacies to society. At that time, the issue of tax avoidance and evasion was taken seriously: in the only Finance Bill that I introduced, in 1995, we closed a number of tax avoidance loopholes, and were forecast to raise £1.5 billion over three years. As many noble Lords have said, this is not a static issue but a never ending game of cat-and-mouse, with the mouse ever mobile and able to get through small cavities in the building—not unlike the Palace of Westminster. My noble friend Lord Leigh has obliged me to update myself.
There can be no doubt about how much weight the Government attach to tackling effectively tax avoidance and evasion, in all its forms. At its heart it comes down to a question of fairness; this was a theme that ran through the whole debate. Every chairman of a FTSE 100 company ought to read the speech that my noble friend Lord Lupton made this evening. In a nutshell, what he said was that politicians misread the political mood when it came to the referendum, and that corporations run the risk of misreading the public mood when it comes to consumer behaviour. We have already seen some shareholder activism on executive pay and my noble friend outlined how, with the help of social media, consumer activism is becoming a much more potent force. There is a shift in attitudes towards companies, and the more responsible companies are already ahead of the game. They take their corporate responsibilities seriously and realise that there may be a backlash if they are seen to take aggressive tax avoidance measures.
There is another reason why we need fairness. It is because our businesses need to compete with their rivals on a level playing field, not one in which those who do not pay what they owe prosper as a result of unfair, not to mention criminal, advantage. That is why we are looking at all the ways in which we can crack down on tax avoidance and evasion—not only through legislation and the action we are taking here, but by driving progress and collaboration on the international stage, and recognising that this is a global challenge which operates across borders.
Our fight against tax evasion and avoidance starts with making sure that we are well equipped for the battle. The noble Lord, Lord Tunnicliffe, raised the issue of resources. Since 2010, we have provided HMRC with an additional £1.8 billion to tackle tax evasion, avoidance and non-compliance, helping it to secure an extra £130 billion in tax revenues. This includes £800 million extra that we invested at the summer Budget to enable HMRC to recover a cumulative £7.2 billion in tax from evasion and non-compliance by 2021. HMRC has also funded 3,000 additional recruits to improve customer service.
My noble friend Lord Borwick entered the Chamber listing heavily to one side because he was carrying with him a copy of this year’s Finance Bill. The Government aim to have a tax system that is simple to understand and easy to comply with. Although he may react with some incredulity, we are taking action to achieve this. We announced at the 2015 spending review a target for HMRC to reduce the annual cost to businesses of tax administration by £400 million by 2019-20. That is a key part of our agenda to create a simpler tax system. This target builds on business cost savings of £250 million that HMRC achieved in the previous Parliament.
My noble friend mentioned the Office of Tax Simplification. I will certainly pass on to its new chairman, Angela Knight, a former colleague of mine in the House of Commons, the suggestions he has made. So far, the OTS has made more than 400 recommendations to simplify the tax system, of which nearly half the Government have implemented. Clearly, we have further to go. My noble friend mentioned that some of his suggestions might be appropriate for the Chancellor to look at in the context of the Autumn Statement.
We are also putting into effect a range of innovative measures to tackle avoidance and evasion. In the last Parliament, we introduced accelerated payments, giving HMRC the power to collect disputed tax bills up front, and that has already brought in £3 billion. I welcome my noble friend’s comments about the general anti-abuse rule, which tackles the worst tax avoidance arrangements. In the Finance Bill we have just been discussing, we further introduced a new GAAR penalty of an additional 60% of the tax due and tough new measures for serial avoiders, including publishing the names of serial users of defeated tax avoidance schemes. We took on those who sought to promote tax avoidance by setting up a tough regime of penalties and monitoring requirements for high-risk promoters of tax avoidance schemes, thereby tackling the supply as well as the demand for marketed tax avoidance.
HMRC has an excellent record of success in litigating tax avoidance schemes. It wins around 80% of all avoidance cases that taxpayers choose to litigate, and many more settle with it before litigation. Earlier this summer, HMRC secured wins worth more than £800 million from avoidance cases involving films schemes attempting to use sideways loss relief alone. However, we must keep the pressure up, and there is much more we will be taking forward over the course of this Parliament.
Much of our debate dealt with international avoidance. As I said at the beginning, we need to ensure that we play our part in driving action at an international level. The UK has led efforts within the G20 to reform international corporate tax rules through the OECD base erosion and profit shifting project mentioned by my noble friend. This makes it harder for multinationals to avoid tax by shifting profits to low or no-tax jurisdictions.
My noble friend Lord Tugendhat referred to the EU Commission’s ruling on Apple. This is primarily an issue for the Irish Government, Apple and the European Commission, but the UK remains committed to ensuring that companies pay the right amount of tax on their activities. In response to my noble friend’s question, the UK is generally supportive of the Commission’s role in its proportionate enforcement and application action. We will look at the ruling carefully when it comes out to ensure that all corporation tax payments genuinely reflect companies’ activities, and we will take into account any new information as part of that.
My noble friend asked whether we will continue to work with EU member states. We are committed effectively to mitigating tax avoidance wherever it occurs. It is a cross-border issue, as my noble friend said, that requires a co-ordinated approach to come up with effective solutions, so we will continue to work with EU member states post the UK leaving the EU in addition to working with other international partners.
On the question my noble friend raised about whether the new offence extends beyond corporate liability to individual liability, I say that if a company is found guilty of not having reasonable procedures to prevent tax fraud, the people who are convicted are company directors for not having put in place reasonable procedures to prevent the fraud. For example, if a chief executive is a company director, this could extend to him or her.
In connection with international action, the noble Baroness, Lady Kramer, urged us not to engage in a race to the bottom by cutting corporation tax or offering unjustified tax breaks. We are committed to a competitive but fair tax system and have no intention of starting a race to the bottom.
As for the treaties that the noble Baroness referred to which may have been negotiated some time ago, decisions on the negotiation and renegotiation of a tax treaty are taken on the basis of a range of factors, including the role of treaties in promoting development. In all of its tax treaty negotiations with developing countries, the UK is committed to ensuring that UK companies pay a fair share of tax in the countries in which they operate. It has long been our practice to include robust anti-abuse provisions in all the revised double taxation agreements. We are also encouraging and giving support to developing countries to participate in international tax reform; more than 100 countries have now joined the inclusive framework on BEPS.
The noble Baroness raised a broader question about GAAR, and why we do not introduce a general anti-avoidance rule instead of a penalty. As she may know, this was looked at by Graham Aaronson’s independent study group in 2011, and again when GAAR was introduced in 2013. It was decided against, on the basis that it would be difficult to make a general rule focused on the right targets and would require HMRC to provide costly clearances to business.
We have led the way in converting these international avoidance measures into domestic legislation. This includes, for example, new hybrid mismatch rules to prevent multinationals exploiting differences in how countries tax financial instruments and entities, as well as new rules to protect against the use of interest on borrowings to shift profits overseas—as mentioned by my noble friends Lord Leigh and Lord Lupton. As other noble Lords have said, we now have the requirement for multinationals to provide HMRC with a country-by-country breakdown of their profits, tax and assets. In addition, we have been calling for an international agreement to get multinationals to report tax information publicly for each country in which they operate.
My noble friend Lord Leigh mentioned alternative methods of taxing businesses, such as a corporate tax based on revenues not profits. Although I agree that these are theoretically simple, issues remain as to whether such alternatives would achieve the right tax result, as linking profits to sales or staff numbers may well undervalue activity in the UK when most sales are undertaken abroad, thereby creating its own challenges.
A number of noble Lords mentioned carried interest. The Government have made changes in this area recently which have made the tax treatment of carried interest fair while maintaining competitiveness.
If I do not get through all the points raised by noble Lords, I will write to them. My noble friend mentioned VAT evasion. In this year’s Finance Bill, the Government are making changes to ensure the UK high street and online businesses can compete on a level playing field with overseas traders. The new measures will ensure that VAT is paid by businesses from outside the EU who store goods in UK warehouses and then sell those goods to UK consumers in online marketplaces. These changes will give HMRC stronger powers to make overseas businesses appoint a UK tax representative and will ultimately make online marketplaces accountable for the trading on their websites. I assure noble Lords that the UK is committed to effectively tackling tax avoidance and evasion and to promoting compliance.
I was asked why the HMRC non-executives were all from the private sector. The non-executives are recruited in line with the HMT code of governance for Whitehall departments, which states:
“Non-Executive Board Members, appointed by the Secretary of State, will be experts from outside Government”.
The HMRC complies with the code and guidance, and its board includes non-executive members drawn from a broad base of knowledge with experience of tax in the commercial and not-for-profit sectors.
Whether it is at home or abroad, we will keep leading the way in our efforts to put an end to tax evasion, avoidance and non-compliance. I pay tribute to the thousands of people at HMRC, who are working so hard to take on those who bend or break the rules. In doing so, they are not only helping to bring the gap between the tax owed and the tax paid to one of the lowest anywhere in the world but ensuring that we increase the tax yields year on year. These go to fund the vital public services we all rely on, as well as reducing the deficit and protecting the public purse.
Finally, I thank all noble Lords who have taken part in this most helpful and informative debate.