Tax Avoidance

Debate between Angela Eagle and John Pugh

Wednesday 16th June 2010 Westminster Hall

[Dr Pugh]

The hon. Gentleman is right to suggest that the black economy needs a whole toolkit of approaches. I happen to have with me the report from the Public Accounts Committee entitled “Tackling the hidden economy”, which contains a number of rational, sensible and workable proposals, which will enable people to earn a living and at the same time pay taxation legitimately and fairly. Obviously the fairer the system is, the more prone people are to do that.

Tax avoidance properly, though, is the apparent attempt to frustrate the intent of tax law. That is fundamentally what it is. It is normally done by organising economic transactions in a way that ensures that whatever wealth, investment, profits, income or rewards people have or aim for, they escape the charge that the state would ordinarily impose on them. The state does not do that for idle purposes, but for the common good. Tax avoidance is therefore morally reprehensible. MPs flipped their homes and were rightly criticised in the media, but it was not the intention of the expenses scheme—or the capital gains tax regime, for that matter—to ensure that that would happen. People in this place availed themselves of a loophole. That is an almost classic case of tax avoidance, but one could give sundry examples, in various exotic formats.

The previous Government did an appreciable amount of work, endeavouring to ensure that tax avoidance, when spotted, gets dealt with. They fought what I would describe as a long guerrilla war against exactly what we are talking about: loopholes. I pay tribute to the right hon. Member for East Ham (Mr Timms), who was a kind of platoon commander, for prosecuting that guerrilla war with some success. He tried to track down the loopholes and closed them where possible. I think that most hon. Members here, while reading through very dull tracts of successive Finance Acts, will have recognised that those provisions are there simply as part of the ongoing skirmishing between the tax planners—tax avoiders—and the Inland Revenue. By and large, however, what we have seen so far have been post hoc reactions to abuses that have been identified in charity law, with repo arrangements, or with controlled foreign companies—we had an awful lot of debate about controlled foreign companies in the last year of the previous Parliament, as well as stamp duty and other matters.

The Inland Revenue has been involved in constructing complex defences against complex devices and schemes. Quite frankly, even though we pretend to understand them properly as we sail through the Finance Act, many of the schemes are not adequately grasped by many Members. It used to amaze me how the right hon. Gentleman had command—or seemed to, at any rate—of some very complex schemes and some very complex remedies for them. The basic strategy, however, is one of shutting the door after the horse has bolted, which normally leads to those people who wish to persist with mechanisms for avoidance simply adjusting the scheme in some marginal way, modifying it and presenting a new scheme that leads to a new ad hoc adjustment, when it is spotted—it is, of course, not immediately spotted and cannot be dealt with retrospectively. Again, I am reminded of guerrilla war. It is rather like the US forces trying to deal with an ever-elusive Viet Cong that springs up around them in the jungle. My analogy slightly breaks down, however, when one recognises that the resources available to the people fighting that guerrilla war far exceeded those of the Government in this case.

The problem is therefore difficult to deal with, and is made immeasurably more complicated by the global reach of modern international capitalism, with the plethora of tax havens and the associated absence of transparency. Again, I pay tribute to the right hon. Gentleman for having done a great deal of work on that. In the last few months of the previous Parliament, there was a slew of double taxation treaties that attempted to deal with precisely that problem, devised meticulously and with extraordinary detail by very clever people in the Treasury. Generally speaking, what we were hoping for—and sometimes got—was greater transparency and sharing of information, but again we were involved in the post hoc job of trying to close down complex tax arrangements that seemed to evade many jurisdictions when it came to the pursuit of tax liabilities. Interestingly, PricewaterhouseCoopers recently suggested that it would make it a heck of a lot easier if big international companies were to list in full their assets right across the piece on a global basis, and suggested that as a new standard for accountancy. I agree, but I think it fairly unlikely that many such companies will follow suit. Big organisations that keep their property arm in Liechtenstein or wherever will not be the first candidates for laying all their cards on the table.

It is worth making the point, in passing, that the British Exchequer is not the only loser here. A substantial amount of tax leakage is caused by people not paying tax in developing countries, and it is distressing to see organisations such as the Commonwealth Development Corporation, which was set up for laudable ends and with massive national and public support, putting an awful lot of money into development projects in the developing world, but having the money sourced or put through private equity companies, many of which are in offshore tax havens.

[Ms Angela Eagle (Wallasey) (Lab)]

Does the hon. Member, like me, support the moves towards country-by-country reporting, which were pushed by the previous Government but developed by the OECD? International corporations are encouraged to report both their profits and their assets on a country basis so that there is that level of transparency. Christian Aid, ActionAid, Oxfam and other development organisations support that, precisely to prevent the tax loss, about which the hon. Gentleman is talking, for countries that are developing.

[Dr Pugh]

I entirely support that, but I consider it a distant ambition that will take an awful lot of putting together over time, and will involve a large number of international bodies. It is, however, entirely the right direction in which to go, and is the direction in which we will all have to go eventually, if we are going to deal with the problem remotely adequately, even on a national basis. What I hope to do as I conclude is to suggest an improvement to what we are doing nationally. The former Minister in the room might correct me, but we have the anomalous situation in which the Exchequer building itself is owned by a sort of semi-bankrupt offshore company. We can see how the need for getting things right on an international basis is just as important as getting things right nationally.

I hope that I have done enough to demonstrate that there is a sort of futility to what we are doing at the moment, which I think is recognised to some extent within the Treasury. I genuinely do not believe that I am pushing at a closed door—it is at least half open—and in discussions with the right hon. Gentleman prior to this Parliament I sensed that. There is a sense in which continually trying to mop up after the errors have been spotted is perhaps not enough, and there have been two significant moves, which are worth remarking on and praising. The previous Government insisted on pre-disclosure of new tax instruments—a vetting system—which is a commendable step forward.

In recent finance legislation, however—I forget which clause of which Bill—I saw for the first time not just simply, “This scheme is wrong, this is how it runs and this is what we’re going to do about it,” but “Any scheme of this nature needs to fit in with certain principles and basic parameters.” I came across a quote from the right hon. Gentleman. He said that

“we need not just new powers but clearer norms for behaviour too.”

We are moving, therefore, to a system in which instead of a case-by-case examination of each scheme, we are laying down principles by which people can judge whether schemes will be acceptable.

I therefore urge upon the coalition Government a final, third step in addition to pre-disclosure and having principles: the introduction into tax law of a general anti-avoidance rule. Some think that that is a distinct probability; I think that it is a possibility. It would parallel moves made in many other countries. Most Commonwealth common-law systems, from Hong Kong to Australia, have something like this. I have argued for it in the past, and I have not been given a dismissive response by the Treasury. Basically, it says, “We have this under consideration, and we may well take it further.”

The advantage of a general anti-avoidance rule being embodied in law is that it would throw the burden of demonstrating the legality of new tax planning schemes on those promoting it by obliging them to show that the schemes will ensure a worthy economic benefit other than tax avoidance—the avoidance of tax law. It would have the added spin-off and economic benefit of ensuring that financial ingenuity would always be employed to the general economic benefit and not simply to dodge tax.

I am aware that, in principle, there are all sorts of downsides to having such a general rule written into law. I have no view of how it should be framed, but we can consider the dispensations of other Governments for advice on that aspect. The legislation certainly needs to be purposeful and clear. There need to be good pre-clearance and adjudication arrangements within HMRC should there be any doubts or disputes that seem incapable of immediate reconciliation. Also, just as in other Government arrangements, there needs to be a sensible and clear list of exceptions.

Given all that, we could certainly run with such a basic rule; indeed, it is recommended by charities and organisations such as Tax Justice Network. Not only can it be done, it is done. It does not encourage wholesale capital flight, as some suggest it might. For example, it has not done so in Hong Kong, which has somewhat of a reputation for financial dealings, and where British judges are involved in a relatively rare dispute resolution procedure based on such a principle.

The strong upside for the Exchequer is that, even on City estimates, it will raise significant revenue. It could be introduced here, and I hope that it will be. I would like to see it introduced as early as possible. It would simplify existing tax law. We are all in favour of that—it needs a certain amount of clarification and consultation. If we follow the road taken by Australia, Hong Kong and many other nations, our tax system will be less prone to the byzantine schemes dreamed up at Canary Wharf and less time will be consumed at the Treasury devising equally elaborate defences. However, we need to get on with it.

If our public finances are in the critical situation that we all think they are, and if, as we appear to be able to do, we can argue for immediate cuts, we must also be able to argue for an immediate and effective attack on tax avoidance if we think it is possible. We are probably talking not about the next Budget, but of the autumn when there will another opportunity. However, certain requirements need to be put in place before we can run an effective regime built around the principles-base that I suggest.

In the first place, HMRC needs the right skills base. I am not yet convinced that it has an adequate degree of specialism. In the past, I have tried to interrogate the Treasury, asking the previous Government how many people were employed on the rather more specialised forms of tax avoidance that we are talking about today than on ensuring general tax compliance. The general answer will be somewhere on the record. It was, “In a sense, that is what we all do all the time.” However, a definite cadre of specialists deals with the high-business end, where some of the bigger centres of tax avoidance are found. We need them still to be in employment at HMRC rather than being affected by staff cuts and other reductions. Indeed, their number needs to be supplemented, so that we have the right sort of tax officers, and tax offices.

It is suggested that cutting the number of local tax offices is not helping in that respect. The tax office in my town has disappeared; I am told that the net effect is that all sorts of local knowledge has gone, and that as a result there will be more tax avoidance. I do not know for sure whether that is true; high-ranking people at HMRC tell me a different story. They say that they now have clever software that does the job infinitely better than local knowledge. It enables them to pick out trends in accountancy and such matters, and it is far more sophisticated and far less consuming of manpower and far more effective in bringing in the shekels.

HMRC has nailed its colours to the mast, putting its faith in software rather than in manpower. I hope that it is right. However, we need some of the right people, and I am not convinced that we have enough of them. I would like more of them to help solve the enigma of why some extraordinarily profitable companies pay surprisingly little tax.

All in all, we need to aim for simplicity. We need a general provision of the kind that I have tried to outline, however inadequately, so that we can stop fighting what I believe is a losing battle. We can do better. We can fight the battle differently. We need to move rapidly towards a general anti-avoidance rule. Ultimately, as the hon. Member for Wallasey (Ms Eagle) said, we need global agreement built upon such pillars. The purpose of the debate is to ask the Government to take up this suggestion—or give reasons why they should not—and if they wish to do so, to get a move on, because clamping down on tax avoidance must be as important as anything else.

--- Later in debate ---

[Ms Angela Eagle (Wallasey) (Lab)]

It is a pleasure to take part in my first debate in Westminster Hall in the new Parliament and to serve under your chairmanship, Dr McCrea.

This has been a fascinating debate. It is entirely in keeping with the work that the hon. Member for Southport (Dr Pugh) has done on this issue and with the fact that he has sat on many a Finance Bill Committee that he has brought this extremely important issue to the attention of the House, and I congratulate him on initiating the debate. He put his case very well and demonstrated that he has spent many years considering these issues. He could see both sides of the argument and he managed to put both of them in much of his contribution. He also identified the free-rider mentality, which is the key thing we all want to crack down on and minimise.

The hon. Gentleman was generous enough to praise the previous Government’s record, and I thank him very much for that; that has not been noticeably present in our debates on the Floor of the House so far in this Parliament, which has diminished our debates in this difficult time for the country. I deplore the rewriting of history and the abuse that the previous Government’s record has received, particularly in the economic context, and it is nice that the hon. Gentleman did not sink to that low level.

I particularly thank the hon. Gentleman for praising the record of my right hon. Friend the Member for East Ham (Mr Timms), who would have been winding up the debate under more normal circumstances. I hope that Members will realise that my right hon. Friend is still recovering from the attack on him at his constituency surgery, and I am sure we all join together in wishing him a speedy recovery. He has been seen back around the House and he is well on the mend, but he is still a bit fragile.

I welcome the new Minister to his position. Those who slog away in opposition do not always end up inheriting the positions that they shadowed when their party is lucky enough to be magically translated into government, but the hon. Gentleman has managed to make that transition. Having experienced the Department he now represents, I know he is a very lucky man, and he certainly deserves luck. I therefore welcome him to the debate.

I want to spend a little time putting the previous Government’s approach on the record. I then want to ask the new Minister a few questions about his Government’s actions and their future intentions on this extremely important issue. I note the self-restraint that the hon. Member for Southport showed in not trespassing on the area of capital gains tax, but I wonder how long the restraint shown by the partners in this Conservative-led Government will last as we get further into this Parliament—I will certainly watch developments with interest. The hon. Gentleman has set a sterling example, although I notice that it was not particularly followed by the right wing of the Conservative party at Prime Minister’s questions earlier today—“interesting noises off” is all I will say about that.

We can all agree that the financial crisis of 2008 led to a radical shift, domestically and internationally, in the approach to tax evasion and tax avoidance. Following the crisis, the previous Labour Government made certain that the UK was at the forefront of the drive for radical change. Internationally, there was a rapid realisation that the lack of transparency in the international financial system presented previously unrecognised but severe systemic threats to the entire global financial architecture, that those threats had to be dealt with and that good progress had to be made quite rapidly. In the forum of the G20 and in the aftermath of the credit crunch in 2008-09, good progress was made, but that momentum needs to be maintained, and one theme of the questions I want to ask the Minister to deal with is how he sees its being maintained.

It is only human nature that when people are in the middle of a crisis, they suddenly put at the top of their political and economic priority list things that have been around for years, although they were never really at the top of the list. Suddenly, transparency, the exchange of information and the ability to supervise global institutions cross-border and globally acquire far more importance. Everybody is very exercised by them, and there are a load of international meetings at the OECD and the G20; indeed, that is what happened, as we can see. The crisis then abates, and people turn back to dealing with more domestic things. If we are not careful, the momentum for change—the momentum behind introducing transparency and opening up cross-border supervision—could wilt. It is important that the new Government continue the momentum that the previous Labour Government created in the aftermath of the crisis. I would certainly be interested to hear how the Minister sees the issue and what plans and actions he has in train to ensure that that momentum is maintained.

The hon. Member for Southport touched on the fact that, domestically, the huge bank bail-outs that were necessary to deal with the immediate threats that the crisis caused to our economic well-being have brought two important truths home to us all. If those truths had not been brought home to us before the election, they certainly would have been once we had spent months on doorsteps in our constituencies listening to our constituents’ experiences and opinions. The first of those truths is that there is growing hostility among the majority of our hard-working constituents who pay all their taxes towards those who avoid paying their fair share. That phenomenon is growing and is more noticeable than it has been, and it will only continue to grow if it is not addressed by policy and Government action. Secondly, where tax revenues have been hard hit by the downturn and the recession caused by the irresponsible greed of a few, there is an even greater responsibility on the tax authorities to collect the tax that is due. That responsibility can only be reinforced when next week’s Budget takes a scythe to the public services that many of our most vulnerable citizens rely on.

The previous Government measured the tax gap and published estimates of it, setting it at £40 billion, as the hon. Gentleman rightly said. He had some other estimates, and the Trades Union Congress has a much larger estimate, as does the Tax Justice Network, which the hon. Gentleman mentioned. For the sake of argument, however, let us say that the tax gap is £40 billion. We know that it is impossible to collect such sums and completely to close the tax gap so that it does not exist at all, but we could certainly do with some of the revenue that is due, but which is not being collected. Even if we closed the tax gap by half, we would avert real pain and suffering among those who are often the most vulnerable in our society and who particularly rely on services provided through public expenditure. In that context, it is even more important than it has been that we do all we can to ensure that we close the tax gap.

As the hon. Gentleman again pointed out, and as the hon. Member for Amber Valley (Nigel Mills) also described in his speech, that is easier to say than to do: it is easier to speak in principle or theory about tax laws that work and are simple for everyone to understand, and that no one tries to game, than it is to bring them about. But just because it is difficult—some might say very difficult—it does not mean we should not keep striving. With the policies established after the credit crunch by my right hon. Friend, we have made considerable progress towards such an approach. I should be interested to learn how the new Government intend to build on the solid foundations left by the previous Government, and to take things further.

It is not morally acceptable for a small minority to think that they can opt out of their obligations if they can buy the right advice or pay for sophisticated tax avoidance products. It is about time for all political parties to adopt and voice that moral approach more. Like benefit fraud, tax evasion undermines the confidence of ordinary taxpayers in the legitimacy of the system. It should be far less acceptable, socially as well as morally—it should not be thought reasonable and polite—to admit in company to earning a living by helping well-off people and companies to avoid their tax liabilities in the jurisdictions where they operate. I do not say that the vast majority of taxpayers or tax accountants do that, but some do, and the practitioners in question probably know who they are. The hon. Member for Amber Valley is nodding, and we can talk to him later—he does not have to say anything on the record. We know the practice when we see it, and it should be far less acceptable morally, and in company, than it has been in the past. We need that switch to happen.

[Dr Pugh]

I accept entirely what the hon. Lady says, and her reference to the free rider principle. We can identify free riders, but it is rather like identifying people who do not pay their bus fare; it does not mean to say that there is an easy way to do it. I refer her to an interesting discussion at the Public Accounts Committee with the landlord of the Treasury, whose office is based, I think, in Bermuda. All the people we interviewed and all the senior staff enjoy the advantages of London society, and the benefits that that bestows on them, but avoid tax by virtue of having a name plate—well, a little more than that, but not much more—in Bermuda.

[Ms Eagle]

The hon. Gentleman will be able to discern from the tenor of my remarks that I agree with him.

I hope we all agree that the world has changed and that there will be no hiding place for tax cheats. The previous Labour Government had a record to be proud of and it is important that the momentum we managed to create should be continued, especially internationally. In 2004 we introduced a requirement to disclose tax avoidance products in advance, to a storm of protest. In 2009 we strengthened the regime, and that has transformed the fight against avoidance. As the hon. Gentleman explained, that protects more than £12 billion of revenue.

The March 2010 Budget made the disclosure regime broader, increased the penalties for non-compliance and gave Her Majesty’s Revenue and Customs access to more information on those who use the schemes. The package was designed to tackle tax avoidance, non-compliance and offshore evasion and to protect £18 billion of revenue. Last year HMRC identified £12 billion in extra tax due—another point to which the hon. Gentleman referred—seized £57 million in assets and £9 million in cash forfeitures and successfully prosecuted 171 cases. Will the Minister set targets or expectations in HMRC to increase the rate of prosecutions, and perhaps achieve better figures this year? We also legislated to give HMRC more effective powers to ensure that the sanctions it could use would be effective and proportionate. There are to be more onerous reporting restrictions in future for those who are caught evading tax of more than £5,000, and as the amounts evaded get higher the consequences under the current law for those who are discovered doing it get worse, and end up with naming and shaming.

Internationally, and as the hon. Member for Southport also recognised, as president of the G20 we led a global clampdown on tax havens and offshore evasion. That is an important aspect of what we must do if we are to close the tax gap. The hon. Gentleman mentioned in passing the 100 tax information exchange agreements signed by OECD countries in the past year, including those the UK has agreed with Jersey, Guernsey, the Isle of Man and, perhaps more interestingly, Belize. In 2007 the offshore disclosure facility gave the customers of five major banks the opportunity to put their tax affairs right, yielding more than £400 million in tax revenue due. Last year, as part of the Budget process, HMRC served notice on more than 300 other financial institutions to hand over details of those who cheat on their tax by hiding income in offshore accounts.

We also concluded the ground-breaking Liechtenstein disclosure facility, which is expected to bring in nearly £1 billion in lost tax revenue. That agreement goes far beyond the tax information exchange agreements we have been discussing, and could be a model for future agreements. I should be interested to hear what the Minister has to say about that. Under the agreement, UK taxpayers with money in Liechtenstein accounts must demonstrate that their tax affairs are in order, and must have letters to that effect from HMRC; otherwise, their Liechtenstein accounts are closed down. They must then settle with the UK tax authorities. Thanks to progress made by the previous Labour Government, there are fewer places for large amounts of money to be sent if Liechtenstein accounts are closed down, and there are fewer places to hide.

We also persuaded the OECD to develop best practice guidelines on country-by-country reporting, as was also mentioned earlier—an excellent initiative that was put on the agenda by the development community, and in particular Christian Aid, ActionAid and Oxfam. Tax evasion costs developing countries billions of pounds each year in lost revenues, and is a barrier to social and economic development and growth.

Ahead of next week’s emergency Budget, I want to ask the Minister a few questions. Will he recognise the excellent work that the previous Government bequeathed him in this important area, and tell us how he intends to build on it? Will he set a target for the tax gap; and what percentage of the fiscal consolidation that we all expect, given the softening-up process of the past few weeks, does he expect closing that gap to represent in the Budget? Will he maintain the hidden economy advisory group to inform that vital work? It was in the middle of extremely important work—particularly on creating routes back to legality for those who might have been in an illegal position, and to allow them to settle their tax.

Does the Minister agree that, in an international setting, maintaining the momentum to clamp down on tax havens and non-compliant jurisdictions is vital, and does he therefore share my disappointment with the perfunctory mention that the entire agenda received in the recent G20 communiqué? Why did it receive such a perfunctory comment at the G20 Finance Ministers’ meeting? I hope the Minister can reassure us that that does not mean this important area is to be less of a priority.

Does the Minister intend to pursue new disclosure facilities, similar to the ground-breaking example we have managed to negotiate in Liechtenstein; and what progress has been made between the UK and the authorities in Belize, given the recent signing of the tax information exchange agreement? How much lost tax revenue does he expect to raise as a consequence of that agreement? I look forward to his response.