Tax: Avoidance and Evasion

Lord Flight Excerpts

Tuesday 13th September 2016 Lords Chamber

[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.