Taxation: Evasion and Avoidance

Lord Haskel Excerpts

Thursday 6th June 2013 Lords Chamber

[Lord Haskel]

My Lords, I, too, congratulate my noble friend on this very topical Motion. Tax avoidance has really captured the public’s attention. I am very sorry to see that there are no speakers on the Conservative Benches, because all of us have to shine a light on these practices. It is only in that way that we will be able to test their credibility and acceptability. I hope that this debate will be part of shining the light on these practices.

I will speak about corporate tax avoidance. We need to shine a light on this because, in this age of austerity, not only do we need the money—as other noble Lords said—but the products, services, jobs, innovations and all the good things in our lives and in the economy that these companies bring. If we get it wrong, all of us will be the losers.

What is the key test? It seems to me that it is credibility. Businesses, especially publicly owned ones, must be credible. They go to great lengths and great expense to appear so. Yes, it is credible to locate production where skills are available. Yes, it is credible to locate services where costs are lower. But is it credible to sell, package and ship a book—not an e-book—from a UK warehouse, and for it to arrive at my house with a UK stamp on the parcel, and then to say that really the transaction took place in Luxembourg—where, incidentally, many of our roaming telephone charges are located? Is it credible that the intellectual property rights for a product should lie in the Cayman Islands, when the science, engineering, design and technology, and all the brain work were done in Europe, Asia and the USA? The Cayman Islands played no part in generating the value, and nor does it provide the patent protection that is so highly valued in these circumstances. Is the transfer pricing credible that goes on with coffee, metal ore and minerals? As the American Senate committee asked, is it credible for a company to have no domicile at all? In the FT, Robert Shrimsley put it rather well when he said that these companies were domiciled somewhere on a cloud. Equally, it is not credible that HMRC should accept these activities as lawful. Is this really what Parliament intended? Is this really the law? I do not think that it is.

The executives of these companies tell us that they pay all the taxes that are legally required. Amazingly, Ministers and HMRC seem to accept this. But, surely, what is legally required is that these companies pay corporation tax on the profits earned in this country, less any allowances that the Government think fit and less any incentives, such as the rather successful patent box for R&D. Routing profits through a low-tax jurisdiction is not a legal requirement. As my noble friend Lord Browne reminded us, it is a matter of choice—a choice made by company executives. John Kay made this very point in his column yesterday.

Some executives say they act in this way because of their fiduciary responsibility to shareholders. Yes, they have a legal fiduciary responsibility but it does not include avoiding tax, particularly avoiding tax by non-credible means which brings the company into disrepute. Again, this is a matter of choice—a choice by the directors. When directors claim that they are paying all the taxes they are legally required to pay, I hope that the Minister will respond by saying that this is just not credible. It is not credible because they pay the tax they choose to pay. I hope that such a statement will encourage HMRC to be more credible as well.

In reality, we know that most large corporations make this choice. ActionAid reported that 98 of the FTSE 100 companies use tax havens. Indeed, the Finance Bill 2012 relaxed the controlled foreign companies rules to facilitate the use of tax havens, presumably because regulation was too strong for this Government. Do we really want to go down this path? We learnt that lesson from the banks. Weak regulation produced weak banks and contempt for bankers. We do not want contempt for our major businesses. We are all losers if that happens.

My noble friend asks what are the social and economic consequences of all this. Many noble Lords have spoken of the less developed countries and aid. On 11 December last year, your Lordships debated the impact of this activity on developing countries. In moving the Motion, the right reverend Prelate the Bishop of Derby explained how the use of tax havens enabled multinational corporations to shift profits from developing countries into tax havens. We have heard about the detrimental effect on the revenues of these countries. Indeed, my noble friend Lord Browne gave us some extraordinary figures regarding Zambia. These same countries are often in receipt of development aid from us, aid which makes up for the shortfall in tax revenue. So that is a social and an economic consequence for us, the taxpayers of this country.

This gaming of the system is available only to well resourced, well advised, powerful companies, as my noble friend reminded us. The noble Baroness, Lady Kramer, told us that this activity helps big firms squeeze out their smaller rivals and she gave as an example the book trade. We hear plenty of fine words from the Government about open markets, fair competition and encouraging SMEs, so here is another economic consequence. What are the Government going to do about it? This is particularly important for our economy now that digital technology has opened up so many new possibilities, markets and opportunities for business and it is the ICT firms that are at the forefront of these new opportunities. How ironic that they should be at risk of losing credibility through their tax avoidance activities. That is another reason why we should not allow this to happen.

What is the solution? One answer is, of course, international co-operation and, yes, the G8 meeting next month provides an opportunity. The G8 may not have the power to impose its will, but it certainly has the authority to persuade. This is a chance not to be missed and I welcome the Government’s efforts in this regard. Meanwhile, we can do other things on our own. The noble Baroness, Lady Kramer, spoke of the general anti-avoidance rule—GAAR, as she put it. Will this enable HMRC to be more assertive and aggressive in challenging these arrangements, which are just not credible? I found what the noble Baroness said rather disappointing because I expected it to be much more powerful. I join other noble Lords in asking whether there is the expertise, staff and will within HMRC to fight the tax avoidance industry and bring more prosecutions. Naming and shaming is helpful, but it is not enough. For instance, will the Government deny public sector contracts to any company which is named and shamed? A solution which I find rather attractive is being investigated by the Oxford University Centre for Business Taxation. This focuses on the residence of the customer rather than on the residence of the supplier or where the click takes place for online business. This kind of sales tax would at least ensure that companies selling here would also make a contribution towards the infrastructure, services and facilities which enable that business to be carried out.

It is also partly the complexity of our tax system which enables companies to game it. There is an Office of Tax Simplification. It obviously needs a much greater sense of urgency injected into its work and probably needs to be given a lot more resources. Are the Government up for this? The current level of public anger over this matter should offer every encouragement for the Government to act. Ministers tell us that they are committed to transparency but they should act on this and require much more transparency showing beneficial ownership in the accounts filed in Companies House. The Government are absolutely right to make more transparent the activities of the UK dependencies which act as tax havens. Showing the beneficial ownership of companies and limited liability partnerships there will expose not only tax avoidance but money laundering. I wish the Prime Minister every success in his forthcoming conference with representatives of the dependencies prior to the G8 meeting and I hope that the outcome will be an automatic information exchange system. The EU has transparency rules for banks and important resources companies. This is now being extended to all large companies, both public and private, and a law requiring companies to break down tax, profits, revenues and staff numbers by country should be passed by the European Parliament within months. I hope that the Government will support this.

“The times they are a-changin’” and I hope that this debate will be instrumental in catching the spirit of these changing times—a more challenging spirit, which means that nowadays business plans have to stand up to scrutiny socially, ethically, morally and environmentally as well as commercially and financially. I think this is what the current Lord Mayor of the City of London meant when he spoke about his year in office being directed towards a City,

“reaching towards a newer, healthier capitalism”.

The new Archbishop of Canterbury expressed similar views. My noble friend spoke of a moral imperative. They are expressing the values that many of us share. Let us therefore encourage our business leaders to join in and make the appropriate choices.