Financial Crime: Legislation

Lord McFall of Alcluith Excerpts

Thursday 17th March 2011 Lords Chamber

[Lord McFall of Alcluith]

I thank the noble Lord. First, I congratulate the noble Baroness, Lady Williams, on such a timely and important debate on tax avoidance and fraud. I will draw attention to the importance of the debate in the context of the outlook for public finances.

There is a consensus across the House on the need to address the deficit and to make cuts. We realise that this adjustment will be painful and that the people who bear the brunt of it will not be the ones who caused the crisis but ordinary working people. The Office for Budget Responsibility estimated that half a million jobs would be lost in the public sector as a result of the cuts, and PricewaterhouseCoopers estimated that another half a million jobs would be lost as a result of private sector cuts.

Today, youth unemployment is at its highest level since 1992. At the end of last year, unemployment for those under 25 rose above 20 per cent, compared with less than 8 per cent for the general population. Youth unemployment in Germany is just 8.6 per cent at the moment, and 7.3 per cent for the general population. On top of this, working people and the vulnerable in society will be hit by cuts in their benefits and their public services, with job losses in the police, the NHS and schools already being reported. The background to this is the issue of fairness. When Amartya Sen spoke to the Treasury Committee a few years ago, he said that the link between effort and reward is how people understand a process to be fair. The word “fairness” needs to crop up continuously in our debate.

There is a concern that tax evasion is a growing problem. The current tax gap is £52 billion, according to the latest data from the Association of Revenue and Customs. That is nearly 9 per cent of the UK’s net tax revenue forecast for 2011-12. It also appears to be rising, with the latest estimate for 2008-09 showing a rise of £4 billion compared with the previous year. With that, the number of successful prosecutions by HMRC also declined by 41 per cent between 2007 and 2009. It is imperative that HMRC has the resources it needs to close that tax gap. I welcome the £917 million that the Government have pledged over the spending review period to tackle tax evasion, which aims to bring in an extra £7 billion of tax revenue. That is a recognition by the Government that investing in dedicated compliance staff at HMRC will save the taxpayer money by closing the tax gap.

The Public and Commercial Services Union, representing HMRC staff, estimates that an average member of staff dedicated to tax compliance yields £640,000 in tax revenue, net of staff costs. However, this extra funding could be more than cancelled out by cuts of £3 billion to HMRC’s budget over the same period, which could mean a loss of 10,000 staff. This also comes after efficiency savings at HMRC equivalent to 25 per cent of its budget, which has seen staffing levels fall by more than 25,000, and 200 of its offices closed since 2004. If efficiency savings mean anything they must surely mean saving money and not, in the long run, costing money. I feel that currently there is a falseness about the process.

This is also about the engagement with staff. During my chairmanship of the Treasury Committee in the other place we found that there had been a high turnover of staff in the organisation and that there was low morale among many employees. At the end of my tenure the committee was concerned that the merger of the Inland Revenue and Customs and Excise had had a knock-on effect on performance, and we were deeply concerned about employee engagement at HMRC. The current Treasury Committee has undertaken an inquiry into the performance of HMRC. In its evidence, the Chartered Institute of Taxation raised concerns about whether HMRC will be able to deliver the Government’s aim on tax compliance. The head of taxation at the Association of Chartered and Certified Accountants told the committee:

“Most people are compliant … [and] try to pay the right amount of tax at the right time”.

He went on to say that it is,

“probably the only thing that has been getting through the current problems ... It is the only reason why the Exchequer is still getting tax paid at the right time and roughly the right amounts”.

There is therefore a lot to concern us about the present situation with HMRC.

I want also to talk about offshore financial centres, because we must focus on those in ensuring that we close the tax gap. Tax havens have not only been used to avoid taxation: during the run-up to the financial crisis they helped bring about the explosion in securitisation in the financial sector. Many of us became aware of that at the time of the run on Northern Rock, when we learnt that the bank had a very large financial vehicle in Jersey. From there, Northern Rock issued securities which made up for 50 per cent of its funding. The need to re-engage with offshore financial centres is important. As my noble friend said, this issue is set against a background of trust and confidence in the system. If we do not maintain the integrity of London as a financial centre, which we all want, we will all lose in the long run.