Financial Crime: Legislation

Lord Palmer of Childs Hill Excerpts

Thursday 17th March 2011 Lords Chamber

[Lord Palmer of Childs Hill]

My Lords, the difference between tax evasion and tax avoidance was once said to be the thickness of a prison wall: evasion is illegal, whereas avoidance was and is legal, when one sticks to the letter if not the spirit of the law. In recent years the difference between evasion and avoidance has been less clear. In 2005, the UK’s chief inspector of taxes said that he wanted to get rid of the distinction and talk about the level of compliance, not avoidance and evasion.

Let me say at the start of my comments that if one reduces one’s tax bill to the lowest possible, which is within the spirit of the law, that is called tax mitigation, as mentioned by the noble Viscount, Lord Eccles, and is considered non-objectionable—even a duty to oneself so to do. It is when devices are created purely for avoiding tax that they become objectionable and can land the person in trouble.

A recent example of legal tax avoidance or mitigation which hit the newspapers was that of a captain of industry who was perceived to be the owner and operator of a large UK business—employing many employees, who, he said, pay tax—that pays VAT and corporation tax. However, the majority of the shares of that company are held in the name of the entrepreneur’s wife, who lives in a tax haven and to whom the company dividends are legally paid.

It is my belief that the UK needs to look further into these legal methods of taxation avoidance, which I believe do not obey the spirit of the law—indeed, in the view of some, they do not obey the law itself. Things are gradually changing, as significant cases have seen tax saving schemes struck down if the scheme lacks “a business purpose”. I am told that the term “money-laundering”—which we have mentioned here today—was coined to describe the activities of Al Capone, the Chicago mobster who used his laundry business to clean dirty money. Noble Lords may well remember that Mr Capone was imprisoned for tax evasion rather than for the other criminal activities.

Given that HMRC aims to stop tax evasion and discourage tax avoidance, I would like to spend a little time today talking about what is an effective agreement between the UK and Liechtenstein, whereby HMRC offers a genuine, if only partial, tax amnesty that is designed to stop evasion practice and—a point made by one noble Lord—bring in sizeable funds into UK tax coffers. In August 2009, HMRC announced the Liechtenstein disclosure facility, which is based on, and can operate because of, the tax information exchange agreement between the UK and Liechtenstein. The aim of the disclosure facility is to eliminate all UK tax evasion with a Liechtenstein connection. At the time, HMRC’s Permanent Secretary for Tax said:

“Those who have been evading UK tax on assets held in Liechtenstein banks must now settle with us. There are no alternatives”.

Financial intermediaries in Liechtenstein are now required to send a formal notification to any customers who have a UK tax exposure. The customer must provide evidence of UK tax compliance. Those who use that disclosure process benefit, in that only unpaid taxes from April 1999 are due—in other words, there is a real, if partial, amnesty. The fixed penalty is only 10 per cent of the tax due plus, of course, the tax itself. If innocent error can be shown, the settlement may be reduced to only six years of the tax with no penalty. The idea is to get people out of the cupboard and paying their taxes so that moneys they have been salting away are brought into the public sector.

As a practical way of raising taxation, both past and future, and of stopping the further hiding away of assets, the Liechtenstein disclosure facility must be applauded and encouraged, and spread to other jurisdictions and secretive tax havens mentioned by other noble Lords here today. It would be useful if the Minister could provide this House with details of the amounts raised by this scheme and indeed any similar schemes. Reducing tax avoidance and evasion is the best way for the UK to raise funds to carry out its duties and obligations in government areas such as social services and education—or whatever else noble Lords would think relevant—which I am grateful to the noble Lord, Lord McFall, for mentioning.

I have not dealt today with the loss of tax and income to the UK from non-doms, who by their very nature have assets abroad so behave differently from other UK citizens. Non-doms not only broadly pay no tax on foreign unremitted income but they use their funds deposited abroad to shop in Paris, Madrid and New York, and do not use those funds to shop and spend their money in the UK.

No one, including noble Lords, likes paying tax. When in the 18th century Benjamin Franklin said,

“nothing is certain but death and taxes”,

he was unaware of the era of tax avoidance and evasion. Regarding the comment made about tax conferences, I must tell you that many people in the industry—and I am a chartered accountant—believe that people go to these conferences to find out ways of avoiding, if not evading, taxes. Listening to the debate today, I was reminded of Sir Walter Scott, who said:

“Oh what a tangled web we weave,

When first we practise to deceive!”.