Taxation: Evasion and Avoidance

Lord Watson of Invergowrie Excerpts

Thursday 6th June 2013 Lords Chamber

[Lord Watson of Invergowrie]

My Lords, I, too, congratulate my noble friend Lord Foulkes, who is my friend, on achieving this important debate. It is a matter of some regret that only one Back-Bench Member from the coalition parties felt that they had anything useful to say on the subject. Perhaps that tells its own story.

Between 1999 and 2011, British companies’ profits increased by 58% but revenues from corporation tax increased by just 5%. Finally, political leaders are beginning to question that gap. That is to be welcomed. Last month, an EU summit pledged to clamp down through the sharing of information on the assets and gains of nationals banking in other countries. The Prime Minister expressed his belief that there was real momentum growing on the issue of tax and that is why he intended place it high on the agenda at the G8 summit, which he will chair in two weeks’ time.

The EU summit was the first time that European leaders had grappled with the increasingly important issue of tax evasion and avoidance. Some high-profile cases in various countries recently assisted in that process. Everyone, whether they are a football fan or not, will be aware that Bayern Munich has swept everything in front of it this season, both domestically and in Europe. However, a spoke in the club’s wheel was when its president, Uli Hoeness, was recently exposed, to much shock in Germany, over serious discrepancies in his tax affairs. Meanwhile, in France, the Cabinet Minister responsible for tax collection had to resign after admitting to having a secret account in Switzerland. You could not make that up.

It is encouraging to note that the intense debate in Britain over the tax behaviour of multinationals such as Amazon, Apple, Google and Starbucks has put the issue at the top of the political agenda. It seems that the catalyst for action at an international level has been the Obama Administration, to which the noble Baroness, Lady Kramer, referred. It will be interesting to see how effective that will prove to be in terms of obtaining information on US nationals’ assets and earnings in other countries.

The savings directive makes it compulsory for EU member states automatically to share details about other EU citizens’ bank accounts. Proponents argue that this allows Governments to detect irregular payments and other signs of tax evasion. The directive does not, however, deal with corporations, and an example would be Google, which has been much publicised and criticised in the UK for outsourcing its advertising sales to Ireland.

It is to be welcomed that Ministers, too many of whom have fixated on austerity plans and deficit reduction as the only answer to the financial crisis, are now coming to accept that there are other ways to balance the books. The campaign group UK Uncut began campaigning on the issue in 2010, and its legal challenge revealed how HMRC had waived a £20 million bill to Goldman Sachs, as well as a £6 billion bill to Vodafone. Journalists, tax experts and campaigners have been exposing some of the tax chicanery perpetrated by big business for far longer. My noble friend Lord Foulkes highlighted the fact that Amazon’s company accounts reveal that its corporation tax bill amounts to less than it gets in grants. It appears that most of those grants are for the company’s new operation in Dunfermline. How can the Government clamp down on the likes of Amazon and Google when the accounting firms used by these companies actually second staff to advise the Treasury on new tax legislation? To be blunt, the more that you can afford to pay a financial adviser, the less you will pay in tax. Figures of course vary and are open to interpretation, but tax evasion is said to cost the Treasury about £14 billion a year.

Yet, while multinationals legally avoid paying millions of pounds, it seems that HMRC concentrates more of its efforts on aggressively targeting small businesses and publishing lists of builders, clothing manufacturers, tradesmen and hairdressers who owe relatively small sums, nearly all less than £50,000. Of course, anyone avoiding or evading the payment of tax should be pursued but there should be consistency in that, not a concentration on picking off the small fry, the easy targets. If all the small fry were rolled into one, they would not stand comparison with the internet giants.

Many of us will have been taken aback by the evidence given last month to the Public Accounts Committee by the head of Google in Europe, Matt Brittin, who denied that the company’s tax operations were unethical. He defended the arrangement whereby most of Google’s taxes on money earned in Britain are channelled through Ireland to Bermuda, with the company paying an effective rate of less than 1%. However, those comments have been destroyed by a former Google employee, who told the Sunday Times:

“Google has pulled the wool over the eyes of HMRC and the British population”.

The PAC chair, Margaret Hodge MP, whom I commend on doing a first-class job, confronted Mr Brittin with Mr Jones’s evidence, but Mr Brittin denied it. Mr Jones’s information, which he says he has taken to HMRC, includes thousands of e-mails in support of what he had to say and must be taken seriously by HMRC. I hope that in due course we will hear some positive response. The revenue from Google’s deals in the UK is sent to Google Ireland Ltd, which in turn pays dividends to its parent companies in Bermuda.

Interestingly, Bermuda is one of a number of overseas territories whose leaders have been invited to meet the Prime Minister in London on the eve of this month’s G8 summit. Mr Cameron apparently plans to urge them to root out the multi-billion pound evasion industry by signing up to agreements to share tax information. His letter calling for action on tax information exchange and beneficial ownership was also sent to leaders in many territories. It is to be hoped that when the Prime Minister meets them, he will have a stick as well as a carrot to hand because it is not just the developed world that stands to benefit if the situation were to be improved. As others have mentioned, the charity ActionAid has demonstrated that nearly one in every two dollars of large corporate investment in developing countries is routed through a tax haven and says that 98% of the FTSE 100 multinational groups have companies in tax havens.

However, it is not just multinationals that employ every trick in the book—and, it is not unreasonable to assume, a few companies that have not yet made the book—to deprive exchequers of tax revenues. More than 100 of Britain’s richest people have been caught hiding billions of pounds in secretive offshore havens, thereby sparking an unprecedented global tax evasion investigation. In April this year, HMRC warned those involved, who were named in offshore data first offered to the authorities by a whistleblower in 2009, that they will face criminal prosecution or significant penalties if they do not voluntarily disclose their tax irregularities. HMRC was quoted as saying that the data,

“reveals extensive use of complex offshore structures to conceal assets by wealthy individuals and companies”.

HMRC is also investigating more than 200 UK accountants, lawyers and other professional advisers named in the data as advising the wealthy on setting up the elaborate offshore tax arrangements. These revelations may be shocking but are surely not surprising. They demonstrate the extraordinary lengths to which some of the wealthiest Britons are prepared to go to avoid making their fair contribution to the resources required to run our country and provide public services for its people.

If only there were more rich Brits with a social conscience such as John Caudwell who built the Phones4u empire. Mr Caudwell has personally paid more than £250 million in tax since 2008; that is 66 times more than Google paid in the same period. Mr Caudwell has called for tax avoiders to be “named and shamed” and for consumers to boycott what he called “serial offenders”. He went further and asserted that unless the Government got to grips with the problem of rich individuals and powerful corporations dodging the taxman, Britain was facing a period of social unrest. It is not sustainable, Caudwell argues, to have mega-millionaires and billionaires increasing their wealth, often by avoiding tax, while other people struggle to get by in the face of rising inflation and the severe reduction in public services over recent years.

One of the recurring issues is of course the role played by HMRC in pursuing those who refuse to make their contribution to tax revenues. We are told that there is to be new funding for HMRC, with the Government handing it almost £1 billion more to secure an additional £7 billion of revenue a year, thereby taking HMRC’s total compliance revenues to £20 billion in 2014-15. The Revenue in this spending review period wants further to expand anti-avoidance and evasion activity focused on offshore evasion, and this investment, it is claimed, will secure a further £2 billion in that period. Yet, as the noble Lord, Lord Foulkes, mentioned, there are hundreds fewer HMRC staff now than there were in 2011 due to total cuts of around £2 billion. How are these two positions to be reconciled? Surely HMRC must have more staff—and more highly paid staff to prevent them being poached by the big accountancy firms—to ensure that HMRC has the tools to make a better fist of reducing tax avoidance and evasion.

The large accountancy firms are in a powerful position in the tax world and have an unhealthily cosy relationship with government, according to Margaret Hodge. They second staff to the Treasury to advise on formulating tax legislation. When those staff return to their firms, they have the very inside knowledge and insight to be able to identify loopholes in the new legislation and advise their clients on how to take advantage of them. As Ms Hodge said:

“The poacher, turned gamekeeper for a time, then returns to poaching. This is a ridiculous conflict of interest which should be banned in a code of conduct for tax advisers”.

I certainly second that. The idea could perhaps be turned on its head, with HMRC staff seconded to accountancy firms, sitting in on their meetings at which intricate plans to subvert legislation are discussed. Now I suggest that that would concentrate a few minds in a slightly different way.

The moral case on tax avoidance is overwhelming. That is why Margaret Hodge was right to be so forthright in her criticism of those individuals and corporations that route their cash through low-tax regimes at a massive cost to the UK Exchequer. Although it was encouraging that the recent Finance Bill contained the introduction of the general anti-abuse rule—again, referred to by the noble Baroness, Lady Kramer—it remains to be seen what deterrent the GAAR will have. I certainly agree with her comment that this is just a dipping of toes in water and that much more needs to be done. The rule is to be reviewed after two years, and I certainly hope that the information gained in that period will be used to ensure that it is extended.

As has been stated, changes to the international tax system will be high on the agenda at the G8 summit and there has probably never been a better time to crack down on tax havens, aggressive tax planning and transfer-pricing schemes. At least in part, this is because Governments are badly in need of tax revenue in a time of weak growth. Tax could become to the 2010s what debt relief was to the 1990s—the focus of a global campaign for reform, and I very much hope that it is.

Part of the way in which this can be undertaken is surely by the Government introducing legislation containing clear and unambiguous anti-avoidance rules. One way would be to charge corporation tax on a definable estimate of the profits generated by all UK sales to other UK companies or individuals, whether in shops or online. Where the head office is based or where the profits are declared would then be of no importance, so the tax could not be evaded by channelling the business, or by claiming to have done so, to a country with a lower tax rate.

In the end, though, the success of any campaign will depend on how the public behave. If the Government cannot, or will not, act, ordinary people should vote with their wallets by boycotting the worst offenders. That might mean higher prices and less choice, but why should we support businesses that exploit loopholes in the tax system to siphon off tax money from Britain that is so desperately needed to provide the services that maintain the fabric of society? On a personal level, in the past year I have stopped using Google as my search engine, I drink my coffee anywhere but at Starbucks and I no longer order goods through Amazon. I am certainly not alone in that but it will take a huge wave before these and other companies notice and give their conscience a makeover.

In the mean time, we have the right to look to political leaders and urge them to fasten on the shin-pads to demonstrate to the corporate giants that, when it comes to paying tax, they are finally determined to take the issue as seriously as business has for many years. We are hearing some encouraging words but those words must be translated into action—action on an international scale—if it is to be of any sustainable value.