Finance (No. 3) Bill (First sitting)

Bim Afolami Excerpts

Tuesday 27th November 2018 Public Bill Committees

[Peter Dowd]

In speaking to amendment 8, I will also speak to amendments 9, 10 and 11, each of which we will press to a vote.

Clause 2 enacts the continued charging of corporation tax. As the explanatory note says, the clause

“charges corporation tax for the financial year beginning 1 April 2020 ...Parliament charges CT for each financial year. This clause charges CT for the financial year beginning 1 April 2020. The rate of CT for the financial year 2020 was set at 17% in Finance Act 2016 Part 2 section 46.”

As I indicated earlier, it is vital to hold the Government to account on the matter of their treatment of corporation tax. The Government have offered huge tax breaks to big business even during their continued programme of austerity, which only two weeks ago the special rapporteur described as causing “misery”. It is important to set that context in relation to our amendments. The Government have slashed—that is the word—the amount of corporation tax paid, with a commitment to continue to cut big company taxes further. By 2020, 11% will have been cut from the main rate.

The main rate of corporation tax applies to companies with profits over £300,000—these are not small family businesses, but big corporations of the sort that we have all come to know, because they play a significant part in our economy. There is no criticism of that, but there is a balance to be drawn.

The main rate started at 28% in April 2010. It was reduced by the former Chancellor to 26% in April 2011 and then was reduced again to 24% in 2012 and 23% in 2013, before reaching 20% in 2015. It was cut further, to 19%, in 2017 with a view to reaching 17% by 2020. As of last year, the Institute for Fiscal Studies found that, compared with 2010, those cuts were denying the country £16.5 billion a year in tax revenue. That will increase if the Government stay in power long enough to push the rate down to 17% by 2020.

The Government have already been criticised by tax experts about the matter, which to some extent takes us back to our debate about the ability to tease out the issues. For example, Bill Dodwell, the former head of tax policy at Deloitte—not a company considered to be particularly socialist—said:

“Nobody seems to welcome the cut to 17 per cent.”

The British Chambers of Commerce has called for a pause to the corporation tax giveaways. When corporations’ own trade associations are making that point, it indicates that something might not be quite right. If it is important that we are all in this together, we must all be in it together on this matter too, and corporations should not be outside that.

We seek to take stock of the Government’s policy, which many people describe as corporate welfare, in the context of eight painful years of austerity for some of the poorest in our society and following numerous criticisms of the corporation tax policy by those who will benefit from it. Will the Minister help us to understand the Government’s position by addressing those criticisms in turn? Perhaps the Government might wish to introduce a review of corporation tax changes since 2010, so that we can get to the bottom of this important matter. After all, in eight years under the Government, corporation tax giveaways are likely to amount to hundreds of billions of pounds, while the number of people in poverty has risen to 14 million. A review of the matter would also help us to compare the Government’s actions with Labour party policy, which is to reverse the cuts and invest the money elsewhere.

Let us have a review to tease out the issues, because £16.5 billion works out at more than £25.5 million per constituency in the UK. The combined total cut from the constituencies of Conservative members of this Committee amounts to £228 million; it is important that the figures are put in context, because that translates to a lot of schools and hospitals that they are prepared to sacrifice.

Along with the important matter of what has happened to corporation tax since 2010, we must also draw a link between the Government’s cuts to corporation tax and their wider programme. In our view, there has been economic mismanagement, but we are not necessarily here today to talk about that.

[Bim Afolami (Hitchin and Harpenden) (Con)]

The hon. Gentleman asserts figures such as £16.5 billion, but does he accept that the tax rate has a dynamic effect on the amount generated for the Exchequer? It is all very well to cite a number as a static figure and say, “Actually, Labour party policy will double the amount we get,” but does he accept that there is a relationship between the rate and the amount that the Exchequer generates because of increased economic growth?

[Peter Dowd]

The hon. Gentleman makes a fair point, which I will address later in my remarks, and which we can tease out across the Committee if we want.

For Members who do not know, labour productivity is calculated by dividing output by labour input. Output refers to gross value added, which is an estimate of the volume of goods and services by an industry, and in aggregate for the UK as a whole. Labour inputs are measured in terms of workers, jobs—“productivity jobs”—and hours worked, or “productivity hours”.

The cuts to corporation tax have done nothing to improve our productivity. The hon. Member for Hitchin and Harpenden may wish to listen to that point, so I will repeat it: the cuts to corporation tax have done nothing to improve our productivity. That strikes at the heart of the Government’s failure on the issue. In fact, the economic statistics centre of excellence and the centre for macroeconomics at the National Institute of Economic and Social Research published a study this year of Britain’s very poor productivity. That brings us to the point that the hon. Gentleman raised, because one would assume that as a result of the tax cuts, more would be invested and productivity would rise—but that has not happened. The Government have argued that those corporations now receiving significant sums in tax cuts would invest in our economy and drive their business models forward, thus increasing UK productivity. Unfortunately, the 2018 paper shows that the billions of pounds of giveaways have not had a positive productivity effect. To deal with the point raised by the hon. Member for Hitchin and Harpenden, that paper says:

“Average annual…productivity growth was 2.5 percentage points lower during the period 2011-2015 than in the decade before the financial crisis…in 2007. We find that several years on from the financial crisis stagnation remains widespread across detailed industry divisions, pointing to economy-wide explanations for the puzzle. With some exceptions, labour productivity…lost…momentum in those industries that experienced strong growth before the crisis. Three fifths of the gap is accounted for by a few industries that together account for less than one fifth of market sector value added. In terms of why we observe continued stagnation, we find that capital shallowing has become increasingly important in explaining the labour productivity growth gap in service sectors, as the buoyancy of the UK labour market has not been sufficiently matched by investment…The collapse in labour productivity growth has been more pronounced in the UK than elsewhere”

notwithstanding those major cuts in corporation tax.

[Peter Dowd]

I do not want to introduce Gilbert and Sullivan, but the point is that it is a topsy-turvy world where cash for corporations equals productivity, when it does not, and cuts to welfare equal productivity, when they do not. It is not as simple as that and I am afraid that the Government’s rather one-dimensional approach does not work. That report shows that the billions handed to those big companies by the Government have not had the required effect on business investment to drive up productivity. The facts are there for everybody to see. No doubt, if we had had some experts here, we could have teased that out a bit more.

[Bim Afolami]

The hon. Gentleman has focused on domestic business investment, but would he not accept that having an attractive corporation tax regime and providing a business-friendly climate also helps with foreign direct investment? Britain is still a world leader in that.

[Peter Dowd]

Yes, but there is not necessarily a causal link there. The reality is—[Interruption.] Let me tease that out. The evidence does not suggest that, as I have tried to point out. The German economy is 35% more productive, because investment in it is significantly better than investment in this country’s economy. We are having a debate at the moment about the question of uncertainty in relation to Brexit, which is probably having a more significant effect than the hon. Gentleman suggests.

The bottom line is that the idea that cutting corporation tax per se will lead to growth in the economy has not proven to be the case. The economy is still flatlining, despite those cuts to corporation tax. The best part of half a billion pounds is still sitting in corporate bank accounts not being invested, despite corporate tax cuts.

--- Later in debate ---

[Peter Dowd]

My hon. Friend makes an important point: we have to have a balance. The massive cuts in corporation tax—sequentially, over several years—have not had the required effect. If they did, there is an argument to be had, but they have not. There does not appear to be any evidence that that is the case, so it begs the question why. If the Government are trying to make a rational case for it, they have singularly failed and it is time to have another look.

The Government once had a plan to tackle, for example, productivity in 2016 when they tried to maintain that there was an agenda beyond austerity, but that has not been the case. Sadly, the plan was not to reverse the corporation tax cuts and invest in the economy, but simply to push on. As a result, the plan was roundly criticised. The Business, Innovation and Skills Committee said

“we question whether the document has sufficient focus and clear, measurable objectives to be called a ‘plan’. This broad and expansive document represents more of an assortment of largely existing policies collected together in one place than a new plan for ambitious productivity growth.”

That plan was the best attempt so far and it has singularly failed. That is why we will continue to press the Government on the true cost of corporate giveaways both in terms of the tax forgone and their effectiveness.

Amendment 8 requires a review of the effects of corporation tax receipts of multinational companies compared with their UK-based revenue. That is a perfectly reasonable approach in the round—it is not just one-dimensional. The Financial Times reported last year that multinational companies avoided paying as much as £5.8 billion tax in 2016 by booking profits in overseas entities. It reported that that represented almost a quarter of the tax underpaid by large corporations last year. In addition to an apparent avoidance of tax, they also get a tax reduction. It is a great life if you can get it: do not pay tax and get rewarded with another tax cut. If only we could all do that, although I suspect none of us would want to.

Sadly, the situation does not seem to have improved under the Government’s plans, despite the warning signs. The Times reported two weeks ago that HMRC is now chasing £28 billion in unpaid taxes from multinationals. The Government’s response was to give them some more. It is a bizarre approach when they owe £28 billion, or when HMRC is chasing £28 billion. I assume colleagues in HMRC do not simply go around chasing £28 billion for the fun of it, and instead do it because there is a requirement and we need the tax, and importantly because companies should pay their fair share. That represents a 50% increase in avoidance over four years. While the Government give corporations tax cuts, the corporations appear to say, “Thank you very much; we will carry on doing what we usually do and avoid our taxes.”

The problem stems from transfer pricing, which refers to the charges made between different parts of a multinational business for goods, services or intangible assets, including intellectual property, for example. Tax rules provide that transactions between connected parties should be taxed as if they were on arm’s length terms. In recent years, multinationals have been accused of arranging their transfer pricing to minimise their tax liabilities in jurisdictions such as the United Kingdom, which accounts for billions of missing tax in the UK.

The Conservative party not only wants to give the wealthiest a tax break but it does not seem too bothered if they give it to others such as corporations that do not necessarily need it. Of course, as my hon. Friend the Member for Oxford East said, that rule applies only to powerful interests and not to the working single mother who pays in full every single month.

[Bim Afolami]

The hon. Gentleman uses the word “corporations” pejoratively and then mentions the hard-working single mother. Does he accept that the hard-working single mother might also run a small business? Why did the Labour manifesto commit to increasing corporation tax on small businesses as well as on multinationals?

[Peter Dowd]

I started my comments by welcoming the role that corporations play in our economy. My use of the word “corporations” was not in any sense pejorative. I have said nothing “pejorative” about corporations. I may have talked pejoratively about those corporations that avoid their tax and I think most other people would, too. Those corporations have a responsibility, and not just legally, to pay tax. I am not suggesting they are evading tax in that sense, but morally they are part of our community. They are part of one of the most stable countries in the world, with a rule of law next—[Interruption.] I am absolutely shocked that the hon. Gentleman is laughing at my assertion that we have one of the best processes for the rule of law in this country. I am sure he did not mean to laugh when I was praising the British constitution—I accept that he did not really mean it.

At the end of the day, the bottom line is that I have not at any time been pejorative, and nor would I wish to be pejorative, about corporations that play their part in society, that pay their taxes, that treat their workers properly and that treat their customers as their first port of call. I would not be pejorative about those corporations, but I will not stop criticising corporations that do not pay their fair share of tax.

To get back to the point, that is why the Government appear to be winding down the diverted profits tax rather than ramping up the pressure on companies that do not pay their way. The review demanded by amendment 8 would strike at the heart of the problem. For too long, the Government have sat idly by and watched the UK being fleeced by many big companies and the public are saying that enough is enough.

On amendment 9, the Government’s blind spot in respect of companies paying their share extends in particular to technology companies. It was reported in The Guardian this year that Amazon had halved its corporation tax despite posting record profits. The article speaks directly to the amendment by saying:

“The company, which has been locked in a race with Apple and Alphabet to be the world’s first trillion-dollar business, revealed that pre-tax profits at its UK business tripled from £24m in 2016 to £72m last year.

The figures were reported by Amazon UK Services, the company’s warehouse and logistics operation that employs more than two-thirds of its 27,000-plus UK workforce, in its annual financial filing to Companies House.

The company almost halved its declared UK corporation tax bill from £7.4m in 2016 to £4.5m last year. It received a tax credit of £1.3m from the UK authorities in 2016, and last year paid £1.7m tax on its profits.”

I do not have the evidence to hand, because time does not permit me to go into all the details, but it would be interesting to know how many of those 27,000 people are on tax credits themselves because the pay they get from that company is pretty low. There is an unacceptable triple-whammy for taxpayers. No. 1 is that some of those companies’ employees get tax credits because they do not get paid enough; No. 2 is that the companies are getting a corporation tax cut; and No. 3 is that they avoid paying their taxes where they can.

Will the Minister guarantee that Amazon will pay a full and reasonable share of tax on its operations next year? I suspect that he is not likely to commit to that suggestion even if he wanted to. What about other companies? Google paid only £50 million last year, despite total sales of £5.7 billion, which is worth repeating. Meanwhile, Facebook paid only £15.8 million in corporation tax, despite collecting a record £1.3 billion in sales. Its accounts show that while it increased its UK income by more than 50% in 2017, its pre-tax profits increased by only 6% to £62.7 million. The Silicon valley-based company’s UK taxable profits were reduced by a £444 million charge for unexplained “administrative expenses”, which is scandalous.

The Chancellor said that he would introduce a digital services tax in response to that flagrant attempt to undermine our tax base. Oddly, though, the tax seemed to bring in only £5 million in the first year and £275 million in the second. Perhaps the Financial Secretary could tell us where the rest is. That seems a pretty pathetic attempt to restore a level playing field in our tax system—the digital services tax is a drop in the ocean. What estimate has the Minister made of the total corporation tax lost to HMRC through avoidance by technology companies? What steps has he taken to work with other nations to deliver a comprehensive response? How many meetings has he had with the European Union since the Budget?

As the Minister knows, the European Union’s approach is much more comprehensive. A Commission press release set out its approach to digital taxation—it is therefore directly relevant to amendment 9. It demonstrates that the EU’s plans are far more developed than the UK’s. It is therefore important that we listen to them. The press release states:

“The Commission has proposed new rules to ensure that digital business activities are taxed in a fair and growth-friendly way in the EU. The measures would make the EU a global leader in designing tax laws fit for the modern economy and the digital age”,

which is what amendment 9 seeks to do. It continues:

“The recent boom in digital businesses, such as social media companies, collaborative platforms and online content providers, has made a great contribution to economic growth in the EU. But current tax rules were not designed to cater for those companies that are global, virtual or have little or no physical presence. The change has been dramatic: 9 of the world’s top 20 companies by market capitalisation are now digital, compared to 1 in 20 ten years ago. The challenge is to make the most of this trend, while ensuring that digital companies also contribute their fair share of tax. If not, there is a real risk to Member State public revenues: digital companies currently have an average effective tax rate half that of the traditional economy in the EU…Today’s proposals come as Member States seek permanent and lasting solutions to ensure a fair share of tax revenues from online activities”

as urgently as possible. Like the European Union, we are seeking to create an initiative

“to reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels. This forms the Commission’s preferred long-term solution.”

I would like the Government to consider a number of European Union proposals as part of the review, including an interim tax on certain revenue from digital tax activities. The Government could take that issue into account as part of the review, too. I hope they will look at it as well.