Corporate Structures and Financial Crime

Charlie Elphicke Excerpts

Thursday 4th July 2013 Commons Chamber

[Helen Goodman (Bishop Auckland) (Lab)]

I am pleased to have the opportunity to speak in this debate and am grateful to my hon. Friend the Member for Bassetlaw (John Mann) for persuading the Backbench Business Committee to hold it. I am extremely concerned, as are all hon. Members, about the morality of cheating in the tax system and, as my hon. Friend said, the economic distortions it creates.

Ordinary small and medium-sized enterprises cannot cheat in that way, and the collapse in the high street is being exacerbated by the tax advantages enjoyed by the internet companies that facilitate online shopping. Indeed, the international internet companies are among the most significant offenders when it comes to tax avoidance. Their business model is built on an apparently free offer to consumers, but the services are paid for by advertising, which is targeted through the collection of personal data from consumers based on the cookie system. I have secured a separate debate in a fortnight’s time on the internet companies’ use of personal data. Today I wish to say something about their business model and its implications.

A Public Accounts Committee report found that between 2006 and 2011, Google paid the equivalent of $16 million in income tax in this country on revenues estimated at $18 billion. It claimed that advertising sales were being made in Ireland, when in fact the two contracting parties were in the UK.

Facebook, another US-based company, has 33 million users in the UK, with 25 million people visiting the site each day. Its revenues from advertising are estimated at around £170 million a year, but last year it reported sales of only £20.4 million. Using that figure for its sales, it reported a pre-tax loss of £13.9 million in 2011, enabling it to pay just £238,000 in tax last year. The position with Twitter is even worse, if that is possible to imagine. It did not even submit any accounts last year.

I want to set the behaviour of those companies, in relation to their corporate structures and tax performances, in the context of the cost to society and the public purse that they are creating. Everyone agrees that online child abuse is a serious crime. We in Parliament, the public and the industry are committed to its eradication. The Internet Watch Foundation is a fantastic organisation that takes down sites that carry child abuse images. It is a membership organisation for the industry, so we were all shocked to hear of the very small contributions that the industrialists were making to its work. Until a month ago, Google was donating £20,000 to the Internet Watch Foundation. In recent weeks, it has upped its contribution to £250,000 a year for four years, and the other media organisations have collectively offered a further £250,000 a year for the same period. I learned this week that Facebook makes a contribution of only £10,000 a year.

The problem with that is that the Internet Watch Foundation is hugely strapped for cash and unable to deal with all the alerts it receives. It is worried, because a survey that it undertook has suggested that, although 1.5 million people have seen child abuse images, only 40,000 reports have been made to the organisation. It is calling on the public to report more, in the interests of child protection, but it requires more resources to enable it to respond. Furthermore, once members of the public start to respond, they are not going to be able to distinguish between the different categories of image—illegal, obscene and indecent—and they will report everything that disgusts them.

We have a similar situation with the Child Exploitation and Online Protection Centre—CEOP—which is the part of the police force that deals with these issues. It believes that 60,000 people in this country are downloading child abuse images, yet its resources are so limited that it was able to secure only 1,570 convictions last year. At the same time, the companies that distribute that material are not paying the taxes that would help properly to resource the police. I have met representatives of those companies and written to Ministers about these issues. I am still waiting for a reply from Ministers.

Returning to the business model that Facebook uses to generate its revenues, I want to explain a further connection between the two kinds of crime. A whistleblower recently informed us that advertisements were appearing alongside the indecent images of children. They were advertising the services of a large number of household-name companies, including PayPal, John Lewis, Procter & Gamble, EE, Hewlett Packard, Betfred, Bing, Johnson & Johnson, Google, BSkyB and Western Union. Facebook has now agreed to do a manual sweep to remove the advertisements from the sites, because the advertisers do not want to finance them and do not want to be seen to finance them. It would be helpful if we had public statements from those companies on their views on that, and on whether they are happy to have so much advertising being channelled to other organisations that are not paying their proper taxes.

[Charlie Elphicke (Dover) (Con)]

I might have misheard her, but it sounded to me as if the hon. Lady was making serious allegations about John Lewis. Will she please reconfirm them for the benefit of Government Members?

[Helen Goodman]

rose—

[Helen Goodman]

Thank you, Madam Deputy Speaker.

Let me respond to the hon. Member for Dover (Charlie Elphicke). The companies that I listed have been inadvertently caught up in financing in this particular way, but the question for them is whether they have made it clear, publicly, that they do not wish to be financing the distribution.

In response to your point, Madam Deputy Speaker, the problem is that we have a system through which money is hoovered up in one way and can then be used to finance any other kind of crime—the crimes that I have described, but also those mentioned by my hon. Friend the Member for Bassetlaw. What we do not have from these organisations is any proper accountability that would allow us to get to the bottom of the issues and tackle them properly. It is extremely problematic that we do not have international agreements about how to deal with these internet companies when it comes to their taxes and their other behaviour. Although it is true that tax avoidance is a scourge and tax evasion is a crime, the industry’s use of these sites helps to promote other kinds of crime. I believe that there is a serious cultural issue about these companies that must be addressed.

[Charlie Elphicke]

I thank the hon. Lady for giving way again. I have used privilege in this place to name and shame financial wickedness and, indeed, industrial scale tax avoidance. I have always done so, however, in an attempt to provide evidence. The hon. Lady has made some serious allegations in respect of which I am concerned she has not provided us with any evidence.

[Helen Goodman]

The hon. Gentleman may not be aware that a whistleblower showed me a large number of pages on which I saw some of these advertisements. The point I am trying to make to him is that the companies are inadvertently drawn into this through the targeting and retargeting of advertisements. Their money is being used to finance the internet companies according to the business model that operates, so if they do not want to be involved, they must take steps to avoid doing so.

To offer the hon. Member for Dover some comfort, Marks & Spencer, for example, took the view that it really wanted action to be taken—and it took it publicly, which had a tremendous impact on Facebook and on what Facebook was doing. The other companies have not yet come out as clearly as Marks & Spencer did.

I had better not speak for too long. This is an important debate, and I am grateful to my hon. Friend the Member for Bassetlaw for opening it up. I am very concerned, however, about what the debate is uncovering.

--- Later in debate ---

[Mr Michael Meacher (Oldham West and Royton) (Lab)]

I pay tribute to my hon. Friend the Member for Bassetlaw (John Mann) not only for obtaining the debate and for making another strong speech on the subject, but in particular for his relentless campaigning on the issue of financial crime in all its forms, including money laundering, tax avoidance and evasion. That is what I want to concentrate on.

As the hon. Member for Wells (Tessa Munt) said, at the G8 summit, the Prime Minister made a great media blitz of his supposed crackdown on corporate tax avoidance. He tried to get UK-controlled tax havens to sign up to an OECD agreement on providing tax information. He also tried to secure a worldwide standard on automatic tax information transfer, to get the G8 countries to reveal the identity of shell companies and to help developing countries to get their rightful entitlement to tax. All those are extremely worthy objectives and no one in the House would demur from any of them, but all he achieved—it is achievement, rather than aspiration, that matters when one is Prime Minister—was a bland statement in favour of the principle of tax information transfer, without any actual means of enforcement.

The Prime Minister defended that feeble result by claiming that little can be done without international agreement and that it takes time to build that, but that is not true. Of course the best result would be an internationally agreed set of rules, but even in the absence of that there is a great deal that Britain can and should do. First, as a number of Members have said, the UK controls 10 Crown dependencies and overseas territories, which collectively embrace over one fifth, I think, of all the world’s tax havens. Most of them have signed up in principle—[Interruption.] Well, we shall see, but they have certainly signed up to the proposal for tax information exchange, and it is now within the purview of the British Government to enforce that proposal, if there is any reneging or backsliding, by the simple expedient of refusing to recognise any financial transactions emanating from those areas if there is any failure to secure full compliance.

That will generate a great deal of resistance, not least from the tax havens themselves, but also I suspect particularly from the big UK banks, which are the main users of these tax haven facilities. Since the Tory party continues to get more than half of its income every year from the banks—[Interruption.] There is no need to roll the eyes or shake the head, as that is an important fact, so facing down the banks on this important issue will test the Government’s resolve.

I therefore want to ask the Minister the following question, which I hope he will answer: will he assure the House that the Government will enforce these tax information exchanges with the tax havens they control? I agree he cannot do that without international agreement in the other havens, but he can control these ones. Alternatively, are we simply going to find that the Prime Minister’s fine words, which we all agree about, will just fade away in a puff of smoke after he has had his PR day in the sun?

What makes the Chancellor’s remonstrations about tax avoidance being immoral seem perverse is that he himself has now emerged as the arch proponent of tax avoidance. He is changing the controlled foreign company rules from 1 January next year to allow any multinational company with a subsidiary in a tax haven—and as the Minister knows very well, 98% of those companies do have a subsidiary in a tax haven—to reduce their corporation tax liability from 23% to a mere 5.5%. Given the boast of the Prime Minister and the Chancellor about cracking down hard on corporation tax avoidance, that is breathtaking hypocrisy. The message is, “Don’t worry about artificial tax avoidance. You needn’t do anything about that, because I am going to serve it up to you on a plate.”

Then the Government went even further. They have put forward the pro-tax avoidance proposal of the patent box, a wheeze whereby any patented process applying to any part of an enterprise, however trivial or minor, not only secures a reduction in corporation tax to 10%, but applies to the entire enterprise. Frankly, the more the Government go on in this way, pushing corporation tax almost to zero, the more tax avoidance fiddles become redundant, because the Government are doing it for them. Perhaps that is the Government’s aim.

[Charlie Elphicke]

Will the right hon. Gentleman give way?

[Mr Meacher]

The hon. Gentleman was a tax lawyer, I think. He is also a very mischievous Member of this House, but I will still give way to him.

[Charlie Elphicke]

I thank the right hon. Gentleman for his kind remarks about me. It is all very well for him to have a go at this Government, but he will recall that under his Government revenues from corporation tax rose by 6% while revenues from income tax, paid by ordinary folk in this country, rose by getting on for 100%. Does he think his own Government did such a great job?

[Mr Meacher]

I do not think that the previous Government did a great job. They did an appalling job on corporation tax, and the hon. Gentleman might be pleased to know that I said so at the time and I have always taken that view. The hon. Member for Bristol West (Stephen Williams) raised the issue of capital gains tax with me when I was last speaking, and I think that that tax should be at the same level as income tax. Corporation tax is another matter, of course, but it should be well above the levels the Government are now proposing.

The Government can and should restructure the whole approach on tax avoidance by switching the onus of proof away from Her Majesty’s Revenue and Customs and on to the potential perpetrators. That is exactly what my General Anti Tax-Avoidance Principle Bill was intended to do. It would have made it clear that any scheme whose primary purpose was to avoid tax, rather than being any genuine economic transaction, would be invalid in law and struck down. In order to discourage perpetrators of this attempt to bend the will of Parliament, there would be a sizeable penalty for attempting to subvert that will. My Bill had only a 10-minute showing on the Floor of the House, thanks to Tory filibustering of the prior Bill on that day, so perhaps I might take this opportunity to ask the Minister: does he accept the general anti-tax-avoidance principle? If he does not, what are his reasons for rejecting it? I think he will say that the Government are putting up their alternative—the so-called GAAR or general anti-abuse rule—but that really does not meet the ticket. I wish to say why, and I hope that he will listen to why the Government’s GAAR is really no alternative.

The GAAR is based on a report by Graham Aaronson, who was always a representative of the tax-avoidance industry and never of the tax-compliance will of Parliament. I accept that the GAAR will have some effect, because it outlaws egregiously aggressive and abusive tax avoidance, but of course the implication of that is that it legitimises rather less extravagant tax avoidance.

--- Later in debate ---

[Mr Meacher]

I am glad to hear it, but the Minister and his Government will have to prove that in the outcomes that we see over the months ahead. He makes an important point, but there is a perception that if we opt for a rule that is limited to dealing with the worst kind of tax avoidance, it suggests that the rest is rather less important in the Government’s mind; I cannot see the point of having a GAAR if one is also going to “include” other abusive tax procedures, about which there is equal concern. I am sure that debate is coming along, but I am glad that he said what he did and we shall certainly hold him to it. The GAAR could actually make things worse and, even at this late stage, I ask the Government seriously to reconsider whether they should not take over my Bill.

The Government could and should recognise that their strategy to deter tax avoidance, which has been in use for many years, including under the previous Government, via the disclosure of tax avoidance schemes—DOTAS—is of limited value and is inadequate on its own. It requires those who are designing and trying to sell these schemes to inform HMRC in advance about each new scheme they introduce. I understand that something over 100 new schemes have been disclosed in each of the past four years under the DOTAS proposals. That shows the industrial scale—I think that was the word that the hon. Member for Dover (Charlie Elphicke) himself used—of tax avoidance going on in the City.

DOTAS still leaves two problems. First, it can take HMRC many years to defeat any of the schemes if it goes to the courts and, secondly, some of those promoting such schemes will go to great lengths to avoid disclosure. Even if they are detected and taken to court, the penalty is often something derisory like £5,000 or so. Those involved in such schemes have every incentive to fail to comply with what the Government are seeking.

HMRC’s working definition of tax avoidance, which is often seen as a rather nebulous concept, is, rather sensibly,

“using the tax law to get a tax advantage that Parliament never intended”.

I think that is extremely sensible, so why can it not be cast in statute? Why can it not be laid down as the principle by which the Government and HMRC will test such schemes? That would see off the tax avoidance industry far more effectively than the soft touch of DOTAS. We are coming to the same view on tax avoidance as we did on the banks, and unless persons as opposed to organisations are held responsible—if need be, in extreme cases, by criminal sanctions—very little will happen. If a person were subject to a penalty that was a multiple of the tax charge—perhaps two or three times the charge, depending on the blatancy and gravity of the offence—for seeking to pervert the will of Parliament, that would act as a serious deterrent.

[Charlie Elphicke]

Will the right hon. Gentleman give way?

[Mr Meacher]

I think that others might wish to speak, but I am sure that I will carry on the conversation with the hon. Gentleman outside and on other occasions.

Finally, corporation tax is, as everyone recognises, so riddled with loopholes as a result of the evolution of the international economy and corporation structures over the past 30 to 40 years that it urgently needs wholesale restructuring. The drive towards territorial taxation must be abandoned and replaced by unitary taxation by which multinationals are taxed according to where their genuine economic activity occurred and not where they pretend it occurred to collect the huge windfalls of transfer pricing.

Surely the most appropriate corporation tax base is either free cash flow or economic rent—the amount, in other words, a business earns in excess of its cost of capital. There are several ways of doing that: removing interest deductibility, introducing an allowance for the cost of corporate equity or shifting the tax base towards tax flow and away from accounting profit.

I have tried to offer several positive proposals. I realise that it is possible to make a lot of pejorative remarks, which are probably just, about the performance of this Government and the previous Government in tackling the problem, but I have tried to be as positive as I can. Unless the Government adopt at least some of the proposals, their claims to have serious intentions about cracking down on today’s enormous cancer of corporate tax avoidance will be seen as the pretence that, sadly, I sometimes think it is.