Finance (No. 2) Bill

David Gauke Excerpts

Wednesday 17th April 2013 Commons Chamber

[Catherine McKinnell]

I thank my hon. Friend for that intervention, which is powerful in itself, but very much reinforces the argument that we on the Front Bench are making today: we have the means within our grasp to make a difference to that situation. I hope that the Minister will provide some reassurance today, and that we shall get some Liberal Democrat support for our amendments, which seek to make a real difference on the ground. [Interruption.]

Returning once again to an amendment tabled by the Opposition last year—and I might say amendments tabled by Liberal Democrat representatives last year but which were withdrawn at the last minute—we believe that changes to the controlled foreign company rules introduced by the Finance Act 2012 should be properly monitored for their impact on developing countries. Many charities have been concerned that the CFC rule changes will make it easier for UK companies to avoid paying tax in developing countries in which they own subsidiaries. While the Government have estimated the potential loss to developing countries at £1 billion, which one would think would be enough, ActionAid believed it could be as high as £4 billion a year. So what we really need is for the Government to undertake a proper assessment of the impact of the changes on the overall tax take of developing countries since last year, and our amendment asks for that to take place.

In conclusion, we will support the Government’s legislation, brought forward today, to introduce a GAAR. However, we believe, along with my right hon. Friend the Member for Oldham West and Royton (Mr Meacher), who has tabled his amendments as a suggested alternative to the GAAR, that the Government’s GAAR has many potential flaws.

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

Does the hon. Lady support the new clauses tabled by her right hon. Friend the Member for Oldham West and Royton (Mr Meacher)?

[Catherine McKinnell]

We support our amendments that we have tabled, and I have presented very clearly the reasons why we support them. I will go on to say why. We support the GAAR and we welcome its being put in place, but we want to see how effective it will be and we will continue to monitor it. We hope that the Government will accept our proposal to come back and report on progress within two years, so that we can continue to monitor its effectiveness and rectify, hopefully, some of the flaws that we see will hinder its effectiveness in tackling this problem. So we call on all—

--- Later in debate ---

[Mr Gauke]

We have had an interesting and thorough debate during which a number of points have been raised. I shall address as many of those points as I can, as quickly as possible.

Clauses 203 to 212 and schedule 41 introduce the general anti-abuse rule, which is a major new development in UK tax law and a key part of the Government’s drive to tackle tax avoidance. Its role is to tackle abusive tax-avoidance schemes. I shall explain what I mean by that shortly, but let me first say a little about how we ended up in our present position.

We declared in 2010 that we would explore the area of tax abuse, and we commissioned Graham Aaronson QC to lead a study group. I pay tribute to the work undertaken by him and by other members of the group. Their report, published at the end of 2011, recommended that we should consider not a general anti-avoidance rule, but a general anti-abuse rule to tackle abusive avoidance schemes that were not being defeated by the current law.

Previous Governments have considered general anti-avoidance rules, but their proposals encountered the problem of how taxpayers, and businesses in particular, could easily distinguish between an activity that clearly constitutes tax avoidance and one that constitutes legitimate tax planning. If I may use the phrase employed by my hon. Friend the Member for Amber Valley (Nigel Mills), we need to find a way of ensuring that we do not take a baseball bat to legitimate commercial behaviour. We need to identify the boundary between tax avoidance and tax planning.

Contrary to some of the claims that we have heard tonight, HMRC has a good record in dealing with tax avoidance when it occurs. It has been very successful in taking taxpayers to court, and has won a great many cases, especially in recent months. However, we must ensure that we do not encounter the difficulty posed by a broadly based general anti-avoidance rule, namely that taxpayers and their advisers would have to consider how the rule might operate in a large number of circumstances in which it might be applied. That would not just stop avoidance where it existed, but cast a long shadow on legitimate arrangements.

We believe—and some Government Members have said this evening—that that would be bad for the country, damaging growth by causing some transactions to be delayed or cancelled because of the lack of clarity. I therefore urge the right hon. Member for Oldham West and Royton (Mr Meacher) not to press new clause 7 to a Division. I assume that Labour Front Benchers do not support the new clause for the same reason, although they did not make their position entirely clear.

I believe that the general anti-abuse rule proposed by the Aaronson group strikes the right balance between dealing with aggressive, egregious, abusive tax avoidance and not creating uncertainty. It targets only avoidance schemes that are clearly abusive. By “abusive schemes”, we mean schemes that can be seen from the outset to be simply highly contrived and artificial arrangements designed to enable people to get around the tax law and avoid paying tax. Those who do become involved with such schemes know very well what they are doing. If the general anti-abuse rule that we are considering today makes them think again and deters them from engaging in such avoidance, I for one will consider that to be a good outcome.

We have consulted widely, and have received a large number of representations, including some 150 substantive responses to our consultation. Interim guidance has been produced by the interim guidance advisory panel. I accept, to respond to the point made by the hon. Member for Newcastle upon Tyne North (Catherine McKinnell), that that was only published on Monday, but it was important that the panel had the opportunity to get this right. It has put in a considerable amount of time on this issue and, as I think all Members will accept, it is very broad-based and includes representatives from various organisations. Although it has taken a little longer than we might have hoped, I congratulate and thank the panel for its work. It has received an excellent response and will provide much help to taxpayers wanting to know where they stand. For example, on the question of what is contrived and what is abusive—a point raised in the debate—the guidance produced by the panel, as well as setting out the overall principles and descriptions, contains a number of examples demonstrating how these terms can be applied in specific cases.

On the penalty regime, we have not ruled out future action to strengthen the deterrent impact of the general anti-abuse rule by attaching penalties if necessary, and we will keep the matter under review. However, the Aaronson report recommended against providing penalties or special rates of interest, and we believe the GAAR should be allowed to bed in before we take any further action.

[Mr Meacher]

Before the Minister leaves the issue of the GAAR advisory panel, does he really think it right that most of its members are City lawyers who have hitherto spent their careers advising companies how to avoid tax? Will he also deal with the question of the “double reasonableness” test—whether it is reasonable to take the view that the course of action in question is a reasonable one? Is that seriously the criterion for deciding on the application of the GAAR?

[Mr Gauke]

The “double reasonableness” test was the one we came to after the lengthy process following the Aaronson review. We believe that it focuses attention on aggressive, abusive tax avoidance. Let me be clear: this is an additional tool that HMRC can use; it does not necessarily mean that for those outside the GAAR, everything is fine. I want to make it explicitly clear that that is not what we are saying. There is avoidance that will not fall within the GAAR, but which HMRC would none the less take action against.

The panel will be broad-based, but I see nothing wrong whatsoever in its having commercial expertise to provide reassurance and ensure that the GAAR will not be abused in the way that some Members have expressed concern about this evening, with too much power being placed in the hands of a part of the Executive. It will be broad-based, in just the way the interim panel has been.

The GAAR does not override UK tax treaties. Given the lack of time, I will not go into further detail, but it acts in much the same way as GAARs do for other countries that respect OECD and UN model tax treaties.

[John McDonnell (Hayes and Harlington) (Lab)]

Will the Minister give way?

[Mr Gauke]

I will, because the hon. Gentleman has been here for much of the debate.

[John McDonnell]

The Minister said that there will be a review of the penalties. When, and will it look at criminal activity as well?

[Mr Gauke]

Let me deal with that in the context of amendment 8, which looks at the general issue of post-implementation evaluation and seeks to establish a review within two years of Royal Assent. We and HMRC have made it clear that we will manage and monitor the GAAR’s operation centrally, so that all cases and potential cases will be scrutinised and recorded. The deterrent effect, which we will see immediately, will be important, but we must also remember the issues of getting the tax returns in and being able to make a full assessment of the implications. We believe that a two-year period would not be practical for a general evaluation. It will take longer properly to evaluate how the GAAR is working, just because of how our tax system operates, so I will not accept amendment 8.

Amendments 3, 6 and 7, which deal with tax avoidance by multinationals and the impact on developing countries, raise a number of important points. The hon. Member for Birmingham, Selly Oak (Steve McCabe) wanted me to set out the Government’s objectives for the G8. I am sorry that I am not in a position to do that this evening; it will be left to the Prime Minister, who will make the UK Government’s position very clear.

The point about transparency is important and the Government have a good record of encouraging transparency in a number of areas, particularly among extractive industries through the extractive industries transparency initiative. We play a leading role internationally through the global forum. We ensure that jurisdictions comply with the international standard on tax transparency and work with the G20 to maintain pressure on non-co-operative jurisdictions. We have been making a lot of progress in the Crown dependencies, particularly as regards the exchange of information, and in ensuring that the US Foreign Account Tax Compliance Act, or FATCA, arrangements on the exchange of information become the international norm. I can assure the Committee that that will continue to be a key part of what we do and part of our G8 agenda.

Amendment 6 asks the Government to require UK companies to report their use of tax-avoidance schemes that affect developing countries and for HMRC to notify those countries and assist them in recovering the tax owed. Amendment 7 asks the Government to carry out an impact assessment on the effect of the changes to the controlled foreign companies, or CFC, rules on developing countries’ tax revenues. The answer to both points is that as a matter of practicality it is difficult for HMRC to perform the roles required by the amendments as they require assessments not of our tax rules but of the tax rules of developing countries. That takes us outside what HMRC can realistically do. The point was raised that amendment 7 largely repeats the debate we had during last year’s Finance Bill, when a similar, if not identical, amendment was tabled. I refer hon. Members to the speech I gave a year or so ago, in which I stated that simply as a matter of practicality that is not something that HMRC can do.

On amendments 11 and 12, tabled by my hon. Friend the Member for Amber Valley, I do not believe that a de minimis rule would be appropriate as regards the general anti-abuse rule as it would miss the point. We do not want anyone involved in abusive schemes to make use of them, and even if only £100,000 was at stake as a de minimis, that could have a significant effect on a number of people. We believe that that would be unfair.

As I said at the outset, I believe that the general anti-abuse rule is a major new development. It sends a message to those who persist with abusive avoidance schemes that even if they try to dance around the tax law, they will face the tough but plain question, “Is it reasonable?” That is a question that we all understand. Those who think about using the schemes will all understand it and, I hope, those who create the schemes will come to understand it. The GAAR will ensure that the time for their clever games, paid at the expense of the tax-paying public, is at an end. I therefore recommend that clauses 203 to 212 and schedule 41 stand part of the Bill.

[Mr Meacher]

In view of the commitment by my hon. Friend the Member for Newcastle upon Tyne North (Catherine McKinnell) to carry out a review of the GAAR, and given the double reasonableness test and its deterrent effect, even though it is less than I should recommend, I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

Amendment proposed: 6, in clause 203, page 120, line 9, at end add—

‘(4) The Chancellor shall review the possibility of bringing forward a requirement for UK companies to report their use of tax schemes which have an impact on developing countries, including a review of the possibility of bringing forward proposals to require that when such schemes are identified under those rules, Her Majesty’s Government shall take steps to notify developing countries’ tax authorities and assist in the recovery of that tax. A copy of the report shall be placed in the House of Commons Library within six months of Royal Assent.’.—(Catherine McKinnell.)

Question put, That the amendment be made.

The Committee divided: Ayes 223, Noes 275.