Tax Avoidance and Evasion

John Pugh Excerpts

Thursday 13th September 2012 Commons Chamber

[Margaret Hodge]

The Committee tries to look at international comparators, but it does not do enough such work. The right hon. Gentleman’s second point was to be one of my suggestions to the Government, and I agree with him entirely. My final point on transparency is that there is a belief in the country at large that bigger companies are not treated in the same way as small and medium-sized enterprises, which are struggling and often pursued relentlessly by Her Majesty’s Revenue and Customs. That belief will be shattered or broken only if we have full transparency and people can see that there are no sweetheart deals.

My second point concerns the proper resourcing of HMRC to tackle avoidance and evasion. Of course we want more efficiency from everyone employed at HMRC. The Labour Government cut 3,000 jobs, but I think that was wrong because evidence shows that for every £1 invested in pursuing tax avoidance, £10 is raised from the money collected. We should, therefore, be sensible about how we cut the deficit and we should invest in those areas where we will get money back.

I say to the Minister that it is worrying to see the threshold at which HMRC intends to pursue fraud actions raised because it does not have enough legal resources. It is also worrying that the extra money released by the Government in the spending review is not currently being used because HMRC cannot work out the training programmes that are required to get individuals up to speed for work on tax avoidance and evasion.

[John Pugh (Southport) (LD)]

One of the reports considered by the right hon. Lady’s Committee contained an acknowledgment by the Treasury that £1.1 billion was lost as a result of premature staff reductions. A report by the National Audit Office gives the figure of £1.1 billion losses to HMRC as a result of accelerating the cuts.

[Margaret Hodge]

I accept that entirely and it was not a sensible way of proceeding. I also want to mention the quality of staff in HMRC. When we carried out the Goldman Sachs review, it was worrying to find that so few people at the heart of HMRC who were engaged in those negotiations had what was called a “deep knowledge” of tax. They were up against highly skilled, knowledgeable and experienced—and highly paid—people, who were advising companies and high-wealth individuals. We must look at both quality and quantity of staff.

My third point is about the outrage caused by people whose income comes out of our taxes, but who fail to make their rightful contribution. I applaud the way the Government responded to the disclosure that some civil servants have personal services companies, and I hope that their work, and the work done by the Committee to support the report on that, will ensure that such practices no longer exist within the civil service. Evidence from the BBC, however, was shocking. Some 25,000 people working for the BBC are on off-payroll contracts, including 13,000 so-called “talent individuals” who appear on our television screens or on the radio. That is not an acceptable practice—goodness knows how it evolved—and I urge the Minister to take action on that and in local government where personal service companies still exist. I should tell the Minister that, in 2010-11, HMRC investigated only 23 cases of potential abuse of the use of the personal service company vehicle, which was down from 1,000 such cases in 2003-04. There is a resources and priorities issue within HMRC. Those people should set an example and show leadership in the fight against tax avoidance, and we should be able to see that they are doing so.

Equally—this point was raised by the right hon. Member for Bermondsey and Old Southwark (Simon Hughes)—companies that benefit from public expenditure and provide infrastructural services from the taxpayers’ pound should pay their proper tax to the Exchequer. That should be written into the contracts. The problem that the Committee has uncovered most is in relation to private finance initiative projects. An assumption is made by the Treasury in the cost-benefit analysis of whether to go ahead with a PFI project that income will come back to the Treasury through corporation tax, yet all too often the companies that take the PFI contracts or buy them subsequently take their interest offshore. A recent survey by the European Services Strategy Unit found 90 firms in PFI contracts funded by the taxpayer that were based offshore for tax purposes. HSBC infrastructure unit, which has a lot of PFI deals, paid only £100,000 in tax on £38 million in profit—a tax rate of less than 0.03%.

Finally, I agree entirely on simplification. Complexity breeds avoidance and evasion. All Governments are to blame. They might introduce complexities with the best of intentions, but they end up as wheezes for avoidance and evasion. Labour’s film tax credit was a classic example of that.

I urge the Government to stop talking—we all talk the same talk. We must now deliver on simplification and on those simple ways to ensure that tax avoidance is not used as an excuse for cutting public services.

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[John Pugh (Southport) (LD)]

I congratulate the right hon. Member for Oldham West and Royton (Mr Meacher) on stimulating this debate. I also welcome the Exchequer Secretary, who survived the ministerial cull. We all welcome his dry wit and expertise. Indeed, I debated this very subject with him in Westminster Hall about a year ago.

As other Members have said, we live in a society where the rights, benefits and privileges that people extract from society are often disconnected from the obligations that they feel towards it. That brings the spectacle of people benefiting from society and thriving because of it, but avoiding contributing to the tax base through either evasion or, more commonly, avoidance. Tax avoidance is a deliberate attempt to frustrate tax law and the intentions of tax legislators. It differs radically from tax evasion, whereby one deliberately ignores or flouts the letter of the law.

There are various remedies for tax avoidance. One, as has been suggested, is to simplify the law to make avoidance more evident and stark. That is what the Mirrlees review was, in part, about. Another remedy, which has been very attractive to people in this place, is to outlaw individual tax avoidance schemes piecemeal. That has been tried in Finance Act after Finance Act, only for further countermeasures to be needed for other schemes. That exercise is a bit like a cat chasing its tail—it is endless. That is why I favour a general anti-avoidance rule and have argued for it consistently in this Parliament and the previous one. That is also why the Government are considering it and why it is in the coalition agreement.

I do not want to comment on Mr Aaronson’s specific proposals, but a GAAR essentially bans schemes that have no commercial benefit other than to frustrate the intent of the law. The right hon. Member for Oldham West and Royton has argued that the progress does not look as though it will be enough. Other people have argued that it goes too far. There are those who believe that we should go only by the absolute letter of the tax law and therefore oppose a GAAR. There are Government Members who believe that. I call such people tax fundamentalists, because they argue that a GAAR would create an element of tax uncertainty and that what is not expressly prohibited should be allowed. They add to that the argument that if we had a GAAR, there would be other disbenefits, such as an increase in litigation and a reluctance to make investment decisions.

More fundamentally, some people argue that it cannot be wrong to do what is not formally and expressly forbidden. That argument is astonishingly weak. It reminds me of the arguments that cropped up during the expenses scandal, when people argued that it was acceptable to buy duck houses or to flip homes because it did not breach a particular rule, even though it frustrated the intentions of the scheme. It is worth noting that there is under-specification in other areas of law, not just in tax law. Disturbing the peace encompasses a number of scenarios, as does defamation in civil law.

None the less, there are ways in which the operation of a GAAR in tax law can be made more certain to address those concerns. The first is through the pre-vetting of tax schemes and disclosure. The previous Government went some way down the road to ensuring that that could and should happen. The second is, during the passage of the legislation, to make clear the intent of the law and what it is contrived to do. The objection about uncertainty is slightly exaggerated. When Tesco set up a holding company in Liechtenstein for its properties, it received no commercial benefit, unless it was in avoiding the property taxes that the Government expected it to pay.

In a recent speech, the Exchequer Secretary spoke about things that would be covered:

“Buying a house for personal use through a corporate entity to avoid”

stamp duty

“is avoidance. Channelling money backwards and forwards through complex networks for no commercial reason…is avoidance. Paying loans in lieu of salaries through shell companies is avoidance. And using artificial ‘losses’ deliberately accrued to claim back tax is avoidance.”

Those examples give a clear indication of the kind of things that should be caught by a GAAR. As my hon. Friend the Member for Bristol West (Stephen Williams) said, we can contrast that with other things that would not be caught, such as charitable tax relief. In that case the Government encourage people to organise their tax affairs in a way that causes a loss to the Exchequer.

We can speculate for as long as we want on the effects of a GAAR, but in some ways we do not need to, because we have a certain amount of evidence to go on. A lot of countries have GAARs in place, and not all of them produce uncertainty and litigation, although some do.

[Stephen Williams]

I believe that the UK is actually unique in not having a GAAR or a rule that is called something else but is effectively a GAAR.

--- Later in debate ---

[John Pugh]

Yes, and that indicates clearly that legal uncertainty and endless litigation are not central and natural features of a GAAR. They do not happen in other countries.

We cannot excuse a poorly drafted GAAR, so we have to get it right. We cannot console ourselves with the thought that the only victims of a poor GAAR are corporate bodies, high net worth individuals and so on. However, a GAAR is a very important tool, and there remains no convincing general argument against it.

[Mr Deputy Speaker (Mr Nigel Evans)]

Order. Before I call the Front Benchers, I remind them that it would be appropriate to give Mr Meacher a couple of minutes at the end to wind up the debate.