Corporate Tax Avoidance

John Pugh Excerpts

Monday 7th January 2013 Commons Chamber

[Ian Swales]

I thank the hon. Gentleman for that invention. As fellow members of the Public Accounts Committee, he and I have looked in detail at that case. He is right that such arrangements should not be made.

The UK should take a look at its own role and its relationship with tax havens such as the Isle of Man, the Channel Islands, the Cayman Islands, Gibraltar and so on, which the Secretary of State for Business, Innovation and Skills has described as sunny places for shady people. UK citizens deserve a full explanation from the Government of why they support those places as tax havens and what net benefit they bring to the UK.

It is also urgent that work takes place at EU level to ensure that companies cannot exploit sweetheart tax deals in countries such as the Netherlands and Luxembourg, aided by the free movement of goods, people and capital. It is time properly to enforce the 1997 EU code of conduct on business taxation. I am especially pleased to see you in the Chair, Madam Deputy Speaker, as that code was ratified under your chairmanship. It specifically highlights issues such as doing deals to give lower rates and tax incentives for activities that are isolated from the domestic economy of a given country. The OECD set up a forum on harmful tax practices at about the same time. Both initiatives highlighted the need for transparency. A race to the bottom helps nobody.

Next, the Government should consider disallowing some foreign interest payments for tax purposes. It is depressingly easy to move a chunk of capital to a low tax regime, then export all one’s profits via interest payments. Foreign interest should have to be specifically justified. When the loans were taken out, what was the purpose? Were they proportional to business need and are they now? Who is the lender? A related company deal needs particular scrutiny, especially as the capital may originally have been exported from the UK with no equivalent taxable interest coming back.

The Government should look at setting maximum royalty and management fees, and disallowing them as a deduction if they are disproportionate to profits. There should be an ability-to-pay test; such payments should not be allowed to wipe out UK profits, as we saw with Starbucks. The Government should work with international partners to disallow management fees and royalty, patent and copyright fees unless they go direct to the country where the relevant value was generated. Payments to tax havens could be automatically disallowed. When a company claims that rights have been sold to other countries, it needs to show that a full and fair price was paid. Of course, that would crystallise a big tax liability in the selling country. The United States would be especially enthusiastic about such a move, as it is one of the big losers from payments going to tax havens.

Because our tax systems are national, all movements of value across borders, including business transfers, need a price attached to them for tax purposes. The Government must also find a way to ensure that VAT is charged on all qualifying sales in the UK, whatever the country of origin. To go back to the point made by the hon. Member for Brighton, Pavilion (Caroline Lucas), we need much more specialist resource in HMRC. A department that brings in 100 times what it costs should not be treated like a normal cost centre; there must be many more invest-to-collect business cases to be made. Maximising our tax revenue is as much about enforcing the rules as about the rules themselves. In particular, a special unit is needed to look at everyone running an internet-based business selling to UK customers, starting with the biggest. It should look at where they are based, their business model and whether they abide by UK VAT and corporation tax rules. We need our rules and enforcement to be up to date with technological changes.

The tax system is way too complex; a whole industry has grown up to find creative ways to avoid tax. When will we see significant output and action from the Office of Tax Simplification? Surely we need radical ideas for cutting through the jungle of our tax system, not just the deletion of obscure, rarely used reliefs. Simplification is badly needed, yet we see even more complexity.

I talked earlier about consumer power. The UK Government are by far the biggest purchaser and grant-awarding body in this country. Is it right that Amazon can get more than £10 million of Government money for a new warehouse in Dunfermline when it is a Luxembourg-based retailer paying little corporation tax in this country, and apparently does not pay VAT on all its sales either? Is it right that Accenture, Capgemini and others win Government contracts when they are named as aggressive tax avoiders? Should HMRC itself have sold its buildings for leaseback to Mapeley, a Bermuda-based company? Is it not time that we recognised in financial assessments that most of the profits from private finance initiative and outsourcing contracts are now disappearing offshore?

[John Pugh (Southport) (LD)]

My hon. Friend is giving a list of remedies for tax avoidance schemes. Would not most of them have been caught by a general anti-avoidance rule?

[Ian Swales]

I thank my hon. Friend for the intervention. I am not familiar enough with how such a rule would be structured, but the idea would certainly be helpful.

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[Mark Field]

I do. Andy Street, the managing director of John Lewis, has made that point, but it obviously applies to many of the smaller independent companies. I represent a central London seat where a lot of big businesses are based and operate. Nothing is more important than encouraging independents, whether they are restaurants, wine bars or book shops, rather than just relying on big multinationals. No one wants to see all our high streets entirely dominated by large international corporations, many of which may involve themselves in what is currently regarded as aggressive tax avoidance.

[John Pugh]

The hon. Gentleman said that retrospective taxation is a threat. Does not the previous Government’s pre-approval scheme, which puts proposals through the Treasury to find out whether they are sound, get round that and remove that fear?

[Mark Field]

Not entirely, because it does not work as well as it should. There is no doubt that this is going to be a much more high-profile issue, and I will be interested to hear what the Minister has to say about my suggestion.

The underlying lesson is that the UK tax code and regime remains far too complicated. The godfather of tax avoidance is complexity and uncertainty in the system. When even tax experts find it impossible to understand the workings of the tax code, people begin to question whether everyone is really paying their fair share. This, in turn, creates a sense of greater acceptability in the avoiding and evading of tax. Furthermore, a complicated and opaque tax system will always be vulnerable to misrepresentation, particularly by the media, and that again weakens confidence and encourages further avoidance. People think, “If Amazon can get away with not paying its fair share, why should I bother to stump up?” I can understand why that is a general sentiment, but it frustrates many of the corporates that, as the hon. Member for Redcar said, have paid in an open and transparent manner and will ultimately undermine their whole business framework.

Government can make piecemeal efforts to address particular instances of avoidance—they can play catch-up to a certain extent—but responses tend to involve making the entire system far more complex, thereby reinforcing the very factors that have driven avoidance in the first place, displacing the activity and giving rise to a whole set of new avoidance techniques. Instead, the Government need to take an entirely different and fresh approach. They should look at how they can overhaul the entire system so that avoidance and evasion offer a similar, smaller reward and will therefore be seen as far less acceptable. Fundamentally, that can mean only lower taxes and a radically simplified tax code. For example, a single income tax applicable to income, however it is received, at the same single rate is the best way of stripping out of the system any incentive to avoid income tax. A simpler tax code would also free up HMRC resources to concentrate on tackling the real problem of tax evasion while making transgressions easier to identify.

It has been a pleasure to make a brief contribution to this debate on an important issue to which we must all return. However, I am concerned that too much of the rhetoric coming from this place almost suggests a sense of powerlessness that gives rise to the view that there is an aggressive anti-business approach in this country. We do need to have a thriving business sector. Global businesses can, of course, choose where they locate their business. We should be proud in this country of having a track record of being open to business, but I also accept that we want to ensure that businesses pay their fair share, because we have a huge deficit and a huge debt that has to be paid off if we are not to burden future generations.

I hope that we will look at the whole issue with that in mind, but above all I hope that the Minister will take on board the idea that HMRC needs to have an approach that is much more open to the pre-clearance I referred to. We must also, as a matter of urgency, look at the complications in our tax code that are allowing some of the high-profile avoidance to take place.

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[John Pugh (Southport) (LD)]

I congratulate my hon. Friend the Member for Redcar (Ian Swales) on introducing this important debate. I begin with the slightly shocking confession that I recently bought a cup of coffee in Starbucks at the Leicester Forest service station. I had no alternative. I am afraid that on that occasion caffeine addiction overcame moral outrage.

I want to take head on some of the concerns about the general anti-avoidance rule that have been raised by hon. Members, because I have a long-standing interest in this going back over several Parliaments. I have observed at close quarters Labour’s approach, which was basically to spot an abuse and legislate against it. Owing to the efforts of Madam Deputy Speaker, the right hon. Member for East Ham (Stephen Timms) in particular, and the right hon. Member for Wentworth and Dearne (John Healey), that produced some quite commendable stuff. Those efforts were often buried quietly away in a Finance Bill or obscure statutory instruments.

Now, because resources are short, we need to get in expected tax revenue far more than we ever used to because, brutally, the alternative is deeper cuts, but even in those days the post hoc approach was seen to have its weaknesses. It was seen to be shutting the door after the horse had bolted; an endless chase against some pretty sophisticated opponents and some horrendously complicated schemes devised by clever and extraordinarily well resourced people. Dealing with avoidance in that way led to a more complicated tax code, which, as we have all acknowledged, is already complex enough. That is why I welcomed the introduction by Labour of the vetting and pre-approval scheme, which has not been mentioned much today. The duty to disclose was introduced by the last Government and it was a good and commendable move, but it is also why I argued in favour of a GAAR in the face of some scepticism. Some scepticism persists, and I want briefly to address that.

The main argument against the GAAR is that it will lead to tax uncertainty and so make tax planning and investment decisions more difficult. After all, many of us take steps to defray tax liability—to organise our affairs, quite legally, to minimise tax—and we need to be sure that these arrangements will not be retrospectively penalised. Let us not be hypocritical about it either: as a country we are not averse to encouraging foreign nationals to avoid their domestic taxation regimes and come here and invest here. This argument about certainty is a little overblown. In many walks of life, the law seeks to inhibit genres and types of behaviour without always being over-specific or utterly specific, and yet we all cope. There is the tort of nuisance, but not a complete list of actionable nuisances. Dangerous driving is entirely contextual and is not defined by road speed. When I go out on the town, which I all too rarely do, I do not have a pocket list of what counts as disturbing the peace. Without the law being absolutely specific, in many contexts we manage with tolerable certainty and without rampant and obvious injustice.

The Chancellor certainly believes that there are arrangements that the Treasury and tax planners can identify as egregious tax avoidance schemes—I think those are his words—and that we all ought to identify as out of order, whether or not they are formally outlawed. One thinks of profitable companies in the UK using their profit to repay a pointless loan to an associated company in Luxembourg; or people who are in all respects BBC employees taking their wages as a contractual payment to their company whose sole function is to receive that payment; or business men who instead of a pay increase receive a pension contribution to a pot with surprisingly quick draw down facilities. All are very obvious attempts to frustrate the intentions of the Treasury, and so the Government, and so the nation. There is no doubt that the Government want profits and employment taxed and not disguised.

If one simply hid one’s money, it would be described as tax evasion. If one cloaks it as something else, it is very similar and has to be described as egregious tax avoidance. It not only ignores the intent of tax legislation in a way that, say, putting money into research and development does not, or having some of one’s wages paid to a charity does not, but it manifests the fundamental and second feature of egregious tax avoidance: it has no business purpose beyond frustrating the intent of tax legislation. If a business asks itself whether a scheme frustrates the intention of tax law and whether it would be used if it did not do so, it should really have no doubt about whether it would be caught by a GAAR.

There is an interesting parallel with the situation we found in this place in 2009 during the expenses saga. The media and the public managed quite satisfactorily to distinguish between proper and improper use of the second homes allowance by considering its purpose. To plead that egregious behaviour could be excused by being within the rules was sufficient for neither MPs, nor the public. If tax planners, having asked the right questions, are still in doubt, they can acquire even greater certainty by using the HMRC pre-approval scheme, which will presumably put all concerns to rest. If even then they are still worried about what will be the general effect on commerce, they can simply look at other regimes and what might be achieved there.

Although it is a classic saying that only two things are certain in life, death and taxes, I would argue that the proper functioning of commerce requires any tax burdens to be reasonably probable, not absolutely certain. To insist on absolute certainty as a precondition of a GAAR is simply wrong. Fundamentally, recognising the intent of tax law and not frustrating it is a good thing, and if people have an issue with that, the way to change it is not to engage in subterfuge but to seek to change the law democratically.