Public Accounts Committee

John Pugh Excerpts

Thursday 16th December 2010 Commons Chamber

[Mrs Anne McGuire (Stirling) (Lab)]

I, too, pay tribute to my right hon. Friend the Member for Barking (Margaret Hodge). She is the first woman—indeed, the first elected—Chair of the Public Accounts Committee, and that is a unique combination. She is also one of the bravest politicians in the House, and anybody who has seen the magnificent election battle that she undertook in her constituency against the British National party may well understand why permanent secretaries might be worried about appearing before her at the Committee.

It is also a pleasure to follow the hon. Member for South Norfolk (Mr Bacon), but he needs to remind me to give him a lecture on Scottish geography. He always tells me that he knows a bit about Scotland, but I must tell him that, although Edinburgh and Stirling have castles, Stirling has by far the best, and it, as opposed to Edinburgh, has me as its MP. I forgive him, however, because I admire the skill and tenacity that he brings to the Committee, and he is a role model for us all.

I am not a new Member, but as someone who has been here since 1957—[Interruption.] It sometimes feels like that. As someone who has been here since 1997, I am asked by some colleagues, “Why do you want to go on to the PAC?” The Committee has an image deficit, and, although in various analyses of our work we are called the “queen of Committees”, we are still a bit of a mystery to the majority of our colleagues. Indeed, today’s attendance shows that we will remain a mystery for another few months at least.

On the PAC, one walks in the footsteps of history. I learned more about William Ewart Gladstone in my first few weeks on the Committee than I ever did taking an honours degree in history at Glasgow university, and all sorts of historical anecdotes add to, if not the glamour, then the attraction of being a member. My right hon. Friend the Member for Barking mentioned Harold Wilson. One of the anecdotes that delights me most was the fact that, when he was shadow Chancellor, he decided that he also wanted to be Chair—he would have been a Chairman in those days, of course—of the Public Accounts Committee. In some ways, that was breaking new ground. Such a decision tuned in with Harold Wilson’s desire to consolidate his portfolio, so that he could ensure he was in control of all the strategic decisions that had to be made within the Labour party at that time. Ben Pimlott, his biographer, states that such a decision also had a practical benefit because, at a time when accommodation at the Palace of Westminster was not available for senior Opposition Front Benchers, the PAC Chairman was provided with his own room—a citadel of great importance in Westminster’s psychological battleground. My right hon. Friend has maintained the image of that citadel in the Upper Committee corridor.

Of course, the Committee does not consider the formulation or the merits of policy; it focuses very much on value-for-money criteria that are based on economy, efficiency and effectiveness, as the hon. Member for South Norfolk mentioned. Those are the three by-words that should determine how we judge the reports that come before us. In many respects, such an approach is almost counter-intuitive for politicians because we spend most of our time discussing and developing policy. However, as at least one previous Labour Prime Minister has commented, it is no use throwing money at something unless it guarantees the delivery of the objectives. I fully understood that cry of frustration in relation to one report we considered in the Committee. I shall come on to that in a moment.

We have gelled reasonably well as a Committee. There is a mixture of people who have longevity in the House, people who have longevity in membership of the Committee and people who have more recently joined this place. We bring to the Committee a range of external work experience, which allows us to question things in a way rooted in some sort of credibility in managing finances. As a Committee, we have a breadth of experience that allows us to challenge even the most eloquent of the accounting officers who appear before us. Although the subject is sometimes considered to be rather dry, we have developed a passion for our discussions with witnesses. Certainly, anyone present at our sittings this week would have noted that both energy and passion are in abundance in Room 15—anyone who follows our deliberations will have that confirmed.

In my brief contribution, I want to highlight three things that I have drawn from my short experience as a Committee member. The first relates to the lessons that we can learn from discussions on the reports and the Committee’s conclusions. Some of these issues have been the subject of previous debates—indeed, I think the hon. Member for South Norfolk has probably raised them—but they do need repeating. There is still a concern, which I hope is shared by most of my colleagues on the Committee, that the recruitment and training of civil servants has not kept pace with some of the issues, particularly that of financial responsibility. There has been an increase in training and personal development, which is welcome, but it astonished me to find out that, for example, it was only a couple of years ago when a financially qualified senior civil servant was recruited by the Ministry of Defence.

Sir Gus O’Donnell stated at a recent hearing that the British civil service has always prided itself on recruiting,

“the brightest and the best”

and on making people skilled generalists. I am not suggesting in any way that we stop recruiting those exceptionally bright people, but we also need to recognise that, in delivering projects efficiently, effectively and economically, they need to be managed properly. Will the Minister address that issue in his comments at the end of the debate and tell us what Departments are doing to enhance the training opportunities for those who undertake project management? It is not fair to the taxpayer or, indeed, to the individual civil servant for us to assume that people can manage complex and expensive projects without having the appropriate skills from the very day on which they assume responsibility for that work. With complex financial projects, learning on the job is simply not good enough.

Another point that has emerged from our discussions is how lessons are disseminated—or not, whichever is the case—across Government Departments. How does this happen currently? I get the feeling that permanent secretaries talk about it when they meet, and I understand that they meet on a regular basis. But is it a structured discussion? Is it then cascaded down to other colleagues in their Departments? Is it a learning experience only for them and their senior officials, or is it used as a corporate opportunity to change the way in which the service as a whole develops? I would like to get a feel for how we spread the word of good practice across all Departments.

Before I leave this part of my speech, I want to comment on one Department where people have tended to get it right—not always, but probably in the majority of cases—and that is the Department for Work and Pensions. Like my right hon. Friend the Member for Barking, I have a special interest in that Department having been a Minister there for more than three years. I was delighted to hear from the retiring permanent secretary about the implementation of the new employment and support allowance IT platforms. I remember this particularly because as a Minister, when we had discussions on that project in undertaking the development work that led to the Welfare Reform Act 2007, we were told that, yes, it was “stretching”, but those officials immediately started to look at ways in which they could deliver it.

I know that there are good officials in all Whitehall Departments, but the one distinguishing feature of the DWP and its senior management team is that they tend to “grow” their own people. Officials at the DWP have come through the ranks. They understand the business, and they have had to deal with real people and solve real problems throughout their civil service career. I was pleased to note that the permanent secretary who was retiring indicated that the new perm sec, Terry Moran, follows in that tradition as someone who joined the Department as a 16-year-old in Blackpool, as I remember. That is an indication of how Departments can get it right. The DWP is not perfect, by any manner of means, but on average it tends to be a bit better in delivering some of its projects.

I want briefly to mention two specific reports and Committee sessions: first, on the academies programme, which my right hon. Friend the Member for Barking also mentioned; and, secondly, on tackling health inequalities. On the first, it was a joy to be present at that discussion. Unlike the current proposals, about which I have grave misgivings on a political level, this programme was intended to improve the performance of so-called failing schools still within the state system and directly managed by the Department of Education. The NAO report clearly indicates that most academies are achieving increased academic success and that Ofsted reports are, in the main, good. There are, of course, imperfections—the report did not say that things were perfect—but in delivering effectively, economically and efficiently, the Department is doing reasonably well.

It was no surprise to discover that one of the reasons that happened was that one person, in the shape of Lord Adonis, was there at the inception of the idea and through to the delivery of the project. Consistent and persistent political overview obviously helped. In the same vein, we need to look to consistent and persistent senior responsible officials to deliver some of these complicated reports.

[Dr John Pugh (Southport) (LD)]

The right hon. Lady may be aware that a previous NAO report seen by the previous PAC established that Excellence in Cities, which was a predecessor programme, achieved equally good results at far less cost.

--- Later in debate ---

[Dr John Pugh (Southport) (LD)]

I am a former member of the PAC, and I found it an extraordinarily useful part of my parliamentary life and actually quite a lot of fun. I noted the remark from its Chair that its members are invariably impeccably well prepared, and I must admit that the Committee has therefore improved somewhat. I can remember times when the odd member might have simply glanced hurriedly at an NAO report just as they walked through the door. I am sure that does not happen today and that things are significantly better.

The PAC specialises primarily in post hoc analysis. The hon. Member for Gainsborough (Mr Leigh), who is in his place, and I wrote to the Treasury about that shortly after the end of the last Parliament, suggesting that it had not learned enough from the PAC and had not taken on board some of the messages that the Committee sent it. We said that there was scope for improving parliamentary scrutiny. Lo and behold, the Treasury has recently asked us to work on improving scrutiny by the House. Some people have greatness thrust upon them, and that is certainly the case for us in our modest role in the order of things.

What the PAC offers is a post hoc diagnosis, a forensic analysis of how policy is implemented by civil servants according to what their political masters dictate. They are invited in for a Socratic discussion about how things have gone, and the idea is that the Treasury then responds by trying to learn lessons and ultimately spread good practice. That is the subject of the motion.

To be fair, the hon. Member for Gainsborough has claimed in the past that the Treasury, or somebody at any rate, has implemented most of the lessons that the PAC has endeavoured to teach it. However, the PAC should have bigger ambitions. Its role in the House could be more than just to provide a commentary, and it could be a more functional part of the legislature, as is its parallel body in the USA, and as the hon. Gentleman and myself desire.

At the moment, after whatever botch-up we happen to be talking about in the Ministry of Defence or wherever, hon. Members, usually the hon. Member for South Norfolk (Mr Bacon), ask rigorously what tests were applied at the time. Indeed, that was the burden of the hon. Gentleman’s speech today. He asks what health checks were made, what the gateway review process was and whether the costings were robust enough.

The hon. Gentleman was honest enough to say today that we might be asking all those questions all over again at the end of this Parliament, because a whole series of other programmes are being rolled out, such as academies, which have been mentioned, welfare reform, NHS reorganisation, which is a heck of a big programme, and court closures. PAC members will be aware that, in the past, it discussed the effect of court availability on such matters as cracked trials, people failing to show up and court costs. There is also the green energy programme announced today. They are all huge Government programmes.

Each of those programmes should, and in fact does, involve some type of internal gateway review and Treasury assessment. There are jolly clever people in the Treasury who make it their business to examine them and see where they are heading. Unlike in local government, however, in which such processes are overt and public papers are circulated, the information never emerges in public. It is not released until long after the event, when the PAC might get its hands on it. It is held within the Government’s walls. In one sense that is bizarre, because Parliament is asked to authorise all the schemes, and in a way we vote for them blind, without adequate financial assurance.

What Parliament does in that regard is not sufficient for the task. We vote on money resolutions, but we do not talk about them. We have the farce of estimates day, and on the occasions when supplementary estimates go before Select Committees, those Committees by and large talk about something else. Occasionally a Committee will probe the finances of a particular project, and the Health Committee has done some trailblazing work in examining the finances of current Government policy. Occasionally there is a political knockabout either in Westminster Hall or on the Floor of the House, but we do not have in place adequate stress testing of policy. The PAC could contribute to that, but that testing is weak in this legislature.

The PAC is ideally set up for such a role, because it is not a policy Committee. It can ensure that costings stand up to critique. The proactive role that I hope for would keep the Government on their mettle—fewer foolish schemes would make progress—and keep the PAC on its mettle. The Committee has the advantage at the moment of always acting in hindsight in that it never gives its judgment up front so that people can see whether it turns out to be correct.

Going down the road I suggest would encourage transparency, avoid Parliament voting in ignorance and bring us into line with other countries. What is more, it would be a significant enhancement both of the PAC’s role and of parliamentary scrutiny, and a significant improvement in government. The NHS IT programme would never have run if the PAC had such a simple and clear-cut role. It would empower Parliament, improve its efficiency, and make the Government more efficient and competent. I believe that people not only in the Treasury, but in the Cabinet Office, have efficiency and competency as a determined ambition now. The country hankers for boring, effective, evidence-led government. We have had enough of being flash, we are fed up with revolutions in this service and that, and we do not really require a great deal of liberation. It would also be significant improvement if Ministers could stop using the word “step change” every time they do anything.

Good, efficient, boring government would be a significant development, and the PAC has a significant role to play if the Government allow it to do so.

Autumn Forecast

John Pugh Excerpts

Monday 29th November 2010 Commons Chamber

[Mr Osborne]

The Irish bank restructuring package will now take several weeks—at least—to put in place, and we are, of course, very aware of the interconnectedness of the banking systems of Ireland and Northern Ireland, and, indeed, the whole UK. That is one of the reasons why we are making this bilateral contribution; it is one of the reasons why we are in the room discussing the conditions and the banking package. I am certainly conscious of the fact that some of the Irish banks have significant assets in the UK, and we have a very real interest in the future of that. That is why my hon. Friend the Financial Secretary came to Northern Ireland earlier this week, and I want to make sure that the Treasury, as well as the Secretary of State for Northern Ireland of course, remain in very close contact with the Northern Ireland Executive and Members from Northern Ireland.

Corporation tax has genuinely been a matter of debate in the European Union. I do not think that has been any secret; it has been in the newspapers. Some member states wanted to attach conditions to Ireland’s corporation tax rate, and I do not deny that that 12.5% rate is a real challenge for companies in Northern Ireland. That is why the Secretary of State for Northern Ireland is looking at that and at packages to help the competitiveness of companies in Northern Ireland. But I took a position, which was that it is not really for other member states to dictate the tax rates of sovereign nations, even when they are seeking international assistance. The rates of tax levied by the Irish Government should be a matter for the Irish Government and the Irish Parliament. If the shoe was on the other foot, we would not want to be accepting, in this country, decisions imposed on this Parliament about tax rates. This should be a matter for the elected Parliament of the country. I do not deny that that 12.5% rate is a challenge for Northern Ireland, but I did not feel it was right to use the position we found ourselves in to get Ireland to increase that corporate tax rate.

[Dr John Pugh (Southport) (LD)]

The Chancellor says he is intent on reforming our “outdated and complex rules for controlled foreign companies.” Can he assure me that this will not create new opportunities for tax avoidance?

[Mr Osborne]

Yes, I can assure the hon. Gentleman that that is certainly not the purpose of the measure and that tax avoidance is what we are going to seek to avoid. The measure is there to keep pace with the changes in corporate tax regimes that have been introduced in many other countries, not only Ireland, which we have just been talking about, but countries such as Belgium and the Netherlands, which have also made corporate tax changes that attract international companies to headquarter there, rather than in the UK. We have to keep pace with those changes, which is why we are taking the measures that we are.

Equitable Life (Payments) Bill

John Pugh Excerpts

Tuesday 14th September 2010 Commons Chamber

[Chris Williamson (Derby North) (Lab)]

Like other hon. Members present, I have been lobbied by a considerable number of constituents. Let me be clear: had Labour won the general election, we would by now be implementing the Chadwick recommendations and people would be receiving payments. What I find so irritating is the extraordinarily cynical, pre-election tactics that were adopted by the Conservative and Liberal Democrat parties in an attempt to garner additional support. It is no good Government Members referring to the country’s financial situation and using the comprehensive spending review as cover for their inaction, because when they signed up to those pledges, they knew very well what the financial situation was. That simply will not wash.

The Opposition have been accused of showing “synthetic anger” and I have heard Government Members congratulate their Front Benchers, including the Minister. Members have said how they trust the Minister and their Front-Bench team. Before the election, one of the most vociferous cheerleaders of the pledge to pay a more generous settlement to the Equitable pension holders was the Minister himself, who regrettably is not in his seat.

I call on Members on the Government Benches to look at the Bill before us. It is extremely thin, and some Members’ contributions seemed to recognise that fact. It is clear from the terms of the Bill that the Government are dragging their feet on the issue. There is no detail on the criteria for payments, there will be no independent appeal process, and there is no timetable for payments.

Only yesterday I received a letter from EMAG, which stated:

“EMAG welcomes legislation to enable payments to Equitable Life sufferers.

However, EMAG is alarmed about the following:

The continuing reliance by the Treasury on Sir John Chadwick’s advice, despite the clear view of the Ombudsman that it is ‘an unsafe and unsound basis on which to proceed’.

There is a mismatch between the formal acceptance of all the ombudsman’s recommendations by the new government and the Treasury’s dogged determination to ignore the PO and build upon Chadwick’s advice, seemingly to provide a phony justification for derisory payments.

The lack of a proper comprehensive assessment of ‘relative losses’ based on all of the PO’s findings.

The inappropriate inclusion of Chadwick’s work as the central building block in the terms of reference for the independent payment commission.”

[Dr John Pugh (Southport) (LD)]

rose—

[Guy Opperman (Hexham) (Con)]

rose—

Finance Bill

John Pugh Excerpts

Monday 12th July 2010 Commons Chamber

[Dr John Pugh (Southport) (LD)]

Should we not recognise that tax avoidance and tax evasion are two very different things, and that although we can make a rational guess as to the extent of the former, tax evasion that is successful is not detected at all and therefore any estimate of it must be highly speculative?

[John McDonnell]

I fully concur, which is why I think that HMRC must apply a lot more resources to tackling quantification. The estimates I have been given range widely from the £40 billion from the Treasury for both avoidance and evasion—its figures do not distinguish between them—to the £25 billion from the TUC solely for tax avoidance, to the higher estimates of anything between £70 billion and £150 billion for both evasion and avoidance. I know that Richard Murphy in particular has focused on evasion, which could account for anything between 40% and 60% of the budget deficit—the structural deficit as well—that this House has recently been debating, and dividing on almost unnecessarily it seems to me.

Capital Gains Tax (Rates)

John Pugh Excerpts

Wednesday 23rd June 2010 Commons Chamber

[Jon Trickett]

I wonder whether the Business Secretary and some of his colleagues came into politics to restrict welfare benefits for the disabled.

People in our areas have reason to fear other elements of the Budget, apart from the VAT hike. Public sector pensions are going to be cut, and the Government will accelerate the rise in the pension age. We know that they are going to cut 25% of departmental expenditure, that there is to be a freeze on child benefit, and that there will effectively be cuts in housing benefit. All those proposals will affect the communities we represent.

I remind the House that it was Mrs Thatcher who stole milk from schoolchildren; now, it is this Government who will take money from poorer mothers. Let me list the effects the Budget will have on mothers, especially those in poorer communities, as it seems they are to be targeted.

According to the TUC, the announcements made yesterday show that poorer mothers will lose about £1,200 a year. From April next year, the Sure Start maternity grant will be available for the first child only. The £500 maternity grant available for poorer mothers having their second child is to be withdrawn, and that is a disgrace. The health in pregnancy grant—a universal grant worth £190 that was available to all mothers to promote child and maternal health and engagement with health services—is being abolished.

The baby element of tax credits is also being cut. That was an additional payment of up to £545 a year for families with a child aged less than one who were in receipt of tax credits. The previous Government’s introduction of a new toddler tax credit would have provided an extra £200 a year for children aged one or two, but that has been cut too.

As we know, child benefit has been frozen for three years, and that obviously amounts to a cut in real terms. Finally, the child trust fund worth £250 has also gone. That may not affect members of the Cabinet much, given that there are 22 millionaires sitting around that table, but I assure the House that £250 can make a difference to children and families in my area.

Whatever my differences with them, I do not believe that people who joined the Liberal Democrat party went into politics to attack poorer mothers, but that is what this Budget does. That is what they will be faced with voting for in a few days, and I ask them to consult their consciences—never mind their party members—to determine whether that is the right thing to do.

Earlier, I said that it would not be my priority at this time to go for further fiscal tightening, given the fragility of the economy and the lack of demand elsewhere in the world. However, that is not simply my view; it has also been expressed by people who are very significant indeed.

The House will be aware of President Obama’s letter to the G20, but hon. Members may not know that KPMG chief economist Andrew Smith has described yesterday’s Budget as a “kill or cure” Budget. I note that the same phrase was used in today’s Financial Times headline, and there is at least a risk that we might kill the recovery. It is quite extraordinary to see KPMG make such a statement, and Andrew Smith, its chief economist, went on to say:

“The aim is to eliminate the structural deficit over this Parliament, but it risks choking off the recovery. There is no guarantee that private demand will rebound just because the government retrenches.”

John Philpott, of the Chartered Institute of Personnel and Development, said that we would see unemployment rise to 3 million for the rest of this Parliament.

[Dr John Pugh (Southport) (LD)]

Can the hon. Gentleman refresh my memory? In the last Parliament, did he vote for £40 billion of unspecified cuts?

[Jon Trickett]

I am talking about yesterday’s Budget and I shall continue to do so. If the hon. Gentleman does not like it, he should think about whether he will vote for it next Monday and Tuesday.

Paul Krugman, the Nobel prize-winning economist, asked how hard it could be to understand that Governments can save economies rather than destroy them. It is not too hard at all, yet as he said:

“All around the world…politicians seem determined…to short-change the economy”.

A consensus has emerged in the media about the need for cuts, which is infuriating sometimes, because there is a counter-consensus that has not been properly heard, represented by many people on the Opposition Benches and by leading economists, President Obama and others: we are taking a huge risk with the future of our economy.

Two million private sector employees work for companies that are dependent on Government contracts—Sheffield Forgemasters has already been mentioned. Further damage will inevitably be done to the private sector by cuts aimed at the public sector. When we look at the performance of the private sector we see that it, rather than the public sector, has brought about the reduction in gross domestic product, especially in investment. People may not like to use the word, but if there is a strike going on at the moment, it is not the BA strike but the investment strike in the private sector. We can understand why it happened, but none the less, £6 of every £10 of the reduction in GDP is down to one factor alone—the decline in private sector investment. It is not clear to me how cuts now will suddenly lead to growth in private sector investment, nor have the Government explained how that might happen. Furthermore, the Red Book shows a decline in public sector investment from £47 billion in 2008-09 to £21 billion, which is less than half that amount, by 2014.

I am troubled both by the assault on poorer communities, which is what the Budget really amounts to, and by the underlying economic philosophy that by reducing the state the private sector will flourish. The reverse is true, as we know from the great economist Keynes and from what happened in the great depression of the 1930s. Recovery in the United States was not brought about by slashing public expenditure, but above all by the new deal. Roosevelt’s great adventure rebuilt the American infrastructure and economy. The private sector was able to revive through expenditure, not cuts.

With those reflections, I turn to the politics of the Budget. The election gave no legitimacy for the course the Government have set. The vast majority of people who voted for the Liberal Democrat party did so on the basis that there would be no further cuts in this financial year, and no increase in VAT. The Conservative party did not achieve a majority and did not significantly increase its vote, in terms of the total numbers of people who voted. On the other hand, it is also clear—I would not claim otherwise—that Labour did not win the election either, but looking at the combined votes for Labour and the Liberal Democrats, for a policy of careful financial management, we see that a vast majority voted for that objective.

My conclusion is that there is no democratic legitimacy for the Budget. When the Secretary of State for Business, Innovation and Skills described his conversion on the road to Damascus on the day after the election, his argument was much less than convincing. It feels as though there has been an attack on middle-class and working-class families and on those dependent on welfare. Inevitably, there will be resistance both in the House and outside. When people reflect on the fact that an extreme Thatcherite Budget has been agreed and will be forced through the House without the legitimacy of an elected parliamentary majority, there will be outrage.

It is for the Labour party, particularly our leadership, to reflect carefully on how we respond to a Budget from a Government who were not elected with a majority, and who propose to impose savage cuts on the living standards of poorer people. Resistance will emerge. The Labour party will want to react responsibly, but we will—at least we should—place ourselves alongside people and communities who are resisting the cuts. I very much hope we shall be doing that in the coming weeks and months.

Tax Avoidance

John Pugh Excerpts

Wednesday 16th June 2010 Westminster Hall

[Dr John Pugh (Southport) (LD)]

It is a pleasure to serve under your chairmanship, Dr McCrea, and I welcome the Front-Bench speakers to the debate. I have a high degree of respect for them both and I hope that between us, in this relatively informal environment, we can start the ball rolling on what is a serious topic for this Parliament: tax avoidance.

Let me put the Minister at ease by saying that I am not going to discuss the capital gains tax proposal or any of the media coverage of it. It is a key aspect of the coalition agreement. All I will say is that the thrust for change comes from the desire to close a loophole that allows for tax avoidance, where people receive economic rewards as capital rather than income so as to avoid higher rates of taxation. Obviously, that is a move for the privileged few that potentially costs the Exchequer millions. Recently, there have been both decent and some dodgy arguments in the media about the mooted capital gains tax proposals. I am prepared to acknowledge that a number of sensible points have been made apropos the need to encourage long-term investment rather than short-term gain, and the need to privilege savers above speculators. There has been much learned discussion about tapers, capital relief and so on. I remain fairly sanguine about the matter and will leave the Minister to his pre-Budget deliberations—provided that, within the coalition, we do not lose the essential goal of successfully attacking tax-avoiding abuse.

Tackling tax avoidance is important to the coalition, particularly in the present circumstances. If the central problem of this Parliament is reducing the structural deficit, there are essentially not two but three ways to help to do that: we can cut spending, which none of us wants to do unless necessary; we can increase taxation, which none of us wants to do unless necessary; or we can ensure that tax revenues are more often and more efficiently collected and not avoided, which all of us would be perfectly happy to do were it the panacea for all our ills. Unfortunately, in the present circumstances, it is not.

If the coalition is not ruthless in its pursuit of avoidance and evasion, now more than ever, we will stand accused of harming or at least being indifferent to the industrious and needy, to the advantage of the devious and the privileged few. That is scarcely fair or in line with the themes announced by the coalition of fair taxation and fair reward. So far in the history of this Parliament, little has been said by the Government about tax avoidance. I understand that the Minister has answered a few questions, both oral and written, but by and large he has given answers that I would describe as holding answers that refresh the position that we understand to be in place—that Her Majesty’s Revenue and Customs does not take lightly the matter of tax avoidance and there is a big gap to be plugged. There is a big gap, because potentially large sums are to be obtained by a clampdown. The Treasury estimates the tax gap of tax avoided or evaded to be about £40 billion. The Tax Justice Network—not uninformed people—gives a figure of £120 billion. The truth is probably that we do not know the precise figure, and perhaps we should split the difference.

The reality is that we have made some progress in getting large sums back to the Exchequer as a result of a serious attack on tax avoidance. That is to the credit of Ministers in the previous Government, who recognised that a serious attack was necessary. The figures for 2008-09 provided by the Treasury suggest that about £12 billion of extra revenue was collected because of the forthright approach taken to tax avoidance. The figure expected for 2010-11—the Minister will be able to tell us whether we get anywhere near it—is a whopping £16 billion. Those are significant sums.

A distinction is often drawn between avoidance and evasion. I do not want to trespass into the area of evasion, as that is a different issue, although at times it is quite difficult to define the difference. Somebody said that the only real difference or line between evasion and avoidance is the thickness of a prison wall.

[Mr Gregory Campbell (East Londonderry) (DUP)]

Or an accountant.

[Dr Pugh]

It is a different sort of accounting, let us put it like that. Evasion characteristically involves not only non-compliance, but a breach of tax law and often an element of downright and explicit dishonesty. However, in truth, some forms of avoidance are almost equally morally reprehensible if looked at from an ethical point of view rather than a technical or legal one. We think of past abuses of charity law, which people have explicitly used to make a fast buck with no real benefit to charity, thereby bringing the whole business of charity law into disrepute. We think of a genuine unwillingness on the part of some members of society to pay towards the maintenance of the society that enables them to thrive—the free-rider mentality that is found in certain sections of society and business.

On the other side, we must recognise that we are talking about an industry that does not hang its head in shame. It is staffed by clever and well rewarded people who are dedicated to not what they would call tax avoidance—although it is that in a sense—but, to give it another name, tax planning. As tax law becomes more sophisticated, the economic instruments with which tax planning is arranged become ever more complex and, because of the global reach of the economy these days, ever more global.

The demands for such services are huge and appreciable. There are some well rewarded people in the City whose life is almost entirely dedicated to some form of tax avoidance or tax planning—whatever they want to call it—which they regard as an entirely legitimate enterprise. One should not be too pompous about this. Few people volunteer to pay more tax than is due, or avoid opportunities that come their way to defray their own tax burden. Some people are capable of availing themselves of clever, post hoc rationalisations that run along the lines of: if they spend the money rather than paying it in tax, it will be spent to greater social benefit. That is not a plausible argument, but it is a comforting moral argument if one’s conscience bends in that direction. Such people argue that they can spend their money better than the state can for the social benefit of people in their community. That is a bit of sophistry with which we need not detain ourselves.

Who has not had a discussion with a tradesman about paying in cash, while remaining completely oblivious to the consequences that might befall the Inland Revenue? Are we not sometimes encouraged by the state to modify our economic behaviour by being offered tax breaks and incentives?

[Mr Gregory Campbell]

I congratulate the hon. Gentleman on securing this debate. He touches on a matter that I have raised for many years. In areas of high unemployment, there is a tendency for the black economy to thrive. There is a tendency for small to medium-sized employers to employ people on the basis that he has just outlined, giving a cash payment of £100 or £150 per week for several hours per day or whatever. The raising of the income-tax level to £10,000, which the Liberal Democrats and my party have been advocating for some time, will help but not completely eradicate the desire of some to employ people on the side, in the black economy, for a few pounds per week, rather than doing it legitimately, which would raise more income for the state and bring people from the black economy into proper, better paid jobs.

[Dr Pugh]

The hon. Gentleman is right to suggest that the black economy needs a whole toolkit of approaches. I happen to have with me the report from the Public Accounts Committee entitled “Tackling the hidden economy”, which contains a number of rational, sensible and workable proposals, which will enable people to earn a living and at the same time pay taxation legitimately and fairly. Obviously the fairer the system is, the more prone people are to do that.

Tax avoidance properly, though, is the apparent attempt to frustrate the intent of tax law. That is fundamentally what it is. It is normally done by organising economic transactions in a way that ensures that whatever wealth, investment, profits, income or rewards people have or aim for, they escape the charge that the state would ordinarily impose on them. The state does not do that for idle purposes, but for the common good. Tax avoidance is therefore morally reprehensible. MPs flipped their homes and were rightly criticised in the media, but it was not the intention of the expenses scheme—or the capital gains tax regime, for that matter—to ensure that that would happen. People in this place availed themselves of a loophole. That is an almost classic case of tax avoidance, but one could give sundry examples, in various exotic formats.

The previous Government did an appreciable amount of work, endeavouring to ensure that tax avoidance, when spotted, gets dealt with. They fought what I would describe as a long guerrilla war against exactly what we are talking about: loopholes. I pay tribute to the right hon. Member for East Ham (Mr Timms), who was a kind of platoon commander, for prosecuting that guerrilla war with some success. He tried to track down the loopholes and closed them where possible. I think that most hon. Members here, while reading through very dull tracts of successive Finance Acts, will have recognised that those provisions are there simply as part of the ongoing skirmishing between the tax planners—tax avoiders—and the Inland Revenue. By and large, however, what we have seen so far have been post hoc reactions to abuses that have been identified in charity law, with repo arrangements, or with controlled foreign companies—we had an awful lot of debate about controlled foreign companies in the last year of the previous Parliament, as well as stamp duty and other matters.

The Inland Revenue has been involved in constructing complex defences against complex devices and schemes. Quite frankly, even though we pretend to understand them properly as we sail through the Finance Act, many of the schemes are not adequately grasped by many Members. It used to amaze me how the right hon. Gentleman had command—or seemed to, at any rate—of some very complex schemes and some very complex remedies for them. The basic strategy, however, is one of shutting the door after the horse has bolted, which normally leads to those people who wish to persist with mechanisms for avoidance simply adjusting the scheme in some marginal way, modifying it and presenting a new scheme that leads to a new ad hoc adjustment, when it is spotted—it is, of course, not immediately spotted and cannot be dealt with retrospectively. Again, I am reminded of guerrilla war. It is rather like the US forces trying to deal with an ever-elusive Viet Cong that springs up around them in the jungle. My analogy slightly breaks down, however, when one recognises that the resources available to the people fighting that guerrilla war far exceeded those of the Government in this case.

The problem is therefore difficult to deal with, and is made immeasurably more complicated by the global reach of modern international capitalism, with the plethora of tax havens and the associated absence of transparency. Again, I pay tribute to the right hon. Gentleman for having done a great deal of work on that. In the last few months of the previous Parliament, there was a slew of double taxation treaties that attempted to deal with precisely that problem, devised meticulously and with extraordinary detail by very clever people in the Treasury. Generally speaking, what we were hoping for—and sometimes got—was greater transparency and sharing of information, but again we were involved in the post hoc job of trying to close down complex tax arrangements that seemed to evade many jurisdictions when it came to the pursuit of tax liabilities. Interestingly, PricewaterhouseCoopers recently suggested that it would make it a heck of a lot easier if big international companies were to list in full their assets right across the piece on a global basis, and suggested that as a new standard for accountancy. I agree, but I think it fairly unlikely that many such companies will follow suit. Big organisations that keep their property arm in Liechtenstein or wherever will not be the first candidates for laying all their cards on the table.

It is worth making the point, in passing, that the British Exchequer is not the only loser here. A substantial amount of tax leakage is caused by people not paying tax in developing countries, and it is distressing to see organisations such as the Commonwealth Development Corporation, which was set up for laudable ends and with massive national and public support, putting an awful lot of money into development projects in the developing world, but having the money sourced or put through private equity companies, many of which are in offshore tax havens.

[Ms Angela Eagle (Wallasey) (Lab)]

Does the hon. Member, like me, support the moves towards country-by-country reporting, which were pushed by the previous Government but developed by the OECD? International corporations are encouraged to report both their profits and their assets on a country basis so that there is that level of transparency. Christian Aid, ActionAid, Oxfam and other development organisations support that, precisely to prevent the tax loss, about which the hon. Gentleman is talking, for countries that are developing.

[Dr Pugh]

I entirely support that, but I consider it a distant ambition that will take an awful lot of putting together over time, and will involve a large number of international bodies. It is, however, entirely the right direction in which to go, and is the direction in which we will all have to go eventually, if we are going to deal with the problem remotely adequately, even on a national basis. What I hope to do as I conclude is to suggest an improvement to what we are doing nationally. The former Minister in the room might correct me, but we have the anomalous situation in which the Exchequer building itself is owned by a sort of semi-bankrupt offshore company. We can see how the need for getting things right on an international basis is just as important as getting things right nationally.

I hope that I have done enough to demonstrate that there is a sort of futility to what we are doing at the moment, which I think is recognised to some extent within the Treasury. I genuinely do not believe that I am pushing at a closed door—it is at least half open—and in discussions with the right hon. Gentleman prior to this Parliament I sensed that. There is a sense in which continually trying to mop up after the errors have been spotted is perhaps not enough, and there have been two significant moves, which are worth remarking on and praising. The previous Government insisted on pre-disclosure of new tax instruments—a vetting system—which is a commendable step forward.

In recent finance legislation, however—I forget which clause of which Bill—I saw for the first time not just simply, “This scheme is wrong, this is how it runs and this is what we’re going to do about it,” but “Any scheme of this nature needs to fit in with certain principles and basic parameters.” I came across a quote from the right hon. Gentleman. He said that

“we need not just new powers but clearer norms for behaviour too.”

We are moving, therefore, to a system in which instead of a case-by-case examination of each scheme, we are laying down principles by which people can judge whether schemes will be acceptable.

I therefore urge upon the coalition Government a final, third step in addition to pre-disclosure and having principles: the introduction into tax law of a general anti-avoidance rule. Some think that that is a distinct probability; I think that it is a possibility. It would parallel moves made in many other countries. Most Commonwealth common-law systems, from Hong Kong to Australia, have something like this. I have argued for it in the past, and I have not been given a dismissive response by the Treasury. Basically, it says, “We have this under consideration, and we may well take it further.”

The advantage of a general anti-avoidance rule being embodied in law is that it would throw the burden of demonstrating the legality of new tax planning schemes on those promoting it by obliging them to show that the schemes will ensure a worthy economic benefit other than tax avoidance—the avoidance of tax law. It would have the added spin-off and economic benefit of ensuring that financial ingenuity would always be employed to the general economic benefit and not simply to dodge tax.

I am aware that, in principle, there are all sorts of downsides to having such a general rule written into law. I have no view of how it should be framed, but we can consider the dispensations of other Governments for advice on that aspect. The legislation certainly needs to be purposeful and clear. There need to be good pre-clearance and adjudication arrangements within HMRC should there be any doubts or disputes that seem incapable of immediate reconciliation. Also, just as in other Government arrangements, there needs to be a sensible and clear list of exceptions.

Given all that, we could certainly run with such a basic rule; indeed, it is recommended by charities and organisations such as Tax Justice Network. Not only can it be done, it is done. It does not encourage wholesale capital flight, as some suggest it might. For example, it has not done so in Hong Kong, which has somewhat of a reputation for financial dealings, and where British judges are involved in a relatively rare dispute resolution procedure based on such a principle.

The strong upside for the Exchequer is that, even on City estimates, it will raise significant revenue. It could be introduced here, and I hope that it will be. I would like to see it introduced as early as possible. It would simplify existing tax law. We are all in favour of that—it needs a certain amount of clarification and consultation. If we follow the road taken by Australia, Hong Kong and many other nations, our tax system will be less prone to the byzantine schemes dreamed up at Canary Wharf and less time will be consumed at the Treasury devising equally elaborate defences. However, we need to get on with it.

If our public finances are in the critical situation that we all think they are, and if, as we appear to be able to do, we can argue for immediate cuts, we must also be able to argue for an immediate and effective attack on tax avoidance if we think it is possible. We are probably talking not about the next Budget, but of the autumn when there will another opportunity. However, certain requirements need to be put in place before we can run an effective regime built around the principles-base that I suggest.

In the first place, HMRC needs the right skills base. I am not yet convinced that it has an adequate degree of specialism. In the past, I have tried to interrogate the Treasury, asking the previous Government how many people were employed on the rather more specialised forms of tax avoidance that we are talking about today than on ensuring general tax compliance. The general answer will be somewhere on the record. It was, “In a sense, that is what we all do all the time.” However, a definite cadre of specialists deals with the high-business end, where some of the bigger centres of tax avoidance are found. We need them still to be in employment at HMRC rather than being affected by staff cuts and other reductions. Indeed, their number needs to be supplemented, so that we have the right sort of tax officers, and tax offices.

It is suggested that cutting the number of local tax offices is not helping in that respect. The tax office in my town has disappeared; I am told that the net effect is that all sorts of local knowledge has gone, and that as a result there will be more tax avoidance. I do not know for sure whether that is true; high-ranking people at HMRC tell me a different story. They say that they now have clever software that does the job infinitely better than local knowledge. It enables them to pick out trends in accountancy and such matters, and it is far more sophisticated and far less consuming of manpower and far more effective in bringing in the shekels.

HMRC has nailed its colours to the mast, putting its faith in software rather than in manpower. I hope that it is right. However, we need some of the right people, and I am not convinced that we have enough of them. I would like more of them to help solve the enigma of why some extraordinarily profitable companies pay surprisingly little tax.

All in all, we need to aim for simplicity. We need a general provision of the kind that I have tried to outline, however inadequately, so that we can stop fighting what I believe is a losing battle. We can do better. We can fight the battle differently. We need to move rapidly towards a general anti-avoidance rule. Ultimately, as the hon. Member for Wallasey (Ms Eagle) said, we need global agreement built upon such pillars. The purpose of the debate is to ask the Government to take up this suggestion—or give reasons why they should not—and if they wish to do so, to get a move on, because clamping down on tax avoidance must be as important as anything else.

[Nigel Mills (Amber Valley) (Con)]

It is a pleasure to speak under your chairmanship, Dr McCrea.

Until the election, I was employed by one of the large firms of accountants, although I assure the hon. Member for Southport (Dr Pugh) that I was not involved in tax avoidance. My role was to seek up-front agreements with Her Majesty’s Revenue and Customs, which was generally more than happy to enter into such agreements with my clients. I am not guilty of the things of which he accuses accountants. I have practised as a tax adviser since 1996, so I remember the previous Government’s attempt to introduce a general anti-avoidance rule in 1997-98, and I can just about recall why that attempt failed.

I agree with much of what the hon. Gentleman said. It is clearly right to tackle tax avoidance and it is important that the new Government continue to do that job. I accept that the previous Government took many effective measures on that front—the move towards targeted anti-avoidance rules and the principles-based approach was the most effective way forward. However, if we are to get the deficit down, we need to increase tax revenue, so we need to attract taxpayers to the UK and encourage them to remain here. A general anti-avoidance rule in principle may not be a brilliant way of doing that.

[Dr Pugh]

I wonder whether the hon. Gentleman has any evidence of that. We have enough examples worldwide of such rules being implemented. We ought to be beyond the stage of simply suggesting that it can happen. We should be able to point to empirical data showing that that is exactly what has happened in places such as Hong Kong.

--- Later in debate ---

[Nigel Mills]

The hon. Lady is correct. The previous Government happened on what is probably the right balance, which is to have principles-based rules targeted at commonly exploited rules, so that taxpayers know when they are wandering on to dangerous ground and therefore need to deal with those rules, rather than having a general principle that might apply to every tax in every situation. The hon. Gentleman mentioned that it puts the burden on taxpayers to declare that what they are doing has a mainly economic benefit rather than being an attempt at tax avoidance. That is a huge burden to put on taxpayers. I am not sure that we should put the burden of knowing how to comply with a general rule in complicated and innocent situations on to every payer of every tax in the country. I am not sure if that is what he intends.

[Dr Pugh]

Some of us laboured long and hard over controlled foreign companies. I remember one difficulty was deciding how different transactions should be linked and/or broken up. Anyone reading the legislation, highly specific as it is, will have to do an enormous amount of work—no less than if they had to apply a general principle to their circumstances.

[Nigel Mills]

I have some familiarity with the controlled foreign company rules, or at least the previous version—I never had to get too close to the attempt to reformulate them. Yes, they are incredibly complicated and they were complicated before, although there was a purpose exemption in the previous rules that was in some cases helpful. I would not necessarily suggest that the new Government should exactly follow the approach that was taken to reforming those rules, because it was a long drawn out process which is, I think, still incomplete.

If we are to tackle avoidance without going down the general anti-avoidance rule route—if the Minister is minded to go down that way, I suspect that by the time he has gone through the full gamut of consultation, he will be backing off quickly—perhaps we should look at overall solutions for tackling the problem rather than proceeding on that basis alone. Targeted purpose rules in areas of tax that are commonly exploited are the better way to go. As a way forward in tackling tax avoidance, we want simple, clear legislation so that the intention of Parliament is clear and both tax authorities and taxpayers can understand the aim of the law and what the rules are. That will help to support the moral argument: if we all understand the right amount of tax to pay in a situation, everyone should be paying it. The present complexity gives people the veneer of an excuse when they structure transactions in an artificial way.

The hon. Gentleman mentioned tax havens. There is a lot of scope for tax planning using other EU nations that have very different tax regimes or much lower tax rates in some situations. I am sure that the Minister has found in his in-tray a load of pending or ongoing cases at the European Court of taxpayers claiming that they have suffered tax that does not comply with various EU treaties. Roughly how much tax is the Exchequer in danger of losing or having to pay back as a result of those cases? It is important when looking at tax law to make it compliant with systems outside the UK, but it is difficult to do.

My area of expertise was transfer pricing. We were forced to apply transfer pricing rules on transactions within the UK, rather than just cross-border ones, which added a huge compliance burden that, frankly, taxpayers were not desperately excited by and the tax authorities did not have anything at stake on. I hope that we can find better ways of writing tax law that do not add to that burden. Perhaps some tweaks to European treaties would have been a better way of sorting this and creating OECD-compliant tax law, rather than using a sledgehammer to crack a nut.

If we want to tackle tax-avoidance effectively, let us have simple, clear legislation, and where there is abuse, let us have targeted, principles-based anti-avoidance rules that state clearly that the intent of Parliament is to stop one-sided complex financing transactions that have no commercial benefit and get a big tax advantage. In that way, we will make the progress that the hon. Gentleman wants.

[Ms Angela Eagle (Wallasey) (Lab)]

It is a pleasure to take part in my first debate in Westminster Hall in the new Parliament and to serve under your chairmanship, Dr McCrea.

This has been a fascinating debate. It is entirely in keeping with the work that the hon. Member for Southport (Dr Pugh) has done on this issue and with the fact that he has sat on many a Finance Bill Committee that he has brought this extremely important issue to the attention of the House, and I congratulate him on initiating the debate. He put his case very well and demonstrated that he has spent many years considering these issues. He could see both sides of the argument and he managed to put both of them in much of his contribution. He also identified the free-rider mentality, which is the key thing we all want to crack down on and minimise.

The hon. Gentleman was generous enough to praise the previous Government’s record, and I thank him very much for that; that has not been noticeably present in our debates on the Floor of the House so far in this Parliament, which has diminished our debates in this difficult time for the country. I deplore the rewriting of history and the abuse that the previous Government’s record has received, particularly in the economic context, and it is nice that the hon. Gentleman did not sink to that low level.

I particularly thank the hon. Gentleman for praising the record of my right hon. Friend the Member for East Ham (Mr Timms), who would have been winding up the debate under more normal circumstances. I hope that Members will realise that my right hon. Friend is still recovering from the attack on him at his constituency surgery, and I am sure we all join together in wishing him a speedy recovery. He has been seen back around the House and he is well on the mend, but he is still a bit fragile.

I welcome the new Minister to his position. Those who slog away in opposition do not always end up inheriting the positions that they shadowed when their party is lucky enough to be magically translated into government, but the hon. Gentleman has managed to make that transition. Having experienced the Department he now represents, I know he is a very lucky man, and he certainly deserves luck. I therefore welcome him to the debate.

I want to spend a little time putting the previous Government’s approach on the record. I then want to ask the new Minister a few questions about his Government’s actions and their future intentions on this extremely important issue. I note the self-restraint that the hon. Member for Southport showed in not trespassing on the area of capital gains tax, but I wonder how long the restraint shown by the partners in this Conservative-led Government will last as we get further into this Parliament—I will certainly watch developments with interest. The hon. Gentleman has set a sterling example, although I notice that it was not particularly followed by the right wing of the Conservative party at Prime Minister’s questions earlier today—“interesting noises off” is all I will say about that.

We can all agree that the financial crisis of 2008 led to a radical shift, domestically and internationally, in the approach to tax evasion and tax avoidance. Following the crisis, the previous Labour Government made certain that the UK was at the forefront of the drive for radical change. Internationally, there was a rapid realisation that the lack of transparency in the international financial system presented previously unrecognised but severe systemic threats to the entire global financial architecture, that those threats had to be dealt with and that good progress had to be made quite rapidly. In the forum of the G20 and in the aftermath of the credit crunch in 2008-09, good progress was made, but that momentum needs to be maintained, and one theme of the questions I want to ask the Minister to deal with is how he sees its being maintained.

It is only human nature that when people are in the middle of a crisis, they suddenly put at the top of their political and economic priority list things that have been around for years, although they were never really at the top of the list. Suddenly, transparency, the exchange of information and the ability to supervise global institutions cross-border and globally acquire far more importance. Everybody is very exercised by them, and there are a load of international meetings at the OECD and the G20; indeed, that is what happened, as we can see. The crisis then abates, and people turn back to dealing with more domestic things. If we are not careful, the momentum for change—the momentum behind introducing transparency and opening up cross-border supervision—could wilt. It is important that the new Government continue the momentum that the previous Labour Government created in the aftermath of the crisis. I would certainly be interested to hear how the Minister sees the issue and what plans and actions he has in train to ensure that that momentum is maintained.

The hon. Member for Southport touched on the fact that, domestically, the huge bank bail-outs that were necessary to deal with the immediate threats that the crisis caused to our economic well-being have brought two important truths home to us all. If those truths had not been brought home to us before the election, they certainly would have been once we had spent months on doorsteps in our constituencies listening to our constituents’ experiences and opinions. The first of those truths is that there is growing hostility among the majority of our hard-working constituents who pay all their taxes towards those who avoid paying their fair share. That phenomenon is growing and is more noticeable than it has been, and it will only continue to grow if it is not addressed by policy and Government action. Secondly, where tax revenues have been hard hit by the downturn and the recession caused by the irresponsible greed of a few, there is an even greater responsibility on the tax authorities to collect the tax that is due. That responsibility can only be reinforced when next week’s Budget takes a scythe to the public services that many of our most vulnerable citizens rely on.

The previous Government measured the tax gap and published estimates of it, setting it at £40 billion, as the hon. Gentleman rightly said. He had some other estimates, and the Trades Union Congress has a much larger estimate, as does the Tax Justice Network, which the hon. Gentleman mentioned. For the sake of argument, however, let us say that the tax gap is £40 billion. We know that it is impossible to collect such sums and completely to close the tax gap so that it does not exist at all, but we could certainly do with some of the revenue that is due, but which is not being collected. Even if we closed the tax gap by half, we would avert real pain and suffering among those who are often the most vulnerable in our society and who particularly rely on services provided through public expenditure. In that context, it is even more important than it has been that we do all we can to ensure that we close the tax gap.

As the hon. Gentleman again pointed out, and as the hon. Member for Amber Valley (Nigel Mills) also described in his speech, that is easier to say than to do: it is easier to speak in principle or theory about tax laws that work and are simple for everyone to understand, and that no one tries to game, than it is to bring them about. But just because it is difficult—some might say very difficult—it does not mean we should not keep striving. With the policies established after the credit crunch by my right hon. Friend, we have made considerable progress towards such an approach. I should be interested to learn how the new Government intend to build on the solid foundations left by the previous Government, and to take things further.

It is not morally acceptable for a small minority to think that they can opt out of their obligations if they can buy the right advice or pay for sophisticated tax avoidance products. It is about time for all political parties to adopt and voice that moral approach more. Like benefit fraud, tax evasion undermines the confidence of ordinary taxpayers in the legitimacy of the system. It should be far less acceptable, socially as well as morally—it should not be thought reasonable and polite—to admit in company to earning a living by helping well-off people and companies to avoid their tax liabilities in the jurisdictions where they operate. I do not say that the vast majority of taxpayers or tax accountants do that, but some do, and the practitioners in question probably know who they are. The hon. Member for Amber Valley is nodding, and we can talk to him later—he does not have to say anything on the record. We know the practice when we see it, and it should be far less acceptable morally, and in company, than it has been in the past. We need that switch to happen.

[Dr Pugh]

I accept entirely what the hon. Lady says, and her reference to the free rider principle. We can identify free riders, but it is rather like identifying people who do not pay their bus fare; it does not mean to say that there is an easy way to do it. I refer her to an interesting discussion at the Public Accounts Committee with the landlord of the Treasury, whose office is based, I think, in Bermuda. All the people we interviewed and all the senior staff enjoy the advantages of London society, and the benefits that that bestows on them, but avoid tax by virtue of having a name plate—well, a little more than that, but not much more—in Bermuda.

[Ms Eagle]

The hon. Gentleman will be able to discern from the tenor of my remarks that I agree with him.

I hope we all agree that the world has changed and that there will be no hiding place for tax cheats. The previous Labour Government had a record to be proud of and it is important that the momentum we managed to create should be continued, especially internationally. In 2004 we introduced a requirement to disclose tax avoidance products in advance, to a storm of protest. In 2009 we strengthened the regime, and that has transformed the fight against avoidance. As the hon. Gentleman explained, that protects more than £12 billion of revenue.

The March 2010 Budget made the disclosure regime broader, increased the penalties for non-compliance and gave Her Majesty’s Revenue and Customs access to more information on those who use the schemes. The package was designed to tackle tax avoidance, non-compliance and offshore evasion and to protect £18 billion of revenue. Last year HMRC identified £12 billion in extra tax due—another point to which the hon. Gentleman referred—seized £57 million in assets and £9 million in cash forfeitures and successfully prosecuted 171 cases. Will the Minister set targets or expectations in HMRC to increase the rate of prosecutions, and perhaps achieve better figures this year? We also legislated to give HMRC more effective powers to ensure that the sanctions it could use would be effective and proportionate. There are to be more onerous reporting restrictions in future for those who are caught evading tax of more than £5,000, and as the amounts evaded get higher the consequences under the current law for those who are discovered doing it get worse, and end up with naming and shaming.

Internationally, and as the hon. Member for Southport also recognised, as president of the G20 we led a global clampdown on tax havens and offshore evasion. That is an important aspect of what we must do if we are to close the tax gap. The hon. Gentleman mentioned in passing the 100 tax information exchange agreements signed by OECD countries in the past year, including those the UK has agreed with Jersey, Guernsey, the Isle of Man and, perhaps more interestingly, Belize. In 2007 the offshore disclosure facility gave the customers of five major banks the opportunity to put their tax affairs right, yielding more than £400 million in tax revenue due. Last year, as part of the Budget process, HMRC served notice on more than 300 other financial institutions to hand over details of those who cheat on their tax by hiding income in offshore accounts.

We also concluded the ground-breaking Liechtenstein disclosure facility, which is expected to bring in nearly £1 billion in lost tax revenue. That agreement goes far beyond the tax information exchange agreements we have been discussing, and could be a model for future agreements. I should be interested to hear what the Minister has to say about that. Under the agreement, UK taxpayers with money in Liechtenstein accounts must demonstrate that their tax affairs are in order, and must have letters to that effect from HMRC; otherwise, their Liechtenstein accounts are closed down. They must then settle with the UK tax authorities. Thanks to progress made by the previous Labour Government, there are fewer places for large amounts of money to be sent if Liechtenstein accounts are closed down, and there are fewer places to hide.

We also persuaded the OECD to develop best practice guidelines on country-by-country reporting, as was also mentioned earlier—an excellent initiative that was put on the agenda by the development community, and in particular Christian Aid, ActionAid and Oxfam. Tax evasion costs developing countries billions of pounds each year in lost revenues, and is a barrier to social and economic development and growth.

Ahead of next week’s emergency Budget, I want to ask the Minister a few questions. Will he recognise the excellent work that the previous Government bequeathed him in this important area, and tell us how he intends to build on it? Will he set a target for the tax gap; and what percentage of the fiscal consolidation that we all expect, given the softening-up process of the past few weeks, does he expect closing that gap to represent in the Budget? Will he maintain the hidden economy advisory group to inform that vital work? It was in the middle of extremely important work—particularly on creating routes back to legality for those who might have been in an illegal position, and to allow them to settle their tax.

Does the Minister agree that, in an international setting, maintaining the momentum to clamp down on tax havens and non-compliant jurisdictions is vital, and does he therefore share my disappointment with the perfunctory mention that the entire agenda received in the recent G20 communiqué? Why did it receive such a perfunctory comment at the G20 Finance Ministers’ meeting? I hope the Minister can reassure us that that does not mean this important area is to be less of a priority.

Does the Minister intend to pursue new disclosure facilities, similar to the ground-breaking example we have managed to negotiate in Liechtenstein; and what progress has been made between the UK and the authorities in Belize, given the recent signing of the tax information exchange agreement? How much lost tax revenue does he expect to raise as a consequence of that agreement? I look forward to his response.

--- Later in debate ---

[Mr Gauke]

I am very grateful to my hon. Friend for that intervention. At this point, given that we will have a Budget next week, I will say that there are a number of issues here. The Government are not hostile to exploring these areas. The coalition agreement is very clear in saying that we want to look at the Liberal Democrat proposals, which included a general anti-avoidance rule. However, my hon. Friend is right to raise some of the complexities and difficulties that may exist and that may need to be overcome. That is a debate that I think the Government, across the board, welcome and want to take forward.

[Dr Pugh]

Again, we have a situation where a proposal is put forward and, as it were, speculative possibilities that could result from that proposal are alluded to. Presumably in any process of investigation, however, one looks at how things actually pan out in the real world in other places. Clearly, if it was the case that, in every regime where a proposal such as this one was introduced, there was this massive clearance backlog, rather like the Independent Parliamentary Standards Authority—heaven forbid—one would never implement such a scheme. In fact, there is no obvious reason why a scheme such as the one that IPSA has should be as complex and as poorly managed as it actually is.

[Mr Gauke]

Again, my hon. Friend makes a fair point. He manages to bring IPSA into the debate—

[Dr Pugh]

Sorry. [Laughter.]

[Mr Gauke]

That tends to be the way of things now, I understand. There is a need for a sensible debate in this area, and today we have heard two excellent contributions, from my hon. Friends the Members for Southport and for Amber Valley, and I for one am very grateful for those contributions.

The hon. Lady raised a number of points and I hope that, in the course of my remarks, I am able to address those points. As far as building on the previous work undertaken by the previous Government and by HMRC, the underlying point that I want to make is that this Government take tax avoidance very seriously. We want to use HMRC’s resources as effectively and as efficiently as possible to ensure that we address this particular matter and so that those who do the right thing and who pay the taxes that are due do not find themselves essentially subsidising those who have not paid their taxes properly. Again, further details will be announced in the Budget.

The hon. Lady raised the specific point about whether one should have a target for the number of prosecutions in this area, and so on. That is perhaps more symptomatic of how the previous Government tended to work, which was on the basis of having targets. However, in the number of meetings that I have had with HMRC officials in the five weeks or so that I have been in my post, I have said that we take tax avoidance seriously. We want to work with HMRC in developing proposals on how we tackle tax avoidance and on how we deploy resources most effectively.

That will continue to be the Government’s position, including on tackling matters such as the hidden economy, which the hon. Lady rightly raised as an important area, and on working on the international stage and engaging with other countries in finding ways to exchange information more effectively. The hon. Lady highlighted the Liechtenstein agreement and that is one agreement that we welcomed in opposition and that we continue to support. I am not in a position to say anything more about particular matters today, for reasons that I am sure she will understand, but we continue to encourage HMRC to engage with other tax authorities to ensure that those people who should be paying tax in this country do pay tax in this country.

The hon. Lady raised the issue of greater disclosure. We support that. She referred to the disclosure of tax avoidance schemes. We think that that was a very successful initiative by HMRC and we wish to continue with that initiative and build on it. We will continue to encourage HMRC to engage with other tax authorities on double taxation treaties and tax information exchange agreements. I have shadowed Ministers in Committees on many statutory instruments on this particular matter and frequently asked how much these agreements will actually raise for the Exchequer, so I know that the answer is that it is not possible to provide the answer. Nevertheless, these agreements apply for Belize as much as for any other jurisdiction and we will continue to encourage HMRC to pursue those agreements and to look to progress as many of them as possible as quickly as possible.

[Mr Gauke]

I would say that there is something there for us to build on, and I think that that probably answers that question as effectively as I can.

The hon. Lady highlighted the issue of country-by-country reporting. Our view is that we certainly want to do everything we can to help developing countries to improve their ability to collect tax. The OECD informal taskforce on tax and development is currently exploring with non-governmental organisations and with industry whether country-by-country reporting would be effective in improving tax transparency. We shall certainly consider this matter very carefully to see what is the most effective way of doing things.

There is also something that the previous Government achieved, which the hon. Lady did not particularly mention but for which I think they deserve some credit, in ensuring that the tax capacity of developing countries can be improved. Again, we are certainly very interested to see what we can do to explore that issue.

Let me turn to one of the key points, which I think was raised by my hon. Friend the Member for Amber Valley, which is the need to do what we can to improve tax law so as to remove uncertainty. That is a very important point. We are committed to reforming the tax system to make it competitive, simpler, greener and fairer, and to ensuring that the quality of tax law is improved. The most effective way to tackle avoidance is, as far as possible, to stop it at source, rather than tackling it once it has happened. Prevention is better than cure.

A simpler tax system that presents fewer boundaries and complexities to be exploited is clearly preferable. As a Government, we are committed to making sure that, when we consider reforms to tax policy, we take into account from the start the impact on avoidance opportunities. We want a tax system that is noted for fairness and simplicity, and addressing tax avoidance risks is a key part of that.

Nevertheless, it is widely acknowledged, including by the Institute for Fiscal Studies, that tax avoidance requires a multifaceted response. There will always be taxpayers who attempt to achieve tax savings that were not intended by Parliament. We intend to be a reforming Government that put in place a better tax framework for business. As we do that, we will take the opportunity to construct a tax framework that reduces the risk of tax avoidance.

Of course, those are the longer-term objectives. In the short term, we will need to introduce specific targeted measures when an avoidance risk is identified. We will take that kind of action when it is justified, but our aim over time is, as far as possible, to move away from the need for short-term measures.

HMRC has published an anti-avoidance strategy that recognises that a range of responses is required. The strategy has three key elements: first, prevention; secondly, detection, and finally counteraction. Prevention focuses on developing robust law. HMRC clearly has a key role in recommending to Ministers changes to strengthen the legislative framework to defeat attempts at tax avoidance.

Another tool in preventing avoidance is deterrence. HMRC publicises details of avoidance schemes that it considers ineffective, to put taxpayers on notice that it will challenge their use of those schemes. For large businesses and the wealthiest individuals, HMRC uses real-time dialogue to obtain early information about transactions under consideration and influence behaviour. To be fair, progress has been made in recent years, and we welcome that. The regime for the disclosure of tax avoidance schemes, in particular, has proved invaluable to obtaining real-time intelligence on avoidance activity, as I acknowledged earlier.

Where HMRC detects avoidance, counteraction involves thorough and expert investigation and, where necessary, litigation. We believe that that range of responses strikes the right balance between providing certainty to taxpayers in their tax affairs and protecting the Exchequer against unacceptable threats to tax revenues. It also maintains flexibility so that the Government can respond quickly and in a targeted way where necessary. We also want to consider longer-term solutions to the problems of tax avoidance, and I hope that I will have all parties’ support as we do so.

[Dr Pugh]

The Minister has mapped out a strategy that we can all understand and appreciate. However, it would be helpful to know whether he has assessed the personnel requirements to fulfil that strategy. Are the staff currently in place in the Treasury, or will he need to acquire more? I ask because we are, obviously, in a time of head count reduction, and we do not want to remove the heads that are most useful in collecting tax revenues.

[Mr Gauke]

I am grateful for that intervention. My hon. Friend raises a perfectly fair point. Because of the crisis in the public finances, all parts of Government face great pressure to find savings. As we prepare for the spending review in the autumn, I have said to HMRC that I want it to focus resources on reducing the tax gap and achieving yield. I hope that during the months ahead, we can develop a strategy to ensure that HMRC has the resources that it needs in the right places to do so. Guaranteeing a certain yield or making estimates about a particular area of expenditure or the expansion of staff in a certain Department is not easy.

The hon. Lady acknowledged that there will always be a tax gap. To respond to her remarks, one can go only so far in making firm predictions about the tax gap reduction, as we must be sufficiently confident that any predictions will withstand the scrutiny of the Office for Budget Responsibility. However, that is not to say that I as a Minister am not keen to see what we can do to reduce the tax gap.

My hon. Friend mentioned the £120 billion estimate, although he did not necessarily say that he thought it was right. It is mentioned frequently among hon. Members and in the media. That figure was produced by the Tax Justice Network, or Tax Research LLP, which is essentially the same organisation. It is a striking figure, and is often repeated. It is very different from the £40 billion estimated by HMRC. The £120 billion figure has clearly focused attention on the matter, and that is no bad thing, but scepticism about it is widespread; indeed, I expressed some scepticism myself from the Opposition Benches a year or so ago. Given the disparity between the £120 billion and HMRC’s numbers, I have asked officials to review it.

It must be accepted that in preparing estimates, organisations external to Government have access to much less data than HMRC. The types of methodology available to them are therefore restricted. It is reasonable to assume that HMRC is clearly in a better position to make an assessment, but there is no reason why outside bodies should not contribute to the debate. However, having considered the methodology used to produce the figure of £120 billion, I must tell the House that even a brief analysis reveals that it is deeply and systematically flawed.

For example, Tax Research LLP estimates total revenue lost due to tax evasion at £70 billion. That figure is obtained by applying the percentage tax gap from VAT to direct taxes. There are two main problems with that. First, different tax regimes have different tax gaps. According to independent research by the OECD, for example, the operational experience shows that tax regimes such as pay-as-you-earn that withhold tax at source have far smaller tax gaps than other types. To apply the VAT gap percentage to taxes collected by PAYE or otherwise at source greatly overstates the tax gap, because the VAT tax gap is considerably higher.

Secondly, an element of double counting is involved, although, to be fair, that might not be apparent from the numbers used by Tax Research. The VAT gap already includes amounts due to tax avoidance and tax debt. Applying that percentage to direct taxes and then adding additional amounts for both avoidance and tax debt, as does Tax Research, results in the double counting of losses from the avoidance of direct taxes and non-payment.

The Tax Research estimate of tax debt is £28 billion. That is a snapshot figure of all tax owed to HMRC on 31 March 2009, which does not represent the actual losses to the Exchequer from non-payment. Almost all tax owed to HMRC is eventually paid, sometimes within days of becoming due. A proportion of debts outstanding are in staged repayment plans, such as those covered by the business payment support service. Only the tax debt written off as uncollectable by HMRC is an actual loss to the Exchequer from debt. That is therefore the amount that HMRC uses in its estimate of the tax gap, which in the 2007-08 tax gap figures was not £28 billion but £3 billion. Of course, we must take steps to reduce that figure further, and I am keen to encourage measures to do so, but we should get the number right.

The final and most significant point concerns tax loss due to tax avoidance, which Tax Research estimates at £25 billion. That estimate includes the use of legitimate reliefs promoted by the Government to encourage certain activities, such as capital allowances to encourage investment and research and development tax credits to encourage innovation. Tax avoidance is generally regarded as the use of legal structures and allowances to reduce tax bills in manners not intended by Parliament when enacting the legislation. It is simply nonsense to categorise as tax avoidance the use of allowances for purposes intended by Parliament.

If I have been unfair in setting out those points, I am sure that Tax Research will correct me, but that appears to be the methodology used. Furthermore, the Tax Research estimate does not provide HMRC with any credit for the significant amount of tax that it recovers by challenging avoidance schemes. The figure of £25 billion therefore seems somewhat wide of the mark.

I thank my hon. Friend for this debate. This Government take tax avoidance seriously. We must take every possible step to minimise tax avoidance. We cannot afford to let it undermine our efforts to reduce the deficit, and it is not fair that by deliberately creating schemes that avoid tax, some people pay less while the vast majority of the hard-working public pay their fair share. Action against tax avoidance will be a priority, alongside improving the tax law-making process, introducing robust legislation and targeting HMRC counteraction and investigation.

Office for Budget Responsibility

John Pugh Excerpts

Monday 14th June 2010 Commons Chamber

[Dr John Pugh (Southport) (LD)]

May I welcome you to your role, Mr Deputy Speaker?

According to the House of Commons Library, the Treasury has, in the past 10 years, been at least as good at accurately forecasting growth as independent forecasters. The background work on the new projections has actually been done by a secretariat provided by the Treasury, and according to Sir Alan, the changes are

“within the normal range of uncertainty”.

Therefore, in all honesty, ought we to regard the new independent forecast as a simple downgrade of Treasury forecasts, and avoid unnecessary point scoring on what is a matter for the whole nation?

[Mr Osborne]

I am always against unnecessary point scoring. I say this to my hon. Friend: I think the new process is a big departure in how Budgets are put together. It is worth reflecting for a moment on what I did in this statement. I have read out what would normally be the first part of the Budget. Everyone now knows the forecasts and the assumptions behind them. He says that the forecasts were produced with the help of Treasury people, but Sir Alan Budd is an enormously respected independent person, and I do not think his independence can be questioned. We now have a set of accurate national accounts. Indeed, when the OBR is on a statutory footing, I want it to do more work on the true state of the national accounts, with regard to private finance initiative liabilities and the like. The big difference is that I must now fit the Budget to the figures, rather than fit the figures to the Budget.

Economic Affairs and Work and Pensions

John Pugh Excerpts

Tuesday 8th June 2010 Commons Chamber

[Mr Osborne]

We chose £25,000 because, quite frankly, the US model suggested that that was an appropriate sum. I am very willing to consider moving to a lower level of disclosure in central Government, once we get the system up and running and working, but I did not want to make the sum so small that it stopped the thing working in the first place. Local councils have much smaller budgets, of course, relative to central Government, and that is why we chose a lower threshold. However, the £25,000 threshold is perhaps just the first step. The big IT challenge is to make the system work, but in the United States they have done so, and they call it “Googling your tax dollars”. Barack Obama, when he was a senator, helped to sponsor the Bill that introduced it, and we are absolutely committed to introducing such a measure here in the United Kingdom.

Secondly, the spending review will challenge Departments, local government and others to consider fundamental changes to the way they provide public services. As part of that process, every part of government and every spending programme will have to answer a series of probing questions. Is the activity essential to meet Government priorities? Do the Government need to fund that activity? Does the activity provide substantial economic value? Can the activity be targeted on those most in need? How can the activity be provided at a lower cost? How can the activity be provided more effectively? Can the activity be provided by a non-state provider or by citizens, wholly or in partnership? Can non-state providers be paid to carry out the activity according to the results that they achieve? And can local bodies, as opposed to central Government, provide the activity? The answers to those questions will inform a fundamental reassessment of the way in which government works.

[Dr John Pugh (Southport) (LD)]

Where will the Public Accounts Committee and, indeed, other Select Committees play a part in the process? How will they play their part?

[Mr Osborne]

The Public Accounts Committee will, I hope, be very involved in the process, and I want to involve the expertise not only of its current membership, but of my hon. Friend the Member for Gainsborough (Mr Leigh), who chaired the Committee with such distinction during the previous Parliament. I served on the Public Accounts Committee when I first entered the House, and it is perhaps our most effective parliamentary tool for dealing with some of the big issues of public expenditure and value for money. One has only to read its reports on, for example, the big Ministry of Defence procurement contracts over recent years to realise that it has identified a very serious problem and, with the National Audit Office, brings a considerable expertise to solving those problems.