Corporate Tax Avoidance

Karl McCartney Excerpts

Monday 7th January 2013 Commons Chamber

[Karl MᶜCartney (Lincoln) (Con)]

I congratulate the hon. Member for Redcar (Ian Swales) on securing this Back-Bench debate on corporate tax avoidance. It is an important subject that has been dangerously blurred by some of our colleagues. I want to say at the outset that I find myself far more concerned about the way in which Government spend our money than about how they collect it. If spending were controlled, or had been—I give the example of the last Labour Government—the collection problem would be vastly reduced. I believe that my Government have taken such sentiments to heart and we are actively reducing spending to aid our country in difficult economic times.

I certainly think the approach of the Chairman of the Public Accounts Committee, the right hon. Member for Barking (Margaret Hodge), and others who have swallowed her line, misses two simple and quite fundamental points. First, the tax on shareholders is inseparable from company tax and is quite high. While companies are literally separate legal entities from their shareholders, they are in effect tax collection agencies for Governments to tax the profit stream which in effect belongs to their shareholders. That profit stream is not just taxed by the corporation tax payment on which all of this debate is focusing. In reality, the profit stream belongs to the shareholders and it is taxed not once by corporation tax, not twice by corporation tax and income tax, but three times, once as corporation tax, once as income tax on distribution, and finally with capital gains tax, or inheritance tax, on retentions as a proxy for the capital gain.

I have a sound mathematical example in my notes that might well lose some Opposition Members, so let me just outline that on £100 of pre-tax profit, with corporation tax and other taxes taken into account, the Government take £52.91 in tax paid. Some of this amount comes from income that can be deferred, but it is a tax that is ultimately not avoidable, other than perhaps by devices such as the trust of the right hon. Member for Barking for her shares in her family company, which one presumes is morally fine with the Opposition Members who have followed the debate so far and so must be okay. But that near £53 from £100 does not sound very low to me, especially given that the Government scrapped indexation relief on capital gains at a time when they are clearly targeting higher inflation. Perhaps more importantly though, what incentive is such a tax on profits to entrepreneurs? What encouragement do such figures give to those involved in setting up and driving forward young businesses, or those entrepreneurs thinking of taking that big first step into the world of small business and working for themselves?

Secondly, is it wrong for companies to avoid tax? Janan Ganesh in the Financial Times has written well on this particular issue, but I would draw hon. Members’ attention to one of his main and salient points for this debate with which I agree. The Starbucks precedent—and by association, one might say, any future pressure on Google, Amazon, and historically some of the mobile phone companies and indeed perhaps most notoriously the Guardian newspaper group—is a dangerous one. Tax should be a matter of law not moral persuasion. If any Government want Starbucks or any other corporation to pay more tax, let them pass an appropriate piece of legislation. Otherwise tax payment will become a matter of public image and impact, and I imagine that very little tax will be paid by the maker of the polystyrene cups, which we may never have heard of. Do we really want to travel down “The X Factor” road of choosing something, indeed policy setting in this country, making important decisions based on fickle public opinion on the hoof?

[Mr Bacon]

While my hon. Friend is right that it should be a matter for law, not for moral persuasion, PricewaterhouseCoopers’ request of the Government, in the consultation that took place last year, that they should do more to clarify what constitutes unacceptable tax avoidance versus what constitutes acceptable tax planning, places a burden on the Government to be clearer about their own intentions.

[Karl MᶜCartney]

My hon. Friend will be pleased to know that I agree with him. I will mention PricewaterhouseCoopers shortly.

The objective of business, any business, is not ostensibly to do good or to pursue corporate social responsibility; it is to do business and make money for the owners and/or shareholders. Directors of all small, medium, large and multinational companies have a fiduciary responsibility to maximise gains for that company’s owners, including minimising the tax paid. Any diversion of company management from that objective is wrong as a matter of law and dangerous as we move forward in the 21st century.

John Christensen of the campaign group Tax Justice Network made a true claim when he said that the figures highlight that tax avoidance by large businesses has become a “much bigger issue” over the past 10 years because of the “enhanced relationship” policy put in place. That policy was put in place by the then Labour Prime Minister, Tony Blair, and his then Chancellor and ultimately successor as Labour Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown).

The problem is perhaps exacerbated in that we have a very complicated tax system. The previous Labour Government did nothing to uncomplicate matters. In fact, they set up a whole new industry making it more complex. What we need as a country, and for us to remain an economic powerhouse on the world stage, is much greater tax simplicity and lower tax rates.

I am pleased that the Government are consulting on a general anti-abuse rule, the GAAR, targeted at artificial and abusive tax avoidance schemes, with a view to bringing forward legislation later this year. Echoing my earlier statement, Mary Monfries, head of tax policy and regulation at PricewaterhouseCoopers, has also been quoted in the media saying with regard to our tax system that “simplicity is key”. She described complexity as a

“key problem with the current tax model”,

adding that the GAAR should

“help to act as a disincentive”

against

“abusive, extreme tax avoidance arrangements”.

But I also believe that some of my colleagues are being disingenuous with the great British public in that the vast majority of multinationals mentioned are not breaking any laws and, as the Government make the law, it is their own and our fault if companies use the rules in place to minimise their tax. Our tax legislation is huge and very complex, so any shortcomings are down to Government failure to create and implement the right tax framework.

The multinational aspects of tax collection and avoidance can be solved only by international bodies working together. That will not be easy for any of my ministerial colleagues to achieve I am sure, but as for any avoidance by UK companies, we do not perhaps need this debate now, as the GAAR legislation will, we trust, come into force during the next tax year. Surely that is the mechanism to stop so-called unacceptable tax avoidance that the hon. Member for Redcar seeks to debate this evening. Many private sector individuals in business may view this debate and other pronouncements by some hon. Members as politicians just diverting public opinion away from their own shortcomings by encouraging media interest in the tax avoidance issue. As politicians we organise the rules and therefore as long as what the companies do is legal, morality surely does not come into it much. Google, The Guardian, Amazon and others are perhaps insulated in that they have little direct competition in the services they provide, so no incentive to make voluntary tax payments as they have avoided such sizeable payments for a number of years. But Starbucks is now paying reportedly quite sizeable sums of voluntary tax, not for moral reasons but to protect its brand and customer loyalty—that is, to protect its profits.

[Bob Stewart]

Surely if a company is making a voluntary contribution of £10 million a year, it must be making very much more than that, and be doing that only because it hopes to get off the hook, and that is something that we must legislate on.

[Karl MᶜCartney]

My hon. Friend makes a good point. I agree that such a company is probably making a lot more in profit than £10 million for the next two years.

A potential solution is perhaps not to hound companies that legitimately use the tax laws as they are, but to make the tax system such that there is no benefit in tax avoidance—that is, reduce corporation tax rates and the complexity of the system, whilst at the same time cracking down hard on those who are abusing the tax system. This, for those in the Chamber who are technically minded, is known as the old carrot and stick approach.

We want multinationals to headquarter in the UK. Frankly, I cannot complain if they organise themselves to pay the lowest legitimate tax that they can. What I am more interested in is that they bring their jobs and spending power to our shores. It fills our restaurants, houses and shops. It provides secondary support service employment across a plethora of sectors in Great Britain.

Let us not be negative this evening, because that will put businesses off coming here, which is the exact opposite of what we want. We want the whole world to know that Great Britain is a superb place to start up, locate or relocate a business, and with the Conservatives in government we continue to be Great Britain. We can all help to send out the message that we welcome international businesses—even Starbucks, Amazon, PayPal and Google—to our shores and would like them to bring more of their business to the UK. We are a country that is determined to drive down tax rates, as demonstrated by our recent corporation tax reductions, undoubtedly a feather in the jaunty cap of the Chancellor and the Treasury team. We are a great place to do business.

It is telling that employment tax brings in 5.4 times more revenue than corporate tax—£259 billion versus £48 billion—so let us focus on those things that create more sustainable jobs, the positives. One of the Government’s main roles is to make the UK the best country in the world to do business in. Everything else will be easier if we can achieve a massive influx of foreign companies moving their bases and thus employing more people here.

I believe that populist politics masquerading as morality is a Lib Dem trade mark that would inevitably lead us into a vicious spiral, one that is downward and certainly not a virtuous circle. We know that the Lib Dems are desperate to be popular. They often say anything on the doorstep, often expressing views that are diametrically opposed to those of their neighbours in order to garner votes, as anyone who has canvassed after them will know. That cheapness was amply demonstrated by their head of communications—presumably the paper clips organiser—who last month supposedly leaked instructions to Lib Dem Members of this House to monster the Conservatives, people like me and my fellow cuddly Conservative Back Benchers, in their vicious pre-Christmas briefing.

The Liberal Democrats might hanker after a yellow paradise of sand and yellow sun, but it is a very small yellow island they currently inhabit, surrounded by very deep and clear blue water. I think they know that it is likely to become a smaller island. They need to mature as members of the coalition Government. They need a dose of reality over the next two and half years. We are not some paradise or utopia—this is the real world.

I am conscious that my time is almost up and so will conclude. Of course all the Conservatives on the Government Benches want our country to have the most competitive corporate tax system of any major world economy. By doing so we will ensure that our country’s economic recovery will be private sector-led, but we expect those corporate taxes to be paid, regardless of where any larger international firms that do business here might be based or have business operations. A need for fairness and reasonableness from both sides seems to be most apt. In that respect, I am particularly pleased that the Chancellor recently announced extra investment in the part of the Inland Revenue that tackles tax avoidance by multinational companies.

--- Later in debate ---

[Dan Rogerson (North Cornwall) (LD)]

I pay tribute to my hon. Friend the Member for Redcar (Ian Swales) for securing the debate, and for the work that he and his colleagues on the Public Accounts Committee do on our behalf to delve a bit deeper into these issues. It is also a pleasure to follow the hon. Member for Amber Valley (Nigel Mills), who made a lot of sensible points.

The hon. Member for Lincoln (Karl MᶜCartney) was a little strident earlier, when he sought to have some political fun within the coalition. I am sure that hon. Members from Northamptonshire would have been proud of him. I thought he was being rather ideological. The Conservatives used to be the party of pragmatism, but his message was that there should be cuts at all costs, and that implementing cuts was the virtuous thing to do. I disagree with that. I believe that if there is something good to be done and the Government have the money to do it, they should spend that money on behalf of the people to try to achieve that goal. I do not think that there is anything inherently good in cuts, but the Government are trying to cut the deficit that we inherited, because it has burdened the country and future generations with huge interest payments and threatened to destabilise the economy. It is therefore the right thing to do.

Pretty nearly all the parties in the House agree that the deficit needs to be reduced over a certain period, but if we are asking people to contribute to that through cuts or through paying tax elsewhere, they need to know that everyone is making a fair contribution. That is understandable. Even though UK Uncut sometimes takes an extreme position and oversells the contribution that could be made to the economy by dealing with this problem more equitably, there is a core of truth in what it says, which is that some organisations are using expensive advice to ensure that they get away with not paying the same contributions as everyone else. As the hon. Member for Hayes and Harlington (John McDonnell) said, those who pay their taxes on a more straightforward basis want to know that everyone else is making a fair contribution.

We represent a diverse economy here in the UK. I represent a small business economy in which it is incredibly difficult for retailers to survive. The hon. Member for Cities of London and Westminster (Mark Field) talked about not wanting our high streets to be homogenous, but we need to be sure that there will be some sort of high street left. I am sure that most of us will have done some online shopping, because it is convenient and helpful, but it cannot be right for small, local businesses to compete under a completely different set of rules from those used by multinationals such as Amazon. We have heard that this is not just about corporation tax, and that the problem exists in relation to other taxes as well. We need to look at the matter across the piece. My hon. Friend the Member for Redcar made that point very well when he framed the debate.

We know why companies avoid paying tax. It is rational behaviour, and we cannot knock them for doing it. An industry has grown up around it because it is legal, rational behaviour. Governments of all political colours have sought to exploit this and to push behaviour in a certain direction. An example is waste policy and the effect of the landfill tax regime, which was used to push behaviour in a particular way. We all bear some responsibility for how we set the terms of the tax regime, but we can also set the culture. The hon. Member for Bognor Regis and Littlehampton (Mr Gibb) mentioned boardroom culture earlier, but this is about the culture of society as a whole. The fact that we are having this debate today is a positive thing. This is not about populism; it is a genuine response to concerns expressed by people who want us to articulate their views.

The coalition has acted to make corporation tax more reasonable, but that will work only if people actually pay it. The trade-off involves ensuring that we have a tighter regime. I agree that we should not move towards a bargaining system in which the final arbiter is public opinion. That is certainly not the way to run a tax system. I praise my right hon. Friend the Chief Secretary to the Treasury and his colleagues for investing in the areas of Her Majesty’s Revenue and Customs that carry out such work, because that is where the battle must be fought and won. Yes, the solution involves the legal framework, but it is also about HMRC having the resources to implement the measures.

It is no accident that we are in this situation. Previous Governments have preferred not to discuss the matter, because big business has a seat at the top table and has been able to lobby effectively. It has made the case that everything it does is good and everything it touches turns to gold, and that it should therefore be left alone to get on with it. I think the culture has changed at this time of austerity in favour of delving a little deeper and saying, “No, that is not the case. Where you do good, we will be partners in rewarding it and ensuring that our economy works, but where you are trying to pull one over on us, we will invest in the resources through HMRC to get the job done.”

The hon. Member for Hayes and Harlington was absolutely right to highlight the closure of tax offices under the last Government. I lost the battle to save my local office in North Cornwall, even though our compliance officers had a great deal of skill at doing such work. If it had been argued that their work could be done more efficiently so that the bigger corporations could be looked at, we could have retrained those people and they could still have been based out in the regions—as Amazon showed, it does not really matter where people are based; the trade will keep coming if things are managed effectively. It is a great shame that we lost that expertise, but that is now ancient history, as we are where we are.

It is clear that the sums involved are highly significant and that previous Governments have been too timid in tackling the problem. We are now having an open and public debate—both here tonight and out in the country—which I welcome. I look to the Minister to set out his determination to tackle the problem, invest the resources in HMRC and ensure that we tighten up the regulations where possible.

[Karl MᶜCartney]

rose—

[Dan Rogerson]

I am afraid that I cannot give way.

Significantly and finally, we must work with our international partners to set up an international framework for a culture in which companies pay for the profit they make and work effectively and in harmony with Government to achieve prosperity in the way that most people would expect.