Corporate Tax Avoidance

Debate between Karl McCartney and Richard Bacon

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.