Tax: Avoidance and Evasion

Lord Borwick Excerpts

Tuesday 13th September 2016 Lords Chamber

[Lord Borwick (Con)]

My Lords, I thank my noble friend for calling this important debate. His timing is, as always, impeccable. That we should debate this subject when we have just passed the Finance Bill is a remarkable coincidence.

I thought I would start to research for this debate by reading the Finance Bill—I am known as an unhinged optimist on these Benches. Here it is—all 644 pages of it, and unnumbered pages of notes. I must confess that I did not get the whole way through it. To me, that is part of a bigger and extremely serious problem—our Houses pass new, complicated legislation every single year in the Finance Bill, yet we do not fully understand what is in it, let alone what impact it will have on millions of families and businesses. That is because it is too difficult to fully understand, and it gets more and more complex each year. This is despite every Chancellor in memory pledging to make taxes simpler and fairer.

The length of the Finance Acts from 1965 to 1990 rarely topped 200 pages; in fact, they only twice surpassed this benchmark. Since then, the length of the Finance Act has soared. The 1990s saw it touch 500 pages on a few occasions, and in the 2000s it passed the 600-page mark twice. However, it has been well over 600 pages every single year since 2012, except for the election year of 2015. This recent and exponential growth in the length of the Finance Act has occurred even after the creation of the Office of Tax Simplification. This body was set up with good intentions, and I held out a lot of hope for it. No doubt its staff work hard and do wish to simplify taxes. However, it is disappointing that taxes are not being simplified—quite the opposite. Have we simplified taxes as a result of this year’s Finance Bill? The Office of Tax Simplification has published interesting work on aligning national insurance and income tax, for instance, but no real action has been taken on this issue. What we have heard less about from it, and the Government, is on reforming corporation taxes. After all, the subject of this debate is mitigating tax avoidance and eliminating evasion. At present, the popular villains in this debate are corporations. Corporation tax itself was concocted in the 1960s, when, for the large part, things were made in set locations, and sold to somebody specific. You could see where the value was added, the profit generated, so it was that bit easier to apply corporation tax. The world has changed somewhat, with different products being made and assets being less tangible. Therefore, to truly address these issues, I urge the Treasury to ask the Office of Tax Simplification to be bolder, then listen to what it has to say, with an intention to take action.

If I may make a humble suggestion to the Office of Tax Simplification, it would be to review the work done on abolishing corporation tax and replacing it with a tax on distributed profits. This would be a much simpler more effective way of taxing the activity of companies. It has been recommended by several organisations, most recently by the Institute of Economic Affairs. In a report released just last month, its researchers found that of all the ways to reform corporate taxes, a tax on the income distributed to company shareholders is the most desirable. Past work has been done on this by the 2020 Tax Commission, too, in its final report The Single Income Tax. Both reports conclude that this kind of reform would reduce incentives and opportunities for avoidance, and raise revenue in the most pro-growth way.

The last point is essential as we disentangle ourselves from the EU. It is crucial that our economy becomes more liberal and competitive. That can happen if we make corporate taxes simpler and fit for the modern economy. It is this kind of thinking that must now be taken on by civil servants and politicians in both Houses, because, if we want to mitigate avoidance and eliminate evasion, we need simpler, flatter taxes that do not take a tax accountant to understand them. The answer of simpler taxes addresses the two crucial questions of how to improve tax compliance and how to boost economic growth. It seems to be a win-win.

The previous Chancellor said that he was a low-tax Conservative. He even established a commission while in opposition to explore tax simplification and flattening taxes. Perhaps circumstances never allowed him to live out his dream. So now my right honourable friend in the other place, the Chancellor of the Exchequer, has the opportunity to change things for the better. He is a businessman and knows the fundamental waste of money involved in training inspectors to collect complex taxes and in training HMRC to keep up with the latest Budget wheezes. Instead of continuing with structures that drive corporations to order a “double Irish”, he should seek to simplify taxes. He has the chance in the next Autumn Statement to be radical, and I trust that he will be.