Taxation: Avoidance

Lord Eatwell Excerpts

Thursday 26th January 2012 Lords Chamber

[Lord Eatwell]

My Lords, the issues raised by the noble Lords, Lord Dykes and Lord Phillips, have recently been the subject of two important reports. First, the report of the Public Accounts Committee into tax disputes, published on 20 December last year, revealed what can only be described as a scandal. It demonstrated a quite extraordinarily cosy relationship between HMRC and major companies, particularly international companies, in the determination of tax liabilities. It also demonstrated a failure to follow proper procedures in the resolution of tax disputes, and a consistent bias towards the favourable treatment of large companies compared with small companies and the ordinary taxpayer.

Everyone in this country who is settling their tax assessment this month, knowing that they will incur a fine and interest charges if they do not pay up on 31 January on the dot, will be astonished to discover that large companies may be given 10 years to settle their tax obligations. They will also be furious that up to £20 million in interest has been lost because of HMRC errors, while, for reasons that are still not clear, the department decided it would not reopen negotiations with the relevant company—a decision that it appears was taken without legal advice. The PAC report says that,

“the Department did not even take the most basic step of making its own note of meetings with the company concerned, relying instead on the record kept by the company”.

To compound this record of complacency and connivance, the department failed to be open with the PAC investigation and was,

“less than clear and consistent in the evidence”,

given to the PAC and to the Treasury Select Committee in another place.

It is important to remember that HMRC is, quite rightly, a non-ministerial department, thereby removing Ministers from any suspicion of involvement in individual taxpayers’ affairs, but this scandal goes beyond matters that can be remedied at arm's length by more effective management and the appointment of extra Revenue commissioners. It strikes at the very heart of the fair and impartial management of the tax system. It reveals systemic failures that have resulted in unfair and partial treatment verging on favouritism, and it demands the exercise of ministerial responsibility, for it undermines public confidence in the probity of government and the integrity of the Revenue.

If the failings exposed by the PAC were an isolated set of events—an aberration—the measures taken so far by HMRC to put its house in order just might be regarded as sufficient. Regrettably, this is not the case. As we have heard from the noble Lords opposite, it is a widely held view that tax avoidance is rife in this country, and that wealthy individuals and large companies that can afford sophisticated tax advisers can avoid attacks by abusive means.

The term “abusive means” has been defined by Mr Graham Aaronson QC as,

“contrived and artificial schemes which are widely regarded as an intolerable attack on the integrity of the UK’s tax regime”.

This quotation is taken from a report entitled A Study to Consider whether a General Anti-Avoidance Rule should be Introduced into the UK Tax System, published in November last year, which was authored by Mr Aaronson and commissioned, to give them due credit, by Her Majesty’s Government. I applaud the initiative. Mr Aaronson concludes that a general anti-avoidance rule should be introduced, and proposes practical means by which this might be done. In his report, he argues that certainty in the tax system makes an important positive contribution to the economic and business environment. The presence of tax loopholes, and their exploitation by the unscrupulous, undermines that certainty. Moreover, competitive pressure forces firms to adopt more and more elaborate tax avoidance measures.

Competitive advantage can be gained by companies that go down the tax-abusive route, and hence firms that attempt to take a high moral stand, as the noble Lord, Lord Phillips, points out, are placed at a competitive disadvantage and may be eliminated from the marketplace. All must join the race to the bottom. Tax avoidance by businesses therefore undermines certainty, forces firms to adopt the tax-avoidance policies of the lowest common denominator, undermines any perception of fairness in the tax system and imposes a dead-weight loss on the economy by spawning a socially useless tax avoidance industry. It is damaging not just to the Revenue, but to the performance of the economy as a whole.

The source of this pernicious burden on our economy, the foundation of the tax avoidance industry, is the complexity of the tax system. It is complexity that by its very nature creates the exceptions and loopholes that can be legally exploited by the enthusiastic, well resourced tax avoider. If we are to tackle the disease rather than the symptoms, complexity should be the target. An important reason for the complexity of the tax system is that Governments attempt to manipulate behaviour via tax allowances and reliefs to incentivise people to behave in a particular way—to invest in new businesses or to undertake more R&D, or to recycle waste, or whatever. What is remarkable is that years of academic study have demonstrated that very few of these incentives actually work. Tax allowances to stimulate investment, for example, do not tend to result in more investment. Instead, they are a subsidy to investment that would have taken place anyway.

Another important source of complexity is a government belief that it is appropriate to differentiate between revenues from different sources, so that benefit deemed to derive from capital gains, or, more scandalously, from carried interest, is taxed differently from benefit derived from income. The treatment of interest on debt as a cost, and hence being tax deductible, is a major factor distorting the funding of business in this country. All this is a rich source of tax avoidance. Then of course there are the tax benefits handed out to specific social groups with the most powerful lobbying voices—the non-doms come immediately to mind.

Whether it derives from good intentions, perceived policy objectives, or mere cowardice and/or patronage in the face of the powerful and well funded, complexity is the fundamental source of avoidance. Without tackling complexity, the avoidance industry will never be significantly reduced. I therefore applaud the establishment by the Government of the Office of Tax Simplification and look forward, in hope rather than expectation, to its efforts bearing fruit. In the mean time, while we wait for the simplified promised land, Mr Aaronson concludes that all current approaches to curb tax avoidance,

“are not capable of dealing with some of the most egregious tax avoidance schemes”.

He might have added, if he had had the PAC report before him, that all attempts to limit tax avoidance are undermined if there exists the cosy relationship between the HMRC and big business identified in the PAC report.

With the PAC report and Mr Aaronson's report before him, the Minister must address a number of questions. First, when did Ministers first know of the matters identified in the PAC report? Were they fully informed, or have they made further investigations? What have their investigations, if any, revealed about further abuse and, if so, what sort of abuses? What action do the Government intend to take to correct the systemic deficiencies in the HMRC? Is it not time for a full investigation into the practices and substance of the taxation of large companies, in order to re-establish public confidence in the probity of government and of the Revenue? Secondly, do the Government accept the conclusions of Mr Aaronson's report? When do they intend to introduce a general anti-avoidance rule, with the institutional support outlined by Mr Aaronson? Thirdly, when can we expect a report from the Office of Tax Simplification that deals specifically with business taxation and tax avoidance?

Confidence in the tax system is, as noble Lords opposite have said, fundamental to our democracy. If confidence in the fairness and probity of the state is lost, effective revenue raising is undermined—colourful examples, perhaps from the Mediterranean, can be imagined. The issues identified in the Public Accounts Committee report and in Mr Aaronson’s report demand an urgent response. I hope we will hear from the Minister today the concrete steps that the Government intend to take to curb abusive behaviour towards the tax system. If practical steps are not forthcoming, the Government will have some explaining to do to this House and to the British people.

[Lord Phillips of Sudbury]

The noble Lord raised some extremely pertinent points about HMRC, but does he agree that the Government reducing the staffing at HMRC over the next few years by 12,000 is scarcely likely to increase the effectiveness of tax collection?

[Lord Eatwell]

I think I shall say yes.

--- Later in debate ---

[Lord Sassoon]

My Lords, as I am sure my noble friend would recognise, all government departments are having to tighten their belts; otherwise, the deficit is not going to be tackled. I hope to reassure him by explaining where HMRC is focusing its efforts. The recruitment of over 1,200 staff in new posts to tackle non-compliance is significantly upping HMRC’s efforts in this area and will bring in significant additional revenue in each tax year, so the answer to his question is yes.

The customer relationship model that HMRC uses has considerably improved its ability to identify risk and to handle these issues. The report by the National Audit Office on HMRC’s 2010-11 accounts, which underlay one of the reports referred to by the noble Lord, Lord Eatwell, noted that HMRC’s high-risk corporate programme has brought in a yield of over £9 billion and that it contributed to reduced avoidance activity by major companies. The investment is there. On another point made by my noble friend Lord Dykes, we do not forget the cash economy in those efforts.

I am grateful to the noble Lord, Lord Eatwell, for drawing attention to the question of the general anti-avoidance rule, the GAAR. We are exploring that option to see whether such a rule could help to deter and counter tax avoidance in a fair way. Attention has been drawn to the work of Graham Aaronson and his colleagues and their report. We received the report in November last year. We will be considering it and are actively discussing its implications with businesses and tax professionals. We will respond to the report at the Budget and set out our plans if appropriate. We have said clearly that we would not introduce a GAAR without a further formal round of public consultation, so that is very much work in progress.

I am also grateful to the noble Lord, Lord Eatwell, for applauding the introduction and the work of the Office of Tax Simplification. The complexity of the tax system has been much remarked on, and I can echo many of the remarks made by noble Lords on that. The OTS has started its work and published recommendations on tax relief, avoidance legislation and IR35, as well as an interim report on small business tax. More is coming down the pipeline and this ongoing work will be an important part of what we all want to see: a simpler tax system that is easier for individuals to comply with. I may disagree with the emphasis of my noble friend Lord Phillips of Sudbury on some things, but I certainly agree that this is fundamentally about individuals doing what they are required by the law to do.

Another critical component of preventing avoidance is the way in which HMRC engages with the largest taxpayers proactively to identify and tackle avoidance. We do not have the time to go into the detail of this but, in response to some of the somewhat one-sided interpretation and selective quoting of the recent Public Accounts Committee report, I draw the attention of the House to HMRC’s detailed rebuttal on many factual points in the conclusion of that report. In brief, to be clear, this effort with large businesses is not in any way HMRC being soft on large business or on those with complex tax affairs. HMRC treats all taxpayers even-handedly and does not allow them to settle for anything less than the full amount due. It is through its engaged and intelligent approach to tax avoidance that the additional revenue to which I have already referred is coming in.

[Lord Eatwell]

The noble Lord referred to erroneous statements in the PAC report. Did they include the observation that senior HMRC officials had had lunch and dinner with the companies that then had a reduced tax burden?

[Lord Sassoon]

My Lords, the substance of the issues to which HMRC takes exception is to do with the size of unresolved tax bills and some of the details of cases in which errors were found that HMRC disputes. That is the substance, rather than the question of who met whom with what refreshments laid on. We should stick to the substance.

Other noble Lords have been scrupulous in keeping to their time. I am conscious that, with the interventions, I risk going over my time, so I will press on. I want to answer just one more question, raised by my noble friend Lord Dykes, about the tax treatment of overseas companies. I just confirm that we are reforming the controlled foreign company rules very much to protect against the artificial diversion of profits to low-tax jurisdictions, just as our general reforms are being made to make the UK a good place for global corporates to have their headquarters. Having said that this is a matter for individuals, I will not comment on the affairs of any individuals.

In conclusion, I have very briefly explained our strategy for tackling tax avoidance to ensure that everyone pays their fair share. This is an important topic and I am glad that we have had this debate. The Government are taking real, decisive, concrete action to close the tax gap. We are making good progress, but there is much more to do. We will ensure that every sector of society pulls in the same direction to tackle the deficit and the woeful economic legacy left to us by our predecessors.