Tax: Avoidance and Evasion

Lord Leigh of Hurley Excerpts

Tuesday 13th September 2016 Lords Chamber

Asked by

[Lord Leigh of Hurley]

To ask Her Majesty’s Government what steps they are taking to mitigate tax avoidance and eliminate tax evasion in the United Kingdom.

[Lord Leigh of Hurley (Con)]

My Lords, I am grateful to have the opportunity to debate this topic here. As is customary, I declare my interests. First, more than 30 years ago, to my amazement and that of many others, I qualified as an associate of the Chartered Institute of Taxation, and remain a somewhat passive member. Secondly, I am sure I pay my fair share of tax. I believe that all in your Lordships’ House also pay their fair share, as I am told that, before being elevated to the peerage, HMRC gives a nod to the powers that be that we are up to date in our tax affairs. Personally, I am delighted that this task is undertaken by HMRC, and it sets the tone for this debate, which is predicated on my belief that all of us in this House are keen to see greater fairness in the tax system.

One reason for my interest in this area stems from my late father showing me his personal tax computations in the early 1970s which, thanks to one relatively modest property transaction, had him paying tax at some 92%. It really shocked me. In 1976, when the Government were forced to seek a bailout—of $17 billion in today’s money—from the IMF, corporation tax stood at 52%, or more than half of a company’s profits.

Two things have happened since then. First, capital has become infinitely more mobile. Companies and people based here do not have to stay here. Secondly, the idea that the Government are not always the best actor when it comes to spending money has become mainstream. Business is recognised as a more effective driver of sustainable economic growth, and there is general global recognition that lower tax is essential for that.

I know that not all in this House share my view on taxation, which is that it needs to be simple, fair and as low as possible, but those of us who do have a duty to make the regime more effective. This means that when rates are set low, they must be paid in full, and when laws are set to ensure compliance, they must be observed in spirit as well as letter. Failure to achieve this leaves business and the whole free-market capitalist system at threat from an increasingly cynical public who have genuine cause for concern. In a way that few anticipated, mobile capital has led not only to tax competition between nations but to widespread avoidance and abuse by businesses operating in multiple jurisdictions. Those of us who want to defend low taxes must address ourselves to this.

In 2015-16, corporation tax brought in £44.1 billion, the fourth largest contributor to the Exchequer. This was after the Government had reduced the corporation tax rate from 28% in 2010 to 20% in that year. This was to be welcomed, but only if—to use the common vernacular—20% means 20%. Economic activity carried out in the UK must be taxed accordingly.

In a global economy, making tax fit for purpose means sound policy at home and leadership abroad. From this Government we have seen both, but I would like to highlight some areas where we have been successful and, in turn, where more work is required. At home we have seen much progress. For example, private equity has a system of remuneration from which the rest of the financial services sector could learn much. However, there was no material reason why carried interest was taxed as capital and not as income, and this has now been rectified. Similarly, on interest deductibility, it is a sound principle that companies can deduct interest payments from their tax bill as a business expense, but not when it leads to abusive structures. Interest deductions are now capped at 30%—a middle way that should allow legitimate deductions to continue without unduly increasing the cost of capital. The days of a private equity executive paying less tax than their cleaner are hopefully behind us.

The previous Parliament also saw the introduction of the general anti-avoidance rule, or GAAR. Before its introduction, the so-called targeted approach was simply encouraging tax advisers to concoct ever more nefarious schemes that flagrantly violated the intended spirit of our tax legislation, while hewing just close enough to its letter to be technically compliant. The GAAR means that, irrespective of the letter of the law, companies should concentrate their innovative energy on their business rather than their tax planning. I understand that HMRC is considering applying a GAAR more generally. This too is to be welcomed.

When I started my somewhat short-lived career as a tax adviser, the idea of any immorality in avoiding tax would have been risible. However, these days responsible corporations have to consider seriously how far they should go. One very senior executive of a global bank told me that they look at their tax liability and do not let it fall below around 29%, so that they are in step with their peers. He explained that they felt they could easily concoct schemes to reduce the rate but had decided that this was not in their long-term interests as a respected institution. Regretfully, others clearly had no such concerns, and some international conglomerates have essentially ducked and dived their way around international tax treaties and devised complex transfer pricing agreements to negate any tax liability in certain jurisdictions.

It is now clear that the general public will not tolerate this. I was amazed, and perhaps a little proud, to see protests in Boots by people objecting to its aggressive tax planning. One solution suggested is a corporate tax based on revenues not profits. It sounds good, but some organisations have very different types of revenue, often computing a meaningless headline number. It has to be remembered that many invest heavily in the UK, knowing full well that they will not make profits for very many years. Should they pay taxes for this when it is clear that they are genuinely not making profits here?

What are the alternatives? Our former Prime Minister used his leadership of the G20 to put global tax avoidance on the diplomatic map. This led directly to the commission of the base erosion and profit shifting—BEPS—work from the OECD, and in October 2015 the endorsement of 15 proposed action points by the G20 Finance Ministers. The focus has been rightly on transfer pricing rules which, as it happens, was the subject of my maiden speech in 2013, so I am pleased to say that it is a subject on which the Government have acted—noting, for example, the profits diversion tax.

However, the G20 process is not binding. It relies on individual countries showing leadership at home to enact real reform. The Finance Bill will update the UK’s own transfer pricing rules to match those agreed at the G20. However, it is clear that more work at the OECD and elsewhere is required to prevent even those updated rules from being abused. Instinctively, I like the Government’s new approach to apply the GAAR where it is clear that a multinational is simply using devices, such as offshore debt instruments, to reduce tax. Where actual tax is paid—I am not talking about the amounts in the accounts, which include things like deferred tax—but cash paid is less than 20% of profit, they should be allowed to consider whether a corporation should be required to pay more.

I hope that it is appreciated how radical this idea really is. This House and the other place have for centuries operated on the principle that taxpayers have certainty and pay only the minimum amount that the law dictates. But as the learned judge Lord Denning said,

“The avoidance of tax may be lawful, but it is not yet a virtue”.

We will need to see more virtuous behaviour if we are to avoid applying rigorous GAAR, which some will argue is retrospective tax, the idea of which could send some in this House, and libertarians, into apoplexy. There will be great resistance; government has to take a lead on it, and corporations will have to act responsibly.

Lastly, we must do more to tackle VAT evasion, particularly when international businesses are gaining an unfair advantage over UK businesses. The issue at hand is international businesses on Amazon and elsewhere selling goods on the internet without accounting for VAT. As highlighted in this Chamber by my noble friend Lord Lucas, of Crudwell and Dingwall, that is illegal evasion and we must take action.

In short, we are on the right track. Global tax avoidance is still ahead of any plan to tackle it, but tackle it we must. Capitalism and the free market is a model that is often harder to defend than one based on higher taxes and higher public spending, but defending it will become next to impossible if we do not come together—businesses and Governments alike—and enact meaningful and lasting reform. It is that reform that we should set our minds to now—Government, Opposition and responsible business.