Low and No-Tax Jurisdictions

Lord Leigh of Hurley Excerpts

Thursday 30th January 2025 Lords Chamber

[Lord Leigh of Hurley (Con)]

My Lords, I congratulate the noble Lord, Lord Sikka, on securing this debate. He has allowed me to claim in the future that he has been talking bananas, but he knows I have too much respect for him to do that.

I congratulate my noble friend Lady Coffey on a truly excellent maiden speech. She has served as Secretary of State for Work and Pensions and for the Environment, Food and Rural Affairs, while representing her Suffolk coastal seat. She is known to love jazz, and as anyone who has been to the Conservative Party conference—which I thoroughly recommend to all noble Lords—knows, she excels at karaoke. In this House, I am sure she will have “the time of her life”—some will know why I say that—which, had I sung it, Hansard would not have recorded, so I think I got away with it.

I hope my noble friend has turned off the alarm on her phone, because I do not want my speech to be interrupted by “I Vow to Thee, My Country”, which I gather has happened in the past. There is a rumour that she and the noble Lord, Lord Clarke, are lobbying for a cigar smoking room to be created on the Terrace—I am not sure about that—as she brings gender equalisation even to this area. What she brings to this House, apart from anything else, is much-needed business experience. She is really welcome; it was an exceptional maiden speech, on which many congratulations.

This debate features one of my favourite subjects. The Minister knows of others, which he will be pleased to know I will not refer to, but I will focus on two areas, which I believe will generate more tax and revenue for the United Kingdom, because we are keen to work together so to do. The subject that the noble Lord, Lord Sikka, has put forward was the subject of my maiden speech in 2013, made in response to the report from the then Economic Affairs Committee. I have spoken a few times on BEPS, as explained so well by my noble friend Lady Coffey, and the noble Lord, Lord Sikka, is quite right to bring it up.

The UK has implemented several legislative measures to address profit shifting by multinational companies and has adopted BEPS measures recommended by the OECD, including the hybrid mismatching rules. These rules prevent tax advantages from differences in tax treatment of entities or instruments between countries. For example, a payment can be treated as a tax-deductible expense in one country and the receipt considered a tax-exempt dividend in another.

Then there is the UK corporate interest restriction, which limits the amount of tax relief that companies can claim on their net interest expenses to the higher of £2 million or 30% of EBITDA. It is a very powerful method of preventing private equity avoiding tax. Then there is the diverted profit tax, which was introduced in 2015. This targets profits artificially diverted from the UK, as it imposes a 25% tax on profits deemed to be diverted through schemes.

When I first qualified as a chartered tax accountant—which was much to everyone’s surprise, particularly my father’s, at the time—it was the controlled foreign companies rules which were the hot new area. They came in in 1984—I qualified in 1985—and were significantly reformed later, in 2012. These rules aim to prevent UK companies shifting profits to low-tax jurisdictions by taxing the income of foreign subsidiaries of UK resident companies. There has of course always been the transfer pricing rules, which ensure that transactions between related parties are genuinely conducted at arm’s length, and HMRC has issued guidance on that as recently as September 2024.

With all this going on, why are we having this debate? It is because of the OECD’s pillars 1 and 2. The UK has one of the most robust anti-BEPS regimes in the world, largely due to measures taken by the previous Conservative Government, but also subsequent actions by the Labour Government. The OECD has led moves to eliminate BEPS since 2012. From the BEPS report in 2015, the UK has implemented pretty much all the material recommendations and closed a number of loopholes. The UK has implemented the first phase of pillar 2 and is implementing the second phase. The UK was one of the group of nations implementing at the very earliest date, along with Australia, Canada, New Zealand and all of the EU countries.

But now, as the noble Lord, Lord Sikka, has indicated, somewhat shockingly perhaps, the US has pulled out of both pillars, and this leaves our Government in a quandary. Do we want to avoid retaliation or do we stick to our guns? We have discussed pillar 1 and pillar 2 at length in this House. A number of us were keen on the digital services tax, or DST, and we tried to persuade the Government that it was time to tighten it up. The argument given to us against this was the John Lewis argument: that if you are not careful, you attack shopkeepers trying to sell their products online, as opposed to marketplace providers which simply facilitate a sale.

At the time, I worked very hard with a very able tax adviser, Glyn Fullerlove, who drafted the legislation—which would have worked—but there was no political impetus to implement it, mainly because we all thought that DST would be a temporary tax while pillar 1 and pillar 2 were properly implemented. This does not look like it is going to happen. Will the Minister look at the DST rules afresh? In his opinion, are they still fit for purpose? Hard choices need to be made on DST—I believe it raised only £380 million last year and might raise about £800 million this year. Given that the Minister wants to help companies grow and raise more revenue, perhaps he might have another look at DST and see whether or not it should be enhanced.

On a practical matter, will a consequence of pillar 2 having no force or effect in the US be that US multinationals will no longer share information with non-US subsidiaries? If they do not share this information, it makes pillar 2 compliance and in particular the understated profits rule tax—UPRT—almost impossible. Has the Minister asked the US multinationals with a presence here whether they will have this information from their head office? I appreciate that the UPRT, which yields some £2.8 billion, will be harder to give up—indeed, it should not be given up—but it would be helpful to hear the Government’s plans for it, given that the information collation may be extremely difficult.

Another related area that I also believe can be of assistance to HMG in raising revenue is the undertaxation of profits in the UK by VAT evasion of offshore online retailers, which is a form of profit shifting. I am very grateful to Richard Allen, the heroic figure of RAVAS, for all his hard work in this area. As we know, bad actors are selling goods online under £135 to evade VAT and to gain a competitive advantage over law-abiding businesses both abroad and in the UK. Distortions of competition caused by the evasion of VAT cause significant harm to domestic retail, both on the high street and online. This harm in turn damages the UK economy through reduced tax revenue, subsequent employment and so on.

Despite recent legislation, which a number of us worked on, there are still obvious flaws in the ID verification system operated by Companies House, and HMRC has essentially enabled bad actors to easily obtain UK company registrations and thus VAT numbers. We have all read about thousands of letters arriving at a flat in Swansea as a result of overseas actors trying to create artificial UK companies. They are pursuing negative and fraudulent behaviour that is essentially the evasion of VAT, and thus shifting profits overseas.

Currently, HMRC has no effective mechanism for enforcing VAT on imports below £135 in value. Import VAT is no longer due on business-to-consumer non-excise goods sent in consignments valued at £135 or less. It is assumed that overseas businesses have complied with the UK legislation that obliges them to register for UK VAT, but that assumption is entirely unenforceable and a coach and horses are driven through it.

Some constructive ideas—such as a passport scheme where you simply put a sticker on every good that can be scanned as it comes in—are around but have not been enforced. It is true that some measures have been introduced, but there remains a significant and immediate problem. Can the Minister look at this urgent issue afresh and perhaps accept a meeting with Richard Allen of RAVAS, so that we can generate the appropriate and correct revenue for HM Treasury and continue the fight against evasion of VAT?

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[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, I congratulate the noble Lord, Lord Sikka, on securing this debate, and thank all noble Lords for their contributions. I also take this opportunity to join others in congratulating the noble Baroness, Lady Coffey, on her maiden speech and welcoming her to your Lordships’ House.

I will seek to set out the work that the Government are doing to uphold internationally agreed principles of fair tax competition and protect the UK against profit shifting by multinational companies. If there are any specific questions raised during the debate that I am unable to answer now, I will happily write to noble Lords.

I start by underlining our commitment to growth—the number one mission of this Government—and how the corporate tax system can help deliver this mission. As the noble Baroness, Lady Neville-Rolfe, mentioned, we had to take some difficult decisions in the Budget last year to restore stability to the public finances. These were not decisions that we wanted to take, but they were necessary to clear up the mess we inherited. We recognise that this has impacted some businesses and has had impacts beyond business, too.

However, in last year’s Budget we also published a corporate tax road map to provide the best possible conditions for incentivising business investment, which is the lifeblood of a growing economy. That road map caps corporation tax at 25% for the duration of this Parliament—the lowest rate in the G7. It maintains our world-leading capital allowances system, including permanent full expensing, and the £1 million annual investment allowance. As a result of permanent full expensing, the independent OBR has forecast that business investment will increase by an extra £3 billion each year. Permanent full expensing solidifies the UK’s position at the top of the rankings of OECD countries’ plant and machinery capital allowances and among the most competitive capital allowances in the world.

The corporate tax road map also maintains generous R&D tax reliefs that will support an estimated £56 billion of business R&D expenditure. It is a road map to provide predictability, stability and certainty to business and investors from around the globe, while generating the revenue needed to invest in Britain. It comes after several years of cliff edges in investment allowances and multiple changes in rate policy, all of which have undermined global confidence in our corporate tax system. Despite the difficult fiscal position, our capital gains tax rate also remains internationally competitive and the current top rate is lower than it was between 2010 and 2016.

The Government’s objective is to maintain an internationally competitive tax system, where businesses pay their fair share of tax in the UK. As noble Lords know, under the current international framework, taxing rights are generally allocated to countries based on where the physical activities of a given business are undertaken. However, businesses rely increasingly on remote business models that allow companies to operate in and make considerable revenue from a market without a physical presence there. This is particularly true of firms providing digital services.

Added to this, business models are increasingly complex and globalised in nature, with businesses often operating in a number of jurisdictions. Intangible assets, such as intellectual property, can also be transferred to low-tax or no-tax jurisdictions more easily than physical goods. These changes are improving competitiveness and dynamism in the global economy, but we now need to ensure that our tax system, much of which dates back over a century, adapts to this changed environment.

According to the OECD, lost global tax revenues now total $100 billion to $240 billion annually—equivalent to between 4% and 10% of global corporation income tax revenues. This is why the Government are committed to addressing unfairness in the international tax system and protecting the UK against base erosion and profit shifting, where it exists.

We have a range of different measures in the UK tax code to ensure that this is the case. For example, measures on transfer pricing ensure that companies do not manipulate prices between related parties for tax reasons. Controlled foreign company rules, which the noble Lord, Lord Leigh of Hurley, mentioned, prevent multinationals shifting profits to low-tax jurisdictions using controlled foreign subsidiaries. Our anti-hybrid rules tackle tax avoidance strategies that exploit differences in the tax treatment of financial instruments or entities across jurisdictions, and our corporate interest restriction rules limit the amount of interest expense that a UK company can deduct from its taxable profits. HMRC conducts rigorous in-depth inquiries to ‎ensure that multinational companies comply with these rules, and it also works closely with international partners to gather intelligence and tackle serious and deliberate non-compliance.

Profit shifting and base erosion is a global issue by its very nature, which is why the UK has supported efforts to strengthen the international tax framework. The most significant of these is the OECD’s inclusive framework on base erosion and profit shifting project, as explained by the noble Baronesses, Lady Coffey and Lady Kramer, and my noble friend Lord Sikka. As other noble Lords have set out, this framework is the result of over 135 countries and jurisdictions working together, and comprises two pillars.

Pillar 1 looks to provide for a more stable and certain international tax system by addressing the issue I raised previously; namely, updating the system of international taxing rights to reflect the digitised nature of the economy. Under plans currently being discussed, a new system would be introduced whereby certain taxing rights are reallocated to market jurisdictions, as opposed to where the company is based.

The noble Lord, Lord Leigh of Hurley, asked about the Government’s position on pillar 1 and the digital services tax. The Government continue to support an agreement on pillar 1 and, as a temporary measure, the UK’s digital services tax currently applies a 2% levy on providers of search engines, social media platforms and online marketplaces, reflecting their UK activities. We look forward to working with the new US Administration to understand their concerns around the digital services tax and consider how these can be addressed in a way that preserves the policy objectives.

The noble Lord also asked about the VAT paid by online retailers. To summarise, as the noble Baroness, Lady Neville-Rolfe, set out, since 2021, overseas retailers are requested to register for VAT on supplies of low-value imports below £135. Where an overseas seller sells goods via an online marketplace, the marketplace is liable for VAT on goods of any value. The OBR continues to estimate that this will raise £1.8 billion by 2026-27.

Pillar 2 of the OECD inclusive framework reforms, also known as the global minimum tax, is already an internationally agreed common approach. It creates fair conditions for attracting inward investment, while protecting countries’ tax bases from large multinationals shifting their profits to low-tax jurisdictions. It does this by requiring multinationals that generate annual revenues of more than €750 million to pay an effective tax rate of 15% on their profits in every jurisdiction where they operate. Where their effective tax rate falls below this, these companies will pay a top-up tax. This effectively imposes a floor on tax competition between jurisdictions.

As the noble Baroness, Lady Kramer, said, the Government are currently legislating for the final part of the pillar 2 agreement through the Finance Bill. The undertaxed profits rule will ensure that firms cannot evade their responsibilities under the global minimum tax.

The pillar 2 agreement is historic in its scope and reach and has been implemented, or is in the process of being implemented, by the UK, all EU member states, Canada, Australia, Japan, New Zealand, South Korea and others. The UK is forecast to raise more than £15 billion over the next six years from pillar 2 to support our public services and help grow the economy.

My noble friend Lord Sikka and the noble Baronesses, Lady Kramer and Lady Neville-Rolfe, asked about executive orders relating to pillar 2. While I know that they would not expect me to give a running commentary on every executive order or decision made by President Trump and his Administration, the UK will of course be open to discussing concerns and ways to alleviate these in a way that upholds the policy aims of pillar 2. To reiterate—here I agree with the noble Baroness, Lady Kramer—this is an international agreement signed by over 135 countries after many years of detailed negotiation. We believe it represents a fair approach to how countries compete for cross-border investment.

The UK operates a comprehensive network of tax treaties to ensure the correct allocation of taxing rights between jurisdictions. Alongside pillars 1 and 2 of the OECD scheme, we participate in a range of other tax transparency arrangements to protect the UK tax base. These include the country-by-country reporting arrangements, which require large companies to provide a detailed report of their income, taxes paid and other financial activities on a country-by-country basis.

We have committed to implementing the crypto asset reporting framework to facilitate the automatic exchange of information on ownership and transactions in crypto assets. The UK is leading international efforts to co-ordinate transparency and the exchange of beneficial ownership, including through registers.

The noble Baroness, Lady Kramer, touched briefly on the Crown dependencies and overseas territories. I recognise that that is a much longer debate but I will briefly say this. The elected Governments of the Crown dependencies and inhabited overseas territories are responsible for many fiscal matters, including tax. They are committed to upholding international tax standards. All Crown dependencies and those overseas territories with a financial centre have become members of the OECD/G20 inclusive framework on base erosion and profit shifting. They have implemented the common reporting standard, and they all meet the standard necessary for the exchange of information on request.

My noble friend Lord Sikka and the noble Baroness, Lady Kramer, asked about country-by-country reporting. As I have said, the Government are a strong supporter of greater tax transparency and efforts to ensure that multinational groups are appropriately taxed in the jurisdictions in which they operate. While public country-by-country reporting could have a role to play in supporting those objectives, the Government believe it is important that any action be co-ordinated at the international level to ensure that it is comprehensive and consistent and avoids competitive distortion.

The arrangements I have already set out sit alongside the steps this Government took at the Budget last year to protect the UK tax base and close the tax gap, which is the difference between the amount of tax owed and the amount that is collected. The measures in last year’s Budget represent the most ambitious package ever to close the tax gap, making sure that everyone who should be paying their tax is doing so. Overall, the package is expected to raise £6.5 billion in additional tax revenue per year by 2029-30. We will achieve that by investing £1.9 billion in HMRC staff and modernised IT systems, including recruiting an additional 5,000 compliance staff. This includes additional resources for HMRC transfer pricing specialists, focused on preventing multinational profits shifting.

I will briefly address the question asked by my noble friend Lord Davies of Brixton and the noble Baroness, Lady Kramer. Our plans include new proposals to close the offshore corporate tax gap. We will consult on lowering the thresholds for exemption from transfer pricing for medium-sized businesses to align with international peers, and we will seek views on introducing a requirement for businesses in scope of transfer pricing rules to report cross-border-related party transactions to HMRC.

My noble friend Lord Sikka questioned the size of the tax gap. The Government have set out data for the domestic tax gap, which has been published online, as well as initial statistics on individuals with undisclosed foreign income. We will continue to be led by this data, and we remain committed to closing the tax gap, both domestic and offshore.

This Government support fair global rules on tax competition which protect the UK against profit shifting and base erosion. Through the action we are taking domestically and through international bodies, including the OECD, we are ensuring that these rules keep pace with the changing nature of global trade and the development of digital technology. In doing so, we are being guided by our number one mission: higher and more inclusive economic growth. That growth must be underpinned by fairness in the global tax arrangements, which is at the heart of our approach, and it must be delivered through a competitive domestic tax regime, which is precisely what our world-leading corporate tax road map will help to achieve.

[Lord Leigh of Hurley (Con)]

Before the Minister sits down—admirably well within his time—I think his answer in respect of my VAT point relates to NETPs, non-established taxpayers, rather than taxpayers who falsely claim to be in the UK. I invite him to consider that particular point further, because I believe it will raise billions of pounds for HMRC if that loophole is addressed. Secondly, he very elegantly sidestepped the issue of the digital services tax. Again, while the Government are in negotiations with the US, which could stretch on for years, there is an opportunity in the meantime for us to have a look to see what extra revenue we can raise through digital services tax.

[Lord Livermore (Lab)]

I have set out as much as I am able to at the moment on the noble Lord’s latter point on the digital services tax, but I will happily raise his point on VAT with my colleague the Exchequer Secretary. We will write to the noble Lord on anything that we can usefully add.