Tax: Avoidance and Evasion

Lord Lupton Excerpts

Tuesday 13th September 2016 Lords Chamber

[Lord Lupton (Con)]

My Lords, I congratulate my noble friend Lord Leigh of Hurley on again exposing to some healthy, fresh scrutiny the question of tax avoidance and evasion in the UK. First, I declare my interest as the European chairman of a financial services firm. We advise corporations—large and small, national and international—on their strategic moves. But we are not, and do not hold ourselves out to be, tax advisers. Despite that, I have noticed recently that our large clients are showing a willingness to engage in a private debate with us about the philosophy of international corporate taxation.

As a modern, centrist Conservative, I am encouraged by what I detect is a clear shift by the more forward-looking corporations from an ethos where legal tax avoidance and the minimisation of tax were a badge of honour to one which at least acknowledges that there are growing influences that may direct boards of companies to consider more carefully what all their stakeholders expect them to contribute to society.

My noble friend Lord Leigh of Hurley focused, with characteristic attention to detail, on some of the important changes made by the Government in the past six years. I will look at this canvas through a more wide-angle lens. Noble Lords will recall that in 2012 the Public Accounts Committee concluded its investigation into the tax affairs of Google, Amazon and Starbucks by saying that,

“we were not convinced that their actions, in using the letter of tax laws both nationally and internationally to immorally minimise their tax obligations, are defensible”.

In so doing, the committee combined what I believe to be the increasingly complex conundrum of the law with the morality of tax. Since then, the European Commission, as my noble friend Lord Tugendhat said, has required Ireland to recover the staggering sum of $13 billion in additional taxes from Apple because of illegal state aid.

So what has happened in recent years to tackle the issue of overaggressive tax avoidance? First, let us look at what the Government have done. There has been an attempt to curtail the practice of transfer pricing from a high-tax regime to a low-tax or no-tax regime, governed by OECD guidance that states that,

“transactions between national parts of a multinational company should be priced for tax purposes as though with independent third parties”.

This was well intended but, as the IFS said, there is no “observable market” between different parts of a multinational corporation, which has made it easier to shift profits to lower-tax jurisdictions.

Secondly, the controlled foreign company rules focus on “passive income” to prevent profits liable to UK tax being shifted to overseas tax havens. This leaves some leeway for continued avoidance. Thirdly, the interest deductibility limits now cap the deduction of interest and bite particularly on instruments that are debt in form but equity in substance. Fourthly, the general anti-avoidance rule introduced in 2013, to which my noble friend Lord Leigh referred, codifies some case law to prevent behaviour deemed to be abusive in intent, regardless of whether it is technically compliant in a narrow legal sense. Finally, the UK Government, through the G20 and the OECD, have shown real leadership in forcing this debate up the international agenda.

These steps are all admirable, but they are not enough. As a believer in our free-market capitalist system—where in principle, the less government interference, the better—I say that some of the slack needs to be taken up by the stakeholders in companies. Take the instance of Starbucks in 2012. It is in that instance very easy for customers to voice their displeasure with such a consumer company, which pursues what they believe to be overaggressive tax avoidance, by crossing the street to Costa Coffee for their daily shot. Costa is of course a subsidiary of Whitbread plc and so far as I know it pays a fair rate of tax. Indeed, Costa Coffee’s turnover figures in late 2012 and 2013, as published by Whitbread, showed that this seemed to happen to a certain extent, consistent with a YouGov poll published in early 2013, which showed that Starbucks as a first choice for a cappuccino dropped from 23% before the tax row to 15% afterwards, while Costa’s rose by an equivalent amount, from 32% to 39%.

I give this example because I suspect that a potentially powerful cosh waits to hit consumer-facing companies which overstep the line of publicly perceived fairness in their tax affairs. As justifiable concern over this issue increases, I hope that companies will be more motivated to beware of reaching a tipping point where their customers suddenly revolt and it is difficult to row back. How, by the way, did Starbucks react to all this? It has now agreed to move its UK tax headquarters to the UK and pay tax. Meanwhile, other household names such as Barclays, Vodafone and Topshop have been thrust into the public limelight for related reasons.

I come back to stakeholders exercising their influence. It surely must be obvious that if a company’s sales, and above all reputation and brand value, begin to suffer as a result of consumer revulsion at its tax planning, shareholders—if only because of enlightened self-interest —should and will sit up and pay attention. I therefore find myself in the peculiar position, as a free-market Conservative, of hoping that pressure groups will continue to hold companies to account to pay a fair rate of tax—after all, ours is one of the lowest in the western world—through the medium of where it hurts most: the top line; that is, sales or turnover. I would rather have a bit of benign shock treatment from the market now than a far-reaching political backlash later.

Sometimes I feel that the huge, short-term pressures bearing down on companies from what have become known as “impatient” capital providers can lead management down the path of taking short-term measures, such as aggressive but legal tax planning, which can provide a short-term sticking plaster to a profits shortfall but damage the business long term. It is a function of our age: of activist investors, event-driven hedge funds—short-termists in general. Some directors claim that legally minimising tax is their fiduciary duty, but it is not as simple as that. The Companies Act 2006 requires them to promote the success of their company based on six factors: the long-term consequences of their actions; the interests of employees; relationships with suppliers and customers; the impact of corporate activities on the community; the company’s reputation for high standards of business conduct; and the need for fairness between different members of the company. Shareholders, especially the large institutional shareholders, must hold to account their investee companies over these principles. Responsible and fair tax policy should form part of a company’s corporate and social responsibility programme, and investors should insist on it. I will understand if noble Lords find these thoughts honourable but somewhat naive, so in conclusion I will try to explain why they are rooted in reality rather than idealism.

Those of us who believe in free-market capitalism need support, not only from the companies themselves in pursuing responsible and fair business practices but—in a democratic system—from the electorate. We all have our own views on the surprise result of the Brexit vote on 23 June, and I stand by my own views as expressed in an email to all my firm’s employees across the world. I wrote the email three hours after knowing the result, at 8.30 am on the Friday, and it was designed to help them contextualise the result to enable them better to advise our international clientele. It said as follows:

“In general terms, this vote will send political tremors across the world. It is a sign that globalisation, when poorly executed or communicated, can leave behind the domestic working population. A key feature of this result, which I view with total dismay for the next generation, is that it underlines the gulf between the governing political class and the people: not least, the Labour Party in the UK failed to persuade much of its core supporters in the North of England to vote Remain. Nationalist parties will flourish in Europe, and people like Trump and Marine Le Pen in France will be delighted by the result”.

Anti-business populist parties are already in power in Spain and Greece. In other countries, parties on both the far left and far right are gaining ground. Here, Labour has already pledged to put up corporation tax, back to 28%. That is bad for business, bad for Britain and bad for working people.

My plea to those inclined to listen is simple. If, as businesspeople, you do not modify your behaviour and pay what you know as a business judgment to be a fair rate of tax, you risk driving the electorate through the tipping point, where those who are poorly educated or low-skilled, whether or not they are in work, will not benefit from the improperly distributed fruits of globalisation and economic success. They will then vote in an Administration that will destroy wealth and damage your business. Long-term investors—pension funds, life companies and the like—should all encourage our Government to keep on pursuing their leadership role on this subject on the world stage. Sometimes, not only here but across the world, even free-market capitalists need to be protected from themselves.