Small Business, Enterprise and Employment Bill

Lord Phillips of Sudbury Excerpts

Monday 9th March 2015 Lords Chamber

[Lord Watson of Invergowrie]

My Lords, I begin by again stressing my strong support for the introduction of a register of people with significant control, and the enthusiastic welcome for it from the All-Party Group on Anti-Corruption, of which I am a member. Indeed, I believe that the PSC register should be overwhelmingly welcomed—I would even go so far as saying to the extent that we should be somewhat suspicious of the motives of those who oppose it in principle.

The introduction of the register is a step forward, and a big one at that, because it will frustrate people who hide or seek to hide criminal activities behind shell companies—a big and increasing problem that stretches across different parts of the world. For example, the UN has reported that Ukrainian arms licences are being given to UK shell companies involved in supplying helicopter parts to Assad in Syria, military kits to Gaddafi’s Libya and nuclear technology to Lithuania, all of which I believe should give noble Lords genuine cause for concern.

The legislation we are considering represents a significant step forward because the PSC register will record the ultimate beneficial owners of our companies and the public will be able to examine it. That said, the Bill leaves what I believe is an important gap: where the chain of ownership extends to foreign companies, not all of the links in the chain will be recorded. This will allow corruption to remain hidden away, out of sight of the UK authorities. These amendments aim to close this gap. Their implementation would involve a minimal burden for a small percentage of the most complex businesses. I very much hope that we can make some progress on this issue today.

Amendments 36, 37 and 38 seek to ensure that, where control of a UK company involves intermediaries in a chain, all the links in the chain should be revealed and exposed to scrutiny, because knowing and understanding the chain of ownership is, I believe, necessary to enable information on the register to be checked. I also believe that the importance of that has been acknowledged by the Government, because the Bill already requires that the method of control be declared, accepting that how control is exercised is important. These amendments seek to make sure that that will be made clear in the small number of cases where there is a chain of entities as part of the method of control. It would make a big difference. For example, developing countries require such information to bring legal action against a person of significant control—something they have often been unable to do in the past, often at great cost to their fragile economies.

When speaking about the register on 31 October 2013, the Prime Minister stressed that it would be publicly accessible and went on to say the following:

“It’s better for businesses here, who’ll be better able to identify who really owns the companies they’re trading with. It’s better for developing countries, who’ll have easy access to all this data without having to submit endless requests for each line of inquiry. And it’s better for us all to have an open system which everyone has access to, because the more eyes that look at this information the more accurate it will be”.

Needless to say, I thoroughly agree with the Prime Minister, but without placing on record the chain of ownership there will not be sufficient information available on the register to enable third parties to verify it properly. I believe that it is self-evident that the success of the register will rest on how accurate it is. To ensure that it is as accurate as possible, there is a need to maximise opportunities to ensure a higher level of accuracy from day one. That is what these amendments are designed to achieve.

The noble Lord, Lord Phillips, and I tabled similar amendments in Committee. The Minister said then that our amendments would be costly. Yet those amendments would have amounted to a minimal burden for a small number of companies—the most complexly structured companies at that. We estimate that only about 2% of UK businesses would need to provide only a very small amount of additional information when submitting their annual reports. The company should already have collected this information in confirming its person of significant control. The only extra demand would involve including this information in its annual report. This is such a minor requirement that I do not believe that it even merits being categorised as a “burden”, but it is a requirement that would fall exactly on the type of company that is most likely to be of concern. For that reason, I believe that it is proportionate.

In Committee, the Minister said that this would be confusing. On the contrary: surely the chain of ownership would be presented more clearly in the register, reducing the likelihood of confusion. The Minister also said in Committee that this would be seen as gold-plating. I agree with her, but is that not to be welcomed? I contend that it is not so much gold-plating as the rather more prosaic—and certainly cheaper—copper-bottoming: ensuring that the register achieves what it is designed to achieve. We are the first country in the world to introduce a public register. I believe that we should be proud of that and I also believe that we should get it right first time.

These three amendments would make a significant difference to developing countries at minimal cost to a small number of UK companies. Having listened to the Minister in Committee, the noble Lord, Lord Phillips, and I have scaled them back from the amendments that we tabled then. I very much hope that they will now find favour with the Minister. If they do not, I look forward from hearing from her how the Government intend to address this issue, perhaps in secondary legislation, so that the register can be established on the firmest possible foundations.

I turn briefly to Amendment 53. The intention of this amendment is to make a very simple point that the noble Lord, Lord Phillips, and I feel has not been properly addressed yet during the Bill’s consideration: that it should be the Secretary of State who is responsible for the operation of the PSC register, rather than Companies House. We suggest an annual report to Parliament from the Secretary of State to highlight this point, allowing parliamentarians to hold the Secretary of State to account on the operation of the register. Since this will be the world’s first public register of beneficial ownership, I believe that it is really important that we get it right.

The Secretary of State must ensure that information in the register is properly verified and that it is kept as up to date as possible. I welcome the comments that the Minister made just a few minutes ago in respect of another amendment about increasing the number of times that it is updated. Throughout the various stages of the Bill, MPs, noble Lords, interested organisations and, indeed, to a significant extent, members of the public have made the point that the public register should be updated more than annually. As things stand, it would be out of date almost as soon as it is published, so again, the Minister’s remarks are to be welcomed.

I hope that the Minister will accept what I think is a relatively straightforward and simple amendment, which will clarify ministerial responsibility for the register and increase parliamentary scrutiny of it. If not, I hope that she will outline how she or the successors of the Secretary of State would ensure that the public register is kept as accurate as possible and that the information contained within it is properly verified. I beg to move.

[Lord Phillips of Sudbury (LD)]

My Lords, my name stands with that of my noble friend Lord Watson of Invergowrie on these amendments. He has introduced them with great panache, and I do not have a great deal more to say but I think that the issues are so important that a few more points are necessary and worth while.

First, I shall give the House some of the facts that point to the scale of the problem of fraud and tax avoidance, which I do not think many of our fellow country people understand. My noble friend Lord Watson and I have been hugely helped by the Anti-Corruption APPG of this House, which, in turn, has been supported by Global Witness and Christian Aid, and a wonderful job they have done. One of the statistics they have produced for us—I think that Transparency International has had some part in this as well—is that the best estimate is that $21 trillion to $32 trillion of private financial assets rest in tax havens, and that 20% to 30% of that huge corpus of assets is corruptly diverted. Of that, they reckon that $120 billion to $180 billion per annum, which is far more than the entire global aid budget, is diverted unlawfully from developing countries. This is a rather poignant day on which to say that, as the Bill concerning the 0.7% contribution to aid has just been passed.

Another fact which I find rather depressing because it affects the UK is that it is reckoned that the Crown dependencies and overseas territories are host to one-third of all the world’s shell companies. On top of that, more than 36,000 properties, which are mainly in the most expensive parts of this wonderful city, are owned by overseas owners but are placed in shell companies in tax havens, 38% of them in the British Virgin Islands, 16% in Jersey, 9.5% in the Isle of Man and 9% in Guernsey. In addition, the World Bank’s review of the 200-plus biggest corporation corruption cases shows that 70% use shell companies as their vehicles of fraud. Therefore, the background to this amendment could not be more important and striking.

At this point, I have to own up to something from my dim and distant legal past. In the mid-1960s I was what was then called a tax mitigation lawyer. I notice a groan from behind me.

[Lord Naseby (Con)]

Another lawyer.

[Lord Phillips of Sudbury]

Yes, another lawyer. However, it is very striking because that was in the mid-1960s. In fact, the last case I did was just after the first Rossminster scheme was launched on the British public. Some of your Lordships may remember those schemes. They were the first of the hyperartificial—I would say hyperludicrous—schemes. I remember putting this to the best tax chambers in London at the time. I asked them, “Would you kindly advise my client via me? Is this scheme a runner?”. Back came the answer, “These chambers will not handle any cases relating to the Rossminster scheme because we view it as anti-social”. It is extraordinary to think of barristers saying that and I am not sure that they did not use the word “immoral”. But my goodness, the world we now inhabit is very different. The demoralisation—that is a useful word to use—of this country and indeed the entire world is really depressing because it has given rise, gives rise and will continue to give rise to an ever increasing number of really shameful frauds conducted by some of the biggest and best companies and banks in this country and everywhere else in the globe. It is very sobering to recollect that we are still a good deal less corrupt in our financial dealings here than virtually every other financial centre in the world.

[Lord Forsyth of Drumlean (Con)]

My Lords, I am most grateful to my noble friend for giving way. I confess that I have not followed these proceedings at earlier stages of the Bill and perhaps he can help me out. He is describing a very undesirable situation. However, as these provisions apply only to companies which are registered at Companies House, why will the criminals and bad guys not operate in other jurisdictions, and how is adding so much cost and burden to honest small businesses justified in that context?

[Lord Phillips of Sudbury]

I think that we need a short debate to answer the question that my noble friend poses. However, I think that the general feeling is that small companies will not be hurt by these provisions. It is these extraordinarily obtuse long chains of shell companies, sometimes in as many as 13, 14 or 15 tax havens, that are the object of this exercise.

[Lord Naseby]

Can my noble friend honestly say that it will not affect small businesses? “Small business” is in the title. Every single small business in this country—not the micros but almost every other small business—is going to have to register, and that is going to cost it a considerable amount of time, money and resources. So how can he possibly say, “Well, it’s not going to affect any of them. It’s only going to be the great big national companies and other big companies that are manoeuvring things internationally”? He is talking rubbish, is he not?

[Lord Phillips of Sudbury]

I did not say that it would not affect them at all; I said that it would affect very few of them to a significant degree, and I stick by that. I have been a small and medium-business lawyer for most of my life, and I can say that these companies will not be significantly inhibited by these provisions or be faced with significant costs.

[Lord Naseby]

I am sorry to interrupt my noble friend again. He may have been a lawyer periodically dealing with a few small businesses; nevertheless, the chambers of commerce and others say exactly the opposite to what he is saying. Surely they know better than some lawyer working part time on small businesses.

[Lord Phillips of Sudbury]

I would not deny for a minute that they know better than the description the noble Lord gave of me. I just repeat that I do not think it will seriously inhibit the small or medium-sized company that operates in a straightforward fashion in this country. I am confident of that.

[Lord Flight (Con)]

My Lords, we touched on this previously. Four million small companies are going to be affected, and if any of them does not obey the law, it will be committing a criminal offence. How is a small entrepreneur with a plumbing business up in Norfolk going to even know that this law exists and that he needs to comply with it?

[Lord Phillips of Sudbury]

I have a huge amount of sympathy with the noble Lord pointing out the hypercomplexity of this. I can only say to him—I must also put it in the context of having worked in this field for more than 50 years and having been a non-executive director of more than 15 SME companies—that I do not think there is any real prospect of an innocent SME going about its business falling foul, let alone criminally foul, of this law. However, I accept that the whole Bill is of near barbaric complexity and I do not know how we get round that. I am afraid that the price for the scandalous intentional misbehaviour of large and some small entities is invariably paid by the innocent.

Perhaps I may try to return to my story. As I said, there is a real demoralisation particularly of the business world but also of our whole society which we need to take intense notice of. We are at a tipping point in terms of the common good. The publicity of some of these awful cases is universal now, so that more and more of the richest people and companies, in terms of the money they have, are seen to be getting away with murder—as the man in the street would call it—in terms of paying tax. That is totally antipathetic to the good and fair society that we seek to create and help in this House. It is a total denial of fairness and duty.

These provisions are very modest but will enable the authorities, in particular the tax and fraud authorities, to grapple with some of these very expensively advised entities and the chains that they establish around the tax havens of the world, without one arm being tied behind their back. We all know that the authorities are ludicrously understaffed in comparison with the private sector—I am talking about the irresponsible part of the private sector—although that is another issue which has to be dealt with another day. I hope that my noble friend will be able to reassure the House that this will not be yet another statute that lies gathering dust on the shelves of Whitehall, but that there will be a practical and rigorous enforcement of the provisions inserted here.

Finally, without the limited transparency that is afforded by Amendments 36, 37 and 38, the authorities will not be able to get at the malefactors any more than they have thus far. I think I am right in saying that not a single bank director has been prosecuted since the collapse of 2008, during which period tens of thousands of our fellow countrymen and women have been prosecuted before magistrates’ courts. We must stop that, as it is profoundly demoralising for this country. We must give the authorities the tools to do their hugely difficult job. The fact that we are the first country to introduce a PSC register is something that the Government should be congratulated on. I commend the Prime Minister, because it is not easy in his party to say some of the things that he has said. The noble Lord, Lord Watson of Invergowrie, mentioned one of those things, but I particularly like what he said to the G8 in 2013. The point he made and the language he made it in were absolutely right. The Prime Minister said that,

“companies should know who really owns them, and tax collectors and law enforcers should be able to obtain this information easily”—

for example, through central registries—

“so people can’t avoid taxes by using complicated and fake structures”.

Bang on. All this series of amendments does is lend a few practical teeth to that sentiment. I hope that this commends itself to the House and the Government.

[Lord Forsyth of Drumlean]

My Lords, I will speak briefly against this amendment. Of course, no one could dispute the intention behind it. If the intention is to stop criminal activities and tax evasion—and I make a distinction between tax avoidance and tax evasion; when we are talking about criminal activities, we are talking about tax evasion—no one could dispute it. However, it rather seems like a sledgehammer to crack a nut, or perhaps a sledgehammer aimed in the wrong places. The impact assessment undertaken by the Department for Business, Innovation and Skills of the proposals as they already stand says that almost £1 billion will be added to the costs of small businesses, which the noble Lord, Lord Phillips, tells us is not really significant. I wager to suggest—

[Lord Phillips of Sudbury]

I am grateful to the noble Lord for giving way. I do not think that he will find in that impact assessment any attempt to assess the cost of the amendments that we are talking about in this group. I will leave it at that.

[Lord Forsyth of Drumlean]

The noble Lord is absolutely right, because this is not the Government’s proposal—which is why I am against his amendment. He said in his speech that it would not be very much extra without actually telling us how much extra it would be. We already have £1 billion being added to the costs of small and medium-sized businesses at a time of great stress in our economy and when we are desperate for them to grow and create wealth. Yet here we are asking people running small businesses to fill in forms, and if they fill them in inaccurately, they will find themselves committing a criminal office.

[Lord Phillips of Sudbury]

I am most grateful to the noble Lord for giving way a second time, and I promise not to intervene again—but that is not so. He should take account of the fact that if we were to recover even 20% more of the tax that currently is not paid but should be, many billions of pounds will redound to the benefit of SMEs as well as of everyone else.

[Lord Forsyth of Drumlean]

I am not sure which bit the noble Lord was saying was not so. He may very well be right in his assertion—although I doubt it—that the Government will collect more money, but that does not help the small business man who is faced with these additional costs, for whom there is no benefit whatever. They already struggle to fill in their VAT forms and their surveys on this, that and the other while trying to run their businesses. This would add a very significant burden.