Finance (No. 2) Bill

Lord Sikka Excerpts

Lords Hansard - Part 1 & 2nd reading & Committee negatived & 3rd reading
Tuesday 22nd February 2022 Lords Chamber

[Lord Sikka (Lab)]

My Lords, I draw attention to my entry in the register of interests. I am an unpaid senior adviser to the Tax Justice Network. I too thank the Minister for her very eloquent speech, but it cannot hide the fact that the Budget does not really do anything at all for the average person. It is regressive, the word “redistribution” is missing altogether, and taxes are piled upon the poorest. On tax avoidance, all we need to do is look for evidence. I once again ask the Minister to name any big accounting firm that has been investigated, disciplined and fined after the courts declared that the tax-avoiding schemes that it marketed were unlawful. I am still yet to hear any name at all.

In the time available, I will raise three questions about the Bill. They relate to an area that I have not really seen debated either in this House or the other House. The first follows on from the Minister’s speech, relating to the tax rate on dividends. From April, it will be in the range of 8.75% to 39.35%. That is still less than the marginal rate of income tax on earned income. Earned income is taxed at 20%, 40% and 45%. Because the two rates are different, that opens the floodgates for the tax avoidance industry. Numerous schemes designed by accountants and lawyers enable clients to convert income into dividends, so that the beneficiaries pay tax at a lower rate and national insurance contributions at a zero rate. Nobody pays any national insurance on unearned income, and that includes dividends, even though those who are not paying can use the National Health Service and receive the benefit of social care.

The Government’s approach is clearly distorting taxpayer behaviour because taxpayers will try to minimise their duty. The Government are fuelling the tax avoidance industry and then expecting HMRC to go and chase down the avoidance schemes. This is an exercise in futility, and it has gone on for years and years. The Government could take a leaf out of the book of the former Conservative Chancellor, the noble Lord, Lord Lawson, who recognised that there is no difference between earned and unearned income—both augment somebody’s wealth and purchasing power. In 1988, the Government decided that earned income needed to be taxed at exactly the same rate as unearned income; both were taxed at the same rate—at least, that was applied to capital gains, which were taxed at the same marginal rate. So the Government at that time ended a whole variety of tax avoidance schemes. The current Government are fuelling the demand for them.

In respect of this, I ask the Minister two questions. First, why do the Government aid the tax avoidance industry by taxing unearned income at a lower rate than earned income? Secondly, what is the cost of chasing the tax avoidance schemes facilitated by the Government’s own policies? I hope that the Minister will be able to give me some numbers, and then we will see where to go.

The second issue I wish to raise relates to tax reliefs. Under this Government, and other Governments since 2010, the number of tax reliefs have vastly increased. The Office of Tax Simplification, which published its final report in November 2021, had previously identified some 1,140 tax reliefs—that is how many tax reliefs we give. The cost of principal tax reliefs is published, but the disclosures by HMRC do not cover all the tax reliefs. Even worse, little is known about the macroeconomic benefits of handing out vast numbers of tax reliefs, or the amount of tax concessions—the actual amounts that people do not pay.

Following on from this, the related question is about the anomalies and abuses of tax reliefs. Let me give one or two illustrations. The first relates to something called video games tax relief, which the Government created in 2014. It was thought that this tax relief would come to about £35 million a year. By the end of March 2020, 1,000 games had received the kitemark that they need—it is called “culturally British accreditation” and is given by the British Film Institute—as a prerequisite for getting video games tax relief. However, anything seems to go; it is nothing to do with being British. Some of the games that received this accreditation are called “Batman”—I did not know that Batman lived in Downing Street—“Goat Simulator” and “Sonic the Hedgehog” are just some examples of games that have been given this culturally British accreditation and millions in tax relief. The real truth is that this culturally British fig leaf was really designed to get around the EU Commission’s rules on state aid and, in reality, it is costing the taxpayer millions of pounds.

Two of the 1,000 games that have been accredited were published by a company called Rockstar: “Grand Theft Auto V”, which received the accreditation in 2015, and “Red Dead Redemption 2”, which received it in 2019. In 2020, Rockstar claimed £56.6 million in video games tax relief. According to its accounts, it has claimed £136.6 million in total in tax relief over the years. It has paid no corporation tax at all but has paid £67.5 million in dividends. Where exactly did those dividends come from? They came from picking the pockets of the British taxpayer. There is no other explanation for this. It does not seem to me that these kinds of tax reliefs are monitored. No evidence is provided by any government department to show what exactly the benefit to the UK economy is of this American company receiving all these tax reliefs.

I will give noble Lords another example, which relates to the James Bond films. James Bond is a quintessentially British fictional hero, but the enterprise is also very lucrative for minimising the UK tax liabilities of the foreign companies behind it. In recent years, the company known as EON, which controls the Bond movies and is behind the films, has declared pre-tax losses while simultaneously receiving a total of about £120 million in tax credits via the UK’s creative industry tax relief schemes. “Spectre”, a Bond film, received £30 million, with £47 million given to “No Time to Die”. “Skyfall” received £24 million. “Quantum of Solace” received around £21 million. The James Bond films are made and marketed through a complex labyrinth of opaque offshore entities. The upshot is that, despite receiving £120 million of subsidy, EON has been paying less than £500,000 a year in UK corporation tax. So where exactly is the benefit of these things?

I would like to talk a little more about these things. A good example concerns R&D—research and development —tax credits or reliefs. For 2019-20, 85,900 claims were made for this tax relief. Some £7.4 billion of tax reliefs were claimed on an expenditure of £47.5 billion. But the Office for National Statistics data for the UK’s total R&D spend is only £25.9 billion. How come the Government have given relief on £47.5 billion?

One explanation is that, when companies conduct research and development—there is a big issue about what that means and, as an accountant, I can tell you that you can classify almost anything as R&D and claim tax relief on it—it appears that foreign companies can also claim. A company may operate and have a subsidiary here but do its R&D in the Bahamas; it can also claim these tax reliefs. So there is a discrepancy of £21.6 billion between the HMRC and ONS data. No explanation has ever been provided by the Government of why these numbers differ and why foreign entities that have little or no economic link with the UK are able to claim these things. The tax reliefs are clearly being abused, yet there is no urgency from the Government to investigate.

I will ask the Minister to do a number of things. First, at every Budget, can we have a complete list of the tax credits? Tell us exactly what their tax cost is and what the abuses might be. Tell us whether the economic benefits that are claimed actually materialise. Have they been audited? At the moment, we get very little or almost no data.

The last issue I would like to talk about is the impending global minimum tax rate of 15%, which the Government support. While the Government are handing out 1,140-plus tax reliefs, what is the impact of these reliefs on the commitment to a 15% global minimum corporation tax rate? The Government say that they are increasing the corporation tax rate but, at the same time, they are giving so many tax reliefs and allowances—at 130% of the cost and so on—that the effective tax rate is incredibly low, and the Government are reducing it even further by handing out more and more tax reliefs. So can we also see some reconciliation from the Government on the relationship between handing out these tax reliefs and a commitment to a global minimum tax rate of 15%?