Tax: Avoidance and Evasion

Lord Young of Cookham Excerpts

Tuesday 13th September 2016 Lords Chamber

[Lord Young of Cookham (Con)]

My Lords, I join others in thanking my noble friend Lord Leigh for initiating this important debate, and for his powerful and knowledgeable speech. He made the case for lower taxation underpinned by proper anti-avoidance measures. Throughout the debate there has been a helpful range of suggestions as to how we might do better in this area and a unanimity of objective from all speakers that we have to promote a fairer society. I will come on to that in a moment.

For me, this is bit like Groundhog Day. Over 20 years ago, I was Financial Secretary to the Treasury and responsible for what is now HMRC. Noble Lords may recall a more memorable figure than me, Hector the Inspector, who helped launch self-assessment. That is one of my legacies to society. At that time, the issue of tax avoidance and evasion was taken seriously: in the only Finance Bill that I introduced, in 1995, we closed a number of tax avoidance loopholes, and were forecast to raise £1.5 billion over three years. As many noble Lords have said, this is not a static issue but a never ending game of cat-and-mouse, with the mouse ever mobile and able to get through small cavities in the building—not unlike the Palace of Westminster. My noble friend Lord Leigh has obliged me to update myself.

There can be no doubt about how much weight the Government attach to tackling effectively tax avoidance and evasion, in all its forms. At its heart it comes down to a question of fairness; this was a theme that ran through the whole debate. Every chairman of a FTSE 100 company ought to read the speech that my noble friend Lord Lupton made this evening. In a nutshell, what he said was that politicians misread the political mood when it came to the referendum, and that corporations run the risk of misreading the public mood when it comes to consumer behaviour. We have already seen some shareholder activism on executive pay and my noble friend outlined how, with the help of social media, consumer activism is becoming a much more potent force. There is a shift in attitudes towards companies, and the more responsible companies are already ahead of the game. They take their corporate responsibilities seriously and realise that there may be a backlash if they are seen to take aggressive tax avoidance measures.

There is another reason why we need fairness. It is because our businesses need to compete with their rivals on a level playing field, not one in which those who do not pay what they owe prosper as a result of unfair, not to mention criminal, advantage. That is why we are looking at all the ways in which we can crack down on tax avoidance and evasion—not only through legislation and the action we are taking here, but by driving progress and collaboration on the international stage, and recognising that this is a global challenge which operates across borders.

Our fight against tax evasion and avoidance starts with making sure that we are well equipped for the battle. The noble Lord, Lord Tunnicliffe, raised the issue of resources. Since 2010, we have provided HMRC with an additional £1.8 billion to tackle tax evasion, avoidance and non-compliance, helping it to secure an extra £130 billion in tax revenues. This includes £800 million extra that we invested at the summer Budget to enable HMRC to recover a cumulative £7.2 billion in tax from evasion and non-compliance by 2021. HMRC has also funded 3,000 additional recruits to improve customer service.

My noble friend Lord Borwick entered the Chamber listing heavily to one side because he was carrying with him a copy of this year’s Finance Bill. The Government aim to have a tax system that is simple to understand and easy to comply with. Although he may react with some incredulity, we are taking action to achieve this. We announced at the 2015 spending review a target for HMRC to reduce the annual cost to businesses of tax administration by £400 million by 2019-20. That is a key part of our agenda to create a simpler tax system. This target builds on business cost savings of £250 million that HMRC achieved in the previous Parliament.

My noble friend mentioned the Office of Tax Simplification. I will certainly pass on to its new chairman, Angela Knight, a former colleague of mine in the House of Commons, the suggestions he has made. So far, the OTS has made more than 400 recommendations to simplify the tax system, of which nearly half the Government have implemented. Clearly, we have further to go. My noble friend mentioned that some of his suggestions might be appropriate for the Chancellor to look at in the context of the Autumn Statement.

We are also putting into effect a range of innovative measures to tackle avoidance and evasion. In the last Parliament, we introduced accelerated payments, giving HMRC the power to collect disputed tax bills up front, and that has already brought in £3 billion. I welcome my noble friend’s comments about the general anti-abuse rule, which tackles the worst tax avoidance arrangements. In the Finance Bill we have just been discussing, we further introduced a new GAAR penalty of an additional 60% of the tax due and tough new measures for serial avoiders, including publishing the names of serial users of defeated tax avoidance schemes. We took on those who sought to promote tax avoidance by setting up a tough regime of penalties and monitoring requirements for high-risk promoters of tax avoidance schemes, thereby tackling the supply as well as the demand for marketed tax avoidance.

HMRC has an excellent record of success in litigating tax avoidance schemes. It wins around 80% of all avoidance cases that taxpayers choose to litigate, and many more settle with it before litigation. Earlier this summer, HMRC secured wins worth more than £800 million from avoidance cases involving films schemes attempting to use sideways loss relief alone. However, we must keep the pressure up, and there is much more we will be taking forward over the course of this Parliament.

Much of our debate dealt with international avoidance. As I said at the beginning, we need to ensure that we play our part in driving action at an international level. The UK has led efforts within the G20 to reform international corporate tax rules through the OECD base erosion and profit shifting project mentioned by my noble friend. This makes it harder for multinationals to avoid tax by shifting profits to low or no-tax jurisdictions.

My noble friend Lord Tugendhat referred to the EU Commission’s ruling on Apple. This is primarily an issue for the Irish Government, Apple and the European Commission, but the UK remains committed to ensuring that companies pay the right amount of tax on their activities. In response to my noble friend’s question, the UK is generally supportive of the Commission’s role in its proportionate enforcement and application action. We will look at the ruling carefully when it comes out to ensure that all corporation tax payments genuinely reflect companies’ activities, and we will take into account any new information as part of that.

My noble friend asked whether we will continue to work with EU member states. We are committed effectively to mitigating tax avoidance wherever it occurs. It is a cross-border issue, as my noble friend said, that requires a co-ordinated approach to come up with effective solutions, so we will continue to work with EU member states post the UK leaving the EU in addition to working with other international partners.

On the question my noble friend raised about whether the new offence extends beyond corporate liability to individual liability, I say that if a company is found guilty of not having reasonable procedures to prevent tax fraud, the people who are convicted are company directors for not having put in place reasonable procedures to prevent the fraud. For example, if a chief executive is a company director, this could extend to him or her.

In connection with international action, the noble Baroness, Lady Kramer, urged us not to engage in a race to the bottom by cutting corporation tax or offering unjustified tax breaks. We are committed to a competitive but fair tax system and have no intention of starting a race to the bottom.

As for the treaties that the noble Baroness referred to which may have been negotiated some time ago, decisions on the negotiation and renegotiation of a tax treaty are taken on the basis of a range of factors, including the role of treaties in promoting development. In all of its tax treaty negotiations with developing countries, the UK is committed to ensuring that UK companies pay a fair share of tax in the countries in which they operate. It has long been our practice to include robust anti-abuse provisions in all the revised double taxation agreements. We are also encouraging and giving support to developing countries to participate in international tax reform; more than 100 countries have now joined the inclusive framework on BEPS.

The noble Baroness raised a broader question about GAAR, and why we do not introduce a general anti-avoidance rule instead of a penalty. As she may know, this was looked at by Graham Aaronson’s independent study group in 2011, and again when GAAR was introduced in 2013. It was decided against, on the basis that it would be difficult to make a general rule focused on the right targets and would require HMRC to provide costly clearances to business.

We have led the way in converting these international avoidance measures into domestic legislation. This includes, for example, new hybrid mismatch rules to prevent multinationals exploiting differences in how countries tax financial instruments and entities, as well as new rules to protect against the use of interest on borrowings to shift profits overseas—as mentioned by my noble friends Lord Leigh and Lord Lupton. As other noble Lords have said, we now have the requirement for multinationals to provide HMRC with a country-by-country breakdown of their profits, tax and assets. In addition, we have been calling for an international agreement to get multinationals to report tax information publicly for each country in which they operate.

My noble friend Lord Leigh mentioned alternative methods of taxing businesses, such as a corporate tax based on revenues not profits. Although I agree that these are theoretically simple, issues remain as to whether such alternatives would achieve the right tax result, as linking profits to sales or staff numbers may well undervalue activity in the UK when most sales are undertaken abroad, thereby creating its own challenges.

A number of noble Lords mentioned carried interest. The Government have made changes in this area recently which have made the tax treatment of carried interest fair while maintaining competitiveness.

If I do not get through all the points raised by noble Lords, I will write to them. My noble friend mentioned VAT evasion. In this year’s Finance Bill, the Government are making changes to ensure the UK high street and online businesses can compete on a level playing field with overseas traders. The new measures will ensure that VAT is paid by businesses from outside the EU who store goods in UK warehouses and then sell those goods to UK consumers in online marketplaces. These changes will give HMRC stronger powers to make overseas businesses appoint a UK tax representative and will ultimately make online marketplaces accountable for the trading on their websites. I assure noble Lords that the UK is committed to effectively tackling tax avoidance and evasion and to promoting compliance.

I was asked why the HMRC non-executives were all from the private sector. The non-executives are recruited in line with the HMT code of governance for Whitehall departments, which states:

“Non-Executive Board Members, appointed by the Secretary of State, will be experts from outside Government”.

The HMRC complies with the code and guidance, and its board includes non-executive members drawn from a broad base of knowledge with experience of tax in the commercial and not-for-profit sectors.

Whether it is at home or abroad, we will keep leading the way in our efforts to put an end to tax evasion, avoidance and non-compliance. I pay tribute to the thousands of people at HMRC, who are working so hard to take on those who bend or break the rules. In doing so, they are not only helping to bring the gap between the tax owed and the tax paid to one of the lowest anywhere in the world but ensuring that we increase the tax yields year on year. These go to fund the vital public services we all rely on, as well as reducing the deficit and protecting the public purse.

Finally, I thank all noble Lords who have taken part in this most helpful and informative debate.