Corporate Structures and Financial Crime

Michael Meacher Excerpts

Thursday 4th July 2013 Commons Chamber

[Mr Michael Meacher (Oldham West and Royton) (Lab)]

I pay tribute to my hon. Friend the Member for Bassetlaw (John Mann) not only for obtaining the debate and for making another strong speech on the subject, but in particular for his relentless campaigning on the issue of financial crime in all its forms, including money laundering, tax avoidance and evasion. That is what I want to concentrate on.

As the hon. Member for Wells (Tessa Munt) said, at the G8 summit, the Prime Minister made a great media blitz of his supposed crackdown on corporate tax avoidance. He tried to get UK-controlled tax havens to sign up to an OECD agreement on providing tax information. He also tried to secure a worldwide standard on automatic tax information transfer, to get the G8 countries to reveal the identity of shell companies and to help developing countries to get their rightful entitlement to tax. All those are extremely worthy objectives and no one in the House would demur from any of them, but all he achieved—it is achievement, rather than aspiration, that matters when one is Prime Minister—was a bland statement in favour of the principle of tax information transfer, without any actual means of enforcement.

The Prime Minister defended that feeble result by claiming that little can be done without international agreement and that it takes time to build that, but that is not true. Of course the best result would be an internationally agreed set of rules, but even in the absence of that there is a great deal that Britain can and should do. First, as a number of Members have said, the UK controls 10 Crown dependencies and overseas territories, which collectively embrace over one fifth, I think, of all the world’s tax havens. Most of them have signed up in principle—[Interruption.] Well, we shall see, but they have certainly signed up to the proposal for tax information exchange, and it is now within the purview of the British Government to enforce that proposal, if there is any reneging or backsliding, by the simple expedient of refusing to recognise any financial transactions emanating from those areas if there is any failure to secure full compliance.

That will generate a great deal of resistance, not least from the tax havens themselves, but also I suspect particularly from the big UK banks, which are the main users of these tax haven facilities. Since the Tory party continues to get more than half of its income every year from the banks—[Interruption.] There is no need to roll the eyes or shake the head, as that is an important fact, so facing down the banks on this important issue will test the Government’s resolve.

I therefore want to ask the Minister the following question, which I hope he will answer: will he assure the House that the Government will enforce these tax information exchanges with the tax havens they control? I agree he cannot do that without international agreement in the other havens, but he can control these ones. Alternatively, are we simply going to find that the Prime Minister’s fine words, which we all agree about, will just fade away in a puff of smoke after he has had his PR day in the sun?

What makes the Chancellor’s remonstrations about tax avoidance being immoral seem perverse is that he himself has now emerged as the arch proponent of tax avoidance. He is changing the controlled foreign company rules from 1 January next year to allow any multinational company with a subsidiary in a tax haven—and as the Minister knows very well, 98% of those companies do have a subsidiary in a tax haven—to reduce their corporation tax liability from 23% to a mere 5.5%. Given the boast of the Prime Minister and the Chancellor about cracking down hard on corporation tax avoidance, that is breathtaking hypocrisy. The message is, “Don’t worry about artificial tax avoidance. You needn’t do anything about that, because I am going to serve it up to you on a plate.”

Then the Government went even further. They have put forward the pro-tax avoidance proposal of the patent box, a wheeze whereby any patented process applying to any part of an enterprise, however trivial or minor, not only secures a reduction in corporation tax to 10%, but applies to the entire enterprise. Frankly, the more the Government go on in this way, pushing corporation tax almost to zero, the more tax avoidance fiddles become redundant, because the Government are doing it for them. Perhaps that is the Government’s aim.

[Charlie Elphicke]

Will the right hon. Gentleman give way?

--- Later in debate ---

[Mr Meacher]

The hon. Gentleman was a tax lawyer, I think. He is also a very mischievous Member of this House, but I will still give way to him.

[Charlie Elphicke]

I thank the right hon. Gentleman for his kind remarks about me. It is all very well for him to have a go at this Government, but he will recall that under his Government revenues from corporation tax rose by 6% while revenues from income tax, paid by ordinary folk in this country, rose by getting on for 100%. Does he think his own Government did such a great job?

[Mr Meacher]

I do not think that the previous Government did a great job. They did an appalling job on corporation tax, and the hon. Gentleman might be pleased to know that I said so at the time and I have always taken that view. The hon. Member for Bristol West (Stephen Williams) raised the issue of capital gains tax with me when I was last speaking, and I think that that tax should be at the same level as income tax. Corporation tax is another matter, of course, but it should be well above the levels the Government are now proposing.

The Government can and should restructure the whole approach on tax avoidance by switching the onus of proof away from Her Majesty’s Revenue and Customs and on to the potential perpetrators. That is exactly what my General Anti Tax-Avoidance Principle Bill was intended to do. It would have made it clear that any scheme whose primary purpose was to avoid tax, rather than being any genuine economic transaction, would be invalid in law and struck down. In order to discourage perpetrators of this attempt to bend the will of Parliament, there would be a sizeable penalty for attempting to subvert that will. My Bill had only a 10-minute showing on the Floor of the House, thanks to Tory filibustering of the prior Bill on that day, so perhaps I might take this opportunity to ask the Minister: does he accept the general anti-tax-avoidance principle? If he does not, what are his reasons for rejecting it? I think he will say that the Government are putting up their alternative—the so-called GAAR or general anti-abuse rule—but that really does not meet the ticket. I wish to say why, and I hope that he will listen to why the Government’s GAAR is really no alternative.

The GAAR is based on a report by Graham Aaronson, who was always a representative of the tax-avoidance industry and never of the tax-compliance will of Parliament. I accept that the GAAR will have some effect, because it outlaws egregiously aggressive and abusive tax avoidance, but of course the implication of that is that it legitimises rather less extravagant tax avoidance.

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

indicated dissent.

[Mr Meacher]

Perhaps we should have some debate about that.

[Mr Gauke]

Let me put the right hon. Gentleman’s mind at rest on this by saying that the GAAR does not do that. We accept that the GAAR is directed at egregious tax avoidance. It is an additional tool, but there will still be targeted anti-avoidance rules and other measures that the Government take. I want to make it very clear that we are not saying that if something falls outside the GAAR, there is no problem with it.

--- Later in debate ---

[Mr Meacher]

I am glad to hear it, but the Minister and his Government will have to prove that in the outcomes that we see over the months ahead. He makes an important point, but there is a perception that if we opt for a rule that is limited to dealing with the worst kind of tax avoidance, it suggests that the rest is rather less important in the Government’s mind; I cannot see the point of having a GAAR if one is also going to “include” other abusive tax procedures, about which there is equal concern. I am sure that debate is coming along, but I am glad that he said what he did and we shall certainly hold him to it. The GAAR could actually make things worse and, even at this late stage, I ask the Government seriously to reconsider whether they should not take over my Bill.

The Government could and should recognise that their strategy to deter tax avoidance, which has been in use for many years, including under the previous Government, via the disclosure of tax avoidance schemes—DOTAS—is of limited value and is inadequate on its own. It requires those who are designing and trying to sell these schemes to inform HMRC in advance about each new scheme they introduce. I understand that something over 100 new schemes have been disclosed in each of the past four years under the DOTAS proposals. That shows the industrial scale—I think that was the word that the hon. Member for Dover (Charlie Elphicke) himself used—of tax avoidance going on in the City.

DOTAS still leaves two problems. First, it can take HMRC many years to defeat any of the schemes if it goes to the courts and, secondly, some of those promoting such schemes will go to great lengths to avoid disclosure. Even if they are detected and taken to court, the penalty is often something derisory like £5,000 or so. Those involved in such schemes have every incentive to fail to comply with what the Government are seeking.

HMRC’s working definition of tax avoidance, which is often seen as a rather nebulous concept, is, rather sensibly,

“using the tax law to get a tax advantage that Parliament never intended”.

I think that is extremely sensible, so why can it not be cast in statute? Why can it not be laid down as the principle by which the Government and HMRC will test such schemes? That would see off the tax avoidance industry far more effectively than the soft touch of DOTAS. We are coming to the same view on tax avoidance as we did on the banks, and unless persons as opposed to organisations are held responsible—if need be, in extreme cases, by criminal sanctions—very little will happen. If a person were subject to a penalty that was a multiple of the tax charge—perhaps two or three times the charge, depending on the blatancy and gravity of the offence—for seeking to pervert the will of Parliament, that would act as a serious deterrent.

[Charlie Elphicke]

Will the right hon. Gentleman give way?

[Mr Meacher]

I think that others might wish to speak, but I am sure that I will carry on the conversation with the hon. Gentleman outside and on other occasions.

Finally, corporation tax is, as everyone recognises, so riddled with loopholes as a result of the evolution of the international economy and corporation structures over the past 30 to 40 years that it urgently needs wholesale restructuring. The drive towards territorial taxation must be abandoned and replaced by unitary taxation by which multinationals are taxed according to where their genuine economic activity occurred and not where they pretend it occurred to collect the huge windfalls of transfer pricing.

Surely the most appropriate corporation tax base is either free cash flow or economic rent—the amount, in other words, a business earns in excess of its cost of capital. There are several ways of doing that: removing interest deductibility, introducing an allowance for the cost of corporate equity or shifting the tax base towards tax flow and away from accounting profit.

I have tried to offer several positive proposals. I realise that it is possible to make a lot of pejorative remarks, which are probably just, about the performance of this Government and the previous Government in tackling the problem, but I have tried to be as positive as I can. Unless the Government adopt at least some of the proposals, their claims to have serious intentions about cracking down on today’s enormous cancer of corporate tax avoidance will be seen as the pretence that, sadly, I sometimes think it is.

[Several hon. Members]

rose—