Tax Avoidance

Nigel Mills Excerpts

Wednesday 16th June 2010 Westminster Hall

[Nigel Mills (Amber Valley) (Con)]

It is a pleasure to speak under your chairmanship, Dr McCrea.

Until the election, I was employed by one of the large firms of accountants, although I assure the hon. Member for Southport (Dr Pugh) that I was not involved in tax avoidance. My role was to seek up-front agreements with Her Majesty’s Revenue and Customs, which was generally more than happy to enter into such agreements with my clients. I am not guilty of the things of which he accuses accountants. I have practised as a tax adviser since 1996, so I remember the previous Government’s attempt to introduce a general anti-avoidance rule in 1997-98, and I can just about recall why that attempt failed.

I agree with much of what the hon. Gentleman said. It is clearly right to tackle tax avoidance and it is important that the new Government continue to do that job. I accept that the previous Government took many effective measures on that front—the move towards targeted anti-avoidance rules and the principles-based approach was the most effective way forward. However, if we are to get the deficit down, we need to increase tax revenue, so we need to attract taxpayers to the UK and encourage them to remain here. A general anti-avoidance rule in principle may not be a brilliant way of doing that.

[Dr Pugh]

I wonder whether the hon. Gentleman has any evidence of that. We have enough examples worldwide of such rules being implemented. We ought to be beyond the stage of simply suggesting that it can happen. We should be able to point to empirical data showing that that is exactly what has happened in places such as Hong Kong.

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[Nigel Mills]

I am afraid that I do not have those data in front of me. Having worked with many businesses on where they want to locate head offices or functions, I know that one of the key determinants of their choice is the tax regime—its simplicity, the ease of compliance and the overall rate. The combination of difficulty of compliance, the rate and ease of getting certainty on tax treatment is what makes people choose where to go. The risk of a general anti-avoidance rule in that situation is that it makes certainty hard to get, and it would be bad to combine that with the UK’s very complex tax regime and some tax rates that are currently not over-competitive, although I hope that that will change. The combination of those three factors might make the UK an unattractive location for people to come to or stay. I am sure that many bodies can provide those data.

The key to tackling tax avoidance is to make tax law simple and understandable to taxpayers. The hon. Gentleman talked about tax avoidance being a way of frustrating the intent of tax law, but at times, it is important that the intent of the tax law is clear in the drafting and that the drafting achieves that intent. Often, commercial situations grow up that tax law does not specifically address, so the intent of Parliament is not easy to establish. If we get the drafting right, it might take away some of those problems. The hon. Gentleman alluded to the finance and Treasury rules, which are incredibly complex and have produced various loopholes that have been exploited in various ways. That is a case of very complex legislation that no taxpayers I can think of could understand, and that the vast majority of tax advisers—myself included—did not really understand. I suspect that a lot of staff at HMRC could not possibly understand it either. If we get that right, some avoidance opportunities will not come up in the first place.

The hon. Gentleman said that he was not the person to draft a general anti-avoidance rule. Where the previous legislation floundered was in the attempt to find words that achieved what was wanted without unnecessarily stopping or discouraging many things that we want people to do. The examples cited at the time were the various tax-advantaged savings schemes, such as individual savings accounts, which in theory would fall within a general anti-avoidance rule unless a lot of care was taken over the exemptions included. Getting the drafting right is extremely difficult, and a lot of detailed consultation will be needed if the Government want to proceed.

I have experience of dealing with some of the existing anti-avoidance legislation, which generally looks at a transaction’s main purpose or one of its main purposes, or at the main benefit or one of its main benefits—one has a choice of which way to go. The difficulty comes in defining “transaction”. What is a scheme of transactions? How many are related? Are we tackling individual components? Should the purpose of the individual components or of the scheme as a whole be looked at? Understanding what is being done becomes very complicated. For example, somebody could decide to buy a UK-headquartered multinational business. We would all say that that is a good commercial purpose, but it commonly needs to be done differently in various territories, depending on the tax needs of those territories. As a result, individual elements of the transaction might be created that look as though they are motivated by a tax benefit, whereas, overall, they are part of a main commercial transaction. We could create great uncertainty about those transactions, which might then fail because the businesses or individuals involved could not be confident that they would get the commercial benefits they were trying to achieve without being drawn into some huge, long tax dispute.

[Ms Angela Eagle]

The hon. Gentleman is making a fascinating speech illustrating precisely the problem that everybody has to grapple with, as the Minister will have to in due course. If one goes for a simple, declaratory and principles-based approach, one has to think about what is motivating people, which is difficult. The only other way of approaching it is the extremely complex and byzantine method of looking at what to do in each circumstance, which the hon. Member for Southport (Dr Pugh) was worrying about. The hon. Member for Amber Valley (Nigel Mills) is illustrating the fact that we get into difficulties whichever route is taken.

[Nigel Mills]

The hon. Lady is correct. The previous Government happened on what is probably the right balance, which is to have principles-based rules targeted at commonly exploited rules, so that taxpayers know when they are wandering on to dangerous ground and therefore need to deal with those rules, rather than having a general principle that might apply to every tax in every situation. The hon. Gentleman mentioned that it puts the burden on taxpayers to declare that what they are doing has a mainly economic benefit rather than being an attempt at tax avoidance. That is a huge burden to put on taxpayers. I am not sure that we should put the burden of knowing how to comply with a general rule in complicated and innocent situations on to every payer of every tax in the country. I am not sure if that is what he intends.

[Dr Pugh]

Some of us laboured long and hard over controlled foreign companies. I remember one difficulty was deciding how different transactions should be linked and/or broken up. Anyone reading the legislation, highly specific as it is, will have to do an enormous amount of work—no less than if they had to apply a general principle to their circumstances.

[Nigel Mills]

I have some familiarity with the controlled foreign company rules, or at least the previous version—I never had to get too close to the attempt to reformulate them. Yes, they are incredibly complicated and they were complicated before, although there was a purpose exemption in the previous rules that was in some cases helpful. I would not necessarily suggest that the new Government should exactly follow the approach that was taken to reforming those rules, because it was a long drawn out process which is, I think, still incomplete.

If we are to tackle avoidance without going down the general anti-avoidance rule route—if the Minister is minded to go down that way, I suspect that by the time he has gone through the full gamut of consultation, he will be backing off quickly—perhaps we should look at overall solutions for tackling the problem rather than proceeding on that basis alone. Targeted purpose rules in areas of tax that are commonly exploited are the better way to go. As a way forward in tackling tax avoidance, we want simple, clear legislation so that the intention of Parliament is clear and both tax authorities and taxpayers can understand the aim of the law and what the rules are. That will help to support the moral argument: if we all understand the right amount of tax to pay in a situation, everyone should be paying it. The present complexity gives people the veneer of an excuse when they structure transactions in an artificial way.

The hon. Gentleman mentioned tax havens. There is a lot of scope for tax planning using other EU nations that have very different tax regimes or much lower tax rates in some situations. I am sure that the Minister has found in his in-tray a load of pending or ongoing cases at the European Court of taxpayers claiming that they have suffered tax that does not comply with various EU treaties. Roughly how much tax is the Exchequer in danger of losing or having to pay back as a result of those cases? It is important when looking at tax law to make it compliant with systems outside the UK, but it is difficult to do.

My area of expertise was transfer pricing. We were forced to apply transfer pricing rules on transactions within the UK, rather than just cross-border ones, which added a huge compliance burden that, frankly, taxpayers were not desperately excited by and the tax authorities did not have anything at stake on. I hope that we can find better ways of writing tax law that do not add to that burden. Perhaps some tweaks to European treaties would have been a better way of sorting this and creating OECD-compliant tax law, rather than using a sledgehammer to crack a nut.

If we want to tackle tax-avoidance effectively, let us have simple, clear legislation, and where there is abuse, let us have targeted, principles-based anti-avoidance rules that state clearly that the intent of Parliament is to stop one-sided complex financing transactions that have no commercial benefit and get a big tax advantage. In that way, we will make the progress that the hon. Gentleman wants.

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

It is a great pleasure to serve under your chairmanship, Dr McCrea. Let me begin by endorsing your words with regard to the right hon. Member for East Ham (Mr Timms). It was a great privilege to shadow him for a number of years, and I look forward to his return. I know that he has a formidable intellect and is a fine parliamentarian, so he will be a very testing person to have as a shadow. He is also a very good man, and I wish him well. I endorse the words of the hon. Member for Wallasey (Ms Eagle).

I congratulate my hon. Friend the Member for Southport (Dr Pugh) on securing this debate and on his excellent contribution. He has the benefit and experience of serving on many Finance Bill Committees. The second excellent contribution was from my hon. Friend the Member for Amber Valley (Nigel Mills), who, I suspect, will serve on many Finance Bill Committees. He brought great expertise and considerable practical experience to the debate.

We had a thoughtful debate on some of the matters relating to the general anti-avoidance rule, and I shall say more on that during the course of my remarks. The quality of this debate has been extremely helpful, and I am very grateful to my hon. Friend the Member for Southport for highlighting this particular issue, and for giving me the opportunity to say a bit more about tax avoidance and the tax gap.

I am grateful to the hon. Lady for her kind remarks in respect of my position. I had the pleasure of shadowing her to some extent. I did not directly shadow her position, but we served on Finance Bills together. She has demonstrated today that she is as tenacious in her Opposition role as she was as a Minister, and I hope to be able to answer her questions.

The issue of the tax gap, which incorporates tax avoidance but does not consist solely of it, is important for the Government. As earlier speakers have mentioned, it has been brought into even sharper relief by the dreadful state of the public finances, which we have inherited from our predecessors. As the hon. Lady pointed out, there is a public mood for people to do the right thing and to play by the rules, and that includes paying the taxes that are due under the law. Those who do not do that have very little public sympathy. The hon. Lady said that she felt that the previous Government are being traduced and unfairly criticised over their record. Although I would be the first to point out the failings of the previous Government with regard to the public finances, there are elements of both HMRC and the previous Government that I want to address in a fair manner, and their record is not all bad.

We are grateful to HMRC for publishing, for the first time, tax gap figures across all of its regimes in December 2009. It was the right thing to do and we welcome that greater transparency of information. Tax gap figures for VAT have been published for some years, but this was the first time that figures for direct taxes had been published. As we have heard, HMRC estimated the UK tax gap to be around £40 billion in 2007-08. That figure is net of the amounts collected through HMRC’s compliance activity.

The tax gap is the result of several different factors, ranging from tax evasion and organised criminal attacks on the tax system through to errors made by customers. One of the largest factors contributing to the tax gap is avoidance. Tax avoidance is estimated to contribute around 17.5%—around £7 billion—of the total tax gap. It is worth making that point at the beginning because, although those contributing to this debate today have not fallen into this trap, there is sometimes a conflation between the tax gap, which is a considerable figure, and tax avoidance, which is still a considerable figure but is only part of the £40 billion figure. None the less, £7 billion is a substantial sum, and this Government are determined to reduce it as far as possible.

As our coalition programme for government says, we will make every effort to tackle tax avoidance, which will include considering the Liberal Democrat proposals. I hope that my hon. Friend the Member for Southport will forgive me, but with the Budget in six days’ time, I do not intend to pre-empt anything that my right hon. Friend the Chancellor may say on that day. My hon. Friend rightly says that my previous responses in this area have been more like holding answers, and perhaps they have, but I hope, given the proximity of the Budget, that he will understand why. For that reason, and that reason alone, I do not intend to wander down the path of capital gains tax, which he gently mentioned. I have no doubt that my hon. Friend will be paying attention to what the Chancellor has to say next Tuesday.

I will say a word or two about the general anti-avoidance rule, which was well debated by both my hon. Friends. They managed to tease out some of the issues as well as outline some of the questions that have to be asked. The hon. Lady talked about the balance between principles and something that is much more targeted. One of the questions that we must consider is whether it enables us to reduce targeted anti-avoidance rules. Do we know the answer to that until we know what the attitude of the courts is? That is clearly something that is worth exploring. Does it require a clearance regime in order to make it work? If it does—in some countries it does and in others it does not—what resources will be necessary? My hon. Friend mentioned HMRC resources in that area. In total, HMRC has something like 17,000 tax professionals. Not all of them work exclusively on tax avoidance matters, but many of them do. There is a question, therefore, over how resources are deployed.

[Nigel Mills]

If the Minister was minded to proceed down that line, a clearance mechanism would be essential to avoid creating huge uncertainty for taxpayers. Having had much experience of dealing with the clearance system, I can say that it would take huge amounts of resources to deal with the amount of clearances that we would get for a general anti-avoidance rule. Almost everybody would want to get that certainty. In any remotely complicated transaction, there would be some element of doubt in the situation. There is a real risk in the case of a purpose transaction. For example, someone may say, “My intention here is commercial and not to avoid tax.” They want HMRC to write back and say, “Yes, we agree.” However, they would have to give a lot of information to achieve that response. There is a risk that if the transaction changes slightly, the claim becomes invalid, or that a hugely long and detailed inquiry would be needed covering many aspects and many different taxes, and that would take a huge amount of time and a lot of resources to complete, which will discourage the transaction from taking place at all.

[Mr Gauke]

I am very grateful to my hon. Friend for that intervention. At this point, given that we will have a Budget next week, I will say that there are a number of issues here. The Government are not hostile to exploring these areas. The coalition agreement is very clear in saying that we want to look at the Liberal Democrat proposals, which included a general anti-avoidance rule. However, my hon. Friend is right to raise some of the complexities and difficulties that may exist and that may need to be overcome. That is a debate that I think the Government, across the board, welcome and want to take forward.