Corporate Tax Avoidance

Nigel Mills Excerpts

Monday 7th January 2013 Commons Chamber

[Ian Swales]

My hon. Friend makes a good point. Amazon has already been found out for charging 20% when it should have been charging 3% on e-books.

Should we care about all that? Yes, we should. There is the obvious point about the loss of billions in Government revenue, leading to higher taxes on other parts of the economy or cuts in services, including the very infrastructure and services on which a tax-avoiding company and its employees might depend. Then there is the question of competition. My previous experience was in the global chemicals industry, but in the internet and franchising age, the unfair effects can hit anyone. Our high streets are now subject to global competition in burger restaurants, bookshops and coffee bars. Local bookmakers have largely disappeared rather than trying to compete with rivals operating from Gibraltar—on paper. Most retailers are competing not only with the unstoppable rise of the internet but with offshore-based giants such as Amazon and eBay. The list of national and local UK businesses that cannot compete will get longer and longer: Comet was the latest to go broke, just before Christmas, probably costing the UK taxpayer £50 million.

Companies that pile up untaxed revenue in tax havens also have enormous financial muscle to reinvest cheaply or take out any other business they want to. It was recently estimated that the world’s tax havens hold $13 trillion of cash, which is the total GDP of the USA plus Japan, or enough to buy the entire London stock market four times over. That highlights the compound effect of tax avoidance, as those companies benefit from not paying the tax to begin with and can then use that money to compete ever more aggressively.

The big accountancy firms have led the charge in devising schemes from which companies benefit. What world do they envisage? If more and more companies routinely avoid taxes, the Government will get revenue only from people stuck as employees on pay-as-you-earn, and from property taxes, business rates and ever-increasing VAT and duty from the companies that cannot find ways to avoid them. There will be a net move from tax on companies to tax on individuals, and if that trend continues, only companies with offshore tax havens will be able to compete. A nation of shopkeepers will be run out of business. There is also a threat to our political system, because we cannot expect all those who pay their taxes fully and fairly to keep on tolerating such abuses indefinitely. UK Uncut might be just the start of the protests.

I have been talking about the problem; now I want to explore ideas for action. First, having a national tax system operating in an international business world means that we need to police our financial borders just as rigorously as we police our physical borders for illegal movements of people, counterfeit goods, drugs or any other activity that we want to control. We must say that if a sale or business activity takes place in the UK it should be accounted for in the UK. The idea that an item can be manufactured in the UK, stored in the UK and shipped to a UK customer, but invoiced from Luxembourg, must be challenged.

We should then force transparency into the system. UK companies doing the right thing report their profits and taxes paid to Companies House in some detail, so the blanket taxpayer confidentiality regime in HMRC, which prevents the disclosure of tax affairs not only to Parliament and the Public Accounts Committee but to HMRC’s own non-executive directors, mainly helps the international tax avoiders. It is time for the publication of simple statistics that are mostly available anyway in Companies House, as that would force companies to justify their behaviour. Transparency and honesty with consumers are important. If companies have nothing to hide, they will have nothing to fear.

[Nigel Mills (Amber Valley) (Con)]

Does the hon. Gentleman agree that one thing we could do is require large companies to file their corporation tax returns with their accounts at Companies House? Then, from their accounts, we could all see their taxable profits and how they got them.

[Ian Swales]

I appreciate that intervention, because I know that the hon. Gentleman has great experience in this area. He goes further than I was proposing, but it is certainly a good idea.

Transparency and honesty are important. As we have seen recently with Starbucks, transparency can lead to consumer power influencing company behaviour. I hope that we will see more of that. Retail, business or government consumers who do not like the ethics or practices of a company do not have to deal with them, except perhaps in cases involving utilities.

HMRC must also be more transparent. Although it steadfastly claims that it does not do deals, Vodafone’s finance director told the City that its deal was worth £500 million a year. One lesson from that and other cases is that no high-level discussions with companies should take place without being minuted, and those minutes must be freely available to tax commissioners and the National Audit Office. The transparency must work both ways; we cannot go on operating through tinted windows.

--- Later in debate ---

[Nigel Mills (Amber Valley) (Con)]

It is a pleasure to speak in yet another tax debate—we seem to be having more and more of them as the months of this Parliament go by. This is an important issue, and the debate is about corporate tax avoidance, not just corporation tax avoidance. We can sometimes drift into focusing on tax on profits and miss out on the avoidance of VAT or payroll tax, which we could more readily do something about.

The publicity on the issue has had some positive impact, because it has probably discouraged a lot of businesses from entering into aggressive or artificial avoidance schemes. That has to be welcomed on one level, but we do not want to go so far that we start to do damage. The last thing that we want to do is deter international investment in this country. After all, the Government have set out to make ours the most attractive corporate tax regime in the G20. There has been great progress on that through rate reductions, and I believe that after the latest reduction we are about fifth in the G20. However, when we consider the effective rates that people actually pay, we are down to about 15th because of the complexities of our system. There is still a lot of work to do to make our system an attractive one that encourages investment both internationally and domestically.

We have to be careful that we do not drift towards having a tax regime that ceases to be based on a clearly advanced and published rule of law and is instead based on arbitrary decisions, with the Revenue having the power to ignore the law completely or rewrite it retrospectively, or if that fails, to bully people into paying a bit more tax until we think it is about right. After all, corporation tax is on profits for tax purposes, not on profits for accounts purposes, and certainly not on sales for accounts purposes. It is worrying that people seem deliberately to confuse the matter, talking about a company with a turnover of £1 billion paying only £500,000 of corporation tax and saying that that is a low percentage. That percentage could be completely irrelevant, because if it has made no profit, it will pay no corporation tax. We need to be accurate and focus on a different issue.

There are some aggressive avoidance schemes that are intended to exploit UK domestic law that we can tackle. The Government are tackling them, and I believe they have announced some more rules today to do so. We need to be as proactive as we can on those schemes, and that is where the general anti-abuse rule has a role to play. I am a sceptic about that. I am not sure I like the idea of giving any government bodies the power to implement something that is not law, but which they think ought to be. We are here to make laws; they are there to implement the laws we make. If we get the laws wrong, we should sort that out and improve our processes, not expect those bodies to find a way of fixing the problem retrospectively.

However, a lot of the avoidance we have been talking about involves transfer pricing. We are an international economy and we want to remain one. One of the things we are focused on is trying to encourage exports—we want people to invent and design things here, and then export and license them and get royalties and sales back. However, we will not win if we start an international war to see who can clobber royalties the most or put up the biggest barriers to trade. That would be a suicidally stupid thing to do.

[Paul Farrelly]

One example of where the Government have quite sensibly changed the taxation regime is their approach towards remote gambling, where they are moving towards a “point of consumption” basis. We might argue about what profits should be taxed, but the principle is that the bet is taxed where it is “consumed”—that is, where the good or service is consumed—not where the business is accounted for. Does the hon. Gentleman agree that that is a model we might follow in order to repatriate other tax revenues?

[Nigel Mills]

Yes, I do. Indeed, I think we will end up travelling in that direction, because corporation tax rates will be in some kind of global race to the bottom—as we reduce ours, people will follow suit, which will lead to revenues falling. However, it is right to say that if something is sold to a UK customer, the VAT on it should be accounted for in the UK—in fact, what we are talking about is like a trading activity. To be fair, if I rang a random business in Botswana tomorrow and said, “Can you send me a widget you’ve made?”, and that business did not regularly sell anything to the UK, I suspect we would not be too worried, but sales of things regularly marketed into the UK should be accounted for here and VAT should be paid. I think we are moving towards that system, which is absolutely right.

To return to my thread, it is not in our interests to encourage some kind of global race towards tax barriers, withholding taxes or whatever else. The right hon. Member for Birkenhead (Mr Field) was talking about some strange tariff for international companies to come and trade here, which would be crazy—certainly illegal and probably economically suicidal. We do not want to end up in that sort of mess.

We should not vilify the payment of royalties, management fees, design fees or even interest. What we need to do is ensure that those payments are not excessive, either individually or collectively. One of the things I fear, having worked in the industry, is this. At times, it is easy to say, “That fee’s okay, that fee’s okay and that fee’s okay,” but then we forget to look at the overall situation in the UK and reflect on the fact that no one would operate a business if the most they could ever make was a 1% margin on turnover in a very good year, while regularly making a loss in an average or bad year. That is not how to trade: these things have to be looked at as a whole, to try to ensure that the profit expected in an average year is reasonable enough for a business to want to operate in that territory.

That point can easily be lost, so what the Government can do to try to improve the situation is this. First, we need global rule changes to try to make internet-based business fit our tax systems. What we are trying to do, not just in the UK but globally, is make a tax system from the 1940s and 1950s—or even earlier—work for a different model of business. I remember that even when I started work a lot of my clients were inbound investors who actually made stuff in the UK and sold it just in the UK. That is not how things work now: people make stuff in low-cost territories, market it globally and administer that regionally. I do not think our system can be made to work in the current situation, where we have Amazon. There is a global need for reform.

However, we can do more on transparency. As I said earlier, we ought to require large corporates to file their tax returns with their annual accounts. People might say, “We have taxpayer confidentiality,” and yes, for individuals we do have that. However, we make companies file accounts and show what their profits are. What is the harm in making them show how they got to their taxable profit and the tax they paid? That would add transparency and show that the vast majority of corporates are not avoiding tax at all, but trying to do the right thing and making use of the different calculations that exist for tax. I have moved amendments in this place proposing to move our corporate system much closer to one based on accounting profit. We do not need all the different tax schedules—we probably do not even need a capital versus revenue divide. We can get our tax system much closer to one based on accounting profit, which would stop all these fears that some people are avoiding tax when they are perhaps not doing so. It would be much harder to implement complex transactions if that were in the accounts published. Indeed, we are talking about the profit that a business is judged on by lenders and the markets.

We could go so far as to say that all multinationals had to disclose all their cross-border transactions with related parties. A lot of companies used to do that in their accounts. They would list the royalties that they had paid to the US, for example, and the management fees that they had paid to Japan. We could get back to that. It would not be too difficult for a company to say that it had paid a royalty of 6% on sales to the United States. That would aid disclosure. There are practical measures that we could take to improve the situation without ending up with some kind of awful taxation baseball-bat regime that would put people off investing here at all.