Tax Avoidance

Debate between Nigel Mills and Angela Eagle

Wednesday 16th June 2010 Westminster Hall

[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.