Corporate Tax Avoidance

Richard Bacon Excerpts

Monday 7th January 2013 Commons Chamber

[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.

[Mr Richard Bacon (South Norfolk) (Con)]

Does my hon. Friend not regard it as extraordinary that in the negotiations between HMRC and Goldman Sachs about some back payments that were due, no legal advisers were present and no minutes were taken?

[Ian Swales]

I thank the hon. Gentleman for that invention. As fellow members of the Public Accounts Committee, he and I have looked in detail at that case. He is right that such arrangements should not be made.

The UK should take a look at its own role and its relationship with tax havens such as the Isle of Man, the Channel Islands, the Cayman Islands, Gibraltar and so on, which the Secretary of State for Business, Innovation and Skills has described as sunny places for shady people. UK citizens deserve a full explanation from the Government of why they support those places as tax havens and what net benefit they bring to the UK.

It is also urgent that work takes place at EU level to ensure that companies cannot exploit sweetheart tax deals in countries such as the Netherlands and Luxembourg, aided by the free movement of goods, people and capital. It is time properly to enforce the 1997 EU code of conduct on business taxation. I am especially pleased to see you in the Chair, Madam Deputy Speaker, as that code was ratified under your chairmanship. It specifically highlights issues such as doing deals to give lower rates and tax incentives for activities that are isolated from the domestic economy of a given country. The OECD set up a forum on harmful tax practices at about the same time. Both initiatives highlighted the need for transparency. A race to the bottom helps nobody.

Next, the Government should consider disallowing some foreign interest payments for tax purposes. It is depressingly easy to move a chunk of capital to a low tax regime, then export all one’s profits via interest payments. Foreign interest should have to be specifically justified. When the loans were taken out, what was the purpose? Were they proportional to business need and are they now? Who is the lender? A related company deal needs particular scrutiny, especially as the capital may originally have been exported from the UK with no equivalent taxable interest coming back.

The Government should look at setting maximum royalty and management fees, and disallowing them as a deduction if they are disproportionate to profits. There should be an ability-to-pay test; such payments should not be allowed to wipe out UK profits, as we saw with Starbucks. The Government should work with international partners to disallow management fees and royalty, patent and copyright fees unless they go direct to the country where the relevant value was generated. Payments to tax havens could be automatically disallowed. When a company claims that rights have been sold to other countries, it needs to show that a full and fair price was paid. Of course, that would crystallise a big tax liability in the selling country. The United States would be especially enthusiastic about such a move, as it is one of the big losers from payments going to tax havens.

Because our tax systems are national, all movements of value across borders, including business transfers, need a price attached to them for tax purposes. The Government must also find a way to ensure that VAT is charged on all qualifying sales in the UK, whatever the country of origin. To go back to the point made by the hon. Member for Brighton, Pavilion (Caroline Lucas), we need much more specialist resource in HMRC. A department that brings in 100 times what it costs should not be treated like a normal cost centre; there must be many more invest-to-collect business cases to be made. Maximising our tax revenue is as much about enforcing the rules as about the rules themselves. In particular, a special unit is needed to look at everyone running an internet-based business selling to UK customers, starting with the biggest. It should look at where they are based, their business model and whether they abide by UK VAT and corporation tax rules. We need our rules and enforcement to be up to date with technological changes.

The tax system is way too complex; a whole industry has grown up to find creative ways to avoid tax. When will we see significant output and action from the Office of Tax Simplification? Surely we need radical ideas for cutting through the jungle of our tax system, not just the deletion of obscure, rarely used reliefs. Simplification is badly needed, yet we see even more complexity.

I talked earlier about consumer power. The UK Government are by far the biggest purchaser and grant-awarding body in this country. Is it right that Amazon can get more than £10 million of Government money for a new warehouse in Dunfermline when it is a Luxembourg-based retailer paying little corporation tax in this country, and apparently does not pay VAT on all its sales either? Is it right that Accenture, Capgemini and others win Government contracts when they are named as aggressive tax avoiders? Should HMRC itself have sold its buildings for leaseback to Mapeley, a Bermuda-based company? Is it not time that we recognised in financial assessments that most of the profits from private finance initiative and outsourcing contracts are now disappearing offshore?

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[Mr Richard Bacon (South Norfolk) (Con)]

It is a great pleasure to take part in this debate, and I commend my fellow member of the Public Accounts Committee the hon. Member for Redcar (Ian Swales), on bringing forward this debate. I was interested in his exchange with the hon. Member for Brighton, Pavilion (Caroline Lucas) on having a set of general anti-avoidance rules. Her view was that it is best to have a set of principles, because principles are less easy to bend than rules. I am not quite sure that I agree; whenever I hear anyone talking about principles, I hear the voice of Oscar Wilde saying, “If you don’t like my principles, I have others.” I fear that if there were a general anti-avoidance principle, as long as it were justiciable, which it would be, it would just create more work for lawyers. I do not think that there is a simple way round this, other than simplicity. I shall come on to that in a minute.

I do not normally take too much notice of the handouts for these debates, but I thought I would take a look at today’s, just in case. I was struck by the words at the beginning, under “points to make”:

“Tax evasion is morally wrong as it means that law-abiding people face higher taxes to make up for the lost revenue.”

Right there, in the first sentence, is the confusion that is so widespread that the difference between tax evasion and tax avoidance has almost disappeared—so much so that I wonder whether I was dreaming when I used to think that there was a clear division between the two. Of course, tax evasion is not just morally wrong; it is illegal. That is the central point. Tax avoidance is not illegal.

I shall quote from the National Audit Office report, “Tax avoidance: tackling marketed avoidance schemes”, which provides a handy definition. You drove through a lot of the legislation on this in the previous Administration, Madam Deputy Speaker, though you have probably forgotten much about this. The report says:

“HMRC’s working definition of tax avoidance is ‘using the tax law to get a tax advantage that Parliament never intended’. Unlike tax evasion which involves fraud or deliberate concealment, tax avoidance is not illegal. However, it often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage.”

That gives rise to the question: how can it be that tax avoidance has grown so much, and how can it be that we have the distinct impression—the Treasury might try to deny it, but I believe that there is evidence for it—that there has been simultaneously a cosying-up to a large number of bigger corporate taxpayers, and tightening of terms applying to, and greater aggression from HMRC towards, small businesses in our constituencies?

The best example of cosying-up that I can think of is the deal with Goldman Sachs. Some years ago, a number of investment banks—around 22 of them—came up with a scheme for avoiding national insurance contributions by ensuring that many of their highly paid employees were technically employed by a company registered in the British Virgin Islands. It was a very contrived scheme, and HMRC challenged it. Indeed, 21 of the 22 investment banks involved caved in eventually and paid the money due. One did not, and that was Goldman Sachs, which continued to pursue its position for many years until, in October 2005, HMRC wrote it a letter, warning it that unless it played ball, it would eventually be liable for all the interest due on the back payments as well.

The case continued for many years, and in 2009 there was an important Court of Appeal judgment that was favourable to HMRC, which made it all the more surprising when HMRC did not pursue the matter more vigorously. It came out in the PAC’s hearing on the subject that the permanent secretary for tax—the head of HMRC—was unaware of the warning that HMRC had issued in a letter to Goldman Sachs in October 2005 until I told him about it. That rather makes one worry about whether HMRC has the right skills in the right places. Indeed, that was the central burden of the National Audit Office report, “Core skills at HM Revenue & Customs”, published on 2 December as HC 1595.

The report makes pretty grim reading. It makes it clear that

“HMRC does not yet have a strategic and systematic approach to its investment in skills”,

and because HMRC is so decentralised, it cannot ensure that there is alignment, at a high level, of investment in skills with its business priorities. To quote the report:

“As well as having limited information on its investment in skills, HMRC does not, at the level of the organisation as a whole, know its current skills gaps or gain an early warning of future skills gaps.”

The report continues:

“there is no clear line of sight from HMRC’s Executive Committee to business areas that would enable the Executive Committee to evaluate whether business areas are delivering expected business benefits from their investment in skills”,

and

“Problems are slow to be resolved. Many of the points in this report were raised by HMRC’s own reviews in 2008 and 2009, but HMRC has not made the changes needed.”

The report goes on; I could quote much more, but I am trying to be brief. The issues that we face to do with corporate tax avoidance are fundamentally to do with complexity. The reason we have had an increase in tax avoidance is that we have had an increase in complexity. The only cure for that is much greater simplicity.

I mentioned earlier that I have seen evidence of a tightening of the attitude of HMRC towards small business customers. Recently, a bookkeeper came to see me in my surgery; he does the accounts and tax returns for a variety of small businesses, from corner shops to companies with a £10 million or £15 million turnover—everything from small manufacturers to fish and chip shops. He came to see me because he was concerned about the change in HMRC’s behaviour; it was becoming more and more aggressive. He had clients who had had to lay people off in order to pay tax bills, and with whom HMRC was not making the time-to-pay arrangements that are certainly made available to some larger companies. Vodafone’s is a classic case: although it had £10 billion on its balance sheet, it was given five years to pay the tax liability resulting from the dispute to which the hon. Member for Redcar referred.

I do not think that the solution that we saw in the case of Starbucks, which gave evidence to the PAC, is the right one. Starbucks made the bizarre announcement that it would pay £10 million in corporation tax in each of the next two years, whether or not it made a profit. That is not the way forward. As for the idea that companies should pay corporation tax because the mob has turned on them, the spotlight is on them, there is public relations attention on them, and they think they have to make an announcement and do something, that is a bizarre way of arranging our tax affairs. The way to do it is for companies to obey the law.

[Mr Frank Field]

If Governments are inactive on this front, what action does the hon. Gentleman propose taxpayers should take, other than that mob action?

[Mr Bacon]

Governments should take notice when they see outside 100 Parliament street, the headquarters of HMRC, large crowds of riot police—there are photographs to that effect, which can easily be found on the web. When Governments see such a thing happening, they should sit up and take notice that the system is not working and that it is not fit for purpose. I understand the burden of the right hon. Gentleman’s question. I understand why people are so angry and feel that they need to do something. There are many people, including those who have given their lives and those who have fought overseas on behalf of this country, who probably would have had better equipment if more tax revenue had been collected—if more of the tax revenue that should have been paid was paid.

It is not always a case of the tax not being due. If HMRC does not have the resources in the right places to check whether the tax is due or not, it may indeed be that corporations are acting illegally, that what they are doing is evasion and that they are getting away with it. That is why it is so important that HMRC is able to have the right management information at the top level so that it can align its investments in skills and in people with its business priorities in a way that currently, as is clear from the NAO study, it is unable to do.

I believe that the solution to all this must be much greater simplicity, and I mean radically greater simplicity. The time for tinkering is over. It was Einstein, I think, who famously once said that the definition of insanity is to do the same thing over and over again and to expect different results. It is time that we got different results and we will get them only by taking different action.

[Several hon. Members]

rose—

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[Karl MᶜCartney (Lincoln) (Con)]

I congratulate the hon. Member for Redcar (Ian Swales) on securing this Back-Bench debate on corporate tax avoidance. It is an important subject that has been dangerously blurred by some of our colleagues. I want to say at the outset that I find myself far more concerned about the way in which Government spend our money than about how they collect it. If spending were controlled, or had been—I give the example of the last Labour Government—the collection problem would be vastly reduced. I believe that my Government have taken such sentiments to heart and we are actively reducing spending to aid our country in difficult economic times.

I certainly think the approach of the Chairman of the Public Accounts Committee, the right hon. Member for Barking (Margaret Hodge), and others who have swallowed her line, misses two simple and quite fundamental points. First, the tax on shareholders is inseparable from company tax and is quite high. While companies are literally separate legal entities from their shareholders, they are in effect tax collection agencies for Governments to tax the profit stream which in effect belongs to their shareholders. That profit stream is not just taxed by the corporation tax payment on which all of this debate is focusing. In reality, the profit stream belongs to the shareholders and it is taxed not once by corporation tax, not twice by corporation tax and income tax, but three times, once as corporation tax, once as income tax on distribution, and finally with capital gains tax, or inheritance tax, on retentions as a proxy for the capital gain.

I have a sound mathematical example in my notes that might well lose some Opposition Members, so let me just outline that on £100 of pre-tax profit, with corporation tax and other taxes taken into account, the Government take £52.91 in tax paid. Some of this amount comes from income that can be deferred, but it is a tax that is ultimately not avoidable, other than perhaps by devices such as the trust of the right hon. Member for Barking for her shares in her family company, which one presumes is morally fine with the Opposition Members who have followed the debate so far and so must be okay. But that near £53 from £100 does not sound very low to me, especially given that the Government scrapped indexation relief on capital gains at a time when they are clearly targeting higher inflation. Perhaps more importantly though, what incentive is such a tax on profits to entrepreneurs? What encouragement do such figures give to those involved in setting up and driving forward young businesses, or those entrepreneurs thinking of taking that big first step into the world of small business and working for themselves?

Secondly, is it wrong for companies to avoid tax? Janan Ganesh in the Financial Times has written well on this particular issue, but I would draw hon. Members’ attention to one of his main and salient points for this debate with which I agree. The Starbucks precedent—and by association, one might say, any future pressure on Google, Amazon, and historically some of the mobile phone companies and indeed perhaps most notoriously the Guardian newspaper group—is a dangerous one. Tax should be a matter of law not moral persuasion. If any Government want Starbucks or any other corporation to pay more tax, let them pass an appropriate piece of legislation. Otherwise tax payment will become a matter of public image and impact, and I imagine that very little tax will be paid by the maker of the polystyrene cups, which we may never have heard of. Do we really want to travel down “The X Factor” road of choosing something, indeed policy setting in this country, making important decisions based on fickle public opinion on the hoof?

[Mr Bacon]

While my hon. Friend is right that it should be a matter for law, not for moral persuasion, PricewaterhouseCoopers’ request of the Government, in the consultation that took place last year, that they should do more to clarify what constitutes unacceptable tax avoidance versus what constitutes acceptable tax planning, places a burden on the Government to be clearer about their own intentions.

[Karl MᶜCartney]

My hon. Friend will be pleased to know that I agree with him. I will mention PricewaterhouseCoopers shortly.

The objective of business, any business, is not ostensibly to do good or to pursue corporate social responsibility; it is to do business and make money for the owners and/or shareholders. Directors of all small, medium, large and multinational companies have a fiduciary responsibility to maximise gains for that company’s owners, including minimising the tax paid. Any diversion of company management from that objective is wrong as a matter of law and dangerous as we move forward in the 21st century.

John Christensen of the campaign group Tax Justice Network made a true claim when he said that the figures highlight that tax avoidance by large businesses has become a “much bigger issue” over the past 10 years because of the “enhanced relationship” policy put in place. That policy was put in place by the then Labour Prime Minister, Tony Blair, and his then Chancellor and ultimately successor as Labour Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown).

The problem is perhaps exacerbated in that we have a very complicated tax system. The previous Labour Government did nothing to uncomplicate matters. In fact, they set up a whole new industry making it more complex. What we need as a country, and for us to remain an economic powerhouse on the world stage, is much greater tax simplicity and lower tax rates.

I am pleased that the Government are consulting on a general anti-abuse rule, the GAAR, targeted at artificial and abusive tax avoidance schemes, with a view to bringing forward legislation later this year. Echoing my earlier statement, Mary Monfries, head of tax policy and regulation at PricewaterhouseCoopers, has also been quoted in the media saying with regard to our tax system that “simplicity is key”. She described complexity as a

“key problem with the current tax model”,

adding that the GAAR should

“help to act as a disincentive”

against

“abusive, extreme tax avoidance arrangements”.

But I also believe that some of my colleagues are being disingenuous with the great British public in that the vast majority of multinationals mentioned are not breaking any laws and, as the Government make the law, it is their own and our fault if companies use the rules in place to minimise their tax. Our tax legislation is huge and very complex, so any shortcomings are down to Government failure to create and implement the right tax framework.

The multinational aspects of tax collection and avoidance can be solved only by international bodies working together. That will not be easy for any of my ministerial colleagues to achieve I am sure, but as for any avoidance by UK companies, we do not perhaps need this debate now, as the GAAR legislation will, we trust, come into force during the next tax year. Surely that is the mechanism to stop so-called unacceptable tax avoidance that the hon. Member for Redcar seeks to debate this evening. Many private sector individuals in business may view this debate and other pronouncements by some hon. Members as politicians just diverting public opinion away from their own shortcomings by encouraging media interest in the tax avoidance issue. As politicians we organise the rules and therefore as long as what the companies do is legal, morality surely does not come into it much. Google, The Guardian, Amazon and others are perhaps insulated in that they have little direct competition in the services they provide, so no incentive to make voluntary tax payments as they have avoided such sizeable payments for a number of years. But Starbucks is now paying reportedly quite sizeable sums of voluntary tax, not for moral reasons but to protect its brand and customer loyalty—that is, to protect its profits.

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[Mr Nick Gibb (Bognor Regis and Littlehampton) (Con)]

I pay tribute to the work of the Public Accounts Committee, particularly its questioning of executives from Starbucks, Google and Amazon on 12 November. I will focus on just one of those companies: Amazon.

I preface my remarks by paying tribute to the brilliant service that Amazon provides. It has made buying books far simpler and cheaper for millions of consumers, myself included. The speed of delivery and its innovative logistics make it a company about which there is a huge amount to admire. The question, though, is: which company? The way in which Amazon is structured means that, when I buy a book from Amazon, I am in fact buying it from Amazon EU SARL, a Luxemburg company. The profit on the sale of a book belongs to this Luxemburg company, notwithstanding the fact that Amazon owns no warehouses in Luxemburg and that the book, if it is in English, will have been sent from one of Amazon’s eight warehouses in the UK. Amazon.co.uk Ltd, a UK company, is just the service company for the Luxembourg company, fulfilling a customer’s order on behalf of Amazon EU SARL. Therefore, although Amazon’s sales in the UK are in the billions of pounds, the sales income of the UK company is just £207 million.

The technical thing that the tax planners at Amazon are keen to avoid is creating what the tax authorities call a permanent establishment of the Luxembourg company in the UK. If the UK tax authorities perceive there to be such a permanent establishment, all the income of the Luxembourg company that relates to that permanent establishment would be taxable in the UK. When I drive up the M1 and see the huge Amazon buildings that package and dispatch millions of books a year, I cannot help thinking that they look pretty permanent, but technically they are not. There will have been great effort and attention to the detail of the documentation to ensure that the warehouses are the operation of the UK service company and that all Amazon’s property and activity in the UK relate to that service and not to the activities of the Luxembourg company.

[Mr Bacon]

When my hon. Friend sees those buildings, do they move slightly each time? Are they on wheels?

[Mr Gibb]

My hon. Friend makes a good point. Everyone knows that this structure is a legal fiction. All the real economic activity for the transaction of my book purchase takes place in the UK. Andrew Cecil, the director of public policy at Amazon, in his evidence to the Public Accounts Committee, said that Amazon.co.uk is the trading name of the Luxembourg company. Therefore, although it sounds as though I am buying my book from the UK company, in fact I am not. However, according to the e-mail that I received in December confirming a book order that I made, if I want further details on my statutory rights, I should contact Amazon.co.uk customer services at 2 to 4 Waverly Gate, Edinburgh. The trading name for the Luxembourg company therefore has premises in Edinburgh. Does that not sound like a permanent establishment of the Luxembourg company?