Corporate Tax Avoidance

Debate between Richard Bacon and Ian Swales

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?