Tax Avoidance and Evasion

Simon Hughes Excerpts

Thursday 13th September 2012 Commons Chamber

[Margaret Hodge (Barking) (Lab)]

I, too, congratulate my right hon. Friend the Member for Oldham West and Royton (Mr Meacher) on securing the debate. I welcome the growing public interest in these issues, which is perhaps not reflected in the attendance in the Chamber on a Thursday afternoon. An issue that is sometimes seen as dry and complex and often portrayed as too difficult or obscure for people to get their heads around is now accepted as a matter of great public interest. I welcome the determination of the media in that regard, particularly that of The Times, which has done a good job of investigating the issues and identifying and exposing what is becoming a plethora of tax avoidance schemes that persist in the UK.

Hard-working British families, who have had to cope with a cut in their living standards and less money in their pockets because of the state of the economy and who pay their proper contribution in tax to fund all our collective endeavours and ensure that we have the public services and infrastructure on which we all depend, are rightly angry when they see a small elite in Britain—wealthy individuals and profitable large corporations—avoiding tax and putting so much time, energy and money into finding ways to avoid making their proper contribution. It is a terrible sickness at the heart of our society that too many well-heeled individuals and profitable corporations simply do not accept that they, too, have a duty, coming from their legitimate wealth, to contribute according to their means to the society from which they expect to take according to their needs and their expectations. Too many rich individuals and profitable companies see tax avoidance as clever, cool and worthy of praise and admiration, whereas it is immoral and wrong.

If we are to maintain public confidence in the tax system, it is vital that everyone knows and sees that it is fair, with everyone paying their fair and proper share to the collective purse. Tax avoidance and evasion are important because huge sums are involved. We have had the HMRC estimates and I have seen a Tax Research UK estimate that puts the tax gap at £120 billion. Whichever argument we believe, we are talking about many, many billions. A quarter of that sum is down to tax avoidance and evasion, but we should also have regard to the fact that the Government, in figures published last year, admitted writing off nearly £11 billion of tax that HMRC called “uncollectable”.

When the Select Committee on Public Administration considered how HMRC handled the large tax disputes with major corporations, we found that up to a potential £25 billion of moneys were outstanding to the Exchequer, although I accept that that figure is not precise. That is a huge sum and we need to set it against the cuts the Government have chosen to implement, such as the £24 billion per annum cuts in benefits, tax credits and pensions that hit the most vulnerable in our society.

The PAC considered a range of tax avoidance issues, including how HMRC handles disputes with large companies, the use of personal service companies and how those who engage in business with and make their money out of the public sector arrange their affairs to avoid tax. This autumn, we will receive a report from the National Audit Office on the tax avoidance schemes exploited by wealthy individuals exposed by The Times, which found that wealthy people were too often paying as little as 1% of their income on tax arrangements—for example, the K2 scheme used by people such as Jimmy Carr.

Based on that work, I want to focus on four points on which I think that the Government can take practical steps to tackle and stop avoidance and evasion. First, greater transparency is vital. We know so little and people get away with so much because the principle of taxpayer confidentiality is used and, in some cases, abused to prevent proper accountability to the public by the tax authorities. We uncovered the scandal surrounding the Goldman Sachs settlement because of the brave and determined efforts of one whistleblower. Questions surrounding other deals remain, such as, in the case of the Vodafone deal, whether the amount finally paid was correct and whether it was right for the company to be given extra time to pay. The Government should consider full transparency on the tax negotiations for the FTSE 100 companies. They are publicly quoted companies that publish their accounts, and we know from their accounts how much they pay, so we should also be able to monitor how settlements are reached and why the amounts are determined. People advising those companies use knowledge gained from negotiating one deal to get a better settlement for other clients. The public should also have that knowledge, so that they can consider whether avoidance exists.

[Simon Hughes (Bermondsey and Old Southwark) (LD)]

I agree with the right hon. Lady and I thank her and members of her Committee for their diligent work. First, have they considered looking at countries that have a full transparency regime for publicly quoted companies? Secondly, will they ensure that no company that does business with the Government can use offshore tax havens in any part of its ownership arrangements? That is currently very common, particularly among public utilities such as water companies and others that supply key, nationally important infrastructure.

[Margaret Hodge]

The Committee tries to look at international comparators, but it does not do enough such work. The right hon. Gentleman’s second point was to be one of my suggestions to the Government, and I agree with him entirely. My final point on transparency is that there is a belief in the country at large that bigger companies are not treated in the same way as small and medium-sized enterprises, which are struggling and often pursued relentlessly by Her Majesty’s Revenue and Customs. That belief will be shattered or broken only if we have full transparency and people can see that there are no sweetheart deals.

My second point concerns the proper resourcing of HMRC to tackle avoidance and evasion. Of course we want more efficiency from everyone employed at HMRC. The Labour Government cut 3,000 jobs, but I think that was wrong because evidence shows that for every £1 invested in pursuing tax avoidance, £10 is raised from the money collected. We should, therefore, be sensible about how we cut the deficit and we should invest in those areas where we will get money back.

I say to the Minister that it is worrying to see the threshold at which HMRC intends to pursue fraud actions raised because it does not have enough legal resources. It is also worrying that the extra money released by the Government in the spending review is not currently being used because HMRC cannot work out the training programmes that are required to get individuals up to speed for work on tax avoidance and evasion.

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[Nigel Mills (Amber Valley) (Con)]

It is a pleasure to follow the right hon. Member for Barking (Margaret Hodge) and I join the congratulations to the right hon. Member for Oldham West and Royton (Mr Meacher) on securing this important debate. I have spent a lot of the last few months debating tax—it came up in the Finance Bill and at various other times—which shows how important it is. I promise that I will not list any Take That songs to embarrass celebrities who seek to avoid tax. I got enough flak for that the last time I tried it.

I agree with hon. Members who have spoken that it is absolutely right that the Government do everything they can to minimise tax evasion and avoidance. All hon. Members want everyone to pay the amount of tax they fairly owe, because that reduces the burden on everybody who does so. It is right that the Government take every step they can within the legal powers they have to ensure that that happens.

Hon. Members have discussed how much the tax gap is. The last HMRC figures say that it is £35 billion. I have served on the all-party group on beer, which has inquired into measures to tackle beer duty fraud, so I have been through in some detail the weakness of tax gap calculations. The same issue came up in the Select Committee on Northern Ireland Affairs, which has had an inquiry into fuel duty. There is a problem in calculating how much revenue we do not have—we do not get the revenue, so it is quite hard to know what it would be—but I suspect that £35 billion is not a million miles off either way. I fear that the figure will have increased in the last tax year. I am told that if we look at the difference between 2008-09 and 2009-10, we see that the big reduction was in the loss of VAT, which was probably caused by the slight lowering of the VAT rate. Obviously, the rate has gone up since, so the tax gap will probably have increased slightly.

A report has shown that the UK tax gap is one of the lowest in the developed world—it is about 14% of tax revenue. I believe the gap in the US is somewhat higher, so it is not as if we are the worst in the world or have the weakest regime. We might even have one of the best.

It is important to understand that the tax gap is not entirely due to complicated tax avoidance or deliberate tax evasion. Much of it is innocent error and people lacking care in filing their returns—they do not actively seek to get it wrong. Measures to tackle avoidance or evasion will not close all £35 billion of the tax gap. There is not much we can do to get tax off someone who has gone bankrupt. Perhaps we could do more to prevent the amount of tax they owe from building up that high, but there will always be some loss when a business goes bust before paying its taxes. So we will not get that £35 billion down to zero—this will not be the panacea for the Government’s deficit problems—but it is right that we seek to get it down as low as possible.

I commend some of what the Government have done. Only this week, we saw a press release from the high tax unit showing that it was well ahead of its target and had already saved the Exchequer £500 million. The Government have adopted the right strategy, building on that of the previous Government, to deal with tax avoidance: they get in the disclosure of these ridiculously aggressive schemes, which ought to be closed down, and then they close them down. Then the strategy is to improve and tighten tax legislation for the areas most under threat, so that those opportunities are not there.

I am not convinced, however, that a general anti-avoidance or anti-abuse rule is the right way to go. I have concerns that it would contravene the rule of law. We, in Parliament, should pass laws that are clear, so that everyone understands what the law is, and then we can expect taxpayers to follow it. And if they do not, they can be severely punished. The problem with a general anti-abuse rule is that it allows the Revenue to say, “Okay, maybe you’re within the law, but we don’t think the law should have said what it said, so you should’ve been outside the law, even though you weren’t, and so we’re going to punish you.” I am not sure that we would want to give that power to a state agency in any other field of the law—the power to enforce not the law as we set it but the law as it might think we ought to have set it.

However much we stretch the general anti-abuse or anti-avoidance rule, fundamentally we are saying that the Revenue can tackle abuse that ought to be tackled by saying, “Ignore what Parliament says. Produce something that you think it should have said. And then enforce that.” I worry that that is a step too far—not that most of the people who would be caught would deserve anything less than they get, but the Revenue would be able to raise that stick against all manner of innocent individuals and businesses as well.

I worked as a tax adviser before entering this place. I can assure hon. Members that I was drawing up advance agreements on transfer pricing. I was not engaged in any naughty tax avoidance of any kind. Revenue Inquiries, in using its powers, writes, “Please send me this information. I think this doesn’t work as you say it does. By the way, if you don’t agree, I’ll have to use the general anti-avoidance rule.” And we have this stick being wielded in all manner of innocent situations in which businesses or individuals have got themselves into a complex situation where tax law is not clear, especially if there are a lot of transactions involving overseas parties.

Those individuals might be making perfectly sensible commercial attempts to apply the law as they think it is. They might not be trying to avoid tax but might be trying to be fully compliant, so the possibility of having that stick held over them and being told, “If you don’t pay up, we’re going to throw all these huge things at you,” will rightly concern lots of businesses around the country. We risk using a large sledgehammer, missing the nut and just increasing the burden on taxpayers. We have to look at the downsides of our tax regime appearing too unfriendly and uncommercial. How much investment will we lose if international businesses and individuals think that this is not a great place to do business? We have to be careful, therefore, about how much power we give the Revenue to apply its own interpretation of the law, rather than getting Parliament to do it.

[Simon Hughes]

I understand all the arguments and have seen the reports about general anti-avoidance measures and so on. Is there not the principle, however, that we should expect everybody, whether individuals or corporate bodies, to pay in tax at least a certain percentage of their profits every year to the Revenue—whether 20%, 25% or whatever—so that people know that they will not be allowed, by clever ruses, to avoid a minimum obligation to the state in which they live and work?

[Nigel Mills]

I thank my right hon. Friend for his intervention. Although that idea sounds attractive, and although various regimes around the world have minimum profit taxes and things like that, it would add huge complexity to our already too complicated tax regime. What we want is for people to be easily able to work out what tax they owe and then to pay it.

I have tabled amendments to both Finance Bills while I have been here to make the tax regime simpler, so that companies can get their tax profit much closer to their accounting profit. It should be much easier for them to know what tax they ought to pay, and if they have made an accounting profit, they ought to pay tax on it. That kind of reform would be a far better way of going down this line and making the transparency agenda much clearer. We do not need most of the complicated adjustments, reliefs or allowances that were introduced, probably to support well-meaning ideas, over the last 150 years. Our regime is far too cumbersome. It incentivises things that we do not mean to incentivise and penalises things that we probably ought to encourage. If we moved to a much simpler, flatter regime, where what a business reports as its accounting profit is pretty much what it pays tax on, that would be in everyone’s interest. It would reduce avoidance and make it a lot easier for business to comply and a lot easier for the Revenue to see that there was compliance, so that the Revenue’s resources could then be focused on tackling avoidance and evasion, which is what we ought to see.

I would like to use my remaining time on a report published quite recently by the RSA called “Untapped Enterprise”, which I would recommend Members read. It looks at how we can try to move people out of the informal economy and get them to be fully compliant as employers and taxpayers. The RSA’s research and the conclusions it reached are quite interesting. The report says that a significant proportion of new entrepreneurs feel that they need to stay in the informal economy while they test out their business and see whether they can make a profit on it, because they know that once they get caught by all the tax compliance and other reporting requirements, that can take up so much time and money that they might not be able to get their business off the ground at all. Most of them do not stay in the informal economy because they want to avoid tax; rather, they just want to focus on running their business.

Some of the ideas in the report for tackling the hidden economy are quite interesting. It makes the point, which has been raised in the debate, that we need to nurture the concept that paying tax is right and moral, that we get proper value for public services from doing so and that everybody ought to be doing it. The last thing we want to encourage is a situation where people think the Government are against them, that the taxman is an enemy or that avoiding tax is a perfectly sensible, reasonable thing to do because they think, “It’s them versus us,” or, “Every penny I can save is a good thing.” We need to make the case that paying tax is the right thing and everyone should do it.

While I am on this subject, I agree that we need to reform the non-dom rules. I cannot see any justification now for saying that because someone’s father was born outside the UK they do not have to pay full tax, even though they have lived here for 30 years. There should be a cut-off at, say, 10 years, so that once someone has been here for 10 years as a non-dom, they lose their non-dom status and have to start paying tax on their worldwide income. That would be a fair compromise between not discouraging people from coming here in the first place and getting our fair share of tax out of them.

The report also sets out the need to simplify the formalisation procedure. We need to make it simple for people to register their businesses for tax and to start paying. It needs to be simple to work out how much tax is owed. Let us not have people making the excuse that they did not pay tax because they did not know how much they were supposed to pay.

My final point is that we are moving towards a cashless society. It ought to be harder for business to be informal, because it is becoming more difficult for people to pay cash—indeed, I do not carry around a large amount of cash to pay for things with. That should move us in that direction, but we should also say to consumers, “Don’t pay people in cash; don’t encourage tax avoidance.”

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[Stephen Williams]

It was the Bob Crow bit that I missed. That may be a fair point, but I would not put Graham Aaronson on the same moral plane as Bob Crow; I do not think that Mr Aaronson has held the public to ransom at various points. However, poachers do often make good gamekeepers. The Government commissioned the report and are acting on it, and they should be commended on doing so, given that the previous Government did nothing to put that in place.

We have talked about the domestic scene, but I wish to say something in passing about our obligations abroad to the developing world. During debates on this year’s Finance Bill, I mentioned how the rules tightening up on controlled foreign companies—that is fine, as it is our responsibility to secure our own tax base—will have unintended consequences for developing countries. It is for the Treasury to work in close concert with the Department for International Development to ensure that every time we change our tax law, we think through the implications that that will have abroad. In addition, some of our expanding aid budget should be expended on training overseas Governments to build up their expertise to make sure that they are able to levy taxes effectively and collect them from the multinationals operating in their countries. I know that a coalition of charities, including Christian Aid, is going to campaign on this issue later this year. I have been working with them, and I look forward to continuing to do so throughout the rest of the year.

[Simon Hughes]

Will my hon. Friend also encourage the Government to examine anti-avoidance measures involving offshore territories such as those that have been started in countries such as Finland?

[Stephen Williams]

My right hon. Friend makes a good point. I think that there is a duty on Parliament to make sure that we are clear about our intentions and clear about what is wrong, and on the Government to allocate the resources to catch the people who go beyond the rules.