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Clause 1 — Main rate of corporation tax for financial year 2011

Part of Finance Bill – in the House of Commons at 6:00 pm on 12th July 2010.

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Photo of David Gauke David Gauke The Exchequer Secretary 6:00 pm, 12th July 2010

Before responding to amendment 11, I would like thank my hon. Friend Karl McCartney for making his maiden speech earlier. He is rightly proud to represent that fine constituency, and I am sure that his constituency will be rightly proud of him. I hope he represents his constituency for many years to come. I will deal with the issues he raised about capital gains tax-as already noted, he shows great independence of mind on this point-when I respond to a later grouping of amendments.

I am very pleased to see Stephen Timms back at the Dispatch Box. It is good to see him returned here and I hope he is returning to good health. He is certainly a formidable person to face on the other side of the Dispatch Box, as he has great expertise and experience in this particular subject. He was a highly popular and effective Minister, performing the same role as I now perform. His are big shoes to fill and I am sure that there will be plenty of disagreements in the months ahead, but it is none the less a great pleasure to see the right hon. Gentleman back, well and in good form.

Amendment 11 seeks the publication of a report assessing corporation tax avoidance and evasion and setting out measures to ensure the payment of tax before the reduction in the main rate of corporation tax can be applied. The Government are committed to a competitive corporation tax rate, which will show that the UK is open for business and encourage growth. The amendment is narrowly focused on the role of evasion and avoidance, so I shall explain later and in more detail our reasons for the more general changes proposed.

Terminology was a large part of the debate on the matter. As we have heard, tax evasion occurs when someone acts against the law. Tax avoidance involves compliance with the letter but not the spirit of the law, and it is right that the Government seek to minimise that. Tax planning is a case of acting in both the spirit and the letter of the law. There is a distinction, although there will be occasions when the line is a little blurred.

The Government are committed to tackling robustly avoidance and evasion, which undermine the effectiveness of the tax system, distort competition and increase the burden of taxation on those who do comply with the spirit and letter of the law. The emergency Budget clearly sets out the Government's strategic approach to reducing tax avoidance and evasion. As a number of my hon. Friends have pointed out, some matters relate to how we make tax law, and to ensuring that tax law has as much clarity as possible. At the time of the Budget, we produced a well-received publication setting out a more deliberative and consultative way to make tax law.

There is also a strong case for a more simplified tax code. Too many allowances and reliefs and too much complication within the tax system provide opportunity for tax avoidance, which we seek to address. We will address long-standing avoidance risks, and I have announced an informal consultation on the introduction of a general anti-avoidance rule. I appreciate that there are arguments on both sides, some of which we heard from the right hon. Member for East Ham. We will ensure that we make changes in the law in a way that prevents increasing complexity and reduces the need for frequent legislative revisions. We will also ensure that we build in sustainable defences against avoidance opportunities when undertaking policy reform. The Government have already closed specific loopholes to prevent the avoidance of corporation tax, and clauses 8 and 9 protect about £200 million of tax revenues per year.

The Government fully support the type of transparency for which John McDonnell calls in his amendment. As others have pointed out, that form of transparency already exists. The right hon. Member for East Ham pointed out that HMRC has published an assessment of corporation tax avoidance and evasion, although it deals with not just corporation tax but tax across the board. In December 2009, HMRC published the document, "Measuring Tax Gaps 2009", which estimated the overall tax gaps across HMRC's regimes for the first time. Alongside that statistical release, HMRC also published estimates of the tax gap by behaviour, including avoidance and evasion, as well as the actions being taken to reduce the gap. As we have heard, HMRC's estimate for the tax gap as a whole is £40 billion, and the definition includes evasion and avoidance, debt and legal interpretation-as my right hon. Friend Mr Redwood pointed out, there are sometimes disputes between two parties, both acting in good faith.

HMRC estimates that corporation tax avoidance by large companies amounts to £3.4 billion, and that such avoidance by small companies amounts to £0.3 billion. We have heard a lot this afternoon about the TUC figures produced by Tax Research UK and by Mr Richard Murphy in particular. As I understand it, his figure for corporation tax avoidance is £12 billion. I note that the right hon. Member for East Ham disagrees with Mr Richard Murphy's estimate of the tax gap. Mr Murphy's calculations on corporation tax avoidance are on the basis of the gap between the statutory rate, which was 30% at the time of the assessment, and the effective rate, which was somewhat lower. That estimate does not take into account those reliefs and allowances that Parliament has determined should be available, for example capital allowances, to the extent that they are more generous than depreciation treatment would allow. Mr Murphy has acknowledged that point and is considering it further.

In addition, as far as we can see, no allowance is made for double taxation relief, which prevents a taxpayer from paying tax twice, in two different jurisdictions, for the same profits. The right hon. Member for East Ham referred to country-by-country reporting, and we continue to consider whether there is a practical way forward in that regard. If we are to have country-by-country reporting, however, double taxation relief becomes all the more important. As far as I can see-if I am wrong, I am sure that Mr Murphy will correct me in his lively and entertaining blog, as he follows these matters closely-the Exchequer cost of double taxation relief is £16.7 billion. It is not clear that that is taken into account in the distinction between the statutory and effective rates. Such a top-down approach does not work for corporation tax.

There are other flaws in Mr Murphy's methods. For example, he does not appear to take into account any tax recovered through HMRC's compliance activity.

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Christie Malry
Posted on 13 Jul 2010 10:38 am (Report this annotation)

I first raised the double tax relief issue on my blog here: http://www.fcablog.org.uk/2010/06/ritchie-and-the-overegged-...