‘(1) This Part has effect for the purpose of counteracting tax advantages arising from tax arrangements that are considered to embrace tax-avoidance.
(2) The principles included in this Part are collectively to be known as the “general anti tax-avoidance principle”.
(3) The general anti-tax avoidance principle applies to the following taxes:
(a) income tax,
(b) corporation tax, including any amount chargeable as if it were corporation tax or treated as if it were corporation tax,
(c) capital gains tax,
(d) petroleum revenue tax,
(e) inheritance tax,
(f) stamp duty land tax,
(g) value added tax, and
(h) annual tax on enveloped dwellings.’.—(Mr Meacher.)
Brought up, and read the First time.
With this it will be convenient to discuss the following:
New clause 8—Meaning of ‘tax arrangements’—
‘(1) Arrangements are “tax arrangements” if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage as a result of tax avoidance was the main purpose, or one of the main purposes, of the arrangements.
(2) Arrangements are not tax arrangements if:
(a) the arrangement was specifically permitted by legislation or regulation relating to any of the taxes referred to in section [General anti tax-avoidance principle] (3) or is clearly consistent with principles on which the taxes referred to in section [General anti-tax-avoidance principle] (3) are based whether express or implied,
(b) the advantaged party shows that the arrangement was neither designed nor carried out with the intention of achieving a tax advantage and that no step or feature was included in or omitted from it with that intention.’.
New clause 9—Meaning of ‘tax avoidance’—
‘(1) Arrangements represent “tax avoidance” if, having regard to all the circumstances, it would be reasonable to conclude that tax is not paid—
(a) by the right person, or
(b) at the right time, or
(c) in the right place, or
(d) under the charging provisions of the right tax, or
(e) at all when it would appear right that it was due, or
(f) in any combination of the circumstances noted in (a) to (e).
(2) In subsection (1) an arrangement is considered “right” when the economic substance of that arrangement giving rise to a potential charge to tax under any one or more of the taxes referred to in section [General anti-tax-avoidance principle] (3) of this Part accords with the form in which that arrangement is declared for assessment for taxation purposes whether in the United Kingdom or elsewhere with non-declaration of a potential charge to tax on the economic substance of a transaction in the United Kingdom as a result of the form adopted for its completion being considered a tax declaration for the purposes of this section.
(3) For the purposes of subsection (2) the economic substance of an arrangement does not accord with the economic form in which that arrangement is declared for taxation purposes if having regard to all the circumstances:
(a) one or more of the parties to the arrangement cannot reasonably have been included as a party to it without the securing of a tax advantage having been an objective,
(b) the contractual form of the arrangement cannot reasonably have been adopted without the securing of a tax advantage having been an objective,
(c) the location in which the arrangement is recorded as having occurred cannot reasonably have been decided upon without the securing of a tax advantage having been an objective;
(d) the timing of the arrangement cannot reasonably have been decided upon without the securing of a tax advantage having been an objective;
(e) the arrangement has as one or more of its objectives the declaration of a transaction for assessment under the provisions of one of the taxes referred to in section [General anti-tax-avoidance principle] (3), or none of them, when declaration under the provisions of another of those taxes would seem more appropriate,
(f) the arrangement represents a transaction as relating to capital when it would appear to related to income,
(g) the arrangement represents a transaction as being income derived from capital when it would appear to be derived from the profits of a trade or employment,
(h) the arrangement appears to be without economic substance,
(i) the arrangement cannot be regarded as a reasonable course of action having taken into consideration—
(i) any relevant tax provisions,
(ii) the substantive results of the arrangements, and
(iii) any other arrangements of which the arrangements form a part.
(j) Any party to the arrangement has stated that an objective of structuring the arrangement in the form adopted was the securing of a tax advantage.
(4) In subsection (3) “taxation purposes” includes—
(a) any action required to comply with the obligations of any legislation or regulation relating to any of the taxes referred to in section [General anti-tax-avoidance principle] (3) or their administration or assessment notwithstanding any deficiency or shortcoming in them that the arrangement is meant to exploit,
(b) any principles on which the taxes referred to in section [General anti-tax-avoidance principle] (3) are based whether express or implied,
(c) the policy objectives of the taxes referred to in section [General anti tax-avoidance principle] (3).’.
New clause 10—Meaning of ‘tax advantage’—
‘(1) A “tax advantage” may be considered to have arisen for the purposes of this Part if:
(a) the arrangement results in an amount of income, profits or gains for tax purposes that is significantly less than the amount for economic purposes,
(b) the arrangement results in deductions or losses of an amount for tax purposes that is significantly greater than the amount for economic purposes,
(c) the arrangement results in a claim for the repayment or crediting of tax (including foreign tax) that has not been, and is unlikely to be, paid,
(d) the arrangements involve a transaction or agreement the consideration for which is an amount or value significantly different from market value or which otherwise contains non-commercial terms,
(e) the arrangement results in an amount of income, profits or gains tax purposes being assessed for tax purposes upon a person who appears to have less economic claim upon that income, profit or gain than another person who would have greater taxation liability due upon it if they were assessed to that income, profit or gain for tax purposes,
(f) the arrangement results in an amount of income, profit or gain being subject to a tax other than that which the economic substance of the arrangement would suggest appropriate with less tax being due as a result,
(g) the arrangements results in an amount of income, profit or gain being subject to tax assessment in a jurisdiction other than the United Kingdom when the economic substance of the arrangement would suggest that inappropriate whether or not more or less tax is due in that other place or not,
(h) the arrangement results in a lower rate of tax being applied to the income, profit or gain than might otherwise have been the case,
(i) the arrangement results in tax being paid later than might otherwise have been the case,
(j) any combination of the circumstances referred to in subsection (a) to (i).’.
(2) Subsection (1) is not to be read as limiting in any way the cases in which tax arrangements might give rise to a tax advantage.
(3) A tax advantage may, without limitation, be indicated to have arisen by the existence of:
(a) relief or increased relief from tax,
(b) repayment or increased repayment of tax,
(c) avoidance or a reduction of a charge to tax or an assessment to tax,
(d) avoidance of a possible assessment to tax,
(e) a deferral of a payment of tax or an advancement of a repayment of tax, and
(f) avoidance of an obligation to deduct or account for tax,
(g) the passing of an obligation to make declaration of a liability to be assessed to tax to another party.’.
New clause 11—Counteracting tax advantages—
‘(1) If tax arrangements meeting the definition of section [Meaning of “tax arrangements”](1) of the Part are identified then the tax advantages arising from the arrangements are to be counteracted on a just and reasonable basis.
(2) The counteraction may be made in respect of each or any tax to which the general anti-tax-avoidance principle applies.
(3) An officer of Revenue and Customs must make, on a just and reasonable basis, such consequential adjustments in respect of any tax to which the general anti-abuse rule applies as are appropriate.
(4) These consequential adjustments:
(a) may be made in respect of any period, and
(b) may affect any person (whether or not a party to the arrangements) so long as they are connected to the party that has enjoyed the benefit of a tax advantage, such connection being as defined in section 993 of the Income Tax Act 2007.’.
New clause 12—Proceedings before a court or tribunal—
‘(1) In proceedings before a court or tribunal in connection with the general anti-tax-avoidance principle, HMRC must show—
(a) that there are tax arrangements that give rise to a tax advantage as a result of tax avoidance, and
(b) that the counteraction of the tax advantages arising from the arrangements is just and reasonable.
(2) In determining any issue in connection with the general anti-tax avoidance principle, a court or tribunal must take into account—
(a) explanatory notes that cast light on the objective setting or contextual scene of the specific Taxing Act or this Part of this Act.
(b) the clear statements by a Minister or other promoter of the specific Taxing Act or this Part of this Act together if necessary with such other parliamentary material as was necessary to understand such statements and their effect.
(c) HMRC’s guidance about the general anti-tax-avoidance principle,
(d) guidance, statements or other material (whether of HMRC, a Minister of the Crown or anyone else) that is in the public domain at the time the arrangements were entered into as to the principles on which the taxes referred to in section [General anti tax-avoidance principle] (3) are based whether express or implied, the nature of tax avoidance, and those matters considered to fall within section [Meaning of “tax arrangements”] (2)(a) of this Part (on which matter HMRC shall issue periodic guidance),
(e) evidence of established practice at that time,
(f) evidence as to the intent of the parties, irrespective of the outcome of the arrangements.’.
New clause 13—Application for clearance of transactions—
‘(1) A person may provide the Commissioners for Her Majesty’s Revenue and Customs with particulars of a transaction or transactions effected or to be effected by the person in order to obtain a notification about them under this section.
(2) If the Commissioners consider that the particulars, or any further information provided under this subsection, are insufficient for the purposes of this section, they must notify the person what further information they require for those purposes within 30 days of receiving the particulars or further information.
(3) If any such further information is not provided within 30 days from the notification, or such further time as the Commissioners allow, they need not proceed further under this section.
(4) The Commissioners must notify the person whether they are satisfied that the transaction or transactions, as described in the particulars, were or will be such that no counteraction notice ought to be served about the transaction or transactions under the provisions of section [Counteracting the tax advantages] of this Act.
(5) The notification must be given within 30 days of receipt of the particulars, or, if subsection (2) applies, of all further information required but subject to the conditions of subsection (6) having been met.
(6) The person making application for a notification under this section shall specify—
(a) the amount of tax that they estimate might be due as a result of making the arrangement, or
(b) if that arrangement shall be continuing within the two-year period following its commencement, and
(c) shall pay a fee in respect of the notification to be supplied under section (4) prior to that notification being supplied of not less than—
(i) £1,000, or
(ii) five per cent of the estimated tax due as a result of making this arrangement, whichever shall be the greater, such charge to be subject to value added tax and to be due whether or not the requested notification can be supplied or not,
(d) HMRC shall have power to substitute such other sum that it thinks appropriate for those sums notified under subsections (a) and (b) if it thinks those estimates unrealistic,
(e) if HMRC makes use of the powers in subsection (d) it shall notify the person within 30 days of its intent to do so and provide its estimate of the tax that might be due under the arrangement with reasons stated, with the person having 30 days thereafter to appeal against the same or let their applications lapse.
(f) HMRC may publish its notifications issued under this section so long as the taxpayer’s identity is anonymised.’.
New clause 14—Effect of clearance notification under section [Application for clearance of transactions]—
‘(1) This section applies if the Commissioners for Her Majesty’s Revenue and Customs notify a person under section [Application for clearance of transactions] that they are satisfied that a transaction or transactions, as described in the particulars provided under that section, were or will be such that no counteraction notice under the provisions of section [Counteracting tax advantages] of this Act ought to be served about the transaction or transactions.
(2) No such notice may then be served on the person in respect of the transaction or transactions.
(3) But the notification does not prevent such a notice being served on the person in respect of transactions including not only the ones to which the notification relates but also others.
(4) The notification is void if the particulars and any further information given under section [Application for clearance of transactions] about the transaction or transactions do not fully and accurately disclose all facts and considerations which are material for the purposes of that section.’.
New clause 15—Power to obtain information—
‘(1) This section applies if it appears to an officer of Her Majesty’s Revenue and Customs that a person may be a person to whom section [Counteracting tax advantages] applies in respect of one or more transactions.
(2) The officer may serve a notice on the person requiring the person to give the officer information in the person’s possession about the transaction or, if there are two or more, about any of them.
(3) That information must be information about matters that are relevant to the question whether a counteraction notice should be served on the person.
(4) Those matters must be specified in the notice under subsection (2).
(5) That notice must require the information to be given within such period as is specified in it.
(6) That period must be at least 30 days.’.
New clause 16—Interpretation—
‘In this Part of this Act—
“arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable),
“connected” is defined by section 993 of the Income Tax Act 2007,
“the general anti-tax avoidance principle” has the meaning given by section [General anti tax-avoidance principle],
“HMRC” means Her Majesty’s Revenue and Customs,
“notification” has the meaning given by section [Application for clearance of transactions] (1),
“tax advantage” has the meaning given by section [Meaning of “tax advantage”],
“tax arrangements” has the meaning given by section [Meaning of “tax arrangements”] (1),
“tax avoidance” has the meaning given by section [Meaning of “tax avoidance”], and
“taxes” has the meaning given to it by section [General anti-tax-avoidance principle] (3).’.
Amendment 11, in clause 203, page 120, line 1, after ‘taxes, insert
‘provided the de minimis test in subsection (4) is satisfied.’.
Amendment 3, page 120, line 9, at end add—
‘(4) Her Majesty’s Revenue and Customs shall review the possibility of bringing forward measures to work in conjunction with other G8 countries to require multi-national companies to publish a single easily comparable figure for the amount of corporation tax they pay in the UK, and within six months of the passage of this Act, place a copy of the review in the House of Commons Library.
(5) The Chancellor of the Exchequer shall review the effects of incorporating measures into the general anti-abuse rule to require multi-national companies to publish a single easily comparable figure for the amount of corporation tax they pay in the UK on Treasury tax receipts within six months of the passage of this Act and consult with G8 countries on their effectiveness, and place a copy of the review in the House of Commons Library.’.
Amendment 6, page 120, line 9, at end add—
‘(4) The Chancellor shall review the possibility of bringing forward a requirement for UK companies to report their use of tax schemes which have an impact on developing countries, including a review of the possibility of bringing forward proposals to require that when such schemes are identified under those rules, Her Majesty’s Government shall take steps to notify developing countries’ tax authorities and assist in the recovery of that tax. A copy of the report shall be placed in the House of Commons Library within six months of Royal Assent.’.
Amendment 7, page 120, line 9, at end add—
‘(4) The Chancellor shall make an assessment of the impact of changes to Controlled Foreign Company Rules in the Finance Act 2012 and as a result of this Part of this Act on the overall tax take of developing countries. A copy of the report shall be placed in the House of Commons Library within six months of Royal Assent.’.
Amendment 8, page 120, line 9, at end add—
‘(4) The Chancellor shall provide a report to Parliament within two years of the passing of this Act, as part of a wider post-implementation review, into the scope of GAAR, the application of the double reasonableness test and its deterrent effect.’.
Amendment 12, page 120, line 9, at end add—
‘(4) The amount of the tax advantage arising from the tax arrangement must be equal to or exceed the following amount for the relevant tax:
(a) for income tax the amount is £100,000,
(b) for corporation tax, including any amount chargeable as if it were corporation tax or treated as if it were corporation tax, the amount is £250,000,
(c) for capital gains tax the amount is £100,000,
(d) for petroleum revenue tax the amount is £250,000,
(e) for inheritance tax the amount is £100,000
(f) for stamp duty land tax the amount is £40,000,
(g) for the annual tax on enveloped dwelling the amount is £40,000.
(5) For the purposes of subsection (4) the amount of the tax advantage shall be the greatest of:
(a) the total tax advantage for all tax years in which it is reasonable to assume that the tax arrangement was anticipated to be effective at the time the arrangements were entered into;
(b) the total tax advantage for all tax years that would have arisen from the tax arrangement other than for the provisions of this Part;
(c) the total tax advantage arising from all tax arrangements of the taxpayer that were anticipated to be effective in the relevant tax year.
(6) For the purposes of subsection (5) the amount of the tax advantage shall include any tax advantage obtained by the taxpayer or a related party of the taxpayer.’.
Clauses 203 to 212 stand part.
That Schedule 41 be the Forty-first schedule to the Bill.
The purpose of new clause 7 and new clauses 8 to 16, which are connected and which stand in my name and those of my hon. Friends, is to replace the Government’s anti-tax avoidance measure, the GAAR or the general anti-avoidance rule, as set out in clauses 203 to 212, with an alternative, much fairer, more effective and more comprehensive measure, the GAntiP or general anti-avoidance principle—I apologise for all the acronyms. In practice, the latter would mean that where a court could establish, having taken account of all the relevant circumstances, that the primary purpose of an arrangement was the avoidance of tax rather than any economically substantive transaction, it could strike it down.
Let me say immediately to the Exchequer Secretary that I appreciate that although UK tax avoidance for the last 70 or so years has been considered on the basis of four UK court decisions—and notably the Duke of Westminster case of 1936—the GAAR guidelines, which were published a couple of days ago, now override that position. I understand that they are, in effect, legal precedent in their own right, which any court has to take into account. That is certainly a significant advance. However, the Government’s GAAR, as set out in this Bill, is still fatally flawed.
First and most importantly, the GAAR advisory panel is riddled through and through with a blatant conflict of interest. It will be drawn almost exclusively from highly paid City lawyers who have spent their careers, and made their fortunes from, giving expensive advice to companies on how to avoid tax. It is like putting the poachers in charge of the gamekeepers. Surely it would be right for independent experts—some drawn from Her Majesty’s Revenue and Customs—to form the main body of what should obviously be an impartial membership.
Secondly, it is proposed that the application of the GAAR will be determined on the basis of a highly subjective and partisan criterion, namely whether the arrangement at issue
“cannot reasonably be regarded as a reasonable course of action”.
From the point of view of HMRC and the poor innocent taxpayers who are penalised if the corporate tax abusers are allowed to get away with it, there is a double jeopardy at work. First, what most people might regard as unreasonable might well be regarded by highly paid City lawyers who make their money out of promoting tax avoidance as perfectly reasonable.
Secondly, what is a “reasonable course of action” is heavily dependent on a subjective view of the role of taxation in society. Whatever else it is, it is not an objective test at all. The point is surely that the GAAR advisory panel has been inserted only as a filter, in order to give the tax avoidance industry a veto on which of its practices shall be called to account. That is clearly prejudicial and indefensible. If City lawyers employed in defending corporate tax abuse are asked whether it is reasonable to hold the view that an arrangement is a “reasonable course of action”, it is a virtual certainty that, except in the most egregious cases, they will agree that it is—at which point many highly controversial and artificial devices will not even get near an independent judge in a court. For that reason alone, I believe that the GAAR should be thrown out, although it has other serious flaws.
Does the right hon. Gentleman not accept that one reason why we have got this far is that Graham Aaronson, who probably meets the right hon. Gentleman’s definition of someone who has made his living from selling tax-avoidance schemes or at least advising on them, recommended that the Government go ahead with the GAAR?
I will say it more loudly. Does the right hon. Gentleman accept that one reason why we have got this far is that Graham Aaronson, who arguably meets his criterion as someone who has made a living out of at least advising on such schemes, recommended that the Government go ahead with the GAAR?
Yes, I appreciate that. It seems that Graham Aaronson, whom I have criticised pretty strongly in the House in the past, has for reasons best known to himself—although I am very appreciative that he has done this—changed his mind in the important respect that the hon. Gentleman described and which I tried to set out at the beginning. There is more joy in heaven over one sinner who repents than over 100 just men.
The right hon. Gentleman will appreciate that I have grave concerns about going down the route of even a general anti-avoidance rule, but surely he must recognise that if his new clauses were agreed and we took a principled, rather than a rules-based approach, that would lead to ever more uncertainty and, dare I say it, even larger fees for the lawyers and accountants whom he wishes to clamp down on in this regard.
I will come to that point. I know that the hon. Gentleman, who has spent enough time in this Chamber, as I have, might think that I am kicking it into the long grass, but I will come to it at the end. I think I have an effective answer to it, but I prefer to give it at that point.
There are other problems with the GAAR. For the reasons given, it is far too narrowly drawn, tackling only the most aggressive forms of tax avoidance. It would not, for example, tackle Google or Amazon—which have had enormous publicity over the last weeks and months—because the channelling of profits from genuine sales through tax havens would still be permitted. That is just one example. The implication—dare I say it one that was probably intended by the Government; I hope that is not unreasonable—is no doubt that a veneer of respectability is thereby cast over everything else, which might well include artificial contrivances designed to avoid tax. They will somehow be seen to be okay.
There is also no clear penalty regime in the GAAR, which is certainly needed if others are to be deterred from exploiting every opportunity to go down the tax avoidance route. Contrary to all other tax logic, where the burden of proof has always fallen on the taxpayer, uniquely in the case of the GAAR, the burden of proof that an arrangement is abusive has unaccountably been placed on HMRC. Despite the one improvement, which I am glad to mention—
I would rather get on, if I may, as many others wish to speak and it is a very short debate.
Despite the improvement I mentioned at the beginning, the net accumulated effect of all these flaws makes it reasonable to argue that the GAAR is a step backward for two particular reasons. One is that while the most heinous cases will certainly be caught—we are all agreed about that—the impression given is that virtually everything else is somehow okay and everything else goes. The other is the outrageous fact that HMRC cannot commence GAAR action on its own initiative. That is rather like forbidding the courts to take action against a thief until the honorary city guild for thieves has given permission.
The alternative is the general anti-tax avoidance principle—the GAntiP—as set out in new clauses 7 to 16. It was drafted by Richard Murphy, one of our foremost tax accountants, as the Minister knows only too well as a sparring partner, and a founding member of the Tax Justice Network. What are the advantages of GAntiP? I will set them out briefly.
First, tax avoidance is currently estimated to cost this country and its other taxpayers £25 billion or up to £25 billion—I know the figure is much disputed, but it is certainly a very substantial sum. It would be significantly reduced so that many services now under threat because of Government cuts could be saved and more money would be available to help promote jobs, which the Government want, and economic recovery.
Secondly, to deal with the point raised by Mark Field, the UK tax system would be made considerably more certain if HMRC were for a small sum to provide prior indication, which I would strongly support, about whether or not an arrangement would fall within the scope of tax avoidance. No one is trying to trick companies; we want certainty, and this would be a very good way to achieve it.
On this matter, I entirely agree with the right hon. Gentleman. I have said on a number of occasions that if we are to go down this route, whether it be a general anti-avoidance rule or on the basis of the principles that the right hon. Gentleman prefers, it must be done hand in glove with a proper pre-clearance process. It needs to be a swift process and it may be that a fee is to be paid as well, but it must be done on the basis that before any new scheme is marketed it must get the thumbs up from HMRC that it is a legitimate one. That would provide a sensible way forward taking into account the certainty reasons that I pointed out earlier.
I am glad to have the hon. Gentleman’s agreement on that. I hope that he will also agree with me that what the Government are proposing—that the criterion should be whether a certain arrangement amounts to a “reasonable view” or a reasonable course of action—is an extremely vague, subjective and uncertain way of deciding this matter.
The right hon. Gentleman referred earlier to egregious schemes, and I think we all recognise that there are some, as highlighted by The Times and other newspapers in recent months. Which particular schemes does the right hon. Gentleman, who is obviously in close contact with Richard Murphy among others, think would not fall foul of the reasonableness test? Which schemes would be regarded as highly egregious yet would fail to be caught?
I have already mentioned two that have had a great deal of publicity—Google and Amazon—but there are many, many others. Only a very narrow and small proportion of the most “aggressive”—the Chancellor’s phrase—or abusive tax-avoidance schemes would be caught. What worries me is the impression given that everything else is somehow okay with the Government. I think that is a very unwise position to adopt.
Briefly, the third advantage of GAntiP is that the incentive for accountants, lawyers and bankers to sell tax-avoidance schemes would be curtailed. That would be a thoroughly good thing, because they and their clients would know that most of those schemes would fail in future.
Lastly, my fourth advantage might be the single most important one. GAntiP really could help to change the rancid culture in British society today whereby the top 1%—whether it be super-rich individuals or the big corporations—are widely perceived to be ripping off the honest remainder of the population.
That is very kind of the right hon. Gentleman, who is making a compelling case. Does he agree that it would be helpful to have a clear commitment from the Opposition Front-Bench team that, if it were to form the next Government, it would introduce the sort of principle that he describes so compellingly? For all the reasons the right hon. Gentleman has outlined, the principle is simpler, it provides greater certainty and it will catch far more of the kind of things we are trying to rule out than the rule approach that we have at the moment.
As always, the hon. Lady has a similar mindset to mine. That is what I hope, too. Discussions are, of course, going on within the party, and we are yet to hear from my hon. Friend Catherine McKinnell who speaks from the Front Bench. I am certainly very keen to try to ensure that before the general election, for all the reasons I have given, the Labour party signs up to GAntiP. I am thus pleased to commend to the Committee new clauses 7 to 16.
It is a pleasure to speak in this debate, and I rise to speak to amendments 11 and 12, which stand in my name.
I have said this before, but I have concerns about Parliament agreeing overwhelmingly with a principle that effectively says, “We as a Parliament, even with all the specialist advice we get, cannot draft the law sufficiently well to leave our taxpayers to try to apply and follow it, and leave HMRC and the courts to determine whether that is the case.” The proposals of the Government and of the right hon. Member for Oldham West and Royton
(Mr Meacher) would in effect create a power for HMRC to say, “While the law actually says that, what we really meant was something a little bit different, so while the taxpayer has complied with the letter of the law, they have not complied with the letter of the law as we wish it had been written.”
That is a real power for Parliament to give away. We are saying to an executive agency of the state, “Your job is no longer to apply the law; your job is to rewrite it as you wish it had been written by Parliament in the first place.” I think we should be very careful before going taking such a line. We need to know exactly what we are doing and we need to be happy with setting that principle. If the Government tried to apply such a principle to criminal justice law, we could end up arresting people for something that was not a legal offence but we wished had been a criminal offence. If we applied it to immigration law, for example, there would be howls of outrage saying that the state had gone mad with excessive power, and that it was the end of the rule of law and not the way for a sensible Government to behave.
I entirely agree. That sense of arbitrariness will potentially do great damage to the UK as a place that has always been welcoming to business internationally, benefiting our economy as a whole. He is absolutely right to draw a direct comparison between issues relating to the Finance Bill—after all, we have one every year, so we can try to tighten up any problems—and issues relating to the criminal justice system. As he says, if the same principle were applied to criminal justice, it would rightly lead to outrage.
I am grateful to my hon. Friend and I would like to expand a little on this theme. It has been said before that there are various ways of interpreting what the rule of law means. One version from the 17th century is that the rule of law is the
“supremacy of regular power as opposed to arbitrary power”.
In the case before us, rather than saying “Here is the law that applies to everyone,” we are giving the Revenue the right to rewrite the law only for certain people subject to certain permissions. That sounds like arbitrary power to me.
As a classics graduate, I thought I would dip back into history and finally find some use in having done a classics degree. Plato said:
“Where the law is subject to some other authority and has none of its own, the collapse of the state in my view is not far off; but if the law is the master of the government and the government is its slave, then the situation is full of promise.”
What we are doing here is saying that the law now has no authority, as we are giving somebody else the power to change the law, and that rather than the Government having to follow the law, the Government and its agencies can change the law retrospectively. We need to be clear that we are weighing up whether the real sin of the existing excessive, outrageous and truly abominable level of complex tax avoidance by people who should know better and should not be doing it is enough for us to risk weakening the rule of law.
I entirely agree with my hon. Friend on the issue of the rule of law. However, I wonder whether the outrageous examples that have caused such scandal over tax avoidance were actually examples of tax evasion, and whether HMRC has in fact been very weak about enforcing the tax law as it exists now.
I agree with my hon. Friend that tax evasion is a crime that should be prosecuted to the fullest possible extent, but in this instance we are talking about tax avoidance.
We should be clear about the principle of what we are doing. We are saying to HMRC, “You can enforce something that is not in law.” If we are to pursue that line, we must be certain that safeguards are in place so that we do not see—metaphorically, of course—tax inspectors turning up with baseball bats, banging down the door of the taxpayer and saying “Give us money or else.” The “or else” would mean, of course, HMRC making the assessment and taking the money in any event, and the other party having to go through expensive court proceedings to try to get it back. I have worked with many tax inspectors, and clearly I do not think that any of them would literally pick up a baseball bat, but there is a risk that in any difficult situation in which there is some doubt about the application of the law, tax inspectors will start writing letters saying, “Unless you agree with my analysis, I reserve the right to apply the general anti-abuse rule, in which case”—effectively—“you will be in deep trouble.”
I think it would be very generous of Members to assume that, in all circumstances and for ever, HMRC would apply this power only to the largest, most abusive and most complicated taxpayers. I suspect that, in the experience of most Members, the Revenue has at times been a little weaker when tackling the very large taxpayers with very big pockets, and a little stronger when tackling those who are a bit smaller and a bit less sophisticated, and who may not be able to fight back as effectively. There is a real risk here. If we give the Revenue a power amounting to complete discretion in regard to whether it applies this rule to individual taxpayers, what is to prevent a large organisation from buying its tax inspector a nice lunch, and an application to apply the rule perhaps never actually being made?
I am not suggesting that that would ever happen. I have certainly never known such things to happen; tax inspectors are usually very law-abiding, and very committed to their role. However, there have been instances in which we as a Parliament have been concerned that the Revenue has not treated the largest and the smallest taxpayers equally. In this instance, we are giving the Revenue a discretionary power, and allowing it to choose when to try to use it. Are we sure that the Revenue will use that power against the people against whom we think it should be used, and not against our constituents who have not done anything particularly wrong?
It has been suggested that we are introducing too many safeguards, and questions have just been asked as to why we are imposing the burden of proof on the Revenue rather than on the taxpayer, as in every other situation. This is plainly not a normal piece of tax law. We are saying, “You may have complied with the law but we still think that you are in the wrong, so we will retrospectively pretend that the law said something different from what it actually said.” In such circumstances it must be right for the Revenue to have a duty to demonstrate that that is appropriate, rather than saying to the taxpayer, “You must prove somehow that you acted within a law that had not actually been published.” That would be nonsensical. It would be equally nonsensical to make the penalties for contravening the GAAR higher than the penalties for contravening the published law. If I flout the law and am defeated in my claim on the basis on the published law, I will rightly be subject to penalties, but for me to be subject to higher penalties when I have not actually broken the published law, which I can read, would certainly be nonsense.
I accept that the Government have undertaken long and detailed consultation and have tried to find a way of introducing a power to tackle the most aggressive, egregious and outrageous tax avoidance without creating some of the pitfalls that would worry me and, I think, my hon. Friend Mark Field. We do not want to create a tax system that is based not on law, but on random interpretations of various transactions by HMRC at some point in the future. I also accept that the Government have made the safeguards as reasonable as is commensurate with ensuring that the law retains some teeth.
I shall ask some questions about the drafting of the Bill later, but let me first explain why I tabled my amendments. I wanted to try to ensure that the power focused on the large, complex, aggressive, expensive schemes peddled by naughty solicitors and accountants, rather than being used as a general threat against ordinary taxpayers who had tried to structure their affairs sensibly and had chosen to conduct a transaction in a way that we could accept.
There are many innocent ways of trying to reduce a tax bill. It is possible to make a pension contribution rather than taking income as taxed earnings. I do not think any of us would object to that. The law clearly identifies it as a choice that we can all make. The owner of a company can choose whether to take a dividend, a salary or a bonus, or whether to leave the cash in the company and to be taxed on a capital gain when he leaves. I do not think many of us would say that someone who chose not to take a bonus in the year in which he sold his company but instead to allow the cash to be deemed a capital gain in order to secure a lower tax rate would be perpetrating an outrageously aggressive tax abuse arrangement of the kind that we should prevent by rewriting the law. We must be careful not to allow the Revenue to apply this power to every piece of innocent, sensible tax planning, when the only fallback will be the definition of a reasonable use of the rules.
Some people might consider it reasonable for Parliament to intend what it says it intends. When we pass a law, it is reasonable to assume that we mean what we put in that law. If we meant something different, we probably ought to have said that something different, and if it turns out that we have got it slightly wrong, we should amend the law. I accept that we have been doing that in various situations for the last God knows how many years, and have ended up with a hugely complex tax code. Every time we build in more complexity, we create more loopholes, and then we have to create even more complex rules to try to close those loopholes—and then we create more and more. Perhaps the answer is to have much shorter, simpler tax codes. I hope that, once the Government have put the GAAR on to the statute book—as I fully expect them to do—we can attempt a wholesale simplification of our tax regimes.
My hon. Friend has identified the nub of the problem. The complications and the sheer size of the tax code have become the godfather of much of the tax avoidance with which many Members in all parts of the House want us to deal.
Am I right in thinking that the second sign of madness is to keep doing the same thing and expecting a different result? I think that that applies to introducing more and more complexity and assuming that the outcome will eventually be different.
Surely the problem with this line of argument is that it does not establish what is cause and what is effect. The assumption seems to be that the fault lies with the fact that tax is too complicated and that there is too much of it, which somehow encourages people to avoid it. Perhaps a complicated tax system, and many of the regulations that exist, have been made necessary by the very fact that people try to avoid tax.
The hon. Lady is right. I have not sought to defend those who peddle tax avoidance schemes. It is probably human nature for us all to try to minimise our liabilities. I personally think that we should try to adjust our tax regimes so that they get much closer to taxing the real profit that is declared, rather than allowing a collection of reliefs, allowances, incentives and so forth to provide scope for manipulation of the various circumstances in which people find themselves. However, I accept that people would still try to get round the simplest tax code in the world, and that we would need provisions to stop them.
My amendments are designed to ensure that, if the Revenue uses this power, it uses it to deal with the largest, most outrageous schemes. We do not want it to go around threatening all the small taxpayers who are simply trying to go about their way of life. I was not convinced that the wording of the Bill, and certainly not the wording proposed by the right hon. Member for Oldham West and Royton, would meet those concerns. I tried to provide a de minimis: the tax at stake would have to be above a certain amount before the rules could be applied. That would provide certainty, ensuring that the vast majority of taxpayers would not be subject to some retrospective, random rewriting of the law.
My hon. Friend is making a powerful speech, and is advancing a compelling argument for his de minimis principle. The problem is, in my view, that it is a compelling argument for the exclusion of part 5 of the Bill, and that the de minimis principle that he seeks to introduce ignores the other principles that he has advocated. Does he agree with that?
Yes, I do. Various Members have expressed concern about the principle before. I think we must accept that the House has concluded that the only way of tackling the problem of excessive outrageous tax avoidance is to risk the principle of the reading of the rule of law, and to be satisfied that a relatively minor version is what is needed to tackle tax avoidance. I am not sure I would have come to the same conclusion. The previous Government looked at a general anti-avoidance rule about a decade ago, and having consulted for quite a while and made various drafts, they decided not to proceed, probably because of the same concerns that my hon. and learned Friend has set out. You perhaps remember those days and that consultation, Ms Primarolo.
Given that this is going to happen, I am trying to find a way to ensure that the provision cannot be abused and used against our small and medium-sized taxpayers. There are precedents in the tax system for certain rules applying only to certain sizes of taxpayer. The transfer pricing rules apply only to large corporates, unless the Revenue gives separate direction. I am not sure it has ever given a direction to apply transfer pricing rules to small or even medium-sized companies; perhaps the Minister has the data somewhere and can find some inspiration as to how many times that has happened in the 10 years or so since those rules have been in place. It is not unusual for us to say that actually, some rules are so complex and burdensome that we will focus them on the largest and most sophisticated taxpayers, and not apply them to small ones.
Ironically, transfer pricing rules are the exact rules we have in place to tackle the abuse by Starbucks, Google or whichever companies the right hon. Member for Oldham West and Royton mentioned. We have the power to restate the pricing of transactions exactly to stop that kind of abuse. However, I am not convinced that a general anti-avoidance rule can prevent people from choosing to put too much profit in one territory, rather than another. I am not sure that there is some kind of artificial arrangement or step that would work. I can see that there could be some complicated corporate legal structure to avoid taxation of a transaction that ought to be taxed, and which the right hon. Gentleman’s new clause might get to. However, I am not sure we can do that by saying, “We think more profit should have been reported in the UK than actually was.” I suspect there would be nothing artificial to trigger the arrangement in that situation, so I am not sure that even his drafting of the rule would catch much of the outrageous avoidance he seeks to catch. We have to use the transfer pricing provision and various other measures to get there.
The principle I have tried to set out in my amendments is that the Revenue can apply the provision only if the tax at stake is a certain amount. I am consciously trying to avoid taxpayers then having a series of schemes that slip under the de minimis. I tried to include a provision establishing that we should test this by aggregating all the schemes in place in a tax year, or when looking at the whole benefit over the life of the scheme, in order to prevent that kind of situation from happening. I am not sure whether the Minister will be inclined to accept this principle. I ask him when he responds to set out exactly what schemes the Government are after, and when they think the Revenue should use this provision. Is it to be used only against the most aggressive and complex schemes that have been designed purely to exploit loopholes, and not intended to be used for routine, grey-area inquiries where there is some uncertainty, or where there has been some choice in how to take various proceeds out of a transaction? A lot of people are concerned that this power will be stretched and used beyond the intention of the Government, for things we could not possibly intend to use it for. Given the Bill’s drafting, it is very hard to be confident that the Revenue would not seek to do that in any situation. The Bill can be read in two ways: as not applying to very much at all, or applying to nearly everything.
I have a couple of questions for the Minister on the Bill’s drafting. A lot of anti-avoidance rules refer to the question whether a person enters into an arrangement to secure a tax advantage for themselves or for a connected person, be it another member of the group of companies, or a relative. The “or another related person” principle is not written into the Bill. I am not sure whether that is an oversight, or whether that is the case because the Government think it unnecessary. Perhaps the Minister can answer that question.
I am also a little intrigued by the references in clause 209 to priority rules, which include a tax treaty. My understanding of the law is that an international tax treaty trumps all domestic legislation, and that it is not possible for us to legislate to overrule a tax treaty. However, that appears to be what we are trying to do here. Perhaps the Minister could explain how he thinks that will work. This would appear to be a weakness of the system.
Overall, I am resigned to the fact that at some stage after passing the Bill, we are going to abandon the principle of applying the rule of law as written, and accept the fact that an agency of the state can rewrite it to suit itself, and the taxpayer has to fight their way through the courts. I am trying to ensure that this provision is used only for the things that we really intend to use it for, and that it does not become a broad, baseball-bat approach to tax compliance, which we would all hate to see. I hope the Minister can deal with some of those concerns.
It is a pleasure to serve under your chairmanship, Ms Primarolo. I rise to speak in support of the Opposition amendments to clauses 203 to 212, which relate to the Government’s proposed general anti-abuse rule and the wider issue of corporate tax avoidance and its impact. I stress “abuse” because people use the terms “avoidance” and “abuse” interchangeably. However, we need to be clear that this is about an anti-abuse rule, rather than a general anti-avoidance rule.
Before turning to the clauses and our amendments, I want to put on the record our deep concern at the delay in the publication of the final guidance notes on how the general anti-abuse rule, or GAAR, will operate. The guidance was initially expected to be published alongside the Finance Bill on
“Our witnesses stressed the importance of the guidance from HMRC and the Advisory Panel on how the GAAR would apply so as to minimise uncertainty. We wholly agree. We recognise that progress is being made in drafting this guidance but are concerned that our witnesses felt it was far from acceptable as it stands.”
We therefore welcome the fact that amendments were made, but surely it is vital that Members have sufficient time properly to consider the final guidance, in advance of the GAAR provisions being considered in this House. The Treasury Committee has already raised directly with the Chancellor the question of Members’ ability properly to scrutinise the Bill within the timetable provided by the Government. It described it as
“an important issue of principle going to the heart of Treasury Ministers’ accountability to Parliament.”
I am therefore keen to put my deep concerns about this issue on the record. Sufficient time has not been provided for Members to consider the guidance and any amendments required to the primary legislation as a result.
At a time when living standards are being squeezed, Government borrowing is up, growth forecasts have been downgraded again, the public services upon which people rely are being cut or threatened across the country, and ordinary people are being asked to pay the price of the Chancellor’s economic failure, there is understandable anger about the unfairness and injustice of people working hard and paying their fair share of taxes, while they hear almost daily about the complex lengths to which a small but significant number of multinational corporations will go in order not to do so.
I am pleased that my hon. Friend has raised that issue and reiterated the difficulty the Chancellor faces in pursuing, with such a one-direction approach, his clearly failing economic policies. He refuses to change course, even though the economy clearly shows that his approach is not working, as does the impact on ordinary people up and down the country. Instead, he is ploughing on for political reasons—because he simply cannot lose face by changing direction.
Let me return to the principal issue. It is right to raise the impact of tax avoidance on public services, which are suffering as a result of the tax gap.
If it is so important to impose an anti-abuse rule such as that which the Government propose to introduce, can the hon. Lady explain to the House why the Labour Government, who were in power for 13 years, did absolutely nothing in that regard?
That is clearly untrue. The Labour Government had a proud record of tackling tax avoidance at every level. We introduced endless targeted measures that brought in an additional £16 billion of revenue. We introduced the disclosure scheme, which, as the Minister will say, has been highly successful, which this Government are building on and which brought in an additional £12 billion of revenue. I shall take no lessons from those on the Government Benches about tackling tax avoidance, because although the Government talk tough the action is yet to be seen on the ground.
Clearly it is unfair and wrong that companies can avoid tax on profits that have been generated from economic activity in the UK. I am sure that we can all agree on that. The profits have been generated by hard-working UK tax-paying consumers and businesses with what appears to be one rule for those at the top and another for everybody else.
There will sometimes be good reasons for companies to pay little or less tax. Some firms invest large sums in research and development, assets and infrastructure. That must be celebrated and acknowledged, but people are rightly entitled to ask what is going wrong when a company can make sales of £1.2 billion and describe itself to investors as profitable yet report no profit in the UK. It totally undermines the concept of a level playing field when good British companies pay their fair share on profits generated in this country whereas others seem to get away with not doing so.
As we all know from our constituency postbags, people are angry about the devastating consequences of tax avoidance not just on the UK and our public services but on developing countries, with multinational giants using tax havens and artificial corporate structures to shift profits offshore and away from the places where they were generated.
We have heard much tough talk from the Government about their apparent determination to tackle tax avoidance. Before us today we have the coalition’s flagship policy on this issue, the general anti-abuse rule. Announced in the 2012 Budget and building on the 2011 report by Graham Aaronson, QC, the GAAR will apply to income tax, national insurance contributions, corporation tax, capital gains tax, inheritance tax, petroleum revenue tax, stamp duty land tax and the new annual tax on enveloped dwellings. I welcome the statement on page 4 of the guidance that was finally published, which suggests that the GAAR
“rejects the approach taken by the Courts in a number of old cases to the effect that taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means, however contrived those means might be and however far the tax consequences might diverge from the real economic position.”
That is a significant advance on the current situation, but, in the Treasury’s words, the GAAR is intended to address
“artificial and abusive avoidance schemes but without creating uncertainty for business investment” and will attack
“only those schemes that are the intended target and not a broader spread of business arrangements.”
The Budget 2013 policy costings documents suggested that the GAAR
“would be highly targeted on abusive avoidance that has abnormal features” and goes on to suggest that the people affected are likely to be those involved in “highly contrived tax avoidance”. Mr Aaronson believes that the GAAR is
“clearly intended to apply only to egregious, or very aggressive, tax avoidance schemes”.
Indeed, clause 204(2)(b) refers to the use of “contrived or abnormal steps” to obtain a tax advantage. Those are definitions that I would say—many would agree with me—are highly subjective and require greater clarity in the final guidance. As the Chartered Institute of Taxation pointed out before the guidance was published, how does one interpret “abnormal” and to what extend does the term “contrived” cover what many tax experts would think—rightly or even wrongly, in many people’s view—is simply tax planning? Page 23 of the final guidance, published on Monday, simply states:
“The words “contrived” and “abnormal” are not defined, and therefore will be applied in their normal sense.”
What deterrent effect is the narrowly defined GAAR expected to have? As the Government’s flagship policy for tackling tax avoidance, what dent will it make in the tax gap—that is, the difference between the tax collected and the tax that would be collected if everybody complied with the letter and the spirit of the law? Table 2.1 of the Budget 2013 and HMRC’s recently updated impact note on the GAAR estimate that it will result in additional revenue of £60 million in 2014-15, rising to £85 million in 2017-18. Those are without doubt notable sums of money, but let us remind ourselves of the tax gap. HMRC’s most recent estimate for the period 2010-11, considered by some to be relatively conservative, stands at £32.2 billion. HMRC believes that about 14% of that can be accounted for by tax avoidance activity, which means £4.5 billion to £5 billion a year.
There are varying views on the tax gap and how it is calculated. Clearly, it is difficult to calculate accurately, because we are effectively calculating something that does not exist. It is tax that HMRC has been unable to collect, so it will always be an estimate. I use the HMRC figure because it is the minimum—it is what it believes and it is a conservative estimate. The Tax Justice Network calculates the gap at £120 billion. Whatever the actual sum, the GAAR and the £60 million and £85 million that it is intended to bring in are simply a drop in the ocean, and many people have described it as that. It is tinkering around the edges of what is legal.
There has been extensive discussion about the proposed GAAR’s strengths and weaknesses, both in this House and elsewhere. I acknowledge that the Government have taken steps in response to consultation submissions to reduce some of the ambiguity of the earlier GAAR proposals. For example, they have attempted to define the so-called “double reasonableness test” so that we can have a better understanding of how to assess, in HMRC’s words, whether arrangements can
“reasonably be regarded as a reasonable course of action”.
Again, the word “reasonable” is highly subjective and open to interpretation. Many, including the Opposition, still believe that the GAAR is too narrow and that, as it tackles only the most egregious schemes, cannot be regarded as general at all.
Other concerns have been raised about the chair, the panel and the manner in which they will be appointed. The chair has been appointed and will appoint his panel, and it is they who will interpret what they believe to be reasonable. What a tax expert considers to be reasonable might be regarded differently in the eyes of a member of the public. Indeed, many tax experts will differ on what they believe to be reasonable tax planning, as opposed to something egregious that would fall under the GAAR. The concern is that the GAAR is so narrow in tackling only the most egregious schemes that it could hardly be considered general at all and should perhaps be called the AAR instead. As has been mentioned, it also risks tacitly legitimising any tax planning or avoidance that does not fall within its remit, making it even harder to tackle the avoidance problem. Those arguments should be seriously considered. The problem was neatly summed up by the former president of the Association of Revenue and Customs, Graham Black, who stated that the GAAR is a
“Trojan horse, which suggests tough action whilst actually facilitating avoidance.”
A further issue, raised by the Institute of Chartered Accountants in England and Wales, is the international legality of the GAAR in relation to the UK’s double tax treaties, particularly with about 100 non-OECD countries where the GAAR could effectively and unilaterally override the UK’s international obligations. There remain serious concerns that there is no specific penalty regime for the GAAR, so it would be helpful if the Minister, in addition to addressing the concerns I have already set out, could tell us how he intends to ensure that this GAAR is not just a toothless tiger.
I am keen to emphasise that we are willing to support the Government in introducing the GAAR, but for the reasons I outlined we are not convinced that this version is up to the job. One of our key concerns should surely be the fact that there appear to be no arrangements to monitor, determine or measure whether the GAAR is actually working as intended or whether, as we fear, it fails in its aims. HMRC’s recently updated impact note on the GAAR simply states:
“Consideration will be given to evaluating how effective the GAAR has been at discouraging as well as stopping abusive avoidance schemes.”
“It would be for consideration whether such a requirement should be built into the legislation, or failing that, a firm Ministerial commitment should be made in the House of Commons at the time the legislation is being considered.”
That time is now, I suggest to the Minister.
Like the Association of Accounting Technicians, the Opposition agree that there should be such a requirement, but like the Chartered Institute of Taxation we believe the review should take place before the five years suggested by the Economic Affairs Committee. Given the seriousness of the problem, the ever-increasing pressure on the Government’s finances and the result of the Chancellor’s failing economic plan, we believe we need an earlier review of the success or otherwise of the Government’s key policy for tackling tax avoidance. Our amendment 8 proposes a maximum two-year gap between Royal Assent to the Bill and the review. I look forward to hearing from the Minister whether he is prepared to commit to such a review, particularly in light of the concerns expressed at the beginning of my submission about the lack of time afforded by the Government’s publishing the guidance so late for proper scrutiny of the legislation.
Perhaps the key concern about the GAAR relates not to its implementation but to the Government’s tendency to promote its provisions as some sort of panacea for dealing with the problem of tax avoidance. My right hon. Friend Mr Meacher raised that concern. I spoke earlier of the justifiable anger about the impact of the problem, particularly of corporate tax avoidance, both on the UK and on developing countries. In continuing to talk up the potential impact of the GAAR, the Government are failing to communicate that it will not deal with many of the issues that members of the public are concerned about. Indeed, the Economic Affairs Committee, which provided valuable scrutiny of the Bill and the GAAR, stated in its report that
“Ministers should make every effort to explain the aims of the GAAR and the reasons why it cannot apply in many of the ways public opinion would prefer, so that unrealistic expectations are banished.”
The Chartered Institute of Taxation commented:
“The Government should be careful not to overstate the effects of the GAAR, raising expectations which will later be disappointed. Many of the examples of ‘tax dodging’ highlighted by the media and campaigners would not be caught by the GAAR. It is important to be clear from the outset what the GAAR will, and will not, achieve.”
The ICAEW stated that
“the GAAR is aimed at countering abusive arrangements and will not fix everything. There remains also uncertainty as to what it will and will not catch.”
The Association of Accounting Technicians remarked:
“We do not see the GAAR as a bulwark against the perceived and real abuse of the UK tax system by multinational corporations. The only way to tackle the growing concern that the UK and many Governments have is by bringing international law up to date, making it fit-for-purpose for the 21st century…The AAT supports Lord MacGregor (Chair of the Economic Affairs Committee) in his demand that the Government make it clear to the public that the GAAR is ‘narrowly focused’ and will not meet ‘public expectations’ of bigger levies on international firms.”
The impact note supports that view in terms of the revenue that the Government expect from the measure.
The Opposition agree with all those comments. Indeed, we think the Government should go further on this critical and pressing issue, which is why we have tabled further amendments. The time for tough talk on tax avoidance is over. We and particularly the developing world need real concrete action now.
Earlier, I outlined the impact of tax avoidance on ordinary UK taxpayers and good British businesses who are paying their fair share but see others going to great lengths to avoid doing so—thus contributing to the tax gap and undermining a level playing field for firms. I briefly touched on the devastating impact of tax avoidance overseas, and I welcome the Chancellor’s confirmation in this year’s Budget that he intends to build on Labour’s legacy by meeting the target of spending 0.7% of gross national income on overseas aid. However, we know that aid alone will not be enough.
Developing countries desperately need to be able to raise more tax revenues to invest in reducing hunger and becoming more self-reliant. Aggressive tax avoidance activity is so significantly reducing the ability of developing country Governments to tackle issues such as hunger, and to invest in the vital infrastructure that we all take for granted, that the OECD estimates those countries lose three times more to tax havens than they receive in aid each year.
Indeed. That very thought was going through my head. We must be serious about the impact we can make as a country to support developing countries. We should do everything we can, not just giving aid and making sure that it is utilised in the best way, but also enabling developing countries to support themselves as best they can. The Enough Food for Everyone IF campaign states that
“dealing with developing countries’ corporation tax alone could raise enough public revenues to save the lives of 230 children under the age of five every day.”
That is a powerful statement and a powerful tool is within our reach.
The Opposition believe that the first step to tackling the issue, and to creating a fair taxation system, is to put an end to tax secrecy. We need concrete proposals from the Government to demonstrate how they intend to put the issue at the top of the G8 agenda, starting with the requirement suggested by our amendment that HMRC should work in conjunction with other G8 countries to bring forward measures to require multinational groups to publish a simple, single figure for the amount of corporation tax they pay. That is the purpose of our amendment 4. Yet, while the issue of tax avoidance and tax transparency can clearly only be properly dealt with at an international level, we believe the UK should be leading the way, demonstrating its determination to take meaningful action on tax transparency here at home. Therefore our amendment 5 would ensure that commitment was there, regardless of progress at an international level.
But tax transparency should not be restricted to the UK and other G8 or OECD countries; it is needed now, more than ever, in the developing world. The Prime Minister and the Chancellor have frequently stated their commitment to championing tax transparency during the UK’s presidency of the G8. They are on record as being committed to ensuring that developing countries also benefit from any reforms, yet with the exception of a relatively small pot of money for capacity-building work, the measures to combat tax avoidance in the Bill before us do nothing to assist poorer countries. So while the Government are determined that Labour’s disclosure of tax avoidance scheme requirements cannot be extended to include subsidiaries of UK companies operating in developing countries, the Opposition believe that the Government should at least commit to reviewing how a requirement for UK companies to report their use of tax schemes that have an impact on developing countries could be enacted. Surely it is the least that the Government can do.
That review, called for by our amendment 6, should of course include considering how the Government would take steps to notify developing countries’ tax authorities of tax schemes that have been identified, to assist in the recovery of that tax. I am quite sure that that proposal will at least have the support of Liberal Democrat Members on the Government Benches, given that their party’s spring conference passed a motion effectively calling for the same measure just last month.
My hon. Friend has made very strong arguments. Will she join me in commending the work of organisations such as ActionAid, Global Witness and the Tax Justice Network, who have done excellent work in exposing a number of examples of corporate tax avoidance in countries such as Zambia, particularly resource-rich countries, and the devastating impacts those are having? If we did not have those stories out there, we would not be aware of the scale of the avoidance that is going on and the impact that it is having in those very poor countries.
I thank my hon. Friend for that intervention, which is powerful in itself, but also very much reinforces the argument that we on the Front Bench are making today: that we have the means within our grasp to make a difference to that situation. I hope that the Minister will provide some reassurance today, and that we shall get some Liberal Democrat support for our amendments, which seek to make a real difference on the ground. [Interruption.]
Returning once again to an amendment tabled by the Opposition last year—and I might say amendments tabled by Liberal Democrat representatives last year but which were withdrawn at the last minute—we believe that changes to the controlled foreign company rules introduced by the Finance Act 2012 should be properly monitored for their impact on developing countries. Many charities have been concerned that the CFC rule changes will make it easier for UK companies to avoid paying tax in developing countries in which they own subsidiaries. While the Government have estimated the potential loss to developing countries at £1 billion, which one would think would be enough, ActionAid believed it could be as high as £4 billion a year. So what we really need is for the Government to undertake a proper assessment of the impact of the changes on the overall tax take of developing countries since last year, and our amendment asks for that to take place.
In conclusion, we will support the Government’s legislation, brought forward today, to introduce a GAAR. However, we believe, along with my right hon. Friend Mr Meacher, who has tabled his amendments as a suggested alternative to the GAAR, that the Government’s GAAR has many potential flaws.
We support our amendments that we have tabled, and I have presented very clearly the reasons why we support them. I will go on to say why. We support the GAAR and we welcome its being put in place, but we want to see how effective it will be and we will continue to monitor it. We hope that the Government will accept our proposal to come back and report on progress within two years, so that we can continue to monitor its effectiveness and rectify, hopefully, some of the flaws that we see will hinder its effectiveness in tackling this problem. So we call on all—
In terms of who will be supporting which amendments, was my hon. Friend not surprised a moment ago to hear comments from a sedentary position from one of the Liberal Democrat Ministers—in fact an International Development Minister—saying that she doubted their support? Having read previous Liberal Democrat policies on this area, I have to say that over the years they have been fairly progressive and very extensive. Was my hon. Friend not surprised to hear those comments?
Excellent. I am grateful for the right hon. Gentleman’s intervention. We look forward to clarification of the Liberal Democrats’ position on the issue, and we hope it does not go the same way as their mansion tax vote went earlier, when they voted against their own policy for the second time in the House.
I call on all right hon. and hon. Members to support our amendment 8, which would monitor the impact of the GAAR and ensure that the Government take genuine action towards securing the tax transparency and fairness that the world needs in this 21st century. We also seek to test the will of the House by pressing our amendment 6 to a vote, to determine whether the House will commit to ensuring that we do all we can in our power to tackle tax avoidance that is damaging not just to the UK, but to developing countries.
I finish by reiterating briefly concerns that I have expressed on several occasions in the Chamber and elsewhere about the huge number of challenges facing HMRC, highlighted recently by yet another scathing report from the Public Accounts Committee. The very body on which the Government rely to tackle tax avoidance is being seriously undermined by devastating budget cuts of £2 billion over this Parliament and the loss of 10,000 staff. These cuts will be a false economy if they hamper HMRC’s ability to collect the billions of pounds in avoided tax, and all the tough talk, strategies and moral indignation in the world will not deal with the problem of tax avoidance if HMRC simply does not have the capacity and resources it requires to do the job.
I strongly support the general anti-avoidance rule and its introduction. Some would say that it is long overdue. Bearing in mind what Catherine McKinnell has just said, how important and urgent it is and how long-standing the problem has been, one has to say that it was overdue in 2010, so it is good that it is in place now. I commend Ministers on the Front Bench for including it in the proposals coming to the Committee now.
I shall spend a minute or two commenting on what my hon. Friend Nigel Mills said in his speech a little while ago, making it clear that there are some risks and some dangers, particularly of retrospection. The Minister will know that we have been in correspondence about one particular series of events which has left constituents of mine at a severe disadvantage, as they see it, because of the retrospective application of an HMRC ruling to them.
What I want to say to my hon. Friend is that one thing that the general anti-avoidance rule will do is put everybody in this country on notice about their tax affairs so that they cannot be caught by surprise, or perhaps even subterfuge or a recycling of policy, in the way that my constituents have been. I will continue to write to the Minister about the case facing my constituents, but a general anti-avoidance rule puts everybody on notice and makes any possibility of an excuse disappear. We should welcome that.
Does my right hon. Friend agree that it is preferable that only people who engage in aggressive tax abuse should be put on notice, and that people innocently going about trying to structure their affairs normally within the law should not be scared of the provision at all?
I was very attracted to one point that my hon. Friend made in his speech, which was that he thought there was a tendency not to go for the biggest fish with the sharpest teeth and the most expensive lawyers, but to go for the little people or at least the middle-sized people. That is a powerful point and I hope those on the Front Bench are listening carefully. A general anti-avoidance rule needs to be general—that is to say, applicable to even the biggest fish with the sharpest teeth and the most expensive lawyers.
In amendment 6 and several others, some of which were debated earlier today and some more of which will be debated tomorrow, the Labour Front-Bench team has given us a very pretty set of trinkets. They all start with the phraseology
“The Chancellor shall review the possibility of” doing this, that and the other. They have all obviously been produced by Labour’s amnesia factory, which has forgotten entirely that, on general election day in 2010, the country, the public purse, borrowed £428 million. The day before it borrowed £428 million, and the day after it borrowed £428 million. I commend Government Front Benchers again for reducing that figure by a quarter—a substantial amount. It is surprising that the range of amendments and the speeches made by Labour Members in the Budget debate, including today, have all said that the right solution to the problem is to borrow more. That is not the right solution, and, as I say, the amnesia factory is churning them out.
I want to ask not just about the result of this Chancellor’s potential review of the possibility of doing various things, but the result of the previous Chancellor’s review of all these attractive propositions. None of the things in these propositions is novel. The mansion tax in particular was not even invented by the Opposition. Yet it would seem that the right course of action now is to “review the possibility of”. What was the result of the last Chancellor’s review of the possibility of increasing tax transparency internationally? What action did he take? What report did he leave in the pigeonhole for the incoming Chancellor? I suppose that Opposition Front Benchers’ proper line of defence is to say that they cannot recall.
Whatever the parentage of amendment 6, I want to spend a few moments talking about it. I just say in passing that, whatever else it does, it certainly does not do what the hon. Member for Newcastle upon Tyne North claimed, which is to take a grasp of this key issue. It says that it wants a review of the possibility of. That is not taking a grasp of anything.
I am proud that in the Budget the Chancellor confirmed the UK Government’s promise to meet the 0.7% GNI target for overseas aid. These are not easy times, and as my constituency mailbag shows, it is not a universally popular decision. But it is the right decision, and it is one that I am proud to see the Government have been ready to take. It channels vital resources from the richest nations, of which we are definitely still one, to those that need it most. But it is also the case that those countries need not only our aid, but the tax revenue to support public services in their countries on their own, so that health there, education there, water supply there—all the aspects of development—can be paid for out of the tax that they should be receiving, supported of course by our continuing aid programme.
The Enough Food for Everyone IF campaign—I think that I am the only Member in the Chamber who is wearing the lapel badge, which is also available in other colours—is an important initiative, which I hope will be powerful and effective, as the Drop the Debt and the Jubilee Debt campaigns were, in convincing politicians of all political stripes that further action on this is needed urgently. The UN, the IMF, the OECD and the World Bank, not to mention our own International Development Committee, have all strongly made the point that when we plan our tax affairs we should be aware of the impact that can have, and should have, on improving the tax income of developing nations.
On that point, may I press the right hon. Gentleman to address amendment 7, which expresses the view of not only Opposition Front Benchers, but the International Development Committee, which recommended an impact assessment of the controlled foreign company rules, and that Committee is chaired by a member of his own party?
Indeed, it is. There are many propositions made here that are highly desirable, and I would not be at all disappointed if the Front-Bench team agreed to accept amendment 7 and a number of others. The point I am making is that what we need across all political parties in the House, and beyond, is strong consensus in favour of not only continuing our achievement of the aid target, but ensuring that we assist developing nations by getting our tax affairs straight and helping them to do likewise.
The right hon. Gentleman correctly says that we need to keep up our efforts on aid, but if the controlled foreign company rules have potentially lost £1 billion to developing countries, as Government Front Benchers appear to accept, that affects our ability to give aid. Would it not make sense to review whether that is correct, because it might ever be more?
Indeed, and I will move on to that shortly. Based on all that has gone before, I think that the Minister will say that the Government have every intention of ensuring that those things happen and that the work being promoted by the IF campaign becomes mainstream in this House and the outcome we all wish to see. I support that campaign and its objectives and am keen for the Government to adopt them and be supportive as well. Indeed, my hon. Friend the Under-Secretary of State for International Development is sitting just in front of me on the Front Bench, and I know that she works very hard on those matters as well.
I do not think that the trinket presented to us in amendment 6 is the core of what we need. I challenge the Government to give an undertaking that the proposals in the Finance Bill will be moved on so that multinationals are required to reveal the tax-avoidance schemes they are using in the developing world and developing countries are helped to collect more of the tax they are owed. I pay tribute to the work, which I think was initially promoted by the International Development Committee in the previous Parliament, and which I know this Government have taken up with some enthusiasm, of supporting developing countries to create effective tax systems of their own. I know that the work that has been done in Zambia is seen as a template for other countries around the world. I encourage the Government to move forward in that direction.
The right hon. Gentleman is bringing to the Committee’s attention the issue of large multinational companies avoiding tax in other countries around the world. Does he agree that it is an issue not only for this House, but for other investment countries, such as the United States, and that together we can address the problem of big companies trying to avoid tax in third-world countries?
Yes, I very much agree. Indeed, I have heard Government Ministers say that they agree. It is why it is important to work through the G8, the OECD and even the UN to get some level of international engagement on that. As is so often the case, those necessary and important international outcomes cannot be achieved by one country taking an initiative on its own. That does not deter me from arguing that the United Kingdom should be giving the necessary leadership, but I think that we have to be realistic about how we can achieve those outcomes.
The right hon. Gentleman made a significant point about the importance of supporting developing countries in developing their tax systems and revenue collection capacity. Was he not surprised, as I was, to see the 8% underspend in the Department for International Development budget this year, given that the Department has given significant support to such projects in the past? Perhaps less support will be going to such activity in future because of that underspend.
In all honesty, I was not surprised because that rule has always been in place. I do not have to hand figures on any similar underspend before 2010, but if I did I am absolutely certain that the Chancellor of the time would have repossessed it. That is part of the system of central Government control of our expenditure. I can understand that the hon. Gentleman is perhaps not in favour of strict control of public expenditure, but it is important that we do not lose sight of the overall objectives.
I shall conclude. I very much support the Government’s direction of travel on the issue. I am delighted that the general anti-avoidance rule is coming into place. The Government will know that I support the IF campaign and therefore I do not think they have gone far enough or yet fast enough. I look forward to the Minister’s giving me some words of comfort when he replies.
It is abhorrent that large companies up and down the country should be avoiding paying their taxes while our constituents are squeezed by the Government at every opportunity. We call on the Government to take vigorous action on tax avoidance. To date, however, despite the Government’s rhetoric, they have consistently failed to deliver.
Quite simply, the cuts to HMRC go too far. With more than 10,000 additional job losses, they will prove to have been a false economy if the Government hamper HMRC’s ability to collect billions of pounds in avoided tax. It is not right and cannot be fair that, while families and small businesses are paying their fair share and feeling the squeeze, large enterprises are allowed to practise “if we can afford it, we can avoid it” tactics.
We believe that the best means of tackling tax avoidance is through not only principle but proper targeted measures and greater capacity in HMRC. If the Government are relying only on the general anti-avoidance rule to do the job, we fear it will not be sufficient. As my hon. Friend Catherine McKinnell has said, we are willing to support the Government’s introduction of GAAR, but we remain unconvinced that the current version is up to the job.
Let me give but one example of how my constituents are feeling the axe while big companies avoid the tax. A group of women attended my surgery last Friday asking, “Why have we been hit while some big businesses seem to escape?” My constituent Mrs Christine Houston of Port Glasgow was made redundant as demand fell and her company experienced economic hardship. She managed to find a part-time job but she works unsociable hours. Her benefits, which acted as a safety net to allow her to live, have now also been cut. Now she has been unfairly affected by the Government’s pension reforms; she was born in October ’53, so she will receive less pension than her two best friends, who were born in March that year. Despite having started work when she was 16 and having paid her share of taxes ever since, she cannot plan for her future as a direct result of the Government’s actions. “Why,” she and her friends ask, “are multinationals plying their trade in this country and getting off lightly on tax while we are being hit hard? Where is the fairness in that?”
HMRC’s most recent estimate, for the period 2010-11, of tax difference—that is, between the tax actually collected and what would have been collected if everybody had complied with the letter and spirit of the law—stands at a staggering £32 billion-plus, and some regard that estimate as low. Serious concerns exist that the Government’s proposed GAAR is too narrow and that they have failed to clarify that it will not cover most of the tax-avoidance activity undertaken by multinational corporations about which the general public are so concerned. HMRC must have the capacity and resources it requires to tackle tax avoidance properly. The Government are undermining its ability to do so with the budget cuts of over £2 billion in this Parliament, leading to 10,000 job losses. While we all agree that making genuine efficiencies is important, there has to be a limit to its capacity to do more with less. The current scale of cuts risks being a false economy if the Government reduce HMRC’s tax yield.
In these tough times, when the Government are cutting spending and raising taxes, it is even more important that everyone plays their part and pays their fair share of tax. Good British firms and millions of families are paying their fair share, but it is not right that some firms do not, and I think we all agree that that needs to change. We must put an end to the era of tax secrecy, because the reason some companies behave like this is that they believe there is little chance of their being found out. We need to reform the rules that allow companies that make profits in Britain but avoid paying tax in Britain to ensure that they do pay their tax.
Recent cases of companies that have manipulated the tax rules to reduce the tax they pay in the UK to virtually nothing have rightly outraged all those people and businesses who do pay their fair share of tax. My constituents in Inverclyde, and hard-working families and businesses, rightly ask why some seem to think that the rules do not apply to them. It is clearly unfair and further undermines companies that do pay their tax, expecting a level playing field. Over the Easter recess, I visited many small and medium-sized companies, and time and again they talked about no growth in the economy, low demand, and larger businesses avoiding paying their taxes while they were expected to pay theirs, and on time. Sometimes, yes, there will be good reasons why companies pay little tax. Some companies invest large sums in research and development, assets and infrastructure, and we should, and do, celebrate and welcome that. However, we also need to know when companies are stripping their profits out of the UK through artificial schemes.
The Government are undermining HMRC’s ability to administer and collect tax by cutting resources too far and too fast—a familiar, failing theme of this Government. HMRC now has more staff working on administering the Government’s child benefit cut than it employs, combined, to tackle tax evasion and avoidance. The people of this country are demanding reform of the current rules that allow companies to make profits in Britain but pay no tax. That also requires reform of our corporation tax system. In the 21st century, value is now often in brands and intellectual property, customer loyalty and ideas that can be traded globally between different parts of the company group. The rules need to be clearer, tighter and properly enforced.
The Government are failing to show the leadership we need to tackle tax avoidance, yet are vigorously pursuing others to help to fill the Treasury’s coffers. The Conservatives and their coalition partners are failing to convince constituents such as Mrs Houston of Port Glasgow that we are all in it together, or that, with their many references to fairness in both their manifestos, they are living up to that fairness. I ask the Minister to explain to Mrs Houston why the Government seem reluctant to tackle tax avoidance and to give her back her pension.
It is a pleasure to speak under your chairmanship, Mr Crausby. I am particularly pleased today to support amendments 3, 6, 7 and 8 in the name of the shadow Chancellor of the Exchequer and others. I see him in the role of Robin Hood, and I will leave my hon. Friends the Members for Newcastle upon Tyne North (Catherine McKinnell) and for Kilmarnock and Loudoun (Cathy Jamieson) to fight it out as to who is Maid Marian. While the Government may be able to find a Robin Hood on the Treasury Bench, they will of course have to resort to the old public schoolboy tradition of one of them dressing up as a woman if they are to have a Maid Marian.
I do not want the Government to be too precious about what they are doing today. I have a feeling that we have been here before—with the Groceries Code Adjudicator Bill perhaps—in that we are all agreed on the general direction of travel but the Government seem resistant to transparent proposals that can be monitored, so that we can see whether they work and achieve what we want them to achieve, or whether they have any adverse impacts. Those on the Treasury Bench have heard concerns raised by Members on both sides of the House. They need to give the Bill the teeth to ensure that it is enforceable.
I want to reiterate some of the concerns raised by my hon. Friend the Member for Newcastle upon Tyne North. The general anti-avoidance rule must have teeth if it is to achieve what we want. At the same time, I understand that, to some extent, it is difficult to come up with proposals that are broad and targeted enough to have the Government’s desired effect. In that case, why do they not agree to review their policy to see whether it works or not?
The Government often resist resourcing the agencies that have to deliver their policies in order to make sure that they work. HMRC clearly faces many challenges. My hon. Friend Mr McKenzie has given examples of our constituents’ experiences of dealing with HMRC. When some of them have provided HMRC with information to show that their circumstances have changed, it has not acted on the information, and in all innocence those constituents have mistakenly received money or not paid taxes that they should have paid, before being pursued relentlessly by HMRC for that money.
On the Government’s welfare reform, a constituent of mine, Mr Jimmy Elder, has repeatedly asked me why he has been hounded to see whether he is entitled to his employment and support allowance. He now faces an assessment as he migrates on to the personal independence payment. At the same time, however, the Government are not pursuing those multinational corporations that are avoiding tax.
I wish that the Government would see our amendments in the spirit in which they are intended. They seek to improve the Government’s proposals and to give them teeth in order to make sure that they deliver for many of our constituents up and down the country who are appalled at what has been exposed in this Chamber, in Select Committees and elsewhere with regard to avoidance and people not paying their fair share. That is what a tax system should be about: it should say a lot about the kind of society we live in. It should be distributionist at its core, but it should also be fair and transparent.
I found interesting the accusations that the Opposition are suffering from selective amnesia with regard to international development and the efforts being made to give dignity and assistance to developing countries. That was a bit rich coming from the present Government, because no Government in this place or in the world have done more to tackle poverty and injustice in developing countries than the Labour Government. I pay particular credit to my right hon. Friend Mr Brown—he would be glad to hear the name of his constituency being pronounced correctly for once—for his work in ensuring that a Government who had so much to do with regard to the NHS and unemployment when they came to power dealt with international development assistance around the Cabinet table and that it remained a priority. Although we want justice for people in our country, we should not expect those in developing countries to accept anything less.
Exactly. We have passed on the torch of 0.7% and I pay credit to the Government. It must be a lot harder for them to take that direction of travel than it was for us, because our Back Benchers were supportive of it. It is not enough, however, for Lib Dems to be warmly supportive of the Government and hope that they will not be disappointed. They have to start voting for what they believe in, what they put in their manifesto and what their conference told them it wants them to do. That is why I intervened earlier on the right hon. Gentleman on the subject of the CFC and its effect. I hope that the Minister will say that he is listening not only to the Opposition but to the Select Committee and its report. The Committee has asked for an impact assessment, and we need to be clear about that. Much as I often disagree with coalition Members, I cannot believe that they intended the CFC to have that effect. An impact assessment would show whether it will damage developing countries.
The right hon. Gentleman also spoke about the IF campaign. It is clear that an essential part of tackling poverty and hunger is having a fair and transparent tax system. It is not surprising that people in this democracy should be outraged by large corporations not paying their fair dues, but we sometimes seem to think that it is all right for developing countries. Do they have to expect their natural resources to be plundered?
I am glad that the Minister shakes her head and I give her credit for much of the good work that she has done in office. However, it is time for action. I repeatedly asked the Secretary of State, when she appeared before the Select Committee, whether she would act and whether she was pressing the Treasury for more transparency. She said that it really was not a matter for her; it was a matter for the Treasury—but it absolutely is a matter for the Department for International Development and for the Secretary of State and her Ministers to address this issue. The people in those developing countries have as much right as people in this country to be outraged, but unless they have access to the information about whether tax has been paid, they will not be able to feel that sense of outrage. I hope that we will see some movement on that issue.
If we are ever to see a situation in which aid does not have to be stuck at 0.7%, as I am sure developing countries and many of us want, it will be by ensuring that tax is paid. We have had estimates from the OECD, as my hon. Friend the Member for Newcastle upon Tyne North said in her opening remarks, that developing countries lose three times as much money as they receive in aid. We have a chance now to do something not just for developing countries, but for our own country, by easing that burden.
I give credit to Sir Malcolm Bruce, the Chair of the International Development Committee for the work he has done and I thank recently joined members of the Committee for their support. The Chairman does not put his party or the coalition first: he genuinely works in the interests of developing countries and the UK in ensuring that tax is spent well. I just wish that we could see Committees in the Scottish Parliament following that good example.
I believe that I may have the honour of serving on the Bill Committee, and I hope that we will not have the same experience as I have had all too often in Committee, with the Government continually refusing to accept amendments, followed by a climbdown. The amendments make genuinely helpful suggestions without asking the Government to alter direction. They would strengthen the measures on which we agree about the direction of travel to ensure that we carefully assess the impact of the policies and that they achieve what we want them to achieve. People have marched in support of the Robin Hood tax and want to see a fairer, more progressive form of capitalism in this country, so the Minister needs to step up to the mark—as well as to the Dispatch Box—and accept the amendments.
The Government repeatedly promise to crack down on tax avoidance. Of course, I welcome any efforts in that direction, but as my hon. Friend Catherine McKinnell pointed out, the prospect of between £60 million and £85 million projected extra revenue against a tax gap of £32.2 billion is hardly the stuff of ground-breaking flagship policies. I am curious to know just who will be pursued under the Government’s plans. As we heard, GAAR will be targeted at abusive avoidance that has abnormal features, and on those involved in highly contrived tax avoidance. Does that mean that normal, low-key, run-of-the-mill, common or garden tax avoidance is going to carry on as normal, with very little activity directed at it at all? Like others, it is not clear to me that GAAR is focused on the tax avoidance of the multinational corporations we have heard so much about lately.
I am pleased that the Government are planning to put tax avoidance on the agenda at the G8 summit, but it would be better if we had a clear indication tonight on what they intend to achieve. For example, I want to know whether the Prime Minister plans to follow up Chancellor Merkel’s concerns about the lack of monitoring of British sovereign territories, which are increasingly used as tax havens. I would love to know how a place such as Jersey became the world’s largest exporter of bananas. Will the G8 be considering guideline prices to help countries in the developing world? Will there be any discussion on an international tax inspector operation to help the countries that are being sucked dry by international lawyers, accountants and financiers?
At the very least, the Government could announce that they are ending tax secrecy by accepting amendment 3 and insisting that multinational groups publish a simple, single figure for the amount of corporation tax they pay in this country, instead of the current arrangements where they parcel the tax paid in a variety of ways that permits avoidance. The Government might also say that they intend to take some action against law firms in this country who all too readily set up shell companies, no questions asked, in the full knowledge that they are aiding and abetting tax avoidance and other corrupt practices.
The Prime Minster might also follow up on his promise that members of his Government publish details of their own tax affairs. Why not lead by example? This is not France. We have nothing to fear here—I think—unlike in France, where the man charged with fighting tax evasion turns out to be a tax fraud himself. At least the French President is now going to force his Ministers to publish details of their tax affairs. Why does our Prime Minister not do the same? He said that he would.
I welcome measures to tighten the rules on companies that arrange loans for their directors or shareholders, in place of taxable salaries or dividends. That particular activity sounds remarkably close to the tax arrangements that brought down Glasgow Rangers football club, and may be widespread in football. I therefore welcome what the Minister is doing on that.
Finally, why has the Chancellor backtracked on retrospective legislation restricting the right of companies to bid for Government work where they have lost disputes with Her Majesty’s Revenue and Customs over tax avoidance? The Government are not frightened of retrospective legislation, as we saw in the case of the jobseeker’s allowance claimants who won their appeal over dodgy back-to-work schemes. Why is it okay to protect tax avoiders, but punish the unemployed?
Today has graphically demonstrated to me one of the real differences between the haves and have-nots in our society. I will not go into the rights and wrongs, but today we spent millions on Baroness Thatcher’s funeral, yet Jade Lomas-Anderson, the 14-year-old child killed by dogs in my constituency, still has not had her funeral, because her parents and the community are still frantically trying to raise enough money to pay for it.
We all have a terrific number of examples of poverty in our constituencies and the consequences of worklessness or low-paid work, and we can all see the cost of the Government’s policy for the poorest in our community, who are being hit not just in their pocket, but by cuts in the services they depend on. We can also see the consequences of cuts to in-work benefits, no pay rises and inflation on those who used to feel comfortably off.
We all know that there are only two ways to balance a budget: cutting expenditure and increasing income. The Government’s cuts are harming not only individuals and their communities, but the economy. Economists tell us that in a recession increased social security spending has a strong multiplier effect of about 1.6. Every £1 spent on welfare is worth £1.60 to the national economy. When social security is cut, the multiplier works in reverse, so £20 million of social security cuts would depress the economy by £32 million. A Financial Times study this week showed that cuts in social security payments would take £19 billion out of the economy.
It is not just social security spending. We know that the low-paid spend more of their income, so less money in a community means more jobs lost, which means more people on benefits and more jobs lost—a downward spiral. The only way to reverse the spiral is to grow the economy by investing in properly paid jobs, so that people are not dependent on social security, but instead are paying into the coffers. So how do we increase national income and so reverse the cuts and have that necessary investment? HMRC estimates that in 2010-11, £32.2 billion was lost to tax avoidance and evasion. Tax Research UK estimates that the gap is £120 billion. Most experts believe that the figure is somewhere between the two, but whichever it is, it is a heck of a lot of money. Just think what a difference it would make.
The tax gap comprises three areas: tax avoidance, where people and businesses minimise their tax bills without deliberate deception, but contrary to the spirit of the law; tax evasion, where there is deliberate non-payment and underpayment of taxes by making false declarations, which also includes error and neglect; and late or non-payment of tax. The closure of tax offices, cuts of £2 billion to HMRC’s budget and the loss of 10,000 jobs will not help to close that tax gap.
I was shocked to learn that more staff are employed to administer cuts to child benefit than to tackle tax avoidance and evasion. Twenty million calls to the HMRC in 2011-12 were not answered. The estimated cost of these calls was £33 million and the value of customers’ time wasted was £103 million. How can we run a system that costs businesses so much? How can it be right that trying to talk to people about paying tax costs industry so many millions of pounds? Tax collection is a service that earns money, but the Government are reducing staffing levels by almost 50%. It beggars belief.
The Government reckon that the general anti-abuse rule will result in the collection of an additional £60 million. On the lowest estimate, that still leaves £32.1 billion of tax not collected. They say that GAAR is intended to address artificial and abusive avoidance schemes, but without creating uncertainty for business investment. It will attack only those schemes that are the intended target, not a broader spread of business arrangements.
Let me try a few scenarios on the Minister to see whether GAAR will tackle them. Would it catch those earning more than £150,000 who brought forward their payment so that they paid only the 40% rate in 2010, and those same people who have delayed their income till after this April so that they pay only the 45% rate? The Government have told us that they dropped the rate to 45% because people earning more than £150,000 had found ways to avoid paying the tax. We do not yet know how much the 50% rate earned in its only full year of implementation, but the HMRC thinks it will be £1 billion. That aside, will GAAR close the loopholes that allow people to avoid paying tax that morally they owe?
When I was a trade union official, I tried to persuade one of my companies to stop employing agency and temporary staff and to take them on properly on the payroll. The company told me that some employees did not want to be employed properly, because they had set themselves up as businesses registered in the Isle of Man, thereby avoiding the tax that the rest of us pay. Will the general anti-abuse rule capture those workers? Will GAAR prevent the travesty of Starbucks, Amazon, Google and all the others that make such vast profits in this country—profits from people who do pay their taxes—from avoiding paying the tax that they should be paying to our Exchequer? If GAAR will not catch them, as seems to be the case, I hope that the Government will tell me what they will do to capture those businesses.
Instead of blaming the poor, the Government need to do much more to tackle the rich who are not playing their part. The vast majority of ordinary people pay their taxes. They do not employ accountants to maximise their incomes. The Government need to do far more to close the tax gap, because if they did, that would go a heck of a long way towards closing the deficit. A “sitting on your hands” Budget is just not good enough. The Government must do better.
It is a pleasure to follow my hon. Friend Julie Hilling, who made a superb speech and hit lots of buttons.
I am speaking briefly at the end of this debate basically to support my right hon. Friend Mr Meacher and his comprehensive, substantial proposals for an alternative scheme. I have also signed his new clauses. I am not a tax lawyer—I am not a lawyer—or a tax expert, but I am angry about the fact that for decades we have failed to collect taxes that should go into the Exchequer and help those in our community and our society who need proper support, allowing the corporate world and the millionaires to get away with vast amounts of money that should rightfully be given to the Treasury.
Nigel Mills said that HMRC would in effect be making its own laws. What about getting rid of a lot of the tax allowances, which are nonsense in any case, and making some of the things that are currently regarded as tax avoidance illegal by calling them tax evasion? Some of the things that are done should be regarded not just as neat ways of avoiding tax, but as crimes that should rightfully be prosecuted through HMRC and the courts. I take a much fiercer view. It is pathetic that successive Governments —and I mean successive Governments—have failed to grasp what needs to be done.
I will tell you some anecdotes, Mr Crausby. When I first entered the House, I went along to my local VAT office. The VAT officials there told me that they needed more staff and every extra member of staff collected five times more than their own salary, and that was just for VAT. I therefore wrote to the Chancellor of the Exchequer and said, “We just need more staff in our VAT offices. There would be a net benefit to the Treasury because all the new members of staff would collect more than their salaries.” I got a letter back from an official—not from the Chancellor—that said, “We are trying to cut costs by reducing staffing,” which is utterly illogical. Reducing staffing means a net loss to the Treasury, not a net gain, and we have been going down that route ever since.
The savage staffing cuts in HMRC are quite appalling. Those in the tax offices that deal with the corporates—the big money—collect hundreds and possibly thousands of times more than their own salaries, if they are allowed to do the job and if they are properly supported and paid. I know from my connections with their union that they are constantly under stress and pressure, and in many cases they are not adequately remunerated. We want to give our tax offices enough staff to do the job, pay them properly and ensure that they have morale, so that they do the job on behalf of us all.
Does my hon. Friend agree that that also goes for working tax credits? When a family notify HMRC of a change in circumstances, their benefits—their working tax credits—are stopped and can be suspended for several weeks while they are reassessed, causing incredible hardship for families that are doing the right thing.
My hon. Friend is absolutely right. Of course, people are now losing their jobs in all areas of the public services. The public services are suffering great stress and the people working in them are being demoralised, and I think that goes even for the senior civil service—I know that certain people at the end of the Chamber would possibly agree with me in that respect.
I must say that the Treasury’s attitude over some decades has been so lax that one has to suspect that it really believes that allowing all the corporates and millionaires to have their money will somehow trickle down and help the economy. That is the sort of economic nonsense that has got us into the mess we are in at the moment. What we should be doing is collecting the taxes and spending in the areas where it is needed.
It has also been argued that despite the harm done to developing countries by the controlled foreign company rules, their application would bring more companies into this country and the wealth would trickle down to the rest of us.
Those are feeble arguments put by people who might have vested interests.
It was interesting to hear Ian Swales, who seems to know a lot about these matters, saying the other day, “What about a few prison sentences for people who fiddle their taxes?” That would concentrate a few minds, and I think that is what we should do, as I think it is criminal for people to rip off the public purse as they do to the detriment of us all. The great majority of my constituents, of course, are working-class people who have to pay their taxes through PAYE—they cannot escape, avoid or evade—so I feel angry on their behalf as well.
It is a matter of political will. If we had the will, we could do these things. We would not need to invent schemes that seem designed to fail. If they were not designed to fail, I am sure the Minister would not be frightened of the amendment proposed by my hon. Friend Catherine McKinnell to have a review in two years’ time. If the scheme were to be successful, the review would show its success; if we collected half of what had been evaded through the Government’s proposed scheme—£16.5 billion or whatever, amounting to 4p on the standard rate of income tax—the review would approve of what the Government had done. If the Government refuse to accept the amendment, they are obviously nervous that their scheme will not be a success. I suspect that they have brought something up that is designed to fail and will help the wealthy and the corporates to continue to avoid and evade taxes.
I do not believe that the Government are genuinely concerned about these matters. If they were, they would take effective action, ensure that it happened through stronger laws and possibly prison sentences for those who break these laws, and collect billions more in taxes. The sort of figures described by Richard Murphy and others are enormous—equivalent to each year’s deficit, about which the Government say they are so concerned. They are cutting spending to solve their deficit problems, but the real problem is not spending—it is that their revenue is too low because they are failing to collect all the due taxes. If the Government were successful in enforcing tax laws so that all due taxes were paid, there would not even be a deficit. They would have enough money to cover it. Let us see the Government take effective action: only then will I take them seriously. Until that time, I shall continue to say what I have said this evening.
Let me touch on a couple of points, partly arising from last year’s debate on the Finance Bill—particularly about the controlled foreign companies regulations and what happened to them. We are often accused of tabling similar amendments to those tabled before, and we did indeed table amendments asking for a review of the impact of those regulations, particularly on developing countries. We were told that the amendments were not needed because the Government would, of course, constantly review these matters. We were told that asking for a specific review would somehow put extra onus on civil servants and that we should simply have trust in what would happen.
On that basis, I ask the Minister—perhaps in his reply now or at some later time—to tell us whether that review has indeed been carried out and what information is already available to assure us that the reassurances given previously have been brought into play. Otherwise, we are simply being told that we are asking for unnecessary reviews and that all will be done. Let us see if it is done, as many organisations were very concerned about what the impact of those changes would be.
It would also be helpful—we asked about this last year—to know whether many companies have returned to this country and made their headquarters here, as we were promised. We were told that that would produce more income for our Government. We need to know not just what the impact has been on developing countries, but how many companies have relocated, how much tax they have paid, and how many jobs they have created.
I see that you are looking at the clock and at me, Mr Crausby, so, on that note, I shall sit down.
We have had an interesting and thorough debate during which a number of points have been raised. I shall address as many of those points as I can, as quickly as possible.
Clauses 203 to 212 and schedule 41 introduce the general anti-abuse rule, which is a major new development in UK tax law and a key part of the Government’s drive to tackle tax avoidance. Its role is to tackle abusive tax-avoidance schemes. I shall explain what I mean by that shortly, but let me first say a little about how we ended up in our present position.
We declared in 2010 that we would explore the area of tax abuse, and we commissioned Graham Aaronson QC to lead a study group. I pay tribute to the work undertaken by him and by other members of the group. Their report, published at the end of 2011, recommended that we should consider not a general anti-avoidance rule, but a general anti-abuse rule to tackle abusive avoidance schemes that were not being defeated by the current law.
Previous Governments have considered general anti-avoidance rules, but their proposals encountered the problem of how taxpayers, and businesses in particular, could easily distinguish between an activity that clearly constitutes tax avoidance and one that constitutes legitimate tax planning. If I may use the phrase employed by my hon. Friend Nigel Mills, we need to find a way of ensuring that we do not take a baseball bat to legitimate commercial behaviour. We need to identify the boundary between tax avoidance and tax planning.
Contrary to some of the claims that we have heard tonight, HMRC has a good record in dealing with tax avoidance when it occurs. It has been very successful in taking taxpayers to court, and has won a great many cases, especially in recent months. However, we must ensure that we do not encounter the difficulty posed by a broadly based general anti-avoidance rule, namely that taxpayers and their advisers would have to consider how the rule might operate in a large number of circumstances in which it might be applied. That would not just stop avoidance where it existed, but cast a long shadow on legitimate arrangements.
We believe—and some Government Members have said this evening—that that would be bad for the country, damaging growth by causing some transactions to be delayed or cancelled because of the lack of clarity. I therefore urge Mr Meacher not to press new clause 7 to a Division. I assume that Labour Front Benchers do not support the new clause for the same reason, although they did not make their position entirely clear.
I believe that the general anti-abuse rule proposed by the Aaronson group strikes the right balance between dealing with aggressive, egregious, abusive tax avoidance and not creating uncertainty. It targets only avoidance schemes that are clearly abusive. By “abusive schemes”, we mean schemes that can be seen from the outset to be simply highly contrived and artificial arrangements designed to enable people to get around the tax law and avoid paying tax. Those who do become involved with such schemes know very well what they are doing. If the general anti-abuse rule that we are considering today makes them think again and deters them from engaging in such avoidance, I for one will consider that to be a good outcome.
We have consulted widely, and have received a large number of representations, including some 150 substantive responses to our consultation. Interim guidance has been produced by the interim guidance advisory panel. I accept, to respond to the point made by Catherine McKinnell, that that was only published on Monday, but it was important that the panel had the opportunity to get this right. It has put in a considerable amount of time on this issue and, as I think all Members will accept, it is very broad-based and includes representatives from various organisations. Although it has taken a little longer than we might have hoped, I congratulate and thank the panel for its work. It has received an excellent response and will provide much help to taxpayers wanting to know where they stand. For example, on the question of what is contrived and what is abusive—a point raised in the debate—the guidance produced by the panel, as well as setting out the overall principles and descriptions, contains a number of examples demonstrating how these terms can be applied in specific cases.
On the penalty regime, we have not ruled out future action to strengthen the deterrent impact of the general anti-abuse rule by attaching penalties if necessary, and we will keep the matter under review. However, the Aaronson report recommended against providing penalties or special rates of interest, and we believe the GAAR should be allowed to bed in before we take any further action.
Before the Minister leaves the issue of the GAAR advisory panel, does he really think it right that most of its members are City lawyers who have hitherto spent their careers advising companies how to avoid tax? Will he also deal with the question of the “double reasonableness” test—whether it is reasonable to take the view that the course of action in question is a reasonable one? Is that seriously the criterion for deciding on the application of the GAAR?
The “double reasonableness” test was the one we came to after the lengthy process following the Aaronson review. We believe that it focuses attention on aggressive, abusive tax avoidance. Let me be clear: this is an additional tool that HMRC can use; it does not necessarily mean that for those outside the GAAR, everything is fine. I want to make it explicitly clear that that is not what we are saying. There is avoidance that will not fall within the GAAR, but which HMRC would none the less take action against.
The panel will be broad-based, but I see nothing wrong whatsoever in its having commercial expertise to provide reassurance and ensure that the GAAR will not be abused in the way that some Members have expressed concern about this evening, with too much power being placed in the hands of a part of the Executive. It will be broad-based, in just the way the interim panel has been.
The GAAR does not override UK tax treaties. Given the lack of time, I will not go into further detail, but it acts in much the same way as GAARs do for other countries that respect OECD and UN model tax treaties.
Let me deal with that in the context of amendment 8, which looks at the general issue of post-implementation evaluation and seeks to establish a review within two years of Royal Assent. We and HMRC have made it clear that we will manage and monitor the GAAR’s operation centrally, so that all cases and potential cases will be scrutinised and recorded. The deterrent effect, which we will see immediately, will be important, but we must also remember the issues of getting the tax returns in and being able to make a full assessment of the implications. We believe that a two-year period would not be practical for a general evaluation. It will take longer properly to evaluate how the GAAR is working, just because of how our tax system operates, so I will not accept amendment 8.
Amendments 3, 6 and 7, which deal with tax avoidance by multinationals and the impact on developing countries, raise a number of important points. Steve McCabe wanted me to set out the Government’s objectives for the G8. I am sorry that I am not in a position to do that this evening; it will be left to the Prime Minister, who will make the UK Government’s position very clear.
The point about transparency is important and the Government have a good record of encouraging transparency in a number of areas, particularly among extractive industries through the extractive industries transparency initiative. We play a leading role internationally through the global forum. We ensure that jurisdictions comply with the international standard on tax transparency and work with the G20 to maintain pressure on non-co-operative jurisdictions. We have been making a lot of progress in the Crown dependencies, particularly as regards the exchange of information, and in ensuring that the US Foreign Account Tax Compliance Act, or FATCA, arrangements on the exchange of information become the international norm. I can assure the Committee that that will continue to be a key part of what we do and part of our G8 agenda.
Amendment 6 asks the Government to require UK companies to report their use of tax-avoidance schemes that affect developing countries and for HMRC to notify those countries and assist them in recovering the tax owed. Amendment 7 asks the Government to carry out an impact assessment on the effect of the changes to the controlled foreign companies, or CFC, rules on developing countries’ tax revenues. The answer to both points is that as a matter of practicality it is difficult for HMRC to perform the roles required by the amendments as they require assessments not of our tax rules but of the tax rules of developing countries. That takes us outside what HMRC can realistically do. The point was raised that amendment 7 largely repeats the debate we had during last year’s Finance Bill, when a similar, if not identical, amendment was tabled. I refer hon. Members to the speech I gave a year or so ago, in which I stated that simply as a matter of practicality that is not something that HMRC can do.
On amendments 11 and 12, tabled by my hon. Friend the Member for Amber Valley, I do not believe that a de minimis rule would be appropriate as regards the general anti-abuse rule as it would miss the point. We do not want anyone involved in abusive schemes to make use of them, and even if only £100,000 was at stake as a de minimis, that could have a significant effect on a number of people. We believe that that would be unfair.
As I said at the outset, I believe that the general anti-abuse rule is a major new development. It sends a message to those who persist with abusive avoidance schemes that even if they try to dance around the tax law, they will face the tough but plain question, “Is it reasonable?” That is a question that we all understand. Those who think about using the schemes will all understand it and, I hope, those who create the schemes will come to understand it. The GAAR will ensure that the time for their clever games, paid at the expense of the tax-paying public, is at an end. I therefore recommend that clauses 203 to 212 and schedule 41 stand part of the Bill.
In view of the commitment by my hon. Friend Catherine McKinnell to carry out a review of the GAAR, and given the double reasonableness test and its deterrent effect, even though it is less than I should recommend, I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
Amendment proposed: 6, in clause 203, page 120, line 9, at end add—
‘(4) The Chancellor shall review the possibility of bringing forward a requirement for UK companies to report their use of tax schemes which have an impact on developing countries, including a review of the possibility of bringing forward proposals to require that when such schemes are identified under those rules, Her Majesty’s Government shall take steps to notify developing countries’ tax authorities and assist in the recovery of that tax. A copy of the report shall be placed in the House of Commons Library within six months of Royal Assent.’.—(Catherine McKinnell.)
Question accordingly negatived.
More than seven hours having elapsed since the commencement of proceedings, the proceedings were interrupted (Programme Order,
The Chair put forthwith the Questions necessary for the disposal of the business to be concluded at that time (
Amendment proposed: 8, page 120, line 9, at end add—
‘(4) The Chancellor shall provide a report to Parliament within two years of the passing of this Act, as part of a wider post-implementation review, into the scope of GAAR, the application of the double reasonableness test and its deterrent effect.’.—(Catherine McKinnell.)
The Committee divided:
Ayes 223, Noes 276.