“(1) The Chancellor of the Exchequer shall, within six months of this Act receiving Royal Assent, publish and lay before the House of Commons a report setting out further proposals to reduce the tax advantages arising from tax arrangements that are abusive.
(2) The report referred to in subsection (1) must in particular include proposals about—
(a) the exemption from the obligation to deduct tax on yearly interest in respect of interest received on a quoted Eurobond contained in section 882 of the Income Tax Act 2007;
(b) disguised employment in the construction sector; and
(c) the use of dormant companies as a means of tax avoidance.
(3) The report referred to in subsection (1) must set out the estimated impact of the proposals contained in the report on the total receipts paid to the Exchequer.”—(Shabana Mahmood.)
Brought up, and read the First time.
I beg to move, That the clause be read a Second time.
We now come to the last of our debates on the Finance Bill today. New clause 12 would require a report by the Chancellor within six months of Royal Assent, setting out further proposals to reduce the tax advantages arising from tax arrangements that are abusive. It makes particular reference to the quoted eurobonds exemption, disguised employment in the construction sector, and the use of dormant companies as a means of tax avoidance. The new clause would require an assessment of the impact of all three on total receipts paid to the Exchequer.
I will turn at length to costings of the abuse of the quoted eurobonds exemption, but it is certainly true that many of the estimates of how much it might be costing the Exchequer have placed the figure at around £500 million.
Let me start with the context and explain the thinking behind our new clause. Public concern about tax avoidance is high, and this is a problem not only for the Government but for parties across the House. The setting of tax rates, decisions about tax reliefs, and the collection of tax are among the most important functions of government. If the system is not working as well as it could be, that needs to be addressed. Over the past couple of years, there have been a number of high-profile media stories focused on the tax arrangements of particular companies and individuals, as a result of which, it is fair to say, public trust in the tax system has been eroded.
The deficit, as we know, is high and will not now be cleared by 2015, as the Government promised when they came to office in 2010. It will not, in fact, be eliminated until well into the next Parliament.
As the hon. Lady has mentioned the deficit, would she now like to apologise on behalf of the Labour party for the catastrophic destruction of the public finances in the last Parliament?
I think the hon. Gentleman and other Government Members should apologise for the fact that their Government have delivered a huge tax cut for millionaires while households are on average £974 a year worse off. That is a deplorable record and the Government should apologise for it.
We have already discussed at length today the fact that ordinary working people in our country are worse off as a result of this Government’s economic plan. As I have said, households are £974 a year worse off as a result of tax and benefit changes, and wages will be 5.6% lower in 2015 than they were in 2010. We also know that it is the richest 1% of the country who have benefited most from the recovery. With working people facing a cost of living crisis, it is vital that everyone pays their fair share and that we restore public trust. When ordinary people are struggling with their household budgets, which are stretched ever thinner, it is understandable that there will be increasing anger if they feel that others are successfully avoiding tax and the Government are failing to do enough about it.
The same goes for businesses, too. We know that small and medium-sized enterprises are struggling with business rates, for example, which have gone up since 2010. Many businesses are now paying more in rates than they do in rent. Businesses that do the right thing when it comes to tax are understandably frustrated and angry when they see others that do not play by the rules, and they are right to think that there should be a level playing field, so that those who do the right thing are not penalised because others get away with not paying their fair share. High-profile cases of tax avoidances have therefore undermined public trust in company taxation and hit businesses that play by the rules.
Our best measure of how well the system is working is the tax gap—which is effectively the amount of uncollected tax in the economy—which has risen under this Government by £1 billion to a total of £35 billion.
Focusing on the actual figure is important. It concentrates the mind when assessing the scale of the task both for this Government and the successor Government in 2015. By anyone’s analysis, £35 billion is a huge sum, which, if collected, would make a very significant difference to the nation’s finances.
My hon. Friend makes an excellent point. He is of course right that this is a huge sum of money and that people are rightly concerned that £35 billion-worth of tax is potentially going uncollected in our country.
I am certainly no defender of the tax gap, and I am on record as having challenged the whole system of tax avoidance many times. However, does the hon. Lady know what the tax gap was in 2010 when the previous Government left office?
The truth is that any tax gap, however big or small, is unacceptable to the public, and strong action should always be taken to tackle it. I was about to say that I am grateful to the hon. Gentleman and that it was £32 billion. As I say, that is too high, and it has gone up to £35 billion under this Government. These large sums of money shake the public’s confidence when it comes to believing that the Government are doing everything they can to tackle tax avoidance.
I will take further interventions later, but I want to make some progress.
What else has been happening on this Government’s watch? The Government have raised expectations in respect of some aspects of their tax avoidance policy, but they have not been met. In particular—we have put this point to the Minister on many occasions—the Swiss deal, which was supposed to bring in £3.12 billion, a sum that would have gone some way towards making a dent in the tax gap, has in fact brought in only £818 million. I know the Minister will say that the figures were okayed by the independent Office for Budget Responsibility when the costings were put in the Red Book, but that does not mean that the Minister can simply get away with it. At the end of the day, there is an unexplained and substantial difference between what was meant to happen as a result of that deal and what did in fact happen, raising questions about the substance of the deal.
Another feature of public debate as the issue of tax avoidance has shot up the public agenda relates to Her Majesty’s Revenue and Customs. If we are to close the tax gap, we need HMRC to be as effective as possible. Last year’s Public Accounts Committee report “Tax avoidance: tackling marketed avoidance schemes” found that HMRC did not know how much it spent on its anti-avoidance work and had not evaluated the effectiveness of its efforts. It calls for HMRC to improve its recording and monitoring of the cost of its anti-avoidance work and to set out clearly how it will evaluate its anti-avoidance strategy. This is a substantial gap in knowledge; again, it has a direct impact on the Government’s ability to tackle tax avoidance effectively and thereby close the tax gap.
I am grateful to the hon. Gentleman for his intervention, but as I just said, the tax gap has widened: despite those efforts, it has gone up by £1 billion or more.
The Public Accounts Committee also raised concerns about the monitoring of tax relief at HMRC and the Treasury. In 2013, there were 1,128 tax reliefs in the UK taxation system—a number that continues to grow. Tax reliefs can range from fundamental components of the tax system, such as the level of the personal allowance, to tax expenditures with more specific objectives to change behaviour, such as film tax relief. They play an important role in the tax system, but can be abused. Indeed, even in this Finance Bill the Government have had to take steps to close down the abuse of tax reliefs. It is therefore very worrying that the Public Accounts Committee has concluded:
“There is a lack of transparency and accountability for tax reliefs and no adequate system of control, following their introduction. HMRC and HM Treasury share responsibility for tax reliefs, but there is no accounting officer with responsibility for the stewardship of tax reliefs, as there would be for” other elements of
“public spending. In 2010, HM Treasury committed to developing a framework for the introduction of new reliefs”.
However, no measures have been implemented so far.
In December 2013—this is relevant to what Charlie Elphicke said a moment ago—there were just four full-time officers in the fugitive unit, trying to catch 124 HMRC fugitives. The Government launched a “most wanted” campaign in August 2012, but earlier this year it was found that just four fugitives had been caught since the publication of the list. Moreover, it was admitted that of the 32 “most wanted”, 11 could not be located. If the Government are to support their claim that they are succeeding in the fight against tax avoidance and evasion, they must be able to demonstrate that they will catch those who break and abuse the rules, and will prosecute them to the full extent of the law.
My hon. Friend has made his point powerfully, and in his characteristic way.
As we can see, despite the Government’s claims, their record of tackling tax avoidance is simply not good enough in a number of areas. They will say that the avoidance measures in this Bill are radical and bold, and are evidence of a commitment to tackling avoidance. We have supported the measures relating to follower notices, accelerated payment notices and the need to tackle promoters of tax avoidance schemes, although we have questioned the Minister about some of the deeply felt concerns of those who will be affected by the follower notices regime and by accelerated payment notices, which have caused a great deal of debate outside the House. However, although those measures have received the Opposition’s support, the fact is that they are not revenue raisers. They will simply bring in money that the Government were expecting to collect, but which had been clogging up the various back channels and alleyways of the legal system.
The hon. Lady has mentioned a number of measures, and has made some good points. Should not the Government be pursuing large multinationals such as Microsoft and Google, which are not paying a penny in corporation tax?
I think the Government should adopt an across-the-board strategy. I think they should deal with companies of all sizes, as well as individuals who engage in the various types of tax avoidance and evasion. I have mentioned a number of areas where there is concern about the Government’s action to date, and about their record of being able to narrow the tax gap.
The Government’s other flagship policy, introduced last year, is the general anti-abuse rule. Of course, it will take some time for the GAAR to settle in, as it is a new measure, and it is not yet clear how it will operate in practice, because it has not yet been the subject of a court case. It is, however, striking that no penalties regime associated with abuse falls within its remit. One would have thought that such a regime was a deterrent, and that the Government would want to make it clear that the type of abuse caught by the GAAR—abuse of the most egregious nature—would not be tolerated.
However, it seems that an individual who fell foul of the GAAR, having engaged in the most egregious form of tax abuse, would incur no penalty but would merely be required to pay the amount that had been disputed. That strikes me as an interesting omission from the GAAR and the Government’s arsenal of measures to tackle tax avoidance.
I think we went through this in the Finance Bill Committee last year. It would be somewhat iniquitous to have a higher penalty for a scheme that complied with the letter of the law but was subsequently ruled out of order by the GAAR than for one that was blatantly outside the law in the first place. I think we should stick to the standard penalties that apply for under-declaring tax on a tax return.
That may be the hon. Gentleman’s view, but I am simply pointing out that in order to fall foul of the GAAR someone has to have engaged in the most egregious form of abuse. It seems odd to me that falling foul of the GAAR will not therefore attract any additional penalty on top of the tax that is in dispute.
No, I am going to make some more progress.
Tax avoidance and how to tackle it effectively and thereby close the tax gap remains a real problem for this Government, hence our new clause. We need more action from this Government, and where they fail the next Labour Government will step in. We are pushing the Government for greater action in three specific areas. Let me take each in turn.
The hon. Lady talks about the next Labour Government. Does she wish to apologise for the slashing of the number of compliance and investigation staff by the previous Labour Government, to the point where this Government have had to add large numbers of people to carry out the work she so much wants?
First, let me take the issue of the quoted eurobonds exemption. That was originally implemented to make it easier for companies to obtain finance from the international bond markets by excluding corporate debt listed on recognised stock exchanges from UK withholding tax. Making it easier for companies to obtain finance on the international bond markets is a legitimate objective that we support. However, as covered in a spate of high-profile media stories last year, the exemption can also be used for tax avoidance purposes, allowing companies to shift profits out of the UK in the form of interest payments, without making any tax payment. As HMRC has noted:
“In recent years a number of groups have issued Eurobonds between companies in the same group, and listed them on stock exchanges in territories such as the Channel Islands and Cayman Islands, where they are not actually traded. In effect, the conversion of existing inter-company debt into quoted Eurobonds enables a company to make gross payments of interest out of the UK to a fellow group company, where otherwise deduction of tax would be required.”
The Government consulted on the issue in 2012, with HMRC proposing to amend the eurobond exemption so it would not apply where the eurobond is issued to a fellow group company and listed on a stock exchange on which there is no substantial or regular trading in the eurobond. HMRC stated:
“The effect of the amended rule would be to leave untouched the quoted Eurobond exemption for the overwhelming majority of Eurobond issues. It would deny the exemption only in the case of intra-group Eurobond issues that appear to be undertaken for the purpose of circumventing the requirement to deduct tax at source rather than being directed at the raising of third party finance.”
Despite HMRC estimating that the proposed restriction could have an extra impact of £200 million a year, in their response, the Government stated that they did not intend to proceed with it. Why not? Well, the Government said they made that decision in the “light of the responses” they received around a number of technical issues and after respondents questioned the positive Exchequer effect set out in the impact assessment.
That is simply not good enough. We say that abuse of the exemption can be shut down and must be shut down. Our proposals will explore removing the exemption where bonds are issued to connected persons, such as where a subsidiary issues a bond to a corporate parent or its private equity fund owners. To minimise disruption to private equity funds using the mechanism to simplify investor rebate claims under double taxation treaties, we would explore either offering an exemption for private equity partnerships where all, or the vast majority of, the ultimate beneficiaries would qualify for double taxation relief, or streamlining the withholding tax rebate process in consultation with the industry. So there is a mechanism to shut down the abuse of the exemption. It could and should have been taken up by the Government.
The estimates of the Exchequer impact of closing the loophole range from £1 billion to the Government’s estimate of about £200 million, with many more commentators saying that they would place it at about £500 million. In a letter to me dated
“Some newspapers quoted a figure of £500m for the tax at risk. This appears to be based on the unrealistic assumption that the interest paid out of the UK had not been restricted for tax purposes and that the beneficial recipient would not be entitled to gross payment. You will appreciate that I cannot discuss individual cases, but HMRC has confirmed to me that computational adjustments are frequently made. Consequently, the £500m sum is very wide of the mark. Any change here will not raise any significant yield.”
I was interested in that response, for which I was grateful and which I received after I had tabled a number of questions about the quoted eurobond exemption, because it displayed a concerning lack of clarity. The Minister says that the numbers quoted are “wide of the mark” but he does not say where the mark actually is. That is surprising, given that HRMC and the Minister have examined this in detail and have consulted on it, and given that they tell us that “computational adjustments” are regularly made for it. Despite that, still no figure has been given.
In my letter, I also offered the hon. Lady a meeting, attended by officials, to discuss the matter and explain some of these points to her further. I will try not to be personally slighted, but she has not responded to that offer. Why has she not done so? Is it because of the fear that when confronted with some of the challenges in this area she might find that this is all slightly more complicated than she has been led to believe by one or two newspaper articles?
I am grateful to the Minister for his intervention and I hope he does not take it as a personal slight that I did not, on that occasion, take him up on the offer of a meeting. I will try not to be patronised by the suggestion that these matters are far too complicated for me to understand and that I am getting my information only from newspaper articles.
It is quite the opposite: I have absolute confidence that the hon. Lady would have the capacity to understand that this matter is somewhat difficult, but it is often advantageous to speak to the officials who deal with it on a day-to-day basis in order to have a better understanding of it. It would be of benefit to her, and to the House as a whole, to ensure that this debate could take place on the basis of as good an understanding of the matter as possible. By the way, the invitation still stands.
I may yet take the Minister up on it. But it would be a mistake for him to think that our proposal has been made without consulting experts who are very much engaged on the issue of eurobonds. I am confident that the information we have put out as a result of our business taxation paper, launched yesterday, is accurate and that we have considered the different legal and other ramifications of limiting the abuse of the exemption as it currently stands.
I am going to make a bit more progress.
Let us say for the sake of argument that the figure is close to the £200 million or so set out in the original HMRC consultation. I was surprised that the Minister did not think that sum would merit action. The tone of his comments to me suggested that he considered that to be a small sum and so it was not worth going ahead with the attempt to close down the abuse of the exemption. I am afraid that, as an argument, that is not something that I am prepared to buy. Why? Well, in this year’s Finance Bill Committee, we have debated and supported a measure in clause 61 on business premises renovation allowances.
I would hate it if the hon. Lady inadvertently gave the impression that it was my view that the £200 million was not something that we would seek to address; we certainly would. In my letter to her of
“In the small number of cases in which a restriction might be considered appropriate, it was also clear from the consultation responses that the proposal would not be effective in addressing the concerns.”
In other words, the proposal that was consulted on would not have got the £200 million. That is why we did not proceed with it. I want to make that clear, and I am sure that she would not want to give a misleading impression.
I am grateful to the Minister for that intervention. I was talking about the overall yield. On the difference between the Government and the Opposition in relation to the technical way in which to seek to close down the exemption, the Government consultation looked at situations in which the bonds are not being actively traded. We agreed that that was not an appropriate way in which to close the exemption but, as I have said, we would explore removing the exemption where the bonds are issued to connected persons and, in doing so, we would look at mechanisms to simplify rebate claims under the double taxation treaties and consider, in consultation with industry, streamlining the withholding tax rebate process.
I would be happy to have a long conversation with the hon. Gentleman about all the different experts, but let me just say that our experts were drawn from across the business and legal worlds. They gave advice and assisted us in thinking through many of the issues related to the abuse of the quoted eurobonds exemption. I will not take this opportunity to put that advice on the record, because I have not sought the permission of those experts to make public some of the assistance and advice that they have given to us. However, our paper is thorough on the issue of how we would seek to close down abuse of the exemption. That tells the House that we have considered these issues deeply, and have thought through all of the problems that might arise from the different attempts to close down the exemption.
I was talking about yield, and how far a potential yield should dictate the Government’s policy in deciding whether to close down an abuse of the system. I referred to the business premises renovation allowance in clause 61. The Government have taken action to close down some of the abuse associated with that allowance, but the impact on the Exchequer was, we were told, negligible. So we see the Government proactively closing down a loophole in which the Exchequer impact is expected to be minimal, but where a loophole exists that is estimated to cost the Exchequer upwards of £200 million a year, they do nothing. How can they justify their decision not to take action to prevent the abusive use of the eurobonds exemption when there are hundreds of millions of pounds at stake?
The potential complexity of the change that would be required is no justification for the failure to act. It has not stopped this Government on other measures, including on the business premises renovation allowance. There seems to be no reason—not money, complexity or anything else—that could stop the Government from acting other than intense lobbying from the affected parties seeking to protect their own interests.
The Government have failed to act, but our new clause gives them the opportunity to do so. If they do not act, the next Labour Government will.
I want to make some more progress.
Secondly, we want to push the Government to take action on disguised employment in the construction industry. Employers falsely declaring their workers to be self-employed is a long-standing and well-documented issue in the sector. Although there is of course some necessary and genuine self-employment in the sector, employers are currently able to declare someone to be self-employed when they exhibit all of the characteristics of an employee.
That results in three problems. The first is a cost to the Exchequer. The Treasury has estimated that that entailed a static cost of £350 million in 2009 and the House of Commons Library recently produced an estimate of about £500 million. The second problem is that those falsely classified as self-employed are denied their employment rights. That means that workers might work for the same company for several years, effectively as an employee, while not receiving any of the resulting employment rights, such as sick pay, holiday pay and maternity and paternity leave.
My hon. Friend is absolutely right about the findings of that report and we know that this is a real problem, particularly for people in the construction industry.
My hon. Friend is making a very fine speech and I agree with what she is saying. In 1970, I served on the TUC construction committee and a major item on the agenda at the time was bogus self-employment and the loss to the taxpayer. Another point is important, too. They do not pay their national insurance, so they will suffer when their pensions come to be paid.
I am grateful to my hon. Friend, who is right that this is a long-standing problem for Governments of all colours and persuasions who have for too long been unable to deal with these very serious issues which result in people not being entitled to sick pay, holiday pay, maternity and paternity leave and other employee rights.
The third problem associated with disguised self-employment is that the unhealthy level of self-employment in the construction industry—40% compared with an average of 14% across all other industries—does not offer a sustainable skill supply for emerging growth opportunities or a change in the economic weather. Employers who want to invest in their staff and employ directly are losing out to companies that use payroll companies which, because they are paying less tax, can sometimes offer slightly higher pay to poach skilled staff.
In July 2009, we published proposals to tackle the problems of false self-employment in the construction industry, but it was not until last year’s Budget that the Government took an interest in the problem when they announced that they would consult on proposals to tackle tax avoidance by intermediaries based offshore who provided labour services to UK companies. We are still waiting for the Government’s response to their consultation on onshore intermediaries, which closed, I think, in March.
Last year, the shadow Secretary of State for Work and Pensions, my hon. Friend Rachel Reeves, reviewed the issue and, based on an investigation of the available evidence and widespread consultation with the industry, we have proposed that workers should automatically be deemed to be treated as employees for tax purposes if they meet criteria that most people would regard as obvious signs that they were employees rather than self-employed subcontractors. It is important to note that the measure would not only close a costly tax loophole but remove a perverse financial incentive for those workers whom most would regard as being in an employment relationship to be classified as self-employed. Such a shift would be good for the construction sector and its work force, too. We want the Government to take further action today to consider the issue and prepare the report envisaged in our new clause.
The third area in which we seek greater action is that of dormant companies. It has been estimated that 30% of all UK companies are not asked to submit tax returns. One explanation that has been given is that those companies are either dormant or are not liable to pay tax in the UK as they trade exclusively overseas. Once companies have declared themselves dormant, they are exempted from filing a corporation tax return for five years. For some companies, that window could be used as an opportunity to trade with tax impunity and yesterday we set out our proposals whereby we will require annual confirmation of dormancy and will further explore the possibility of banks’ automatically informing HMRC when there is activity in supposedly dormant accounts. That would deal with an issue of tax evasion, rather than tax avoidance, but it is important that the tax lost as a result of weaknesses in the rules of dormancy is firmly on the Government’s radar and it has not been to date.
As I have set out, tackling tax avoidance and closing the tax gap effectively remains a top priority for the public. This Government’s record is not good enough. Our new clause pushes for greater action on three important issues and practical measures that can help to close the tax gap. We hope that it will have the support of the House this evening.
I am pleased to take part in this debate—it is the first time I have participated in a Finance Bill debate for quite a long time. I rise to take issue with Shabana Mahmood, who made a long and interesting speech, about her definition of tax abuse. Indeed, there was no definition of what is considered to be abusive tax arrangements. I think that we have all become lax in our use of language in a matter which is of huge concern to our fellow citizens, for the powers of the Inland Revenue—HMRC—to take money earned by our fellow citizens is an important power and one that should be used very carefully indeed. This House has a responsibility to ensure that these matters are properly debated.
I have to tell my hon. Friends that I am increasingly alarmed by the Government’s rhetoric on what they refer to as “aggressive tax avoidance”. I was brought up to understand that tax avoidance is not only legitimate but, indeed, the duty of the head of every household. It is not their duty to maximise their tax; it is their duty to minimise it. It is our money, which is taken from us by the Government.
The hon. Gentleman is entirely right, but overwhelmingly it is the entrepreneurs of this country who drive our economy. Ensuring not only that our entrepreneurs are encouraged to invest in providing jobs for people but that this country is a good place in which people from overseas wish to invest their enterprise must be a major consideration.
As I say, I was brought up to understand that tax avoidance is entirely legitimate, and if a scheme is found to be outwith that which the Government intend, it is for Parliament to close any loopholes; tax evasion, on the other hand, is illegal. However, we have become consumed by the idea that because some high-profile companies do not pay tax in this country, tax avoidance as a whole is somehow immoral. I think that some of the companies that do not pay tax here ought to and I strongly support endeavours by the Government to ensure that they pay their fair share, but when, 10 days ago, I was approached by a constituent who told me about the accelerated payment scheme, I became very concerned indeed.
My constituent, a pharmacist, together with a local GP practice and a dentist, wishes to set up an enterprising, innovative scheme in Aldershot to provide a new, modern facility, but if he is told to pay the thick end of £100,000 when he understood the scheme to be perfectly lawful, where is that money to come from and what happens then to his investment in his proposed business? I think this measure will lead to great uncertainty. I pay tribute to my hon. Friend Mark Field for the clear way he has drawn attention to the potential repercussions of the Government’s proposal.
The Government are proposing to confer massive powers on state officials. Clause 213(3) provides that
“The payment required to be made under section 216 is an amount equal to the amount which a designated HMRC officer determines, to the best of that officer’s information and belief, as the understated tax.”
There we have it—huge power residing in the hands of unelected officials. We, as right hon. and hon. Members, all know from our constituency experience the number of cases where HMRC gets it wrong. We are invoked to try to recover the money that constituents in many cases have been unable, by direct contact with HMRC, to secure for themselves. Very often, it is only after our intervention that the matter is put right. A dangerous precedent is being set here for a rapacious future Government, perhaps a Labour Government. Perhaps that is what the hon. Lady was threatening; I am not sure that I would yet be in a position to accuse her of being rapacious, but perhaps she will let us know her intention.
We should be careful about giving these extensive powers to HMRC. Interestingly, my noble Friend, Lord Howard of Rising, asked Her Majesty’s Government
“how much money was repaid to taxpayers as a result of overcharging by HM Revenue and Customs in each of 2009-10, 2010-11, 2011-12 and 2012-13.”
The noble Lord Deighton responded:
“The information is not available as HM Revenue and Customs does not collect information on amounts underpaid or overpaid.”—[Hansard, House of Lords, 23 June 2014; Vol. 754, c. WA135.]
Therein lies a severe problem. If HMRC is incapable of giving us that information, what confidence can we have that it will exercise these powers carefully?
I quite understand the challenge faced by my hon. Friend the Exchequer Secretary, who is a very splendid Minister indeed, in trying to restore the public finances to order after they were destroyed by the former Prime Minister and Chancellor of the Exchequer. It is a massive challenge that we face. But we could make a start by looking at some of the money owed to Departments. I understand that the Ministry of Justice, for example, has quite a lot of money outstanding. In November 2011, the National Audit Office reported that the Ministry of Justice was owed £2 billion in outstanding fines and uncollected criminal assets. Last year, it wrote off £76 million in uncollected court fines, which was a 50% increase on 2010-11.
I also understand when my hon. Friend says that the Government want to address the issue of taxpayers dragging out contested cases in the courts. It is a fair point. But if the measure goes through, what incentive will there be on state officials, never knowingly understanding the importance of time, to expedite contested claims themselves? The president of the Chartered Institute of Taxation made a good observation. He said:
“We have sympathy with the Government’s need to accelerate dealing with some tens of thousands of outstanding mass marketed avoidance cases which are jamming up the courts…However, handing HMRC almost unprecedented executive powers to decide who falls within the mischief they intend to deal with, without the usual safeguards and appeal rights, is not something which should be done lightly”.
I strongly endorse that.
I remind my hon. Friends that when we came into office 35 years ago, and the noble Lord Howe, then Sir Geoffrey Howe, as Chancellor of the Exchequer, delivered his first Budget on
I will not support new clause 12 and do not think that the House should do so, but I do think that it needs to look much more carefully at the powers that the Bill proposes to confer on HMRC officials.
On the question of tax avoidance, if the Government do not design the tax system properly and people who should pay tax can avoid it if they do so legally, that might be correct legally, but it is not necessarily correct morally. Having said that, if the Government design the tax system in that way and someone takes advantage of it, particularly an entrepreneur, who might take the money they save in tax and reinvest it in further jobs and enterprises, that person can defend that on the basis that if the Government were really skilful they would not be able to avoid it. On the question of tax evasion, people should go to prison if they evade tax. It is very simple in my view.
I have written to the Minister on behalf of a constituent who is an entrepreneur. He is about to retire and will probably dispose of his company in the process, because he is not talking about another income stream coming from continuing contact with the company. He accuses the Government of bringing in retrospective legislation in this Finance Bill, because from clause 192—I have read this part of the Bill right the way through to chapter 3, which is on accelerated payments—it is quite clear that the Government intend these retrospective investigations to go back to 2004. It gives HMRC power to declare in the arrangements for follower notices the ability to claim the tax based on other cases that might be similar to the case it is investigating or discussing. If it does so, it can claim the payment from the individual based on that follower notice.
I understand that the advice given to my constituent, who is a business person, came from one of the best financial advisers in Scotland. In fact, it was the financial adviser who wrote to Equitable Life long before anyone realised that it was defrauding people by enhancing assets falsely, and who was the first person called to give evidence to the Treasury Committee. They have advised my constituent that the problem is, in fact, in this Bill and the performance under its terms. It might be based on a previous ability to do so, but the concept of follower notices and accelerated payment notices are, in fact, in this Bill and did not exist before.
The question is whether the provision is retrospective, because I believe that the Minister is on record—I think that it might be in writing—as saying that he does not agree with retrospective tax powers. I also understand that the Treasury Committee confirmed in a recent report that this is indeed retrospective and the Government are yet to explain what is wholly exceptional about the performance they have put in this Bill—the follower notices and the accelerated payment notices—that will justify the use of retrospective claims for taxation.
It seems to me that when someone is doing their tax planning, particularly when coming to that later period in life—quite a few Members of this House are in that age group—they look at the law at the time, take tax advice from advisers, make arrangements and do their tax planning accordingly, and that is what they think will be their future income. Those people tend not to be receiving a pension paid by someone else; they are earning their pension by their own efforts and enterprises. If that advice is taken and their tax planning goes ahead, I want the Government to assure me that they will not then be told after this Bill is passed, “You made that arrangement in 2000, but we have decided that from 2004 that that tax planning, although legal then, is not legal, so we want you to pay a substantial amount of tax back that was not in the tax arrangements then.” I think that it is only just that the Government give people an assurance that they will not come seeking to turn what was a legal tax arrangement into an illegal one and cost them a substantial amount of money.
The hon. Gentleman is making a powerful argument. However, he should consider whether his model of an individual looking at tax approaches is the right one; many businesses look to tax advisers for advice. It is those tax advisers, who have given what is at least imperfect advice to businesses, who need to be examined more carefully.
I hope that the hon. Gentleman thinks I am a bit smarter than his question implies. If someone does something that is tax-efficient but not legal or justifiable, it is clear that the Government can say that it is illegal and they want the money back. People pay financial advisers quite a bit for good, legal, tax-efficient plans—to find ways not of cheating the system, but using it efficiently.
I might think it wrong for people to avoid tax and I might say that they should put it all in the bucket, like those in the PAYE system. The reality is, however, that tax efficiency is about people seeking to minimise their tax; that advantages people employed by their enterprise or seeking a just reward for their efforts throughout their life as an entrepreneur. I am not against that. If we want to close an avoidance loophole, we should close it. If the loophole is open and used, the Government should not be able to come back 10 years later and say, “We’ve changed our mind. Yes, it was efficient and legal, but we want money from you.”
Under this legislation, once the decision has been made, there is no appeal; someone would have to go to private litigation to fight the taxman. That is the problem. The system will not be fair, but completely and utterly repressive—designed to give all power to HMRC and the Government and none to the private individual. My constituent is 65. He has worked for a long time and employed lots of people in my constituency. He has done things legally, but on retirement he could face the prospect of being chased by HMRC under this law, the only way to fight it being to have enough money in the bank to bring private litigation.
The proposals give all power to the taxman, and that is not a correct, just or moral way to run the country. I hope the Minister will assure us that the law will not be used in such a way and that, if required, amendments will be tabled to ensure that.
Order. I assume that Members taking part in the Finance Bill debate are arithmetically astute, so will be able to work out as quickly as I can that, if the Minister is to have any chance of answering the many points put to him, particularly by Opposition Front Benchers, the four people wishing to speak have little more than 10 minutes left. If they take less than three minutes each, everyone will get to speak; if they take more, they will be being discourteous to each other.
I will endeavour to be as brief as possible, Madam Deputy Speaker.
I have often made the case against tax avoidance—international and national—in the House. I have often mentioned the behaviour of the water companies, which used the quoted eurobond exemption to further their strategies. Yet I cannot support the new clause, which is, in the words of the Labour party’s head of policy, Jon Cruddas, nothing less than an “instrumentalised, cynical” nugget
“of policy to chime with…focus groups and…press strategies”.
The new clause would not raise £500 million. I will be interested to hear the Minister say exactly how much it would raise, as in many cases double taxation treaties could be used. When I raised the loophole in question, my case was about the debt-equity gearing ratio—a far more effective way of looking at the issue. I would be surprised if the Labour party had consulted experts beyond its own advisers. Indeed, there was a consultation on this issue in 2012. I stand to be corrected, but I do not believe the Labour party gave a response to that consultation. It simply thought, “What wheeze can we table as a new clause to plonk out there for our press strategy as our instrumentalised policy nugget?”
The new clause is highly cynical. It has been devised purely to make a case and to say, “Yes, we are on the pitch in the tax avoidance debate.” In fact, when the Labour party was in power receipts from income tax doubled but receipts from corporation tax went up by 6%. Again, we heard cynicism in the debate today with remarks about the tax gap going up by £1 billion to £35 billion. That is because the economy is growing. In reality, the percentage has fallen from 7.1% to 7%, so the tax gap has been heading in the right direction.
The Government have done a lot to make the case on this issue and to take the battle to the tax avoiders. I support the accelerated payments regime—I differ from my hon. Friend Sir Gerald Howarth on this—because people who are subject to it know that they are engaging in a tax avoidance arrangement that is going to be under attack, and so should be prudent and keep the money to one side. If they are not doing so, they should be thinking about things rather more carefully, because they know they have entered into an arrangement that is likely to be under attack from the Revenue.
It is a disgrace that while millions of ordinary people suffer the privations of wage cuts, unemployment and poverty, a rich minority is avoiding and evading taxes. I am talking about corporates and billionaires. There is indeed one law for the rich and one for the poor, the poor being the great majority of wage and salary earners. They are not necessarily poor in the specific sense, but they pay their taxes—I pay PAYE myself.
The Government’s concerns about the deficit seem hypocritical given that they have failed to collect the taxes that are owed. The estimate of the amount of uncollected tax made by HMRC and the Government is of the order of £40 billion. But estimates by others—including the Public and Commercial Services Union, the trade union that represents the workers in the tax collecting industry, the TUC and Richard Murphy, a noted tax expert I have seen speak on many occasions—put the amount at £120 billion or even more.
Even if we take the £40 billion figure, if the Government collected half of it, that would be an extra £20 billion a year, equivalent to 5p on the standard rate of income tax. I suggest that that would not just bring down the deficit but would give us plenty more to spend on the health service and on decent pay rises for public servants, who have suffered so much for so long.
As for staffing in HMRC, I have spoken out about that under previous Governments as well, not just this one, because that has been a weakness for Government efforts to challenge tax avoidance and evasion for a long period. I will tell a little anecdote. In 1997, when I first came into Parliament, I went to visit my local VAT office. The people there said that if they had more staff, they could collect more taxes. In VAT from local businesses alone, every individual tax inspector collected five times their own salary. Naturally I wrote to the then Chancellor of the Exchequer. I got an answer back from a civil servant, not from the Chancellor, which said that the Treasury wanted to make savings by cutting staff. That is utterly irrational when staff collect many times their own salary.
As I said, with VAT from local firms the amount collected is five times a staff member’s salary. When it comes to the big corporates, extra staff collect many, many times their own salary, and we should have many more tax staff. Perhaps if HMRC did not have such difficulties with staffing, it would be able to work more accurately and would not make the mistakes that have been mentioned.
We have recently seen Vodafone, which apparently owed something like £7 billion in tax, do a cosy little deal with Dave Hartnett, the then boss of HMRC, and pay £1 billion. The rest was siphoned through Luxembourg, I think—wherever it was, large amounts of money were lost from the corporates. Interestingly, Dave Hartnett, who was a public servant and should have been committed to the public interest, retired and finished up as an adviser to corporates on tax avoidance. That is unacceptable. Civil servants should be motivated by the public service ethos and be determined to collect taxes. They should not be cosying up to the corporate world.
Finally, as my right hon. Friend Mr Meacher has pointed out, the 1,000 richest people in this country have seen their wealth double in the past five years from a quarter of a trillion pounds to half a trillion pounds. That is a staggering amount of money. Much of that must be to do with tax avoidance and tax evasion. If we were to collect just some of that, we would have no deficit and plenty more to spend on the health service.
I will not vote for new clause 12, and I will briefly explain why.
A year ago, we enacted the general anti-abuse rule. One argument that Mr Aaronson made when he reviewed that idea was that it would allow us to have fewer of these complicated, focused anti-avoidance rules in Finance Bills and to avoid cluttering up the tax regime with more complexity because we would be able to rely on the general rule. I look forward to seeing that, rather than another huge, thick Finance Bill next year.
Subsection (1) of new clause 12 speaks of
“tax arrangements that are abusive.”
Surely those come within the general anti-abuse rule and can therefore be challenged, even if they are technically legal. Given that, we will not need to come back and assess the three items that are set out, because they will already have been tackled and there will be no further revenue to raise.
I racked my brains and did a bit of googling to try to find methods of tax avoidance using dormant companies. I struggled to think of one, because once a dormant company does something, it ceases to be dormant and therefore cannot be used to avoid tax. If what is meant is that companies are pretending to be dormant, but are actually active and are not filing returns that they know full well are due, that is tax evasion and should be clobbered severely using the existing rules. We probably do not need to create a huge compliance burden for every innocent dormant company out there. There might be sensible reasons for maintaining those companies, such as to protect a name or previous transactions, or simply that the cost and hassle of striking them off are greater than they ought to be. That would be an unreasonable compliance burden to impose.
We should be a bit careful about the language that we use about eurobonds. I have some sympathy with the view that when they were created 40 or 50 years ago and the exemption was passed, Parliament probably did not intend for intra-group loans to be traded randomly on Channel Island stock exchanges but never actually traded, just held by the same third party throughout the period. I see the temptation to remove the exemption and it was right that the Government proposed some sensible ways of doing so two years ago. However, if the Government consult on something and look into the detail, but then decide that it would not raise as much money as they thought and that it would act as a big disincentive to investment, it is unwise to come back to it so quickly. We should learn the lessons from that and just accept that if we want the UK to be attractive to investment and the hub of the private equity industry, which many small businesses in all our constituencies benefit from, it is foolish to risk putting up the cost of borrowing for that industry and adding complexity for it by revising the rules again.
I think that the new clause is superfluous and I will not vote for it.
In the few moments that I have, I want to point out that self-employment is being used by far too many employers to engage workers in the construction industry, as my hon. Friend Shabana Mahmood pointed out. According to the Union of Construction, Allied Trades and
Technicians report “The Evasion Economy”, 400,000 workers are being engaged in that way. Those workers miss out on the rights that normal workers get. According to another UCATT report, “The Great Payroll Scandal”, this practice is costing the Exchequer up to £1.9 billion per annum.
When I talked to construction workers on Friday night, they spoke of the scandal of payroll companies making millions of pounds. This is a legitimised dodgy practice. The companies get workers to sign a contract to say that they are self-employed, but they work for a single employer. In any legal sense, their status would be defined as a direct employee, yet they lose all the rights that we have spoken about. It should no longer be possible for companies to instruct such construction workers to turn up on site when they want them. Construction workers need the security of employment rights and full national insurance contributions should be paid.
We have had a lively debate, and I will try to address as many of the points raised as possible in the time available.
New clause 12 seeks to have the Government produce a report on how to reduce the tax advantages arising from tax arrangements that are abusive. I agree that tax avoidance is a key issue, and the Government have made it abundantly clear that we will not stand for a minority of taxpayers continuing to seek unacceptable ways to reduce the amount of tax they pay through contrived and artificial means. That increases the tax burden on the rest of society and creates an unfair playing field for businesses.
Let me explain why I do not think that a report would be beneficial. The Government have taken strong and robust action to tackle avoidance. Since 2010 we have introduced 42 changes to tax law to close avoidance loopholes and make strategic changes to prevent and deter tax avoidance. Those measures include the introduction of a general anti-abuse rule, strengthening the disclosure of tax avoidance schemes regime, clamping down on stamp duty land tax avoidance with a new range of measures —including an annual tax on envelope dwellings—and numerous changes to business tax rules and reliefs to tackle bad behaviour, including misuse of the partnership structure and corporate loss buying.
We are going further. In the Finance Bill we are introducing new measures to put in place tougher monitoring regimes and penalties for high-risk promoters of tax avoidance schemes, and we are introducing accelerated payments and follower notice measures that will give HMRC the power to collect disputed tax bills up front, putting those who try to avoid tax on the same footing as the vast majority who pay all their tax up front.
Let me address the concerns raised by my hon. Friend Sir Gerald Howarth and Michael Connarty. The vast majority of people pay their tax up front, but it is possible for people working through self-assessment to make use of a tax avoidance scheme and hold on to the money during the—often lengthy—period where there is a dispute. The law is the law, however, and it is the law that existed when the arrangements were made that continues to apply. We are making a change, however, to say that while there is a dispute, the money should be held by the Exchequer and not the taxpayer, just as happens in many other circumstances where there is a dispute in our tax system. This is money that the individual would have already paid if they had not entered into an avoidance scheme. When completing their self-assessment return, they would have notified HMRC that they were taking part in a tax avoidance scheme under the disclosure of tax avoidance schemes regime, and as I said, the taxpayer can continue to dispute the case and will be paid interest should they win. The rights of the individual are therefore not being restricted. Prudent taxpayers should recognise that tax avoidance carries a significant risk of not working and the tax becoming payable, and they should make plans for such an outcome.
In addition to changes in law, we have invested £1 billion in increasing HMRC’s compliance resource, which has reaped huge benefits. HMRC is ever more successful at tackling the avoidance it sees, and it has an excellent record in litigating the avoidance schemes that taxpayers choose to take to tribunal. It wins about 80% of cases, and persuades many more taxpayers to settle before the case gets that far. Between April 2010 and March 2014, it won 94 avoidances cases in tribunals and courts, and in 2013-14 alone, its 30 wins protected £2.7 billion of tax.
The Government will continue to close loopholes in tax law and introduce strategic responses to tax avoidance across the tax system. We will act robustly to respond to abuses that we see. We consult on those measures where we can, although hon. Members will understand that in certain circumstances we must act quickly to close down abuse, so consultation is not possible. A report will add nothing to the progress that we have made and continue to make. Action is more important. We have proved we are taking action to tackle tax avoidance across the board, and we will continue to do so.
In the time available I do not think I can do justice to the fairly lengthy speech on eurobonds by Shabana Mahmood, but the £500 million figure that she quoted, which is somehow supposed to be at risk, seems to be based on an article in a newspaper. It is not a figure we recognise. It wrongly assumes that the recipient of the interest would not be entitled to gross payment of interest and fails to take into account the fact that under the UK’s double tax treaties the tax would often be repaid anyway.
I extend again the offer that I made in March to the hon. Lady. I have been a shadow Treasury Minister and I recognise the challenges in developing policy in these areas without access to officials. I would be more than happy to meet her, with officials, to talk through some of the practical points of this issue. I think she will find that that £500 million is something of an illusion. In terms of the practical points that she raised about changing the withholding tax system, I ask her to bear in mind the double taxation treaties. Her proposals might not be as easy as she believes.
The alleged abuse of disguised employment in the construction sector is an important point. Some labour providers have created structures specifically designed to avoid tax and national insurance and gain a commercial advantage over those who play by the rules. The Government aim to put a stop to those practices in the construction sector and elsewhere through the new measures introduced in this Bill to tackle false self-employment intermediaries. They will provide a level playing field for compliant labour providers who help to facilitate the UK’s flexible labour market.
The new measures that we are introducing target structures set up to present workers as self-employed when they are really employees. This has been a growing problem in recent years and has spread from the construction industry to other sectors. That is not acceptable. Workers lose out on their rights, it creates competitive disadvantages for compliant businesses, and ultimately the taxpayer foots the bill. That is why we are acting now to stop the abuse. Intermediaries are the biggest mechanism for delivering false self-employment within the construction industry, and as I have said, the practice is spreading. Tackling employment intermediaries used to facilitate false self-employment will not only more effectively target a sizeable section of the false self-employment in construction—a point raised by Mike Kane—but will stop the spread of the problem to the wider economy.
We believe our proposals are the best way to tackle avoidance in that area. The previous Government consulted on proposals to tackle false self-employment in construction in 2009, which deemed all construction workers to be employed unless they fulfilled one of three criteria. In practice, that would have meant that bricklayers would need to provide their own bricks and roofers would have had to supply their own tiles to be categorised as self-employed. As set out in the consultation response document, analysis suggested that the proposals could undermine legitimate commercial practice and run the risk of capturing genuinely self-employed individuals.
A dormant company is one that is not within the charge to corporation tax at all, whereas the new clause appears to relate to companies that are within the charge but fail to file returns. That is not avoidance but evasion. HMRC uses risk-based procedures and extensive data-matching analysis to identify companies that should have filed returns but have not done so. All such companies are risk-assessed to establish whether they come within the charge to tax. Research suggests that the risk of tax loss is small. HMRC’s activity is carefully targeted, ensuring administrative burdens for compliant customers are minimised while focusing on the non-compliant.
I draw the House’s attention once more to the Government’s strong response to the threat of tax avoidance, including our unprecedented action to close loopholes and provide new tools for HMRC to tackle avoidance. The report proposed by the Opposition is unnecessary and would distract HMRC from delivering on its important work tackling avoidance. I call on the hon. Lady to withdraw the new clause.