Clause 30 - Construction industry scheme

Finance (No. 2) Bill – in the House of Commons at 2:40 pm on 20th April 2021.

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Question proposed, That the clause stand part of the Bill.

Photo of Nigel Evans Nigel Evans Deputy Speaker (Second Deputy Chairman of Ways and Means)

With this it will be convenient to discuss the following:

Amendment 70, in schedule 6, page 121, line 1, leave out “ceases to be” and insert “is not”.

This amendment would allow that a de minimis amount of minor works can be disregarded.

Amendment 71, page 121, line 2, after “time” insert

“, but the body or person expects it to be met at any time,”.

See the explanatory statement for Amendment 70.

Amendment 72, page 121, line 3, leave out “continuing to be” and insert “being”.

See the explanatory statement for Amendment 70.

Amendment 84, page 121, line 4, leave out “any further”.

See the explanatory statement for Amendment 70.

Amendment 85, page 121, line 5, at end insert “exceeding £3,000,000”.

See the explanatory statement for Amendment 70.

Amendment 73, page 121, line 8, leave out paragraph 3.

This amendment would remove the provision making businesses who fall within the current definition, but who would not fall under the new definition of “deemed contractor”, to be drawn into the new regime for CIS from 6 April 2021.

Amendment 74, page 121, line 20, leave out paragraph 4.

This amendment would remove the provision requiring that, when a contractor is deducting the relevant percentage from a contract payment made to a sub-contractor, they should first deduct only the cost of material purchased by the sub-contractor from the figure to which the relevant percentage deduction is applied.

Amendment 75, page 123, line 17, leave out “2021-22” and insert “2022-23”.

This amendment would delay commencement until April 2022.

Amendment 76, page 123, line 20, leave out “2021” and insert “2022”.

See the explanatory statement for Amendment 75.

That schedule 6 be the Sixth schedule to the Bill.

Clause 36 stand part.

Government amendments 17 to 42.

That schedule 7 be the Seventh schedule to the Bill.

Clause 41 stand part.

Clause 115 stand part.

That schedule 27 be the Twenty-seventh schedule to the Bill.

Clauses 117 to 121 stand part.

Amendment 77, in schedule 29, page 319, line 23, at end insert—

“32 After section 280 of Finance Act 2014 insert—

‘280A Treatment of promoters of abusive tax avoidance schemes

(1) In any proceedings for the offence of cheating the public revenue, where—

(a) the person charged acted as a promoter in relation to relevant arrangements within the meaning of section 235, or the person charged gave in the course of business affirmative advice on the viability of relevant arrangements within the meaning of section 234, and

(b) the relevant arrangements were abusive tax arrangements within the meaning of sub-paragraph 3(2) of Schedule 16 of Finance (No. 2) Act 2017, subsection (2) shall apply, subject to subsection (3).

(2) If, at any time that the person charged acted so as to fall within subsection (1)(a), that person was aware of the course of action or intended course of action having the consequence that the relevant arrangements were abusive tax arrangements within the meaning of sub-paragraph 3(2) of Schedule 16 of Finance (No. 2) Act 2017, the actions of that person in respect of the relevant arrangements shall be deemed to have been dishonest.

(3) Subsection (2) shall not apply if the person charged proves that they held in good faith the belief that the course of action or intended course of action was reasonable in the circumstances.’”

This amendment would cause promoters of tax avoidance schemes which are abusive (defined in existing legislation to mean schemes where it is not reasonable to regard the scheme as a reasonable course of action) to be treated as acting dishonestly for the purposes of criminal prosecution of tax offences, without dishonesty having to be separately proved by the prosecution.

That schedules 29 to 32 be the Twenty-ninth to Thirty-second schedules to the Bill.

New clause 14—Review of changes to construction industry scheme—

“(1) The Chancellor of the Exchequer must review the impact on investment in parts of the United Kingdom and regions of England of the changes made to the construction industry scheme by section 30 and schedule 6 of this Act and lay a report of that review before the House of Commons within six months of the passing of this Act.

(2) A review under this section must consider the effects of the provisions on—

(a) business investment,

(b) employment,

(c) productivity,

(d) GDP growth, and

(e) poverty.

(3) In this section—

‘parts of the United Kingdom’ means—

(a) England,

(b) Scotland,

(c) Wales, and

(d) Northern Ireland; and ‘regions of England’ has the same meaning as that used by the Office for National Statistics.”

This new clause would require a report on the construction industry scheme provisions on various economic indicators.

New clause 15—Review of effect on tax revenues—

“(1) The Chancellor of the Exchequer must review the effects on tax revenues of section 115 and schedule 27, and sections 117 to 121 and schedules 29 to 32 of this Act, and lay a report of that review before the House of Commons within six months of the passing of this Act.

(2) A review under this section must consider—

(a) the expected change in corporation and income tax paid attributable to the provisions; and

(b) an estimate of any change, attributable to the provisions, in the difference between the amount of tax required to be paid to the Commissioners and the amount paid.

(3) The reference to tax required to be paid in subsection 2(b) includes taxes payable by the owners and employees of Scottish limited partnerships.”

This new clause would require a report on the impact of certain provisions of the Bill on narrowing the tax gap by comparing: (a) the expected change in corporation and income tax paid attributable to the provisions and (b) an estimate of any change, attributable to the provisions, in the difference between the amount of tax required to be paid to the Commissioners and the amount paid. In particular, this includes taxes payable by the owners and employees of Scottish limited partnerships.

New clause 29—Review of tax avoidance measures—

“(1) The Chancellor of the Exchequer must review the impact of sections 117 to 121 and Schedules 29 to 32 of this Act and lay a report of that review before the House of Commons within six months of the passing of this Act, and then annually for five further years.

(2) A review under this section must estimate the expected impact of sections 117 to 121 and Schedules 29 to 32 on—

(a) levels of tax avoidance,

(b) levels of tax evasion, and

(c) reducing the tax gap in each tax year from 2021-22 to 2025-26.”

This new clause would require the Government to review the impact of the provisions relating to tax avoidance and publish regular reports setting out their findings.

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury 2:50 pm, 20th April 2021

The Government remain committed to tackling tax avoidance, evasion and other forms of non-compliance. Since 2010, we have introduced over 150 new measures and invested over £2 billion in additional funding to ensure that the right tax is paid at the right time. These efforts have helped to secure and protect over £250 billion for the UK’s public services that would otherwise have gone unpaid, and they have helped to bring down the tax gap to 4.7% in 2018-19—its lowest recorded rate.

But there is still work to do. Clauses in this Bill build on our previous reforms in order to clamp down on deliberate non-compliance and make sure that everyone pays their fair share. They include measures to tighten the anti-avoidance rules aimed at those who promote and enable tax avoidance schemes. They also close a loophole in the existing anti-avoidance rule aimed at preventing non-UK resident individuals from claiming relief when they gift business assets to a company controlled overseas.

The clauses support HMRC’s strategy on promoting good tax compliance. As an example of that approach, the Government are amending the follower notices regime, which penalises taxpayers who have used avoidance schemes that have been shown to be ineffective, in order to make it fairer for those who comply, while ensuring that the regime remains just as effective at combating avoidance. The Bill also seeks to bring parts of the hidden economy out of the shadows by making some licence approvals conditional on tax registration and compliance. The clauses in the Bill are necessarily technical, which is in part down to the complex rules that are currently in place. Given the number of issues that we are covering and the number of speakers in the debate, I will keep my remarks fairly brief.

Clause 30 and schedule 6 introduce changes to tackle abuse of the construction industry scheme. The construction industry scheme is a revenue protection scheme designed to tackle evasion in the construction sector. The scheme protects approximately £7.1 billion in tax every year by requiring contractors to make deductions from the payments they make to subcontractors that they engage. Those payments count as advance payments towards those subcontractors’ tax and national insurance. The changes made by clause 30 will allow HMRC to correct employers’ CIS deductions when they are false or incorrect. Clause 30 will clarify the rules on deductions for the cost of materials and change the rules for determining which businesses will need to operate the CIS. It will also expand the scope of the current penalty for providing false information to HMRC.

Scottish National party amendment 74 would remove paragraph 4 of schedule 6 to the Bill, which would have the effect of removing the proposed changes to rules for deductions for materials. However, there is a clear case in public policy for these changes. Some contractors and subcontractors are interpreting the rules incorrectly at present in a way that undermines the purpose of allowing materials deductions within the scheme, which allows some contractors and subcontractors an advantage over others. The proposed rule changes will ensure a clear and consistent approach, providing a level playing field for those involved. I therefore urge the House to reject amendment 74.

Amendment 73 proposes to remove paragraph 3 of schedule 6, which relates to the transitional arrangements between the old and new rules for qualifying as a deemed contractor. This would mean that many businesses would have to change their business arrangements overnight and go through the process of re-registering for the construction industry scheme under the new rules. As this could be more disruptive and confusing than the proposed transitional arrangements, I urge the House to reject the amendment.

Amendments 75 and 76 would delay the commencement of this measure to April 2022 rather than April 2021. Such a delay would not be appropriate, as industry has already been consulted on the changes and any impacts are expected to be limited. Again, I urge the House to reject these amendments.

Clause 36 and schedule 7 amend the corporation tax rules governing so-called hybrid mismatches. These rules are intended to tackle aggressive tax planning by multinational companies that seek to take advantage of differences in how countries view entities and financial instruments. Hybrid mismatches can lead to double deductions for the same expense or deductions for an expense without any corresponding receipt being taxable. The Government have consulted in this area and are amending the rules in several areas so that they remain proportionate and do not lead to economic double taxation. That includes introducing a limited grouping matching rule and a change to the type of income that counteractions under the rules can be set off against.

Government amendments 17 to 42 to clause 36 have been tabled to ensure that the changes provided under that clause work and reflect the underlying policy intent. They address various technical issues that have been raised by external commentators following the publication of the Bill, and mostly change small and technical details.

Clause 41 will close a loophole in the capital gains tax gift holdover relief rules by preventing non-UK residents from being able to claim the relief while transferring a business asset to a company controlled overseas that they personally own. By making this change, the Government are ensuring that the relief is used fairly and only for its intended purpose.

Clause 117 and schedule 29 make changes to the promoters of tax avoidance schemes regime, known as POTAS. The changes allow Her Majesty’s Revenue and Customs to issue stop notices to prevent the promotion of schemes that it suspects do not work and to obtain information from suspected promoters at an earlier stage of the process than at present. They also prevent promoters from sidestepping the rules by rearranging their corporate structure to carry out activities through different entities. There are a number of other technical amendments to ensure the continued effectiveness of the regime. There are also further measures in the Bill to enhance the operation of the disclosure of tax avoidance schemes—DOTAS—rules.

Clause 119 changes the penalties issued to enablers of tax avoidance schemes that have been defeated in court, at tribunal or otherwise counteracted. The changes will allow HMRC to obtain relevant information from potential enablers at the earliest possible moment so as to be able to consider whether they are liable for an enabler penalty.

Clause 120 and schedule 31 make changes to ensure that the general anti-abuse rule can be used as intended in respect of partnerships that have entered into abusive tax avoidance arrangements.

Finally I turn to clause 121, which from April 2022 makes the renewal of certain licences to trade conditional on licence applicants in England and Wales completing checks with HMRC. The checks will confirm whether applicants are registered for tax, and new licence applicants will be directed to HMRC guidance about their tax obligations.

I turn to the most substantive of the amendments before us today: amendment 77, which relates to the POTAS provisions that I outlined. The amendment seeks to amend schedule 29 so that anyone subject to the promoters of tax avoidance schemes regime, and promoting or enabling abusive tax arrangements, should be deemed to have been acting dishonestly unless they can show that they acted in good faith and believed the arrangements to be reasonable. This would mean, in respect of the criminal offence of cheating the public revenue, that a person would automatically be treated as dishonest where it had been demonstrated that they had promoted abusive tax arrangements as defined in the general anti-abuse rule. As such, there would be no requirement for any prosecution to prove dishonest conduct.

I fully agree that promoters who break the law should face the consequences of their actions. That is why the Government are putting so much emphasis on anti-avoidance measures and measures against promoters of tax avoidance in the Bill and elsewhere. We should be under no illusions about this. It is not honest to market tax schemes or arrangements that are known not to work and that at their heart feature false statements.

However, cheating the public revenue is the most serious tax offence, carrying a potential sentence of life imprisonment. It is therefore right that the prosecution should have to prove its case beyond a reasonable doubt—the usual standard of proof in a criminal case—and to demonstrate that the person has been dishonest in order to secure a conviction of cheating the public revenue. We all want fraudulent operators to be brought to book, but shifting the burden of proof for such a serious crime on to the defendant to prove their innocence is at odds with the principles of our criminal justice system and would undermine the right of a defendant to remain silent. The burden should be on the prosecution to prove dishonesty to the criminal standard of proof. That is fundamental to the rule of law.

I therefore recommend that amendments 17 to 42 are made to clause 36, and that clauses 30, 36, 41, 115 and 117 to 121, as well as schedules 6, 7, 27 and 29 to 32, stand part of the Bill.

Photo of James Murray James Murray Shadow Financial Secretary (Treasury) 3:00 pm, 20th April 2021

I will speak to new clause 29, tabled in my name and the names of the Leader of the Opposition and other right hon. and hon. Friends. It is timely to consider what the Government are doing to tackle tax avoidance and tax evasion today, with this month marking five years since the publication of the Panama papers. Those papers revealed the true global scale of tax avoidance and tax evasion and the need for comprehensive and effective action to tackle them. Of course, the clauses we are considering are far more limited in scope.

The Minister set out that clause 30 relates to the abuse of the construction industry scheme rules, clause 36 makes amendments to the corporation tax rules for hybrids and other mismatches and clause 41 amends the anti-avoidance rule when claiming relief for gifts of business assets. More widely, clauses 115 and 117 to 121 relate to other measures, including penalties for the promoters of tax avoidance and giving HMRC new powers to obtain information. We will not oppose those measures today.

However, our concern about the Government’s approach is centred not so much on what those clauses cover but what the Bill, and the Government’s approach more widely, fail to do. Our concern is that, faced with the challenges of tax avoidance and tax evasion, and with the public clearly wanting to see definitive action from the Government, Ministers have presented a Bill of measures that are relatively minor and technical. Indeed, as the House of Commons Library analysis of the Bill concluded, it would seem that the Exchequer impact of these changes will be minimal as they are not included in the Budget report costings.

The truth is that three Conservative Prime Ministers and five Conservative Chancellors have failed to tackle tax evasion and aggressive tax avoidance. The Government have repeatedly promised to act, but their proposals in the Bill fall far short of the change we need. That is why our new clause would require the Government to review the impact of provisions in the Bill relating to the levels of tax avoidance and tax evasion and the size of the tax gap, and to publish regular reports setting out their findings. The Government must not be allowed to hide behind warm words on this matter. They need to be transparent about the impact, or lack thereof, that their proposals will have.

We also welcome the amendment in the name of my right hon. Friend Dame Margaret Hodge, which seeks to treat promoters of tax avoidance schemes which are abusive as acting dishonestly for the purposes of criminal prosecution of tax offences. This kind of change is crucial if we are to shift towards more criminal prosecutions for the promoters of tax avoidance schemes, and to shift the gear of the Government’s approach.

At the moment, where tax avoidance has occurred, the system lands liabilities on the tax payers, who are usually not tax experts and may have been falsely told that a tax avoidance scheme is lawful. In contrast, the promoters of tax avoidance schemes are allowed far too often to get away with it. We therefore welcome any efforts to strengthen penalties for the promoters of failed tax avoidance schemes. But we have seen nothing from the Government today to raise the stakes and to make greater use of the powers HMRC already has to bring criminal prosecutions against the promoters of fraudulent tax schemes.

We know that HMRC recognises its power to use criminal investigation approaches to tackle the promotion and enabling of tax avoidance schemes, but in a letter the Financial Secretary sent me in January this year, he admitted that, since the formation of HMRC’s fraud investigation service in 2016, only 20 individuals have been convicted for offences relating to arrangements that have been promoted as tax avoidance. An average of around four people a year does not feel like a concerted effort.

Photo of Catherine West Catherine West Shadow Minister (Foreign and Commonwealth Affairs)

My hon. Friend is making a great speech. Does he agree that it seems disproportionate that more people, in an adjusted sense, tackle benefit fraud than tackle big business or dodgy individuals who are taking money from the public purse?

Photo of James Murray James Murray Shadow Financial Secretary (Treasury)

I very much agree. My hon. Friend makes an important point about the Government’s priorities, and about the lack of priority they give to going after the promoters of tax avoidance schemes and those who evade paying tax, in comparison to other actions in Government. We are seeking to put pressure on them today to address that imbalance.

HMRC’s criminal investigation policy states:

“Criminal investigation will be reserved for cases where HMRC needs to send a strong deterrent message”.

However, we know that fraud through the promotion of tax avoidance continues at scale, involving at least an estimated £20 billion in 2018-19, so it is hard to imagine why Ministers would not support a stronger deterrent message being sent by the greater use of criminal prosecutions.

Part of the answer may be the understaffing of HMRC. In a response on 11 January this year to a parliamentary question, the Financial Secretary admitted that the number of full-time equivalent employees at HMRC had fallen since 2010 from 67,553 to 58,467. That is a reduction of more than one in seven. The question of capacity in HMRC and the impact that that may have on its ability to tackle tax abuse must not be ignored. The Tax Justice Network refers to the fact that a member of staff in the compliance business stream at HMRC brings in on average over £900,000 a year on a £30,000 salary. It has pointed out that the Chancellor’s additional investment in HMRC staffing is directed towards tackling fraud related to covid spending, while previous funding increases have supported HMRC’s Brexit capacity. Its view is that the Chancellor must invest further in HMRC’s core compliance capacity.

Furthermore, beyond the questions around tackling the promoters of tax avoidance, the Bill is also silent on other important areas that need to be pursued, such as efforts to set up a register of overseas entities. Legislation is needed to establish a register that would show exactly who owns the foreign companies buying up British property. This would serve as a key part of any clampdown on money laundering.

The then Prime Minister, David Cameron, first announced plans for this in 2015, yet more than five years later, the legislation is nowhere to be seen. I bet he has not been in touch with Ministers for action over that. I would welcome the Minister using his speech at the end of this debate as an opportunity to explain whether the promised deadline of introducing legislation to set up a register of overseas entities by 2021 will be missed. If he is silent on this matter, we will take that as a yes.

I would like to use the opportunity of a discussion on tax avoidance to ask the Treasury ministerial team again to confirm whether the Chancellor backs plans for a global minimum corporate tax rate, as proposed by the US President. When I asked the Minister’s colleague, the Exchequer Secretary, to address this point during the Bill’s Second Reading last Tuesday, she did not respond, which I am sure was an oversight. I would therefore welcome the Financial Secretary addressing this question directly in his closing speech, to avoid any misperception that he and his colleagues are deliberately avoiding the question.

Our criticism of the Government in relation to tax avoidance and evasion centres not so much on what the measures in the Bill would achieve but rather on the ways in which the Bill and the Government’s wider approach fall short. The Government lack a tough and comprehensive approach to prosecuting the promoters of tax avoidance, to going after international money launderers and to pursuing those who seek to evade tax. We know that the impact of the measures in the Bill will be relatively minor and technical. The public deserve to have the Government present clearly and transparently what effect the measures in the Bill will have, and our new clause simply requires that their impact on tax avoidance, tax evasion and the size of the tax gap should be reviewed and laid in public before this House.

Throughout the Minister’s statements and comments, there is a clear pattern that the Government favour minor technical amendments to legislation on this matter, rather than upping their game and truly calling time on the practices that the public clearly want to see ended. Today they have an opportunity, by supporting our new clause, to show that they understand the need to be clear with the public, to recognise the need to strengthen their approach on this matter, and to commit to coming back with the resources and legislation that are needed to truly make a difference.

Photo of Andrew Mitchell Andrew Mitchell Conservative, Sutton Coldfield

I want to make a few points, principally on amendment 77. Perhaps I can start by saying that I do not agree with the Opposition spokesman, who has just addressed the House so eloquently, that the Government have been slow to tackle tax abuse and tax fraud. I should, at the outset, draw the House’s attention to my entry in the Register of Members’ Financial Interests. I think the Government have been very good at tackling tax fraud, starting in 2010 when this Conservative Government first came into office. The reforms that were introduced by George Osborne, the Chancellor of the Exchequer, deliberately targeted tax abuse and set up a number of measures to try to ensure that we clamp down on it, as it is common cause on both sides of the House for us to do.

Where I do agree with the Opposition spokesman is in his reference to the Panama and paradise papers. That excellent work by journalists from, I think, The Guardian and the BBC exposed the fact that money laundering, dirty money and abuse in that sector were far more rampant than we realised. That is one of the reasons why Dame Margaret Hodge and I have made so much of an effort in this House, along with colleagues on both sides of the House, to try to clamp down on money laundering and dirty money and ensure that we have sunlight as the best disinfectant on all of this. That is why we introduced the open public registers of beneficial ownership for the British overseas territories, and why we strove so hard to persuade the Crown dependencies—successfully, now—to introduce those same open registers. That is the way in which we stop kleptocrats, bent politicians, warlords and corrupt businesspeople from stealing from the Exchequer but also, of course, from Africa and Africans. That was the great benefit of the paradise and Panama papers: they showed so clearly the extent of what was going on.

I thought that the Financial Secretary made some very good points about amendment 77. In general, I do think that the Revenue has enough power over the private citizen in the laws of the land as they stand at the moment. However, the point I would make to the Financial Secretary—he has been most receptive in listening to the right hon. Member for Barking and me about this—is that eternal vigilance is required. As we have seen, and as amendment 77 draws attention to, there is an inequality of arms in this matter. Advisers who set up these schemes often have an aura of authority, because they are lawyers, accountants and professional people, which those whom they advise may not be.

I want more to be done to ensure that, where these bad schemes of tax evasion are put together by professional advisers, they do not get off scot-free while the people they put into these devices, or talk into going into them, take the rap. It is not right that they should just lose the fees that they earn, which I think is currently the position: we should toughen the financial penalties. The Minister handles these matters very well, and I know that he wants this to be more than a senior common room debate. I know that he is conscious of the balance between the rights of the individual and making sure that people are not able to evade tax. I know that he does think seriously about that, so I would just urge him to always keep an open mind on this issue.

This is a familiar theme. In this year of Britain’s presidency of the G7, we should remember the work that was done by George Osborne for the last G8, at which he championed the open registers that were introduced in Britain in 2016. It is a proud achievement of this Conservative Government that, at the last G8, they moved the world towards focusing on these illicit flows of money, and this year with the G7, I hope that the Minister will consider it important as well. I completely accept that we are not going to divide the Committee on amendment 77. What the Minister said about the amendment was extremely constructive and I hope he will feel it right for the House to return to this matter on very regular occasions, in pursuit of what unites us all: that people should pay their fair levels of tax.

Photo of Margaret Hodge Margaret Hodge Labour, Barking 3:15 pm, 20th April 2021

It is a pleasure to follow Mr Mitchell, with whom I work very closely on this issue; it demonstrates the best of Parliament that we are able to do so across the House.

I rise to speak in support of amendment 77, which stands in my name and that of members of the all-party group on anti-corruption and responsible tax. Our proposals command support across the House, and I know the Minister will therefore address this issue thoroughly and seriously, not just in his response today but in the work that I know he is doing to bear down on those who enable and support tax avoidance and financial crime. I simply say this to the Minister: he may have reservations about the technicalities of our proposals, but he should at the very least accept the principle that underpins them and say so today.

Big corporations and high net-worth individuals who engage in tax avoidance schemes and financial crime do not dream up these schemes on their own; they are invented and developed by the huge army of tax professionals—accountants, lawyers, banks and advisers—who spend their working life trying to identify loopholes and wheezes. The schemes they devise do not just help but actively encourage people not to pay their rightful contribution through tax to the common purse for the common good.

At present, HMRC may slowly and belatedly catch up, and may deem such schemes unlawful. If it does so, the individuals have to pay up and sometimes face enormous tax demands, but the enablers of tax avoidance mostly get away scot-free; at worst they may lose the fees they earned from setting up the scheme for their clients. Our amendment would hold these enablers to proper account. If advisers and promoters involved in a scheme know that the scheme does not work, they are committing the criminal offence—mentioned by the Minister—of cheating the public revenue. They are breaking the law, so they should be pursued, charged and convicted with a criminal charge.

That does not happen now, and our amendment seeks to make it easier for the enforcement agencies to pursue criminal prosecutions. Not only would they hold the advisers to account, but I am completely convinced that the threat of a criminal prosecution would act as the most effective deterrent and bring to a halt many of the activities of these rogue advisers. It would be the most efficient way of tackling tax avoidance at source. It is a common-sense approach to the problem, and it would be welcomed by all taxpayers, who are so frustrated by paying their tax unquestioningly while seeing others avoid tax or break the law. It would restore confidence in the tax system. It is a good idea, and I hope that when the Minister responds he will say that he shares our view that we need to amend our legislation to make it easier to pursue and prosecute advisers who deliberately promote egregious schemes that are unlawful.

I know from my time chairing the Public Accounts Committee how embedded the culture of avoidance, evasion and financial crime has become in our financial services sector. We saw it plainly with the revelations from HSBC, with the Falciani leaks from its Swiss branch. It was there in the PricewaterhouseCoopers leaks keenly exposing that firm’s activities in Luxembourg. The Panama papers uncovered the shenanigans involving the law firm Mossack Fonseca, while the Paradise papers disclosed the nefarious activities of another law firm, Appleby. While it may no longer be seen as cool to be involved in tax avoidance, the latest leak of documents contained in the FinCEN papers spells out the complicity of major global banks in facilitating and enabling financial crime, from tax avoidance through to fraud and money laundering.

Normal working people, however, often suffer the most. The film tax relief that was exploited ruthlessly by the company Ingenious Media left many facing huge tax demands, though the chief executive, Patrick McKenna, is still lauded through public appointments in the creative sector. The loan charge scheme was promoted vigorously by enablers. They walked away scot-free, but left devastation in their wake. I understand from the all-party parliamentary loan charge group that seven suicides have been reported to the group—people driven to suicide because they were conned by enablers into participating in a scheme that later unravelled. That is truly shocking.

I welcome the consultation that the Government have launched on tackling the promoters of tax avoidance. The all-party parliamentary group will be preparing a response to that consultation. Most advisers, of course, work in an honest and straightforward way, and we do not want to pursue with criminal charges those who make an honest mistake, but there are still individuals, companies and organisations who deliberately and wilfully promote egregious schemes that they know do not work. Such enablers move quickly, they are well resourced and they are well capable of outmanoeuvring HMRC. As soon as one wheeze is uncovered, they move on to the next. Worst of all, they act with impunity, safe in the knowledge that they will escape any real punishment if they are ever caught.

Why do these rogue advisers not get prosecuted? The answer lies in what the Minister said: HMRC has to demonstrate dishonesty to proceed against them and it is virtually impossible to do so. The advisers can always claim that they honestly believed that the scheme would work. We therefore want a new test, which makes criminal prosecutions feasible and practical.

We suggest adopting the test that is in place for the work of the GAAR—the bar for prosecution for those ne’er-do-wells should be just as stringent. It would simply make it possible and practical to take action. HMRC would have to demonstrate not simply that the avoidance scheme was not reasonable; it would have to demonstrate that it was not reasonable for anybody to think that the avoidance was reasonable. Sorry for the complication, but that is a double reasonableness threshold. I assure the Minister that that double reasonableness test is in effect the same as the “beyond reasonable doubt” test that he mentioned in his opening remarks. Of course, it would be easy for enablers to avoid prosecution —they just need to stop promoting or recommending tax avoidance that is so aggressive that they know it will fail.

Our amendment tackles a gross injustice in the system. People are completely fed up with reading endless stories about scurrilous tax avoidance schemes promoted by those working in the financial services sector. The perceived difference in the way that hard-working taxpayers and rich individuals are treated breeds mistrust. We suggest a practical change in the law that would make it possible to pursue the enablers, not because we want to see the courts clogged up with prosecutions against bankers, accountants, lawyers and advisers, but because we think that that is the best way of making those advisers think twice before they promote unlawful schemes. It would deter most of them from trying to cheat the public revenue. I urge the Minister, please, to be bold on the issue, to state today that he will tighten up the law and to give us the assurance that, if he does not like our particular solution, he will come forward in a timely manner with his own proposal.

Photo of Peter Grant Peter Grant Shadow SNP Spokesperson (Europe), Shadow SNP Deputy Spokesperson (Treasury - Chief Secretary)

I am pleased to speak in this debate and to speak to the amendments and new clauses to which I have added my name and which were detailed earlier.

All the SNP amendments relate to schedule 6, under clause 30. Amendments 70 to 72 and 84 and 85 seek to amend subparagraph (3A) of paragraph 2. Taken together, the paragraph would read:

“Where the condition in subsection (1)(l) or (2) is not met in relation to a body or person at any time, but the body or person expects it to be met at any time, the body or person may allow for the condition to be treated as being met until the body or person is not expected to make expenditure on construction operations exceeding £3 million.”

On the face of it, it does not look like a major change, but the amended wording is more in keeping with the spirit of the existing construction industry scheme. It allows, for example, for a de minimis amount of minor works to be disregarded in the operation of the scheme.

Amendment 73 seeks to remove paragraph 3 from schedule 6. I know that the Minister has spoken against this amendment and amendment 74, but we have seen no convincing argument that this change is necessary just now, and we believe that it would be much better for industry to be allowed to continue with the existing scheme for the current year rather than asking it to change the way of doing things. Let us face it, with its being a major part of our recovery from the covid recession, industry has far more important things to concentrate on.

A similar reasoning applies to amendment 74, which seeks to leave out paragraph 4 from schedule 6. That paragraph relates to the way in which the costs of materials purchased for a construction contract are taken into account for tax purposes. The construction industry has had to meet a number of challenges this year. We do not see how changing the way in which it has to account for tax on purchases by a subcontractor for another subcontractor, for example, during this current year will help. We do not see why it needs to be done just now.

New clause 14 requires the Chancellor to report back to Parliament on the impact that the changes proposed in clause 30 and in schedule 6 have had on key economic indicators. One would think that it would be automatic that, when a Government make changes to the tax system, they would go back a wee while later to see whether the changes have had the desired effect. This Government are perennially hopeless at doing that. We seldom if ever see a published assessment of what impact the new legislation or changes to the tax system had. That makes it much more difficult for MPs and the public to hold the Government to account. Even more importantly, it means that, when mistakes are made—that is when, not if—there is no reliable process to identify that and to put things right.

For this Committee sitting alone the Government have had to table no fewer than 22 amendments in order to correct mistakes or to remove inconsistencies and ambiguity from their own Bill which they themselves commended to the House only last week. We can only hope that they have spotted all the mistakes by now, but surely with such an important piece of legislation it makes sense to ask the Chancellor to report back to us to tell us whether it is working, or whether there have been unintended consequences that need to be addressed sooner rather than later.

New clause 15 again requires the Chancellor to report back to Parliament, but this time on the effectiveness of various anti-tax avoidance measures in clauses 117 to 121, and the follower notice penalties in clause 115. I note that the Opposition have tabled something similar, although a bit more restricted in scope.

We welcome the further measures included in this Bill, but they still do not go nearly far enough. Time and again, it has been pressure from SNP MPs that has forced the Government to take any action at all on the scandalous levels of tax avoidance that they continue to tolerate. We still do not have an overarching and workable general anti-avoidance rule. We have an inadequate system of company registration and regulation that makes it far too easy for companies to hide the truth about who really benefits from the profits that they make on the hard work of citizens of these islands and who is really in control of the company. For example, the SNP has highlighted over and over again the need for legislation to combat the abuses of so-called Scottish Limited Partnerships by money launderers and organised crime. As things stand, almost anybody in the world can set up one or several Scottish Limited Partnerships and then use them to get round even the inadequate regulatory and transparency requirements that apply to other companies.

Scottish limited partnerships are an almost unique form of company structure, which the Government know make money laundering easier and law enforcement harder, but Ministers have yet again brought forward a Finance Bill that fails to regulate them or to close this loophole properly. At a time when essential public services face yet another financial squeeze, and the only feasible way to pay for the economic costs of the global pandemic is to saddle future generations with eye-watering levels of debt, it must surely be a top priority for the Government to make sure at the very least that those who make billions from their business activities in these four nations are required to pay their fair share of taxes. Why, then, do we allow big Government contracts to be used to line the pockets of people who pay next to no tax in the United Kingdom?

I know that the UK Government will be watching with interest to see who forms the Government of Scotland after the elections on 6 May and which equal-partner Government they will have to deal with for the next few years. Given my comments about the UK Government’s failures to clamp down on tax avoidance, it will come as no surprise that if the current Scottish Government are re-elected, they will seek a further transfer of powers to allow them to take action on tax dodgers, whom the British Government have allowed to get away with their activities for far too long. If re-elected, the Scottish Government will also investigate whether their existing powers allow them to levy a higher business rate poundage on properties whose owners are registered in a tax haven. That is also an idea that I commend to the UK Government. It would not have been competent to include it as an amendment to this Bill, but it is well worth looking at.

To sum up, the amendments we have suggested would improve the Bill, although they would not make it a good Bill—there are still far too many omissions and weaknesses in the Government’s proposals for tax avoidance prevention. However, because of the way the Bill has been put together, and because of the procedures in the House, it would not be competent to move further amendments at this stage. The SNP will continue to hold the Government’s feet to the fire until we get to the day when everybody who makes money from running a business in the United Kingdom pays their fair share of tax to pay for the essential services that all of us enjoy.

Photo of Kevin Hollinrake Kevin Hollinrake Conservative, Thirsk and Malton 3:30 pm, 20th April 2021

It is a pleasure to speak in this part of the debate, and I draw the House’s attention to my entry in the Register of Members’ Financial Interests.

It was probably 15 years after we set up our business that our own accountants came to us—we were making reasonable profits by then—and suggested that we take advantage of a tax avoidance measure, and a pretty aggressive one in our view. This was not a particularly unusual accountants—it had a decent reputation locally— but so much money potentially runs through these schemes that some promoters inevitably see an opportunity for themselves.

I must tell the House that we told our adviser that we did not want to take part in such a scheme, and there were two reasons: we believed that people should pay their tax—that we should all pay a fair amount of tax—but also that any person who takes up such measures should be afraid that HMRC will one day come along and say, “Those measures were not appropriate.” By that time, a lot of the money that they think they have saved has gone out in costs to promoters and the rest of it, and they are left with a huge bill.

Had the person who promoted that scheme to us—our accountant—thought that he would potentially end up on jail, I do not think he would have come to us and told us about it. This was a reputable local person, and perhaps he did not even think that tax avoidance at that point was fraud. Nevertheless, it certainly can be fraud, and in many cases it is. If we are willing to hold people to account, ultimately through a criminal prosecution—as HMRC can, of course, as the Minister pointed out earlier—there would be a lot less of this kind of promotion and a lot fewer of these activities.

Before I talk in more detail about that, I want to tackle some of the shadow Minister’s points. It is a little churlish not to recognise the steps that the Government have taken since 2010. There have been 150 measures to tackle tax avoidance; that was at a cost of £2 billion to the taxpayer, but it brought in £250 billion in contributions to our public services. Of course, the Minister said that we need to go further, but it is wrong to simply say that the Government are not doing enough. Some of those measures, such as the digital services tax and the diverted profits tax, are very significant internationally.

Photo of Ruth Cadbury Ruth Cadbury Labour, Brentford and Isleworth

I acknowledge the point that the hon. Gentleman makes and the amount of money brought into the Revenue by the measures, but is he not also conscious that the sheer number of different measures has, for many taxpayers, added to the complexity? We have one of the most complex tax regimes in the world and that complexity often catches people unawares, and costs them lots of money and sometimes their businesses and their homes.

Photo of Kevin Hollinrake Kevin Hollinrake Conservative, Thirsk and Malton

I absolutely accept that our tax system is very complex, and I have proposed a number of measures on the Floor of this House to try to simplify it. For example, abolishing business rates and replacing them with an increase in VAT would simplify the tax system, instead of having an online sales tax. However, in terms of this debate I do not think it is the complexity of the issues that catches people out. We can see that 99% of tax avoidance schemes in the UK involve disguised remuneration—these are very contrived schemes. We should look at amendment 77 carefully. As to whether it is unfair on a person who is a promoter of what I would say is an extremely contrived tax avoidance measure, I am not totally sold that that should be a problem.

One of the biggest problems we have is faith in the system. This Government have done a huge amount to reduce the tax gap, which is at a record low of 4.7%, but if there is a £20 billion tax gap from fraud, the person in the street might reasonably say, “Why should I pay my tax?” This creates an incentive then for people to look at ways of avoiding tax. As to whether tax avoidance is fraud, the Government’s own call for evidence last month says clearly:

“The Government recognises that the design of arrangements that are sold as avoidance schemes may in fact enable fraud.”

So there is a good case for being able to take these further measures, as the Government are doing through stop notices, further civil penalties and stopping individuals hiding behind corporate structures.

The trouble is that, as we see in many areas, not least the banking sector, which I am pretty active in through my work in the all-party group on fair business banking, these kinds of organisations see a fine—a civil penalty—as a cost of doing business; the real deterrent for people is a criminal penalty. One of the best examples of this is to be found in a completely different sector, with the personal liability for a director in the construction industry. As soon as that personal liability came in and there was the potential for someone to go to jail if they did not make sure their sites were safe or they did not put measures in place, there was a huge decrease in the number of injuries and fatal incidents in the workplace in construction. That speaks to the point that if there are real criminal sanctions that we are willing to take forward and people think that that is going to happen, this promotion of avoidance schemes will start to drop significantly.

We probably have better resourced areas in terms of the prosecution of avoidance; I believe there are about three and a half times this number of people in the Department for Work and Pensions looking at benefit fraud, despite the fact that it is a much lower level of fraud—the level of benefit fraud is about 10% of that seen by HMRC. A beefing up of the resources in HMRC is therefore something we should consider. We have seen very famous schemes. I believe the Ingenious film scheme cost the taxpayer £1.6 billion, but not a single promoter has been held to account for it. We need more resources, but we should also look at legislation. This country does not have a great record on prosecuting serious fraud. There are a number of examples where the Serious Fraud Office has failed to make charges stick—I think, for example, of cases involving Tesco and Barclays. That is why the SFO wants to bring in more legislation, which the Government have agreed to do, to create a corporate offence of failing to prevent economic crime. This would be a personal sanction on the directors of a corporation that failed to do that. Of course, in banking we now have the senior managers regime that the Financial Conduct Authority put in place following some of the scandals there, when nobody was held to account for the disgraceful abuse of both consumers and businesses through the past couple of decades in the sector. The excellent Minister might say that amendment 77 is not the right vehicle for this, but some beefing up of the legislation to make it easier to prosecute fraud—criminal activity—is something that we should seriously consider.

Photo of Christine Jardine Christine Jardine Liberal Democrat Spokesperson (International Trade), Liberal Democrat Spokesperson (Exiting the European Union), Liberal Democrat Spokesperson (Treasury)

It is a pleasure to take part in this debate and to follow Kevin Hollinrake.

I welcome the action that the Government are finally taking against the promoters of tax-avoidance schemes. My Liberal Democrat colleagues and I will be supporting new clause 29, which would require the Government to review the impact of provisions relating to tax avoidance and publish regular reports that set out the findings. We will also support amendment 77, which would cause the promoters of abusive tax-avoidance schemes to be treated as acting dishonestly for the purposes of criminal prosecution for tax offences, without dishonesty having to be proved separately by the prosecution. We believe that the measures we are considering are what the Government should have been doing earlier. The promoters of abusive tax-avoidance schemes have deprived the public purse of millions of pounds and defrauded countless people who thought that their services and the advice offered were legitimate.

The action being taken now comes too late for so many victims of these schemes who had no intention to do anything unlawful or to evade taxes and have already been unfairly penalised. Liberal Democrats are committed to clamping down on tax avoidance, but the retrospective nature of the loan charge is causing uncertainty and financial hardship to ordinary working families, most of whom acted in good faith. Thousands of IT support professionals, social workers, teachers, cleaners and nurses—all of whom acted in good faith, based on professional financial advice that what they were doing was legal—now face immense pressure, which is impacting on their mental health and causing serious financial hardship, which will only be magnified by the economic consequences of covid-19.

Meanwhile, online tech giants and international corporations have been avoiding tax for years but have not been clamped down on in the same way, even internationally. With the load charge, the Government are going after nurses and teachers. Like many other right hon. and hon. Members in this place, I have a number of constituents who find themselves in exactly the position that I have described, facing retrospective taxation since HMRC changed its rules in 2017. One constituent whom I have been representing has attempted to correspond with HMRC on anomalies in the settlement agreement policies, but to no avail. Although he is categorised as fully compliant and not liable for the loan charge and pre-2010 loans, he is not being refunded any settlements that include pre-2010 amounts. The fully compliant are not benefiting from the pre-2010 amendments, while other categories are.

As I have said, we undoubtedly need to clamp down on tax avoidance—the deliberate evasion of taxes—but we should be clamping down on those who promoted it, not on those who took advice believing that it was lawful. The Chancellor must also go further than his recent decision merely to limit, in the Budget, the retrospective element of the charge to 2010; he must end the retrospective application of the rules altogether so that nobody who fell victim to such schemes before 2017 should be unfairly penalised. The Government must also further re-examine IR35.

I shall end my speech there, but it is important that we recognise that the steps that we must back today should have come before us much earlier.

Photo of Antony Higginbotham Antony Higginbotham Conservative, Burnley

It is a pleasure to follow Christine Jardine, but I must pick up on one of her points. She indicated that the Government had done nothing to crack down on online companies, but the evidence shows that the Government took action to ensure that if we buy something from an online marketplace such as eBay, Wish or Alibaba, the seller charges VAT. That was a significant source of lost income for the Exchequer.

It is right for Opposition Members to raise the Panama papers, because they highlighted to the general public—to residents up and down the country—the actions of a small number of tax-avoidance advisers and very wealthy individuals who did not want to pay their fair share. I think it is right that we should look at that in the context of the action that the Government have taken.

The latest HMRC figures show that the tax gap and the loss from tax avoidance have been reduced significantly in recent years. That is testament to the more than 150 measures that the Government have taken, as the Minister outlined, and it means that 95.3% of all tax due is being collected. That does not mean that we should not aim to collect that 4.7% and get the figure to 100%. That is what we do in this House: we make laws, and we decide what taxes businesses and people should pay. We should strive to ensure that we hit 100%. I think there is something about low-tax Conservatives advocating exactly that, because if we want a fair and low tax system, we need everyone to pay the taxes we bring in. With that in mind, I support all the measures that the Government are introducing in this Bill.

If any member of the general public wants to understand why it is so important to crack down on tax avoidance and evasion and close the gap, they need look no further than the last 12 months, when we have created such a direct link between tax and spend. With furlough, grants and loans, businesses and people can see exactly what they get when they pay into a system. Only this week, the mortgage guarantee was launched, allowing thousands, if not millions, of young people to get on the housing ladder. We have a tax system that allows us to do that.

Although I particularly welcome the strengthening of the anti-avoidance rules in this Bill, I think we need to focus on the link that we have created in the last 12 months between what people pay into the system and what they get. People realise that the state is there and, if they pay in the right amount of corporation tax or pay-as-you-earn, it will look after them. As much as I think we should focus on cracking down and using enforcement and prosecution, as my hon. Friend Kevin Hollinrake said, we should also look to sustain that link in the next couple of years. To ensure that people continue to pay into the system, we should encourage them to remember the support that the Government have been able to give. That will enable us to continue to close that gap and go from 95.3% to 100%.

Photo of Catherine West Catherine West Shadow Minister (Foreign and Commonwealth Affairs) 3:45 pm, 20th April 2021

How delightful it is to see you in the Chair, Ms McDonagh. I am very pleased to speak to amendment 77 and new clause 29, and to have listened to the excellent speech by my hon. Friend James Murray. I pay tribute to Members from across the parties who have stood up for those who have been so badly affected by the loan charge scandal, and I was particularly pleased to hear my hon. Friend Ruth Cadbury speaking so eloquently on Radio 4 on Sunday evening. We are getting these important messages across.

I also wanted to pay tribute to the important work that is being done by the all-party parliamentary group on anti-corruption and responsible tax, led by Mr Mitchell and my right hon. Friend Dame Margaret Hodge, on simplifying things and making the basics better, for example by improving the Companies House regulations. I understand that some of that is coming forward shortly, but the general picture is that things are quite slow.

It was lovely to listen to Antony Higginbotham speaking about the importance of taxation. Once upon a time, I am sure that would have been quite a tricky topic for certain Conservative Members to talk about, but there is a new wind blowing. It is great to hear President Biden talking about the global minimum corporate tax level and the importance of an online sales tax, and even to hear our own Government leading the charge across Europe on the importance of introducing a digital sales tax and simplifying things to bring in the important public funds that we all need to keep our society going.

The scale of tax offences is clear, with a recent TaxWatch report finding that between 2009 and 2019, the UK prosecuted 23 times as many people for benefits offences as for tax offences—that theme has been echoed in today’s speeches—despite the fact that the value of tax fraud is nine times higher than that of benefit fraud. We know that American research has shown that for every $1 the Internal Revenue Service invests, it gets back $10 of benefit for the public purse, and I wonder what the consultation the Treasury ran said about incentivising officers based in HMRC so that the more money brought back, the more colleagues come on board to help them in their important work.

We know that a lot of this work is about priorities, and we need to prioritise criminal prosecutions so that there is not a decrease in taxation, as there has been of 39% since 2015. We need to look at the balance of the DWP employing 3.5 times more staff in compliance than HMRC. We know that we have to improve that balance, because quite simply there is much more money to be found in illicit finance and among tax avoiders than from those eking out a living on universal credit or personal independence payments.

The Minister will I am sure make it clear in his remarks that the Bill is intended to tackle some of these issues and to amend that imbalance, and I look forward to hearing that. However, I make the case for quicker progress so that we can move forward as fast as possible, particularly given the fact that, as the hon. Member for Burnley mentioned, the furlough scheme and some of the other schemes are quite expensive, and therefore the need to find more in this way from tax evasion is ever more pressing.

I want briefly to mention the importance of the provisions on freeports and the corporation tax super deduction, which do not appear to come with sufficient tax avoidance and evasion safeguards. I hope that during the debate—perhaps not right at this instant, but over the course of today—we will get some reassurances on that matter. In March, the Financial Secretary was unable to say how many additional staff HMRC plans to recruit to deal with taxation, duty, excise and customs issues pertaining solely to freeports, but I hope that that information is forthcoming. Given the attention and focus the Government gave to these announcements, we would have expected them to get the basics right, but we still have some questions that are outstanding.

While the Government are bringing forward—perhaps deliberately, some of us would say—a weak set of measures in the Finance Bill, other tools that we need to tackle evasion and avoidance, such as the draft Register of Overseas Entities Bill, could well sit gathering dust, since they were initially announced quite some time ago. Will the Minister use today as an opportunity to outline his views on that particular Bill?

On the question of illicit money, do not forget that our own Intelligence and Security Committee called London a “laundromat” for illicit and dark finances, often coming from Russia. I would hope that the Minister will redouble his efforts to understand how to clamp down on the facilitation of those finances through the UK financial system. We would have expected such a description of our capital city to force action from the Government, but we are still waiting to see exactly who owns some of the foreign companies buying up British property. Can someone still walk in and purchase a £1 million property in cash, and does the Minister believe such a way of purchasing expensive properties in London is appropriate?

Photo of Kevin Hollinrake Kevin Hollinrake Conservative, Thirsk and Malton

I draw the Committee’s attention to my entry in the Register of Members’ Financial Interests. Is the hon. Member aware that there are very strict requirements for people involved in the property market to check the identity and the source of funds of those she has just described?

Photo of Catherine West Catherine West Shadow Minister (Foreign and Commonwealth Affairs)

I thank the hon. Member, and it is always lovely to have an accountant in the room. If there are some improvements, we are very grateful for them.

Photo of Ruth Cadbury Ruth Cadbury Labour, Brentford and Isleworth

If I may intervene, London is one of the few cities that has no residency or nationality rule for owning residential property, and many very high-cost cities for residents to live in, such as Vancouver and Auckland, have such rules. Could this Government consider such rules, because this issue has helped to trigger the explosion in housing prices, particularly in London, but also in our other large cities?

Photo of Catherine West Catherine West Shadow Minister (Foreign and Commonwealth Affairs)

My hon. Friend makes a very important point. I am sure it has not escaped the Treasury’s attention that prices of the top 1% of properties in the country—mainly in London—have been skyrocketing, when everybody else’s house prices have been going up by a little. That differential is quite frightening. In this terrible time when our economy has shrunk by 11%, who can afford to buy properties worth several million pounds, and do we know enough about these individuals? We know that there are big gaps in the way that Companies House operates, in terms of simply understanding who owns what, and simplifying that is the sort of thing that would make the work of HMRC much more streamlined.

I would also like to put on record the wonderful work being done by civic society groups to spread information and education about the importance of understanding taxation, what it does and what it purchases. It is through these campaigns—often outside this House—that we can understand how to change things.

Aside from our international reputation often being questioned on the issue of Russian oligarchs, we know that the lack of action on questioning some people’s contacts with the Kremlin is costing us over £30 billion every year in lost revenue from taxes. That is a lot of money, and it would be better used to pay for the furlough, eliminate child poverty, vaccinate more children in the third world, or pay and equip our NHS staff for the heroic job that they do every single day.

The Government must act without delay and begin by supporting amendment 77 and new clause 29, which are a significant improvement on the weaker proposals put forward by the Government. That would send a signal that the UK will no longer be silent in the face of tax evasion and tax avoidance and is no longer a welcome home for the oligarchs and agents who see the UK as the destination of choice for their ill-gotten gains. I urge the Minister to do the right thing.

Photo of Ruth Cadbury Ruth Cadbury Labour, Brentford and Isleworth

I speak in support of new clause 29 in the name of Her Majesty’s Opposition and cross-party amendment 77. I congratulate my hon. Friend James Murray, my right hon. Friend Dame Margaret Hodge and Mr Mitchell on their speeches.

Addressing tax avoidance and evasion is, of course, an important objective of the Treasury, and Finance Bills and other legislation are the vehicles to do that, but as with all tax changes, Government must assess and respond to the unintended consequences of any changes. This Government have a terrible track record on tackling tax evasion and aggressive tax avoidance. They have consistently stood in the way of Labour’s calls to clamp down on loopholes and have failed to collect over £30 billion in taxes every year. They have promised to legislate on these issues, but the proposals in the Bill fall far short of any substantive change. Instead, they have been responsible for an increasingly complex system of payment, fraught with difficulties and risks for the unsuspecting worker.

A growing number of working people need to work on a contractor basis, either for personal reasons or because it is the only way of getting work in their sector or with their professional skillset. Increasingly, the alternative to being a contractor is to be a PAYE freelancer—to pay tax in full but without any of the rights of being an employee and all the costs of being self-employed. This is zero-rights employment, and it is unfair.

We need an effective tax avoidance policy that criminalises those promoting tax avoidance, rather than going for the workers inadvertently caught up in them, as this Government and HMRC have been doing with the loan charge in particular. That is the wrong target. While ordinary people who are victims of mis-selling are facing ruin and bankruptcy, the Government have done too little, too late to go after those who promoted the schemes.

I acknowledge that the Bill contains measures to tackle the promoters of tax avoidance and changes the system of penalties, but those measures are extremely limited in scope. Indeed, those changes are not even included in the Budget report costings, which suggests that their financial impact must be minimal. IR35 was enacted 21 years ago to stop the practice of those who, in reality, were permanent, generally full-time workers being paid as contractors through personal services companies, as many were paying much less tax than if they had been employees. It was right to address that tax avoidance, but the Government must address the unintended consequences for workers and the labour market that have followed since then.

Many genuine contractors are advised by accountants to work through disguised remuneration schemes using umbrella companies. Despite HMRC’s claiming otherwise, the reality is that it did not act at the time to stop these schemes or tell users not to use them. Then, in 2016, it brought in the loan charge, which it said would stop the operation and use of such schemes, only the worker pays; to date, not one scheme promoter has been prosecuted for promoting these schemes.

Tens of thousands of hard-working people were suddenly hit with, in effect, retrospective taxation of eye-watering sums. It is no coincidence that the all-party parliamentary loan charge group grew in a very short time to be one of the largest APPGs in this Parliament. The evidence clearly shows that people went into schemes not to avoid tax, but to avoid being caught by IR35. They were advised that that was the best way to manage their work and were assured that the schemes were legal and compliant. For too many years, HMRC did not disabuse them or their accountants of that.

Despite the loan charge, disguised remuneration schemes have not gone away. The roll-out of the IR35 off-payroll rules has instead led to the proliferation and increased use of umbrella companies to promote disguised remuneration. Workers, particularly basic rate taxpayers, are seduced by comparison sites into signing up with the umbrella company that offers the best take-home rate, without realising that the correct tax and national insurance is not being paid on their behalf. Often, the worker is given no choice which umbrella company to use. Too often, there is a lack of transparency over deductions, fees and contractor pay and payments, and some recruitment agencies ignore the legal requirement to provide all workers with a key information document, or KID.

HMRC’s own figures suggest that disguised remuneration made up 99% of tax avoidance in 2018-19, as opposed to only 60% in 2013-14, and a growing number of individual workers are involved. In the past, disguised remuneration schemes involved mainly better-paid contractors; now, increasingly, those in basic tax bands are affected, in the public sector as well as the private sector. We are talking about people such as nurses, teachers, IT technicians and many more.

The relevant clauses in the Bill do not address the problem of non-compliant umbrella companies, despite being intended to clamp down on tax avoidance by giving HMRC the power to issue stop notices. Those are essentially orders to cease particular avoidance measures, but they carry no other penalty. There is therefore little deterrent from tax avoidance.

A number of clauses attempt to close various loopholes. Schedule 29 and clauses 117 to 120, 115 and 121 bring in penalties for promoters of tax avoidance and give HMRC new powers to obtain information. However, as my hon. Friend the Member for Ealing North said, those measures are reasonably minor and stop short of criminalising those encouraging and facilitating tax avoidance, which is what the Government should be addressing in this Finance Bill.

Clause 21 deals with

“workers’ services provided through intermediaries”.

The legislation, as originally drafted, would have meant that recruitment agencies had to put workers on their own payroll, where they would have enjoyed the protections offered by existing agency legislation. That would also have meant closing the door on many tax avoidance schemes. The Government could simply strike out clause 21. Doing so would ensure that workers got the agency rights they should be getting. Agencies can run their own payroll for their own staff anyway, so they could do so for the workers they take on as contractors.

Alternatively, the Government could amend the Bill to allow only compliant umbrella companies to exist—and there are a number of compliant umbrella companies. Doing that would allow umbrella companies to continue operating, but it would mean that they were no longer able to wrongly skim off money from contractors’ pay and that they had to pay holiday pay, and kickbacks between recruitment agencies and umbrella companies would be outlawed. This would stop all dodgy umbrella companies and provide much-needed transparency. The only umbrella companies that would complain, surely, would be the ones involved in the exploitation. It would also put the onus on clients and agencies only to use umbrella companies that were acting properly, because if they did not they would be liable for any tax deemed to be avoided. That is exactly the same rule that is already being used to make other firms properly assess a contractor’s status under the new IR35 off-payroll rules. Changing the Bill in this way would stop tax avoidance schemes, stop the covert exploitation of contractors and stop the kickbacks being used that encourage malpractice. It is hard to understand why the Government have not done this. If they really are serious about clamping down on tax avoidance schemes, they must do this now.

Labour’s new clause 29 would be a start towards effective tax control while protecting unsuspecting workers. The new clause would require the Government to review the impact of provisions in the Bill relating to tax avoidance and publish regular reports setting out their findings. The review would consider the impact of these provisions on levels of tax avoidance and evasion, and on the size of the tax gap.

Amendment 77, which my right hon. Friend the Member for Barking and the right hon. Member for Sutton Coldfield have discussed so eloquently, would cause promoters of abusive tax avoidance schemes to be treated as having acted dishonestly for the purposes of criminal prosecution of tax offences without dishonesty having to be separately proved by the prosecution. I fully support these amendments, but at the same time the Government must not miss this opportunity finally to tackle the proliferation of non-compliant umbrella companies and stop tax avoidance schemes in the first place.

It has been 21 years since IR35 first came into law. Instead of achieving its objectives of ending tax avoidance in the contractor market, further Government changes brought us the retrospective taxation of the loan charge, the flawed off-payroll rules and now this industry of umbrella companies, many of which are withholding the tax and national insurance of contractors. Again and again, hard-working people are paying the price and the Revenue is losing out.

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury 4:00 pm, 20th April 2021

I am grateful to all those who have spoken in the debate. Let me start with my hon. Friend Kevin Hollinrake, who, as always, brought a robust common sense, as well as the skills of an accountant, to bear, especially when it comes to holding the Opposition to account for some of their comments.

Photo of Andrew Mitchell Andrew Mitchell Conservative, Sutton Coldfield

I should defend our hon. Friend Kevin Hollinrake. He is not an accountant; he is an estate agent.

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury

I have been held to account by my right hon. Friend and I am grateful to him for that, because that power—if I have any power—should always be held to account. Let me put the record straight: my hon. Friend the Member for Thirsk and Malton is an estate agent, and yet with that estate agency genius he combines the forensic skills of an accountant in holding to account, indirectly, members of the Government and, directly, the Opposition. I thank him for that.

My hon. Friend the Member for Thirsk and Malton pointed out that these disguised remuneration schemes are highly contrived. It is terribly important to remind ourselves of that. It is all very well to complain about the loan charge, but these are highly contrived schemes. My hon. Friend reminded us—as, indeed, did my right hon. Friend Mr Mitchell —of the general rule that all taxpayers are responsible for their own tax, and that if, by implication, a scheme looks too good to be true, it almost certainly is too good to be true. Those are important messages and no Government should wish to weaken that important principle that people are responsible for their own tax.

Photo of Ruth Cadbury Ruth Cadbury Labour, Brentford and Isleworth

I understand what the Minister has said. Of course, most of us are aware of our own tax bands. But how can the Minister expect basic rate taxpayers—a nurse, an IT contractor, somebody working in the film industry, even somebody on minimum wage—to do due diligence when nothing they read or have been sent ever mentions loans, and when they are given a convincing narrative that their tax is being paid for and they do not need to worry? Should not HMRC and the Treasury be addressing this issue, because it is a growing part of the employment market?

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury

HMRC is addressing these issues. That is why this Bill has so many measures in it that are focused on the disclosure of tax avoidance schemes, toughening up that regime and improving the regime against the promoters of tax avoidance. But let me say to the hon. Lady that I thought her remark was dripping with condescension towards the ordinary taxpayers of this country. The fact of the matter is that people, from whatever walk of life, are perfectly competent—they do not need to be patronised by Labour Members of Parliament—at working out when something looks too good to be true. That is why so many—such a high percentage; well over 90% of people—do manage to work out what is too good to be true and behave on that basis. To suspect otherwise, when HMRC is absolutely working as hard as it can to make sure that the truth is out there and well understood, and is closing down opportunities for misleading advertising, in a recent initiative with the Advertising Standards Authority and a whole host of other things, is completely wrong.

I am grateful to my hon. Friend Antony Higginbotham for what I thought was a very robust and thoughtful contribution. He is absolutely right to highlight that HMRC has not been slow in this area. He was right to pick up the point about VAT on online platforms, but, of course, that is merely the tip of the iceberg. James Murray somehow suggested that we were failing to tackle this issue. The tax gap, as he pointed out, is 4.7%—a historic low. Let me remind the House and him of some of the actions that the Government have taken—leadership on base erosion and profit shifting over many years, the diverted profits tax, the corporate interest restriction, the tax charge on offshore receipts, hybrid mismatch rules, our new digital services tax.

Photo of Kevin Hollinrake Kevin Hollinrake Conservative, Thirsk and Malton

I very much welcome the digital services tax, which is there to try to make sure that everybody pays their fair share, as the Minister said in his opening remarks. Having said that, it does not apply to Amazon’s direct sales on that platform. It applies only to third-party merchants, so there is not that much of a level playing field between those two different cohorts. Will he look at that in future?

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury

Brilliantly, my hon. Friend has intervened just before I was about to mention that we are consulting on an online sales tax, which is a parallel initiative. Indeed, the digital services tax includes the introduction of a new basis for tax—that is, UK user content. That itself is a flag to the energy and innovation that the Government are seeking to bring to this issue, and I thank him for his comments.

The hon. Member for Ealing North asked about the beneficial ownership registry on overseas companies that own or buy property in the UK. As he will know, the Government published a draft Bill. It has gone through prelegislative scrutiny. The process has, for reasons that the House will not need any reminding of or highlighting, been somewhat interrupted over the past year, but the Government plan to introduce the Bill in due course, so I reassure him on that point.

The hon. Gentleman raised the question about minimum corporate taxation. He should know that the Government have been, as I said, in the international vanguard in trying to drive change on base erosion and profit shifting, and processes of international tax agreement through the OECD. We were also in the vanguard of delivering the creation, originally, of the G20 commitments for a comprehensive global solution to this issue, based on two pillars, and we are leading the way, during our G7 presidency, on this issue, as the Chancellor has made clear. So we absolutely welcome the renewed commitment that the US Administration have made in this area, which we think is a very important change.

Finally, I turn to the important amendment 77, which was tabled by my right hon. Friend Dame Margaret Hodge. My right hon. Friend was right to highlight the importance of eternal vigilance—I absolutely share his view on that—and he was right, as the right hon. Lady was, to talk about the ever-shifting and evolving ways in which some of the malefactors in this area are ceasing to operate, and, of course, that is true. However, if I may say so, he erred in suggesting that the penalty on the enablers—that is to say, a sum equal to the gross fees to be collected in relation—was in any sense modest or small. It is one of the largest charges in the tax system, and because it is a gross fee, it is of course charged on the total amount of income. It is therefore income on which the promoter will have to recognise all their costs, and indeed any profit and any tax they may have paid, so it is actually a fairly formidable penalty.

The right hon. Member for Barking claims that the double reasonable test that she has advocated is equivalent to the test of “beyond a reasonable doubt”. I am not aware of any evidence, or indeed any legal opinion of a reputable senior authority—such as a QC or similar, or a court judgment—that would suggest that this is the case. It is a claim: it may be right or it may not be right, but it remains to be proved, and I do not think it has been proven.

In relation to amendment 77—this is a fundamental point—no one doubts the importance of addressing this issue, but the means that it adopts are not ones that this Government, or indeed any responsible Opposition, should be associating themselves with. Let me just quote the words of one of the leading firms of solicitors, Kingsley Napley—that

“using the criminal law as an alternative to challenging a scheme in the tax tribunal is not a viable solution. It is certainly”— this is a point that the House might want to reflect on—

“not as easy as inserting ‘a simple one-liner’ into the common law offence of cheating the public revenue…A Jury should not be left to interpret whether a particular scheme is reasonable or abusive… and the overburdened criminal justice system is certainly not the place to be resolving complex tax disputes.”

That is a source of expertise that we would do well to heed.

Question put and agreed to.

Clause 30 accordingly ordered to stand part of the Bill.

Schedule 6 agreed to.

Clause 36 ordered to stand part of the Bill.