Clause 9 - GAAR to apply to national insurance contributions

National Insurance Contributions Bill – in a Public Bill Committee at 2:30 pm on 21st November 2013.

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

Photo of David Gauke David Gauke The Exchequer Secretary

Thank you, Mr Streeter. I would like to think that we could maintain the same pace, but I suspect we might not at this point.

Earlier this year the Government introduced the general anti-abuse rule, a major new development in UK tax law, and a key part of the Government’s drive to tackle tax avoidance. The Bill would complete the job by extending the GAAR to national insurance contributions.

The Government have made it clear that we will take a robust line in tackling tax avoidance. It is simply not acceptable that a small but persistent minority tries to find ways around our tax laws to avoid paying their fair share, especially when the public finances are under considerable pressure.

Photo of Julian Smith Julian Smith Conservative, Skipton and Ripon

When the Minister was looking at GAAR, did he come to any conclusion why a GAAR or a similar policy had not been introduced by the previous Government? We went so far and so long without having a GAAR under Labour.

Photo of David Gauke David Gauke The Exchequer Secretary

My hon. Friend raises an interesting point. Perhaps I am not the proper person to answer. I hope that we may get an answer during the course of the afternoon.

I will talk a little bit about how we got to where we got to. I also make a wider point. Given the quite significant increases we are seeing in yield from HMRC, given the action taken by the Government to close many loopholes during the past three and a half years, and given the reinvestment into HMRC to address avoidance and evasion behaviour, I think we have a proud record as a Government. Indeed, I would go further and say that I do not believe that any UK Government have done as much as we have to address avoidance and evasion.

The GAAR is but one part of it. I do not suggest it is the solution to every problem in the tax system, but it is a useful contribution. It is a key part of our strategy to prevent avoidance from occurring at the outset and tackle it firmly where it persists. This is the culmination of a long and considered process, starting with the Aaronson review in 2011, the HMRC consultation in 2012, the 2013 Finance Act and now this Bill.

The Aaronson report advised against the introduction of a broad spectrum general anti-avoidance rule. The risk of a broadly based GAAR was that taxpayers and their advisers would have to look at what the GAAR might do in a large number of circumstances where the possible application of such a GAAR could arise. This would place a significant burden on business and would risk damaging investment, all of which we want to avoid. To answer my hon. Friend the Member for Skipton and Ripon, when the previous Government looked at this matter not long after they were elected to  office, they looked at a general anti-avoidance rule, which was broader, and concluded that the difficulties of such a GAAR were pretty well insurmountable.

Graham Aaronson and his Committee put forward proposals for a general anti-abuse rule which targets only those avoidance schemes that are clearly abusive. By “abusive” we mean the sort of scheme that one can see from the outset is simply a highly contrived arrangement designed to get round the tax law and avoid paying tax. Where something is on the borderline, the GAAR may prompt some to question what is and is not abusive. But that is no bad thing as the uncertainty will be limited to activities that are tax avoidance and will not impact legitimate business.

We consulted widely on this measure following the Aaronson report, and I have been struck by the widespread consensus that this is the right way forward. The public was rightly shocked in summer 2012 by some of the news items about highly contrived schemes used to avoid paying tax, a number of which tried to avoid NICs as well as tax. At a time when we need to make sure that everyone is paying their fair share to help to reduce the deficit, abusing the tax system in this way at the expense of the majority has to stop. Representatives of business, individual taxpayers and the professions have all shown common cause in wanting to get rid of this problem, and I am very grateful to everybody who committed a lot of time and expertise to help us to get this right.

The GAAR is only one plank in our overall strategy to tackle avoidance. HMRC published “Levelling the tax playing field” alongside Budget 2013 to provide an update on the strategy and set out the full range of measures being taken to tackle tax avoidance. We have heard arguments that because the GAAR is tightly focused it will give a green light to all other forms of tax avoidance. Those who think that should take note of the range of actions we have taken in recent Budgets and Finance Bills. We have, for example, taken firm action to clamp down on stamp duty land tax avoidance, introduced the new annual tax on enveloped dwellings, and continued to close loopholes as quickly as possible after they emerge.

In the summer, we published a consultation called “Raising the stakes on tax avoidance” in which we sought views on proposals for a new set of obligations for promoters of high-risk tax avoidance schemes. HMRC does an excellent job defeating tax avoidance schemes in the courts and ensuring that people know that many of these schemes simply do not work, but we know that there is more to do. That was why the consultation also encouraged users of avoidance schemes to settle their tax affairs after similar cases had lost in court or tribunal. The GAAR is an important step to increase the pressure on the tax avoidance industry, but it is not the only step and we will continue to take action against all forms of tax avoidance. Clause 9 will apply the tax GAAR introduced in part 5 of the Finance Act 2013 to national insurance contributions, and I hope that it has the support of the whole Committee.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury) 2:45 pm, 21st November 2013

The Minister and I will no doubt disagree on many occasions about the GAAR. Today is one such occasion, although its application to the Bill,  such as it is, is uncontroversial. The problem that we have with the general anti-abuse rule as it stands is that it is so narrowly defined that the number of occasions on which it will be used will be few and far between. A question therefore arises of the extent to which it will prevent the kind of abuse that has caused the public such outrage in recent months. The rule requires the agreement of a panel of experts, all of whom are drawn from the tax avoidance industry, before it can be used by HMRC, and that consent is not unlikely in most cases.

Photo of David Gauke David Gauke The Exchequer Secretary

May I urge a little caution from the hon. Lady? I know where her points about the tax avoidance industry arise from, but I think she should be a little cautious about suggesting that every tax advisor, whether lawyer or accountant—I declare a family interest in that my wife writes on tax law matters—is a member of that industry. I do not think that she would want to give that impression in this Committee or outside it.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

No, and I am grateful for the opportunity to clarify the position, but I believe that that impression is given to the public. The Minister knows that I am referring to the incident of a former member of the independent advisory panel on the GAAR who had to resign after he was caught at a tax planning conference advising people how to

“keep money out of the chancellor’s grubby mitts”.

That does not create a huge amount of confidence among the public about how the independent advisory panel and the GAAR might operate. I accept that the gentleman in question has resigned, but I hope that the Minister recognises that the policy must not only be effectively implemented, but send the right signals, and as signals go, that was a pretty bad one.

Photo of Julian Smith Julian Smith Conservative, Skipton and Ripon

I think that the hon. Lady had a very successful career at an accounting firm before she entered the House. Does she regret that the Labour Government did not do more to deal with tax avoidance? She has seen this from both sides—as a Member, and from an accountant’s point of view—so could more have been done?

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

The hon. Gentleman says that I had a career in the accounting industry, but I did not— I was a barrister specialising in professional indemnity litigation. I hope he did not get his information from my Wikipedia entry, which also has me down as two years younger than I am.

Photo of Julian Smith Julian Smith Conservative, Skipton and Ripon

I admit that I did look at the hon. Lady’s Wikipedia entry yesterday, perhaps because her former boss, the shadow Business Secretary, has such a track record with Wikipedia—[ Interruption. ]

Photo of Gary Streeter Gary Streeter Conservative, South West Devon

Order. Meanwhile, back to the Bill.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

I think that is quite enough discussion about Wikipedia, but I am grateful to the hon. Gentleman for giving me the opportunity to set the record straight.

I am sure the Minister did not mean to forget about the disclosure of tax avoidance schemes in his response to the hon. Member for Skipton and Ripon. I am sure his amnesia was only temporary and that he will remember that, in 2004, the Labour Government introduced that process to require disclosure. As a result of the information obtained from that, 90-odd changes to tax law were made. The Government are building on that process, which has led to a recovery of revenue in the range of £16 billion and has had a profound impact on tax avoidance in this country. It has certainly recovered a great deal more than the Government’s estimate of how much the GAAR will yield, which is only £85 million a year by 2017-18. In the context of the £16 billion raised by the disclosure of tax avoidance schemes, that is a very small amount. The thrust of the GAAR ought to be to close the tax gap, but given that that is in the £35 billion range, the GAAR’s contribution to that will be very small. One of our problems with the GAAR is that its scale is so small that it will not do enough to close the tax gap.

As the Minister knows, there are no penalties for using a scheme to which the rule might be applied, so there is little or no disincentive for anyone who seeks to avoid tax. The GAAR is in danger of becoming a mere fig leaf to which the Government can point to say they are doing something about tax abuse and avoidance. However, in reality, it will not change the picture profoundly. It will certainly not go as far as the disclosure process that we introduced in 2004, which made a much greater contribution to closing the tax gap.

As the Minister considers the GAAR, which I am sure, like everything else, he keeps under constant review, I hope he will take on board the points that have been made about its effectiveness. A Government scheme for closing down tax avoidance should do more to close the tax gap than he estimates his policy will.

Photo of David Gauke David Gauke The Exchequer Secretary

We have moved into an area of great contention and I will try to deal with the hon. Lady’s points.

I return to the intervention of my hon. Friend the Member for Skipton and Ripon, who asked why a GAAR was not introduced by the previous Government. I am tempted to respond to the question of why the new GAAR is not raising more money by pointing out that it is raising a darn sight more than the old GAAR, because there was not an old GAAR. The GAAR is a new innovation in our tax system, and the previous Government did not introduce one.

To be fair—Committee members know that I always try to be fair to the Opposition—Labour did look at this proposal, but it concluded that a general anti-avoidance rule would to be too difficult, both administratively for HMRC, and for businesses, because it would create too much uncertainty. It was thought that the only way to address that uncertainty would be through some kind of clearance regime so that businesses and individuals would be able to take proposed arrangements to HMRC, which would determine whether they fell within the general anti-avoidance rule. The conclusion was that the proposal simply would not be workable, which was why the previous Government did not go forward with it.

There will always be a tension between creating uncertainty and administrative burdens on the one hand and, on the other hand, trying to deal with avoidance behaviour. However, the Aaronson review’s group of  tax experts from the legal profession and academia, who had commercial experience, came up with a solution to try to deal with the worst of avoidance behaviour, while not creating wider uncertainties or greater problems for business or HMRC. That is why we are where we are with the general anti-abuse rule that tries—quite successfully—to square the circle.

What has been devised is quite ingenious, and it works because of the advisory panel. I want to caution the hon. Member for Birmingham, Ladywood about her remarks about the panel, which provides clarification and guidance, and effectively prevents the need for burdensome clearance procedures. If we are to have an advisory panel that assesses whether behaviour is egregious, abusive, or outside the normal scope of tax planning, it clearly makes sense that it has a broad spread of expertise covering tax and commercial knowledge. That is exactly what the advisory panel provides, so we should be cautious about criticising the fact that there are people who know about tax on a tax advisory panel, which is perfectly sensible.

I have set out the reasons why the GAAR is what it is and why the measure is targeted at the abusive end of things. I think that that is a pragmatic response, so I urge the Opposition to support the GAAR, which I think is a great step forward.

I take the hon. Lady’s point about penalties under the GAAR. This is a complex area, because if there are penalties under the general anti-abuse rule, should there not be penalties under targeted anti-avoidance rules and so on? I do not think there can be a glib answer, and any changes are likely to be quite fundamental to how our tax system works. It is important that the GAAR can be bedded in and that there is a period in which taxpayers and advisors can get to grips with it. We have not ruled out future action to strengthen the deterrent impact of the rule by attaching penalties, if necessary. We will keep that matter under review. I do not want to digress greatly today, but there are complexities in terms of what that reform would involve and its collateral impact on our tax system.

I fully acknowledge that the previous Government introduced disclosure of tax avoidance schemes. The hon. Lady rightly said that this Government have built on and extended that, and increased penalties and so on. None the less—I will not be drawn too far into this wider debate, Mr Streeter—if one looks across the piece, I can comfortably and confidently state that no previous Government have done as much as we have done on tax avoidance, and we will continue to do so. The GAAR plays a useful part in what we are doing, although that is not all of it.

Question put and agreed to.

Clause 9 accordingly ordered to stand part of the Bill.

Clause 10 ordered to stand part of the Bill.