It is a pleasure to serve under your chairmanship, Dr McCrea, and I welcome the Front-Bench speakers to the debate. I have a high degree of respect for them both and I hope that between us, in this relatively informal environment, we can start the ball rolling on what is a serious topic for this Parliament: tax avoidance.
Let me put the Minister at ease by saying that I am not going to discuss the capital gains tax proposal or any of the media coverage of it. It is a key aspect of the coalition agreement. All I will say is that the thrust for change comes from the desire to close a loophole that allows for tax avoidance, where people receive economic rewards as capital rather than income so as to avoid higher rates of taxation. Obviously, that is a move for the privileged few that potentially costs the Exchequer millions. Recently, there have been both decent and some dodgy arguments in the media about the mooted capital gains tax proposals. I am prepared to acknowledge that a number of sensible points have been made apropos the need to encourage long-term investment rather than short-term gain, and the need to privilege savers above speculators. There has been much learned discussion about tapers, capital relief and so on. I remain fairly sanguine about the matter and will leave the Minister to his pre-Budget deliberations-provided that, within the coalition, we do not lose the essential goal of successfully attacking tax-avoiding abuse.
Tackling tax avoidance is important to the coalition, particularly in the present circumstances. If the central problem of this Parliament is reducing the structural deficit, there are essentially not two but three ways to help to do that: we can cut spending, which none of us wants to do unless necessary; we can increase taxation, which none of us wants to do unless necessary; or we can ensure that tax revenues are more often and more efficiently collected and not avoided, which all of us would be perfectly happy to do were it the panacea for all our ills. Unfortunately, in the present circumstances, it is not.
If the coalition is not ruthless in its pursuit of avoidance and evasion, now more than ever, we will stand accused of harming or at least being indifferent to the industrious and needy, to the advantage of the devious and the privileged few. That is scarcely fair or in line with the themes announced by the coalition of fair taxation and fair reward. So far in the history of this Parliament, little has been said by the Government about tax avoidance. I understand that the Minister has answered a few questions, both oral and written, but by and large he has given answers that I would describe as holding answers that refresh the position that we understand to be in place-that Her Majesty's Revenue and Customs does not take lightly the matter of tax avoidance and there is a big gap to be plugged. There is a big gap, because potentially large sums are to be obtained by a clampdown. The Treasury estimates the tax gap of tax avoided or evaded to be about £40 billion. The Tax Justice Network-not uninformed people-gives a figure of £120 billion. The truth is probably that we do not know the precise figure, and perhaps we should split the difference.
The reality is that we have made some progress in getting large sums back to the Exchequer as a result of a serious attack on tax avoidance. That is to the credit of Ministers in the previous Government, who recognised that a serious attack was necessary. The figures for 2008-09 provided by the Treasury suggest that about £12 billion of extra revenue was collected because of the forthright approach taken to tax avoidance. The figure expected for 2010-11-the Minister will be able to tell us whether we get anywhere near it-is a whopping £16 billion. Those are significant sums.
A distinction is often drawn between avoidance and evasion. I do not want to trespass into the area of evasion, as that is a different issue, although at times it is quite difficult to define the difference. Somebody said that the only real difference or line between evasion and avoidance is the thickness of a prison wall.
It is a different sort of accounting, let us put it like that. Evasion characteristically involves not only non-compliance, but a breach of tax law and often an element of downright and explicit dishonesty. However, in truth, some forms of avoidance are almost equally morally reprehensible if looked at from an ethical point of view rather than a technical or legal one. We think of past abuses of charity law, which people have explicitly used to make a fast buck with no real benefit to charity, thereby bringing the whole business of charity law into disrepute. We think of a genuine unwillingness on the part of some members of society to pay towards the maintenance of the society that enables them to thrive-the free-rider mentality that is found in certain sections of society and business.
On the other side, we must recognise that we are talking about an industry that does not hang its head in shame. It is staffed by clever and well rewarded people who are dedicated to not what they would call tax avoidance-although it is that in a sense-but, to give it another name, tax planning. As tax law becomes more sophisticated, the economic instruments with which tax planning is arranged become ever more complex and, because of the global reach of the economy these days, ever more global.
The demands for such services are huge and appreciable. There are some well rewarded people in the City whose life is almost entirely dedicated to some form of tax avoidance or tax planning-whatever they want to call it-which they regard as an entirely legitimate enterprise. One should not be too pompous about this. Few people volunteer to pay more tax than is due, or avoid opportunities that come their way to defray their own tax burden. Some people are capable of availing themselves of clever, post hoc rationalisations that run along the lines of: if they spend the money rather than paying it in tax, it will be spent to greater social benefit. That is not a plausible argument, but it is a comforting moral argument if one's conscience bends in that direction. Such people argue that they can spend their money better than the state can for the social benefit of people in their community. That is a bit of sophistry with which we need not detain ourselves.
Who has not had a discussion with a tradesman about paying in cash, while remaining completely oblivious to the consequences that might befall the Inland Revenue? Are we not sometimes encouraged by the state to modify our economic behaviour by being offered tax breaks and incentives?
I congratulate the hon. Gentleman on securing this debate. He touches on a matter that I have raised for many years. In areas of high unemployment, there is a tendency for the black economy to thrive. There is a tendency for small to medium-sized employers to employ people on the basis that he has just outlined, giving a cash payment of £100 or £150 per week for several hours per day or whatever. The raising of the income-tax level to £10,000, which the Liberal Democrats and my party have been advocating for some time, will help but not completely eradicate the desire of some to employ people on the side, in the black economy, for a few pounds per week, rather than doing it legitimately, which would raise more income for the state and bring people from the black economy into proper, better paid jobs.
The hon. Gentleman is right to suggest that the black economy needs a whole toolkit of approaches. I happen to have with me the report from the Public Accounts Committee entitled "Tackling the hidden economy", which contains a number of rational, sensible and workable proposals, which will enable people to earn a living and at the same time pay taxation legitimately and fairly. Obviously the fairer the system is, the more prone people are to do that.
Tax avoidance properly, though, is the apparent attempt to frustrate the intent of tax law. That is fundamentally what it is. It is normally done by organising economic transactions in a way that ensures that whatever wealth, investment, profits, income or rewards people have or aim for, they escape the charge that the state would ordinarily impose on them. The state does not do that for idle purposes, but for the common good. Tax avoidance is therefore morally reprehensible. MPs flipped their homes and were rightly criticised in the media, but it was not the intention of the expenses scheme-or the capital gains tax regime, for that matter-to ensure that that would happen. People in this place availed themselves of a loophole. That is an almost classic case of tax avoidance, but one could give sundry examples, in various exotic formats.
The previous Government did an appreciable amount of work, endeavouring to ensure that tax avoidance, when spotted, gets dealt with. They fought what I would describe as a long guerrilla war against exactly what we are talking about: loopholes. I pay tribute to Mr Timms, who was a kind of platoon commander, for prosecuting that guerrilla war with some success. He tried to track down the loopholes and closed them where possible. I think that most hon. Members here, while reading through very dull tracts of successive Finance Acts, will have recognised that those provisions are there simply as part of the ongoing skirmishing between the tax planners-tax avoiders-and the Inland Revenue. By and large, however, what we have seen so far have been post hoc reactions to abuses that have been identified in charity law, with repo arrangements, or with controlled foreign companies-we had an awful lot of debate about controlled foreign companies in the last year of the previous Parliament, as well as stamp duty and other matters.
The Inland Revenue has been involved in constructing complex defences against complex devices and schemes. Quite frankly, even though we pretend to understand them properly as we sail through the Finance Act, many of the schemes are not adequately grasped by many Members. It used to amaze me how the right hon. Gentleman had command-or seemed to, at any rate-of some very complex schemes and some very complex remedies for them. The basic strategy, however, is one of shutting the door after the horse has bolted, which normally leads to those people who wish to persist with mechanisms for avoidance simply adjusting the scheme in some marginal way, modifying it and presenting a new scheme that leads to a new ad hoc adjustment, when it is spotted-it is, of course, not immediately spotted and cannot be dealt with retrospectively. Again, I am reminded of guerrilla war. It is rather like the US forces trying to deal with an ever-elusive Viet Cong that springs up around them in the jungle. My analogy slightly breaks down, however, when one recognises that the resources available to the people fighting that guerrilla war far exceeded those of the Government in this case.
The problem is therefore difficult to deal with, and is made immeasurably more complicated by the global reach of modern international capitalism, with the plethora of tax havens and the associated absence of transparency. Again, I pay tribute to the right hon. Gentleman for having done a great deal of work on that. In the last few months of the previous Parliament, there was a slew of double taxation treaties that attempted to deal with precisely that problem, devised meticulously and with extraordinary detail by very clever people in the Treasury. Generally speaking, what we were hoping for-and sometimes got-was greater transparency and sharing of information, but again we were involved in the post hoc job of trying to close down complex tax arrangements that seemed to evade many jurisdictions when it came to the pursuit of tax liabilities. Interestingly, PricewaterhouseCoopers recently suggested that it would make it a heck of a lot easier if big international companies were to list in full their assets right across the piece on a global basis, and suggested that as a new standard for accountancy. I agree, but I think it fairly unlikely that many such companies will follow suit. Big organisations that keep their property arm in Liechtenstein or wherever will not be the first candidates for laying all their cards on the table.
It is worth making the point, in passing, that the British Exchequer is not the only loser here. A substantial amount of tax leakage is caused by people not paying tax in developing countries, and it is distressing to see organisations such as the Commonwealth Development Corporation, which was set up for laudable ends and with massive national and public support, putting an awful lot of money into development projects in the developing world, but having the money sourced or put through private equity companies, many of which are in offshore tax havens.
Does the hon. Member, like me, support the moves towards country-by-country reporting, which were pushed by the previous Government but developed by the OECD? International corporations are encouraged to report both their profits and their assets on a country basis so that there is that level of transparency. Christian Aid, ActionAid, Oxfam and other development organisations support that, precisely to prevent the tax loss, about which the hon. Gentleman is talking, for countries that are developing.
I entirely support that, but I consider it a distant ambition that will take an awful lot of putting together over time, and will involve a large number of international bodies. It is, however, entirely the right direction in which to go, and is the direction in which we will all have to go eventually, if we are going to deal with the problem remotely adequately, even on a national basis. What I hope to do as I conclude is to suggest an improvement to what we are doing nationally. The former Minister in the room might correct me, but we have the anomalous situation in which the Exchequer building itself is owned by a sort of semi-bankrupt offshore company. We can see how the need for getting things right on an international basis is just as important as getting things right nationally.
I hope that I have done enough to demonstrate that there is a sort of futility to what we are doing at the moment, which I think is recognised to some extent within the Treasury. I genuinely do not believe that I am pushing at a closed door-it is at least half open-and in discussions with the right hon. Gentleman prior to this Parliament I sensed that. There is a sense in which continually trying to mop up after the errors have been spotted is perhaps not enough, and there have been two significant moves, which are worth remarking on and praising. The previous Government insisted on pre-disclosure of new tax instruments-a vetting system-which is a commendable step forward.
In recent finance legislation, however-I forget which clause of which Bill-I saw for the first time not just simply, "This scheme is wrong, this is how it runs and this is what we're going to do about it," but "Any scheme of this nature needs to fit in with certain principles and basic parameters." I came across a quote from the right hon. Gentleman. He said that
"we need not just new powers but clearer norms for behaviour too."
We are moving, therefore, to a system in which instead of a case-by-case examination of each scheme, we are laying down principles by which people can judge whether schemes will be acceptable.
I therefore urge upon the coalition Government a final, third step in addition to pre-disclosure and having principles: the introduction into tax law of a general anti-avoidance rule. Some think that that is a distinct probability; I think that it is a possibility. It would parallel moves made in many other countries. Most Commonwealth common-law systems, from Hong Kong to Australia, have something like this. I have argued for it in the past, and I have not been given a dismissive response by the Treasury. Basically, it says, "We have this under consideration, and we may well take it further."
The advantage of a general anti-avoidance rule being embodied in law is that it would throw the burden of demonstrating the legality of new tax planning schemes on those promoting it by obliging them to show that the schemes will ensure a worthy economic benefit other than tax avoidance-the avoidance of tax law. It would have the added spin-off and economic benefit of ensuring that financial ingenuity would always be employed to the general economic benefit and not simply to dodge tax.
I am aware that, in principle, there are all sorts of downsides to having such a general rule written into law. I have no view of how it should be framed, but we can consider the dispensations of other Governments for advice on that aspect. The legislation certainly needs to be purposeful and clear. There need to be good pre-clearance and adjudication arrangements within HMRC should there be any doubts or disputes that seem incapable of immediate reconciliation. Also, just as in other Government arrangements, there needs to be a sensible and clear list of exceptions.
Given all that, we could certainly run with such a basic rule; indeed, it is recommended by charities and organisations such as Tax Justice Network. Not only can it be done, it is done. It does not encourage wholesale capital flight, as some suggest it might. For example, it has not done so in Hong Kong, which has somewhat of a reputation for financial dealings, and where British judges are involved in a relatively rare dispute resolution procedure based on such a principle.
The strong upside for the Exchequer is that, even on City estimates, it will raise significant revenue. It could be introduced here, and I hope that it will be. I would like to see it introduced as early as possible. It would simplify existing tax law. We are all in favour of that-it needs a certain amount of clarification and consultation. If we follow the road taken by Australia, Hong Kong and many other nations, our tax system will be less prone to the byzantine schemes dreamed up at Canary Wharf and less time will be consumed at the Treasury devising equally elaborate defences. However, we need to get on with it.
If our public finances are in the critical situation that we all think they are, and if, as we appear to be able to do, we can argue for immediate cuts, we must also be able to argue for an immediate and effective attack on tax avoidance if we think it is possible. We are probably talking not about the next Budget, but of the autumn when there will another opportunity. However, certain requirements need to be put in place before we can run an effective regime built around the principles-base that I suggest.
In the first place, HMRC needs the right skills base. I am not yet convinced that it has an adequate degree of specialism. In the past, I have tried to interrogate the Treasury, asking the previous Government how many people were employed on the rather more specialised forms of tax avoidance that we are talking about today than on ensuring general tax compliance. The general answer will be somewhere on the record. It was, "In a sense, that is what we all do all the time." However, a definite cadre of specialists deals with the high-business end, where some of the bigger centres of tax avoidance are found. We need them still to be in employment at HMRC rather than being affected by staff cuts and other reductions. Indeed, their number needs to be supplemented, so that we have the right sort of tax officers, and tax offices.
It is suggested that cutting the number of local tax offices is not helping in that respect. The tax office in my town has disappeared; I am told that the net effect is that all sorts of local knowledge has gone, and that as a result there will be more tax avoidance. I do not know for sure whether that is true; high-ranking people at HMRC tell me a different story. They say that they now have clever software that does the job infinitely better than local knowledge. It enables them to pick out trends in accountancy and such matters, and it is far more sophisticated and far less consuming of manpower and far more effective in bringing in the shekels.
HMRC has nailed its colours to the mast, putting its faith in software rather than in manpower. I hope that it is right. However, we need some of the right people, and I am not convinced that we have enough of them. I would like more of them to help solve the enigma of why some extraordinarily profitable companies pay surprisingly little tax.
All in all, we need to aim for simplicity. We need a general provision of the kind that I have tried to outline, however inadequately, so that we can stop fighting what I believe is a losing battle. We can do better. We can fight the battle differently. We need to move rapidly towards a general anti-avoidance rule. Ultimately, as Ms Eagle said, we need global agreement built upon such pillars. The purpose of the debate is to ask the Government to take up this suggestion-or give reasons why they should not-and if they wish to do so, to get a move on, because clamping down on tax avoidance must be as important as anything else.
It is a pleasure to speak under your chairmanship, Dr McCrea.
Until the election, I was employed by one of the large firms of accountants, although I assure Dr Pugh that I was not involved in tax avoidance. My role was to seek up-front agreements with Her Majesty's Revenue and Customs, which was generally more than happy to enter into such agreements with my clients. I am not guilty of the things of which he accuses accountants. I have practised as a tax adviser since 1996, so I remember the previous Government's attempt to introduce a general anti-avoidance rule in 1997-98, and I can just about recall why that attempt failed.
I agree with much of what the hon. Gentleman said. It is clearly right to tackle tax avoidance and it is important that the new Government continue to do that job. I accept that the previous Government took many effective measures on that front-the move towards targeted anti-avoidance rules and the principles-based approach was the most effective way forward. However, if we are to get the deficit down, we need to increase tax revenue, so we need to attract taxpayers to the UK and encourage them to remain here. A general anti-avoidance rule in principle may not be a brilliant way of doing that.
I wonder whether the hon. Gentleman has any evidence of that. We have enough examples worldwide of such rules being implemented. We ought to be beyond the stage of simply suggesting that it can happen. We should be able to point to empirical data showing that that is exactly what has happened in places such as Hong Kong.
I am afraid that I do not have those data in front of me. Having worked with many businesses on where they want to locate head offices or functions, I know that one of the key determinants of their choice is the tax regime-its simplicity, the ease of compliance and the overall rate. The combination of difficulty of compliance, the rate and ease of getting certainty on tax treatment is what makes people choose where to go. The risk of a general anti-avoidance rule in that situation is that it makes certainty hard to get, and it would be bad to combine that with the UK's very complex tax regime and some tax rates that are currently not over-competitive, although I hope that that will change. The combination of those three factors might make the UK an unattractive location for people to come to or stay. I am sure that many bodies can provide those data.
The key to tackling tax avoidance is to make tax law simple and understandable to taxpayers. The hon. Gentleman talked about tax avoidance being a way of frustrating the intent of tax law, but at times, it is important that the intent of the tax law is clear in the drafting and that the drafting achieves that intent. Often, commercial situations grow up that tax law does not specifically address, so the intent of Parliament is not easy to establish. If we get the drafting right, it might take away some of those problems. The hon. Gentleman alluded to the finance and Treasury rules, which are incredibly complex and have produced various loopholes that have been exploited in various ways. That is a case of very complex legislation that no taxpayers I can think of could understand, and that the vast majority of tax advisers-myself included-did not really understand. I suspect that a lot of staff at HMRC could not possibly understand it either. If we get that right, some avoidance opportunities will not come up in the first place.
The hon. Gentleman said that he was not the person to draft a general anti-avoidance rule. Where the previous legislation floundered was in the attempt to find words that achieved what was wanted without unnecessarily stopping or discouraging many things that we want people to do. The examples cited at the time were the various tax-advantaged savings schemes, such as individual savings accounts, which in theory would fall within a general anti-avoidance rule unless a lot of care was taken over the exemptions included. Getting the drafting right is extremely difficult, and a lot of detailed consultation will be needed if the Government want to proceed.
I have experience of dealing with some of the existing anti-avoidance legislation, which generally looks at a transaction's main purpose or one of its main purposes, or at the main benefit or one of its main benefits-one has a choice of which way to go. The difficulty comes in defining "transaction". What is a scheme of transactions? How many are related? Are we tackling individual components? Should the purpose of the individual components or of the scheme as a whole be looked at? Understanding what is being done becomes very complicated. For example, somebody could decide to buy a UK-headquartered multinational business. We would all say that that is a good commercial purpose, but it commonly needs to be done differently in various territories, depending on the tax needs of those territories. As a result, individual elements of the transaction might be created that look as though they are motivated by a tax benefit, whereas, overall, they are part of a main commercial transaction. We could create great uncertainty about those transactions, which might then fail because the businesses or individuals involved could not be confident that they would get the commercial benefits they were trying to achieve without being drawn into some huge, long tax dispute.
The hon. Gentleman is making a fascinating speech illustrating precisely the problem that everybody has to grapple with, as the Minister will have to in due course. If one goes for a simple, declaratory and principles-based approach, one has to think about what is motivating people, which is difficult. The only other way of approaching it is the extremely complex and byzantine method of looking at what to do in each circumstance, which Dr Pugh was worrying about. Nigel Mills is illustrating the fact that we get into difficulties whichever route is taken.
The hon. Lady is correct. The previous Government happened on what is probably the right balance, which is to have principles-based rules targeted at commonly exploited rules, so that taxpayers know when they are wandering on to dangerous ground and therefore need to deal with those rules, rather than having a general principle that might apply to every tax in every situation. The hon. Gentleman mentioned that it puts the burden on taxpayers to declare that what they are doing has a mainly economic benefit rather than being an attempt at tax avoidance. That is a huge burden to put on taxpayers. I am not sure that we should put the burden of knowing how to comply with a general rule in complicated and innocent situations on to every payer of every tax in the country. I am not sure if that is what he intends.
Some of us laboured long and hard over controlled foreign companies. I remember one difficulty was deciding how different transactions should be linked and/or broken up. Anyone reading the legislation, highly specific as it is, will have to do an enormous amount of work-no less than if they had to apply a general principle to their circumstances.
I have some familiarity with the controlled foreign company rules, or at least the previous version-I never had to get too close to the attempt to reformulate them. Yes, they are incredibly complicated and they were complicated before, although there was a purpose exemption in the previous rules that was in some cases helpful. I would not necessarily suggest that the new Government should exactly follow the approach that was taken to reforming those rules, because it was a long drawn out process which is, I think, still incomplete.
If we are to tackle avoidance without going down the general anti-avoidance rule route-if the Minister is minded to go down that way, I suspect that by the time he has gone through the full gamut of consultation, he will be backing off quickly-perhaps we should look at overall solutions for tackling the problem rather than proceeding on that basis alone. Targeted purpose rules in areas of tax that are commonly exploited are the better way to go. As a way forward in tackling tax avoidance, we want simple, clear legislation so that the intention of Parliament is clear and both tax authorities and taxpayers can understand the aim of the law and what the rules are. That will help to support the moral argument: if we all understand the right amount of tax to pay in a situation, everyone should be paying it. The present complexity gives people the veneer of an excuse when they structure transactions in an artificial way.
The hon. Gentleman mentioned tax havens. There is a lot of scope for tax planning using other EU nations that have very different tax regimes or much lower tax rates in some situations. I am sure that the Minister has found in his in-tray a load of pending or ongoing cases at the European Court of taxpayers claiming that they have suffered tax that does not comply with various EU treaties. Roughly how much tax is the Exchequer in danger of losing or having to pay back as a result of those cases? It is important when looking at tax law to make it compliant with systems outside the UK, but it is difficult to do.
My area of expertise was transfer pricing. We were forced to apply transfer pricing rules on transactions within the UK, rather than just cross-border ones, which added a huge compliance burden that, frankly, taxpayers were not desperately excited by and the tax authorities did not have anything at stake on. I hope that we can find better ways of writing tax law that do not add to that burden. Perhaps some tweaks to European treaties would have been a better way of sorting this and creating OECD-compliant tax law, rather than using a sledgehammer to crack a nut.
If we want to tackle tax-avoidance effectively, let us have simple, clear legislation, and where there is abuse, let us have targeted, principles-based anti-avoidance rules that state clearly that the intent of Parliament is to stop one-sided complex financing transactions that have no commercial benefit and get a big tax advantage. In that way, we will make the progress that the hon. Gentleman wants.
It is a pleasure to take part in my first debate in Westminster Hall in the new Parliament and to serve under your chairmanship, Dr McCrea.
This has been a fascinating debate. It is entirely in keeping with the work that Dr Pugh has done on this issue and with the fact that he has sat on many a Finance Bill Committee that he has brought this extremely important issue to the attention of the House, and I congratulate him on initiating the debate. He put his case very well and demonstrated that he has spent many years considering these issues. He could see both sides of the argument and he managed to put both of them in much of his contribution. He also identified the free-rider mentality, which is the key thing we all want to crack down on and minimise.
The hon. Gentleman was generous enough to praise the previous Government's record, and I thank him very much for that; that has not been noticeably present in our debates on the Floor of the House so far in this Parliament, which has diminished our debates in this difficult time for the country. I deplore the rewriting of history and the abuse that the previous Government's record has received, particularly in the economic context, and it is nice that the hon. Gentleman did not sink to that low level.
I particularly thank the hon. Gentleman for praising the record of my right hon. Friend Mr Timms, who would have been winding up the debate under more normal circumstances. I hope that Members will realise that my right hon. Friend is still recovering from the attack on him at his constituency surgery, and I am sure we all join together in wishing him a speedy recovery. He has been seen back around the House and he is well on the mend, but he is still a bit fragile.
I welcome the new Minister to his position. Those who slog away in opposition do not always end up inheriting the positions that they shadowed when their party is lucky enough to be magically translated into government, but the hon. Gentleman has managed to make that transition. Having experienced the Department he now represents, I know he is a very lucky man, and he certainly deserves luck. I therefore welcome him to the debate.
I want to spend a little time putting the previous Government's approach on the record. I then want to ask the new Minister a few questions about his Government's actions and their future intentions on this extremely important issue. I note the self-restraint that the hon. Member for Southport showed in not trespassing on the area of capital gains tax, but I wonder how long the restraint shown by the partners in this Conservative-led Government will last as we get further into this Parliament-I will certainly watch developments with interest. The hon. Gentleman has set a sterling example, although I notice that it was not particularly followed by the right wing of the Conservative party at Prime Minister's questions earlier today-"interesting noises off" is all I will say about that.
We can all agree that the financial crisis of 2008 led to a radical shift, domestically and internationally, in the approach to tax evasion and tax avoidance. Following the crisis, the previous Labour Government made certain that the UK was at the forefront of the drive for radical change. Internationally, there was a rapid realisation that the lack of transparency in the international financial system presented previously unrecognised but severe systemic threats to the entire global financial architecture, that those threats had to be dealt with and that good progress had to be made quite rapidly. In the forum of the G20 and in the aftermath of the credit crunch in 2008-09, good progress was made, but that momentum needs to be maintained, and one theme of the questions I want to ask the Minister to deal with is how he sees its being maintained.
It is only human nature that when people are in the middle of a crisis, they suddenly put at the top of their political and economic priority list things that have been around for years, although they were never really at the top of the list. Suddenly, transparency, the exchange of information and the ability to supervise global institutions cross-border and globally acquire far more importance. Everybody is very exercised by them, and there are a load of international meetings at the OECD and the G20; indeed, that is what happened, as we can see. The crisis then abates, and people turn back to dealing with more domestic things. If we are not careful, the momentum for change-the momentum behind introducing transparency and opening up cross-border supervision-could wilt. It is important that the new Government continue the momentum that the previous Labour Government created in the aftermath of the crisis. I would certainly be interested to hear how the Minister sees the issue and what plans and actions he has in train to ensure that that momentum is maintained.
The hon. Member for Southport touched on the fact that, domestically, the huge bank bail-outs that were necessary to deal with the immediate threats that the crisis caused to our economic well-being have brought two important truths home to us all. If those truths had not been brought home to us before the election, they certainly would have been once we had spent months on doorsteps in our constituencies listening to our constituents' experiences and opinions. The first of those truths is that there is growing hostility among the majority of our hard-working constituents who pay all their taxes towards those who avoid paying their fair share. That phenomenon is growing and is more noticeable than it has been, and it will only continue to grow if it is not addressed by policy and Government action. Secondly, where tax revenues have been hard hit by the downturn and the recession caused by the irresponsible greed of a few, there is an even greater responsibility on the tax authorities to collect the tax that is due. That responsibility can only be reinforced when next week's Budget takes a scythe to the public services that many of our most vulnerable citizens rely on.
The previous Government measured the tax gap and published estimates of it, setting it at £40 billion, as the hon. Gentleman rightly said. He had some other estimates, and the Trades Union Congress has a much larger estimate, as does the Tax Justice Network, which the hon. Gentleman mentioned. For the sake of argument, however, let us say that the tax gap is £40 billion. We know that it is impossible to collect such sums and completely to close the tax gap so that it does not exist at all, but we could certainly do with some of the revenue that is due, but which is not being collected. Even if we closed the tax gap by half, we would avert real pain and suffering among those who are often the most vulnerable in our society and who particularly rely on services provided through public expenditure. In that context, it is even more important than it has been that we do all we can to ensure that we close the tax gap.
As the hon. Gentleman again pointed out, and as Nigel Mills also described in his speech, that is easier to say than to do: it is easier to speak in principle or theory about tax laws that work and are simple for everyone to understand, and that no one tries to game, than it is to bring them about. But just because it is difficult-some might say very difficult-it does not mean we should not keep striving. With the policies established after the credit crunch by my right hon. Friend, we have made considerable progress towards such an approach. I should be interested to learn how the new Government intend to build on the solid foundations left by the previous Government, and to take things further.
It is not morally acceptable for a small minority to think that they can opt out of their obligations if they can buy the right advice or pay for sophisticated tax avoidance products. It is about time for all political parties to adopt and voice that moral approach more. Like benefit fraud, tax evasion undermines the confidence of ordinary taxpayers in the legitimacy of the system. It should be far less acceptable, socially as well as morally-it should not be thought reasonable and polite-to admit in company to earning a living by helping well-off people and companies to avoid their tax liabilities in the jurisdictions where they operate. I do not say that the vast majority of taxpayers or tax accountants do that, but some do, and the practitioners in question probably know who they are. The hon. Member for Amber Valley is nodding, and we can talk to him later-he does not have to say anything on the record. We know the practice when we see it, and it should be far less acceptable morally, and in company, than it has been in the past. We need that switch to happen.
I accept entirely what the hon. Lady says, and her reference to the free rider principle. We can identify free riders, but it is rather like identifying people who do not pay their bus fare; it does not mean to say that there is an easy way to do it. I refer her to an interesting discussion at the Public Accounts Committee with the landlord of the Treasury, whose office is based, I think, in Bermuda. All the people we interviewed and all the senior staff enjoy the advantages of London society, and the benefits that that bestows on them, but avoid tax by virtue of having a name plate-well, a little more than that, but not much more-in Bermuda.
The hon. Gentleman will be able to discern from the tenor of my remarks that I agree with him.
I hope we all agree that the world has changed and that there will be no hiding place for tax cheats. The previous Labour Government had a record to be proud of and it is important that the momentum we managed to create should be continued, especially internationally. In 2004 we introduced a requirement to disclose tax avoidance products in advance, to a storm of protest. In 2009 we strengthened the regime, and that has transformed the fight against avoidance. As the hon. Gentleman explained, that protects more than £12 billion of revenue.
The March 2010 Budget made the disclosure regime broader, increased the penalties for non-compliance and gave Her Majesty's Revenue and Customs access to more information on those who use the schemes. The package was designed to tackle tax avoidance, non-compliance and offshore evasion and to protect £18 billion of revenue. Last year HMRC identified £12 billion in extra tax due-another point to which the hon. Gentleman referred-seized £57 million in assets and £9 million in cash forfeitures and successfully prosecuted 171 cases. Will the Minister set targets or expectations in HMRC to increase the rate of prosecutions, and perhaps achieve better figures this year? We also legislated to give HMRC more effective powers to ensure that the sanctions it could use would be effective and proportionate. There are to be more onerous reporting restrictions in future for those who are caught evading tax of more than £5,000, and as the amounts evaded get higher the consequences under the current law for those who are discovered doing it get worse, and end up with naming and shaming.
Internationally, and as the hon. Member for Southport also recognised, as president of the G20 we led a global clampdown on tax havens and offshore evasion. That is an important aspect of what we must do if we are to close the tax gap. The hon. Gentleman mentioned in passing the 100 tax information exchange agreements signed by OECD countries in the past year, including those the UK has agreed with Jersey, Guernsey, the Isle of Man and, perhaps more interestingly, Belize. In 2007 the offshore disclosure facility gave the customers of five major banks the opportunity to put their tax affairs right, yielding more than £400 million in tax revenue due. Last year, as part of the Budget process, HMRC served notice on more than 300 other financial institutions to hand over details of those who cheat on their tax by hiding income in offshore accounts.
We also concluded the ground-breaking Liechtenstein disclosure facility, which is expected to bring in nearly £1 billion in lost tax revenue. That agreement goes far beyond the tax information exchange agreements we have been discussing, and could be a model for future agreements. I should be interested to hear what the Minister has to say about that. Under the agreement, UK taxpayers with money in Liechtenstein accounts must demonstrate that their tax affairs are in order, and must have letters to that effect from HMRC; otherwise, their Liechtenstein accounts are closed down. They must then settle with the UK tax authorities. Thanks to progress made by the previous Labour Government, there are fewer places for large amounts of money to be sent if Liechtenstein accounts are closed down, and there are fewer places to hide.
We also persuaded the OECD to develop best practice guidelines on country-by-country reporting, as was also mentioned earlier-an excellent initiative that was put on the agenda by the development community, and in particular Christian Aid, ActionAid and Oxfam. Tax evasion costs developing countries billions of pounds each year in lost revenues, and is a barrier to social and economic development and growth.
Ahead of next week's emergency Budget, I want to ask the Minister a few questions. Will he recognise the excellent work that the previous Government bequeathed him in this important area, and tell us how he intends to build on it? Will he set a target for the tax gap; and what percentage of the fiscal consolidation that we all expect, given the softening-up process of the past few weeks, does he expect closing that gap to represent in the Budget? Will he maintain the hidden economy advisory group to inform that vital work? It was in the middle of extremely important work-particularly on creating routes back to legality for those who might have been in an illegal position, and to allow them to settle their tax.
Does the Minister agree that, in an international setting, maintaining the momentum to clamp down on tax havens and non-compliant jurisdictions is vital, and does he therefore share my disappointment with the perfunctory mention that the entire agenda received in the recent G20 communiqué? Why did it receive such a perfunctory comment at the G20 Finance Ministers' meeting? I hope the Minister can reassure us that that does not mean this important area is to be less of a priority.
Does the Minister intend to pursue new disclosure facilities, similar to the ground-breaking example we have managed to negotiate in Liechtenstein; and what progress has been made between the UK and the authorities in Belize, given the recent signing of the tax information exchange agreement? How much lost tax revenue does he expect to raise as a consequence of that agreement? I look forward to his response.
It is a great pleasure to serve under your chairmanship, Dr McCrea. Let me begin by endorsing your words with regard to Mr Timms. It was a great privilege to shadow him for a number of years, and I look forward to his return. I know that he has a formidable intellect and is a fine parliamentarian, so he will be a very testing person to have as a shadow. He is also a very good man, and I wish him well. I endorse the words of Ms Eagle.
I congratulate my hon. Friend Dr Pugh on securing this debate and on his excellent contribution. He has the benefit and experience of serving on many Finance Bill Committees. The second excellent contribution was from my hon. Friend Nigel Mills, who, I suspect, will serve on many Finance Bill Committees. He brought great expertise and considerable practical experience to the debate.
We had a thoughtful debate on some of the matters relating to the general anti-avoidance rule, and I shall say more on that during the course of my remarks. The quality of this debate has been extremely helpful, and I am very grateful to my hon. Friend the Member for Southport for highlighting this particular issue, and for giving me the opportunity to say a bit more about tax avoidance and the tax gap.
I am grateful to the hon. Lady for her kind remarks in respect of my position. I had the pleasure of shadowing her to some extent. I did not directly shadow her position, but we served on Finance Bills together. She has demonstrated today that she is as tenacious in her Opposition role as she was as a Minister, and I hope to be able to answer her questions.
The issue of the tax gap, which incorporates tax avoidance but does not consist solely of it, is important for the Government. As earlier speakers have mentioned, it has been brought into even sharper relief by the dreadful state of the public finances, which we have inherited from our predecessors. As the hon. Lady pointed out, there is a public mood for people to do the right thing and to play by the rules, and that includes paying the taxes that are due under the law. Those who do not do that have very little public sympathy. The hon. Lady said that she felt that the previous Government are being traduced and unfairly criticised over their record. Although I would be the first to point out the failings of the previous Government with regard to the public finances, there are elements of both HMRC and the previous Government that I want to address in a fair manner, and their record is not all bad.
We are grateful to HMRC for publishing, for the first time, tax gap figures across all of its regimes in December 2009. It was the right thing to do and we welcome that greater transparency of information. Tax gap figures for VAT have been published for some years, but this was the first time that figures for direct taxes had been published. As we have heard, HMRC estimated the UK tax gap to be around £40 billion in 2007-08. That figure is net of the amounts collected through HMRC's compliance activity.
The tax gap is the result of several different factors, ranging from tax evasion and organised criminal attacks on the tax system through to errors made by customers. One of the largest factors contributing to the tax gap is avoidance. Tax avoidance is estimated to contribute around 17.5%-around £7 billion-of the total tax gap. It is worth making that point at the beginning because, although those contributing to this debate today have not fallen into this trap, there is sometimes a conflation between the tax gap, which is a considerable figure, and tax avoidance, which is still a considerable figure but is only part of the £40 billion figure. None the less, £7 billion is a substantial sum, and this Government are determined to reduce it as far as possible.
As our coalition programme for government says, we will make every effort to tackle tax avoidance, which will include considering the Liberal Democrat proposals. I hope that my hon. Friend the Member for Southport will forgive me, but with the Budget in six days' time, I do not intend to pre-empt anything that my right hon. Friend the Chancellor may say on that day. My hon. Friend rightly says that my previous responses in this area have been more like holding answers, and perhaps they have, but I hope, given the proximity of the Budget, that he will understand why. For that reason, and that reason alone, I do not intend to wander down the path of capital gains tax, which he gently mentioned. I have no doubt that my hon. Friend will be paying attention to what the Chancellor has to say next Tuesday.
I will say a word or two about the general anti-avoidance rule, which was well debated by both my hon. Friends. They managed to tease out some of the issues as well as outline some of the questions that have to be asked. The hon. Lady talked about the balance between principles and something that is much more targeted. One of the questions that we must consider is whether it enables us to reduce targeted anti-avoidance rules. Do we know the answer to that until we know what the attitude of the courts is? That is clearly something that is worth exploring. Does it require a clearance regime in order to make it work? If it does-in some countries it does and in others it does not-what resources will be necessary? My hon. Friend mentioned HMRC resources in that area. In total, HMRC has something like 17,000 tax professionals. Not all of them work exclusively on tax avoidance matters, but many of them do. There is a question, therefore, over how resources are deployed.
If the Minister was minded to proceed down that line, a clearance mechanism would be essential to avoid creating huge uncertainty for taxpayers. Having had much experience of dealing with the clearance system, I can say that it would take huge amounts of resources to deal with the amount of clearances that we would get for a general anti-avoidance rule. Almost everybody would want to get that certainty. In any remotely complicated transaction, there would be some element of doubt in the situation. There is a real risk in the case of a purpose transaction. For example, someone may say, "My intention here is commercial and not to avoid tax." They want HMRC to write back and say, "Yes, we agree." However, they would have to give a lot of information to achieve that response. There is a risk that if the transaction changes slightly, the claim becomes invalid, or that a hugely long and detailed inquiry would be needed covering many aspects and many different taxes, and that would take a huge amount of time and a lot of resources to complete, which will discourage the transaction from taking place at all.
I am very grateful to my hon. Friend for that intervention. At this point, given that we will have a Budget next week, I will say that there are a number of issues here. The Government are not hostile to exploring these areas. The coalition agreement is very clear in saying that we want to look at the Liberal Democrat proposals, which included a general anti-avoidance rule. However, my hon. Friend is right to raise some of the complexities and difficulties that may exist and that may need to be overcome. That is a debate that I think the Government, across the board, welcome and want to take forward.
Again, we have a situation where a proposal is put forward and, as it were, speculative possibilities that could result from that proposal are alluded to. Presumably in any process of investigation, however, one looks at how things actually pan out in the real world in other places. Clearly, if it was the case that, in every regime where a proposal such as this one was introduced, there was this massive clearance backlog, rather like the Independent Parliamentary Standards Authority-heaven forbid-one would never implement such a scheme. In fact, there is no obvious reason why a scheme such as the one that IPSA has should be as complex and as poorly managed as it actually is.
That tends to be the way of things now, I understand. There is a need for a sensible debate in this area, and today we have heard two excellent contributions, from my hon. Friends the Members for Southport and for Amber Valley, and I for one am very grateful for those contributions.
The hon. Lady raised a number of points and I hope that, in the course of my remarks, I am able to address those points. As far as building on the previous work undertaken by the previous Government and by HMRC, the underlying point that I want to make is that this Government take tax avoidance very seriously. We want to use HMRC's resources as effectively and as efficiently as possible to ensure that we address this particular matter and so that those who do the right thing and who pay the taxes that are due do not find themselves essentially subsidising those who have not paid their taxes properly. Again, further details will be announced in the Budget.
The hon. Lady raised the specific point about whether one should have a target for the number of prosecutions in this area, and so on. That is perhaps more symptomatic of how the previous Government tended to work, which was on the basis of having targets. However, in the number of meetings that I have had with HMRC officials in the five weeks or so that I have been in my post, I have said that we take tax avoidance seriously. We want to work with HMRC in developing proposals on how we tackle tax avoidance and on how we deploy resources most effectively.
That will continue to be the Government's position, including on tackling matters such as the hidden economy, which the hon. Lady rightly raised as an important area, and on working on the international stage and engaging with other countries in finding ways to exchange information more effectively. The hon. Lady highlighted the Liechtenstein agreement and that is one agreement that we welcomed in opposition and that we continue to support. I am not in a position to say anything more about particular matters today, for reasons that I am sure she will understand, but we continue to encourage HMRC to engage with other tax authorities to ensure that those people who should be paying tax in this country do pay tax in this country.
The hon. Lady raised the issue of greater disclosure. We support that. She referred to the disclosure of tax avoidance schemes. We think that that was a very successful initiative by HMRC and we wish to continue with that initiative and build on it. We will continue to encourage HMRC to engage with other tax authorities on double taxation treaties and tax information exchange agreements. I have shadowed Ministers in Committees on many statutory instruments on this particular matter and frequently asked how much these agreements will actually raise for the Exchequer, so I know that the answer is that it is not possible to provide the answer. Nevertheless, these agreements apply for Belize as much as for any other jurisdiction and we will continue to encourage HMRC to pursue those agreements and to look to progress as many of them as possible as quickly as possible.
In general, does the Minister view the Liechtenstein agreement, which is new, as an interesting model, in that it goes further than the tax information exchange agreements? I am not asking him to declare today which country is going to be next. I am just trying to tease out from him what he thinks about that approach, which was quite groundbreaking. We know the history of it, but something extremely effective came out of it. Does he see that general approach as a model that ought to be promoted around the world, to ensure that we begin to clamp down on jurisdictions and tax havens where people can hide money that is illegitimately held and untaxed?
I would say that there is something there for us to build on, and I think that that probably answers that question as effectively as I can.
The hon. Lady highlighted the issue of country-by-country reporting. Our view is that we certainly want to do everything we can to help developing countries to improve their ability to collect tax. The OECD informal taskforce on tax and development is currently exploring with non-governmental organisations and with industry whether country-by-country reporting would be effective in improving tax transparency. We shall certainly consider this matter very carefully to see what is the most effective way of doing things.
There is also something that the previous Government achieved, which the hon. Lady did not particularly mention but for which I think they deserve some credit, in ensuring that the tax capacity of developing countries can be improved. Again, we are certainly very interested to see what we can do to explore that issue.
Let me turn to one of the key points, which I think was raised by my hon. Friend the Member for Amber Valley, which is the need to do what we can to improve tax law so as to remove uncertainty. That is a very important point. We are committed to reforming the tax system to make it competitive, simpler, greener and fairer, and to ensuring that the quality of tax law is improved. The most effective way to tackle avoidance is, as far as possible, to stop it at source, rather than tackling it once it has happened. Prevention is better than cure.
A simpler tax system that presents fewer boundaries and complexities to be exploited is clearly preferable. As a Government, we are committed to making sure that, when we consider reforms to tax policy, we take into account from the start the impact on avoidance opportunities. We want a tax system that is noted for fairness and simplicity, and addressing tax avoidance risks is a key part of that.
Nevertheless, it is widely acknowledged, including by the Institute for Fiscal Studies, that tax avoidance requires a multifaceted response. There will always be taxpayers who attempt to achieve tax savings that were not intended by Parliament. We intend to be a reforming Government that put in place a better tax framework for business. As we do that, we will take the opportunity to construct a tax framework that reduces the risk of tax avoidance.
Of course, those are the longer-term objectives. In the short term, we will need to introduce specific targeted measures when an avoidance risk is identified. We will take that kind of action when it is justified, but our aim over time is, as far as possible, to move away from the need for short-term measures.
HMRC has published an anti-avoidance strategy that recognises that a range of responses is required. The strategy has three key elements: first, prevention; secondly, detection, and finally counteraction. Prevention focuses on developing robust law. HMRC clearly has a key role in recommending to Ministers changes to strengthen the legislative framework to defeat attempts at tax avoidance.
Another tool in preventing avoidance is deterrence. HMRC publicises details of avoidance schemes that it considers ineffective, to put taxpayers on notice that it will challenge their use of those schemes. For large businesses and the wealthiest individuals, HMRC uses real-time dialogue to obtain early information about transactions under consideration and influence behaviour. To be fair, progress has been made in recent years, and we welcome that. The regime for the disclosure of tax avoidance schemes, in particular, has proved invaluable to obtaining real-time intelligence on avoidance activity, as I acknowledged earlier.
Where HMRC detects avoidance, counteraction involves thorough and expert investigation and, where necessary, litigation. We believe that that range of responses strikes the right balance between providing certainty to taxpayers in their tax affairs and protecting the Exchequer against unacceptable threats to tax revenues. It also maintains flexibility so that the Government can respond quickly and in a targeted way where necessary. We also want to consider longer-term solutions to the problems of tax avoidance, and I hope that I will have all parties' support as we do so.
The Minister has mapped out a strategy that we can all understand and appreciate. However, it would be helpful to know whether he has assessed the personnel requirements to fulfil that strategy. Are the staff currently in place in the Treasury, or will he need to acquire more? I ask because we are, obviously, in a time of head count reduction, and we do not want to remove the heads that are most useful in collecting tax revenues.
I am grateful for that intervention. My hon. Friend raises a perfectly fair point. Because of the crisis in the public finances, all parts of Government face great pressure to find savings. As we prepare for the spending review in the autumn, I have said to HMRC that I want it to focus resources on reducing the tax gap and achieving yield. I hope that during the months ahead, we can develop a strategy to ensure that HMRC has the resources that it needs in the right places to do so. Guaranteeing a certain yield or making estimates about a particular area of expenditure or the expansion of staff in a certain Department is not easy.
The hon. Lady acknowledged that there will always be a tax gap. To respond to her remarks, one can go only so far in making firm predictions about the tax gap reduction, as we must be sufficiently confident that any predictions will withstand the scrutiny of the Office for Budget Responsibility. However, that is not to say that I as a Minister am not keen to see what we can do to reduce the tax gap.
My hon. Friend mentioned the £120 billion estimate, although he did not necessarily say that he thought it was right. It is mentioned frequently among hon. Members and in the media. That figure was produced by the Tax Justice Network, or Tax Research LLP, which is essentially the same organisation. It is a striking figure, and is often repeated. It is very different from the £40 billion estimated by HMRC. The £120 billion figure has clearly focused attention on the matter, and that is no bad thing, but scepticism about it is widespread; indeed, I expressed some scepticism myself from the Opposition Benches a year or so ago. Given the disparity between the £120 billion and HMRC's numbers, I have asked officials to review it.
It must be accepted that in preparing estimates, organisations external to Government have access to much less data than HMRC. The types of methodology available to them are therefore restricted. It is reasonable to assume that HMRC is clearly in a better position to make an assessment, but there is no reason why outside bodies should not contribute to the debate. However, having considered the methodology used to produce the figure of £120 billion, I must tell the House that even a brief analysis reveals that it is deeply and systematically flawed.
For example, Tax Research LLP estimates total revenue lost due to tax evasion at £70 billion. That figure is obtained by applying the percentage tax gap from VAT to direct taxes. There are two main problems with that. First, different tax regimes have different tax gaps. According to independent research by the OECD, for example, the operational experience shows that tax regimes such as pay-as-you-earn that withhold tax at source have far smaller tax gaps than other types. To apply the VAT gap percentage to taxes collected by PAYE or otherwise at source greatly overstates the tax gap, because the VAT tax gap is considerably higher.
Secondly, an element of double counting is involved, although, to be fair, that might not be apparent from the numbers used by Tax Research. The VAT gap already includes amounts due to tax avoidance and tax debt. Applying that percentage to direct taxes and then adding additional amounts for both avoidance and tax debt, as does Tax Research, results in the double counting of losses from the avoidance of direct taxes and non-payment.
The Tax Research estimate of tax debt is £28 billion. That is a snapshot figure of all tax owed to HMRC on
The final and most significant point concerns tax loss due to tax avoidance, which Tax Research estimates at £25 billion. That estimate includes the use of legitimate reliefs promoted by the Government to encourage certain activities, such as capital allowances to encourage investment and research and development tax credits to encourage innovation. Tax avoidance is generally regarded as the use of legal structures and allowances to reduce tax bills in manners not intended by Parliament when enacting the legislation. It is simply nonsense to categorise as tax avoidance the use of allowances for purposes intended by Parliament.
If I have been unfair in setting out those points, I am sure that Tax Research will correct me, but that appears to be the methodology used. Furthermore, the Tax Research estimate does not provide HMRC with any credit for the significant amount of tax that it recovers by challenging avoidance schemes. The figure of £25 billion therefore seems somewhat wide of the mark.
I thank my hon. Friend for this debate. This Government take tax avoidance seriously. We must take every possible step to minimise tax avoidance. We cannot afford to let it undermine our efforts to reduce the deficit, and it is not fair that by deliberately creating schemes that avoid tax, some people pay less while the vast majority of the hard-working public pay their fair share. Action against tax avoidance will be a priority, alongside improving the tax law-making process, introducing robust legislation and targeting HMRC counteraction and investigation.