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6 May 2009 : Column 107WH—continued
The Channel Islands are a British concern, and there is not as much of an issue about American companies as there is in the West Indies, so we can deal with the problem by insisting on the principle of absolute openness. All ownership of companies should be on the public record. All the name plates that flourish in Jersey and Guernsey make a fascinating tour; people could think they were touring a mighty industrial empire as they went around looking at those name plates gleaming on the doors of companies there—but there is nothing behind them. They are just name plates. There should be openness about ownership in the public record; all accounts should be on the public record, so that we would know who was passing the money through, and could deal with that; and there should be full compliance with the European savings tax directive. In other words just paying withholding tax and keeping the accounts secret should not be allowed; full compliance with the
directive should be insisted on. That transparency would produce radical change and a substantial reduction in the kind of financial sector that is found in the Channel Islands. It might drive them back to their old basics of tomatoes and tourism, and they might need financial help with that, but we cannot avoid the principle.
There is a need to build such measures. We can do it on a national basis without waiting for international agreement, and we should. There is a need to act quickly rather than wait for international agreements, because we are now in a situation of some desperation. We need the companies in question, which do not pay their tax dues or their social rent to this country, to pay.
I conclude with an important point, which my hon. Friend did not deal with. We are now concerned about the environment and global warming, and it must clearly be dealt with on an international scale. Global warming and the development, control and management of industries cannot be dealt with unless the financial side of the question, and the management and control of the tax capability of the relevant companies, is dealt with. It must be done, and soon.
3.21 pm
Mr. George Mudie (Leeds, East) (Lab): It is with some humility that I take part in the debate surrounded by accountants and international aid experts. I was considering whether to contribute to the debate, but I came to support my hon. Friend the Member for North-West Leicestershire (David Taylor). He has done us all a service by obtaining the debate; he has also done a great service, to which other hon. Members have added, in what he has said. The scandal has been going on for too long. I am interested in what the hon. Member for Twickenham (Dr. Cable) will say.
I view the past 20 years as a time when there was urgent need for various actions by the authorities, but, as happened with so many things, no one was prepared to blow the whistle, or to stand up and attempt to stop the over-exuberance.
David Taylor: My hon. Friend says that no one has been prepared to stand up. An organisation is nominally charged with that responsibility: the International Accounting Standards Board, which is, as I said, predominantly funded by the gang of four large accountancy bodies. He who pays the piper calls the tune, and you do not bite the hand that feeds you. There are all sorts of sayings that come to mind to explain why the IASB has been so torpid in tackling the problems.
Mr. Mudie: I have some agreement with that; but there is a larger question concerning Governments and financial authorities. Why have those not been willing to intervene? The picture, certainly in the UK, has been that the City has earned so much money and had such a large part in the economy that I do not think any Governments have been willing to stand up against some of the practices that were current.
The hon. Member for Banbury (Tony Baldry) questioned international aid development, but I do not think that the situation is anything to do with international aid; and the debate is not set out in those terms. It is clear that the credit crunch and the global financial crisis are having an effect on the major developed countries; they
are desperate to get their hands on billions that have been lost to them in the past few years, but which, in the eyes of the authorities, they could afford to lose. They cannot afford the loss now, and it is self-interest in Europe, America and the UK that is now the spur to action.
The basis on which I came to the Chamber to support my hon. Friend was my hope that the Minister will take a firmer line than has been taken in the past by Ministers, including the Chancellor. Only two months ago, when we were discussing the banking crisis with him in the Treasury Committee, I pressed the Chancellor on The Guardian’s excellent articles and could not get him to say a word of praise about The Guardian. I do not think that it was The Guardian that upset him; but he certainly refused to be forthcoming. I wonder about the depth of the Government’s commitment, and whether the current issue has been forced on to the agenda by the G20 as part of the political furniture that shows the people that we are taking every action. If that is so, it is outrageous.
My hon. Friend raised questions about the OECD standards; we shall all, apparently, be grateful if every country and all the offshore centres meet those. However, there is clear evidence, as my hon. Friend said, that those standards are too low and would not do the job alone. I should have thought that we now have the political opportunity, with a public who face public expenditure cuts and tax increases, and who do not see why big firms, multinationals and banks should not pay their proper whack in tax, to raise the bar and take steps that were not politically opportune in the past. To return to the comments of the hon. Member for Banbury, I wonder whether it is any coincidence, or accident, that the latest adventure of Barclays is to set up an offshore bank in Ghana. If the hon. Gentleman is not alarmed at that, I do not know what world he lives in. Certainly, all the development agencies rightly raise issues of money laundering, drug money and tax evasion. They all see the move as something that should not happen. I want to ask the Minister whether we have made any representations—such things have been done by Governments in the past—to suggest that Barclays should not go ahead with the adventure.
While I am dealing with Barclays, it would be good to mention its disgraceful record. My hon. Friend the Member for Great Grimsby (Mr. Mitchell) and I grew up—as did the hon. Member for Twickenham—in a world where Barclays was rightly considered the villain, when it supported apartheid in South Africa. I thought in my innocence that it had reformed and was a different sort of organisation, until The Guardian drew the curtains aside and we saw what the structured capital markets division of Barclays Capital was up to. Barclays went to court to get a gag and stop the information coming out. Thanks are due to the hon. Member for Twickenham who got a copy and sent it out. We could see what was happening. We ought to mention Rog “the dodge” Jenkins whose annual salary is £40 million, and his colleague, Bob Diamond, who runs the capital division, who has a modest salary of £250,000 a year but an annual bonus of £20 million. It is quite right to ask what on earth they do to earn such money. Barclays engages through offshore banks in activities in which it is the leading international bank, involving firms, banks
and individuals avoiding tax—but that shades into evading tax, and in the event that is what it is. That is what Barclays is up to.
When Barclays refused Government help and went to the middle east for more expensive help, we all thought that it did not want Government intervention because of those salaries. Clearly, that might have played a part, but the bigger part in the decision was stopping the Government getting into the firm and seeing what it was up to and putting a stop to those measures. If Barclays is taking Government money in any way, I hope they will go into it and do what they did by agreement with Royal Bank of Scotland, and stop its tax avoidance activities.
3.30 pm
Dr. Vincent Cable (Twickenham) (LD): I congratulate the hon. Member for North-West Leicestershire (David Taylor) on securing the debate. This is a very topical issue and he presented the case extremely well. Rightly, the focus has been on tax havens—the common theme is secrecy—which my colleague, the noble Lord Oakeshott, called
“sunny places for shady people.”—[Official Report, House of Lords, 26 March 2009; Vol. 709, c. 772.]
People go to the British Virgin Islands or the Caymans not because they want financial expertise but because they have got something to hide, even if there are other reasons why people want secrecy.
The debate is on the revenue side. The hon. Member for Banbury (Tony Baldry) rightly asked for an evidence base. There is fragmentary evidence. Her Majesty’s Revenue and Customs estimated three years ago that the British Exchequer was losing something in the order of £10 billion to £40 billion a year—a wide range—to tax avoidance and evasion activities of various kinds. Richard Murphy, who has rightly been praised for his practical work on the matter, has estimated that HMRC is losing something in the order of £18 billion specifically through tax havens. High net worth individuals account for about half of that through legal avoidance; £3 billion is lost through corporates; and the rest is lost to illegal evasion. A lot of evidence has come through in the past few years, for which The Guardian has rightly been praised, on corporate tax avoidance, as distinct from evasion.
In 2005-06, a third of British companies in the FTSE 100 paid no tax at all on their profits—none whatever—and a third paid very little. We have an extraordinary state of affairs. The average corporate tax rate for small companies in Britain is 21 per cent., which is supposed to be concessional, but the average tax paid by big companies is 20 per cent., because the latter have access to the lawyers and accountants that the former do not. That is utterly perverse.
Before I go any further, we need to clarify the language. We all use the words “avoidance” and “evasion”, but there is clearly a continuum—it is not one or the other. On the one hand, there is outright criminal activity, and on the other the form of tax avoidance that all taxpayers engage in when the Government, sometimes rather foolishly, openly give a differential that invites people to take advantage. We had a good example in the Budget: we now have a 50 per cent. top rate tax on earnings, but only an 18 per cent. rate on capital gains tax, which is an open invitation to perfectly law-abiding individuals
to turn their income into stocks so that they can pay tax at a much lower rate. We cannot blame people for that. The measure could have been simple incompetence, but it could also have been deliberate.
Somewhere between avoidance and evasion is a very grey area, on which the debate has centred. The hon. Member for Great Grimsby (Mr. Mitchell) and the hon. Member for Leeds, East (Mr. Mudie) helpfully described the complex structured arrangements in which organisations such as Barclays engage. I believe that Barclays has 110 specialists working on the absolute edge of the margin between evasion and avoidance, so that they stay on just the right side of the criminal law. They nevertheless have the very clear intention of avoiding paying UK taxes, which is our main concern.
The big question that the hon. Member for North-West Leicestershire asked was, what do we do about it? It is partly about taking international action and partly about domestic policy. Internationally, the fundamental issue raised by the G20 was transparency, and he raised two of the three key issues, the first of which is the automatic exchange of information. The current OECD white list is very good at creating transparency, but it leaves substantial hurdles when it comes to getting information from tax havens. Information exchange has to be made automatic to be effective. As he mentioned, the Government are resisting such a measure. There are good reasons for resisting automatic exchange in some cases—one would not want automatic exchange of information with, say, Mugabe’s Zimbabwe, for human rights reasons—but, as a general principle, between countries that have satisfactory human rights, automatic exchange of information should be the norm.
The second transparency issue that the hon. Gentleman raised was country-by-country accounting. As several hon. Members mentioned, it is an issue for the IASB. There is a lot of foot-dragging, and political leadership is needed, but that is the way to stop the systematic abuse through transfer pricing, the manipulation of profits and the minimisation of corporate tax payment.
The hon. Gentleman did not mention the third transparency issue, namely the identification of the beneficial owners of trusts and companies. A lot of tax avoidance through tax havens takes place by hiding the names of the ultimate owners. The EU savings directive precludes that, but it is not being enforced. One difficulty that the UK has in being righteous about the matter is that our trust system is incredibly opaque. Many trusts are never registered and other countries might reasonably ask, “Why are the British getting heavy-handed about this when their own system of tax law in relation to trusts is so opaque?” Until we deal with that problem, it will be impossible to crack down effectively on the tax haven system.
On the specifics, the Prime Minister has now taken the initiative of writing to all our Crown dependencies and overseas territories and challenging them to come up with standards of behaviour that meet the requirements of the G20 and OECD systems. That is a step forward. One could legitimately ask why he did not take that step 12 years ago, but he has done it now. I guess that he did not introduce the measure earlier partly to protect the City, which has sustained many such relationships, and partly because DFID encouraged many of the territories to get into tax haven activities supposedly as a way of
making their economies sustainable. That was foolish, as the hon. Member for Banbury pointed out, but we are stuck with it.
What action is going to be taken to follow up that initiative? I have two specific questions for the Minister. First, what sanctions are going to be taken against the seven British territories that are on the OECD grey list which do not even comply with the OECD’s fairly modest demands? What powers do we have in respect of those territories to which the Prime Minister has written? I suppose that we cannot be too draconian. Fifty or so years ago, when General de Gaulle was annoyed by the tax avoidance activities of Monaco, he cut the water supply off; by the following day, Monaco complied. We are not in a position to do that, but I assume that sanctions against British territories are available. If so, what are they?
Secondly, the three United Kingdom Crown dependencies—Jersey, Guernsey and the Isle of Man—comply to pretty high standards under the OECD rules, but they do not automatically exchange information. What steps are being taken to make them comply with that higher requirement which, I think we have agreed in the debate, is necessary to make the crackdown on tax havens effective?
That deals with the international dimension, and I wish to pose a series of questions to the Minister on domestic policy in my remaining three minutes. First, what resources are the Government putting into HMRC to crack down on avoidance activities such as the complex structured arrangements in the banks that have been described? My understanding is that the budget for the relevant department within HMRC was cut by 5 per cent. for the current financial year. Is that true? What is being done to ensure that HMRC is properly resourced to pursue its activities? Is it true, as I have been told, that HMRC is not yet even so much as investigating the information that came to light as a result of the German crackdown on Liechtenstein? That brought to light a lot of British names. As far as I know, they are not being investigated. Is that true? What will be done following the Government’s promise to name and shame companies and individuals who are engaged in systematic tax avoidance? What form will that action take and when will it start?
Secondly, as the hon. Member for Leeds, East said, we cannot be in a position in which the Government are guaranteeing banks and simultaneously allowing them to participate in tax avoidance activity. There is a lot of ambiguity about that. It is clear that the Government intended that the beneficiaries of the asset protection scheme comply with British tax rules, but in subsequent statements, including to me, the Chancellor has said that it is a separate issue. How separate an issue is it?
On the legislative provisions—several hon. Members referred to this—there has been a general expression of belief that we need to move to general anti-avoidance rule processes. What is the Government’s time schedule for that, and do they have any specific provisions to introduce a purposive rule in order to ensure that the courts, when dealing with marginal cases, are clearly directed to ensure that companies and individuals seeking to avoid paying taxes are prosecuted?
The hon. Member for Great Grimsby correctly described how companies establish subsidiaries for the purpose of avoiding tax. My understanding is that such subsidiaries
are required to be disclosed under the Companies Act 2006, but evidence unearthed by newspapers investigating the issue suggests that they are not being registered. They are not compliant with the law. Are the Government investigating the matter? Is action being taken against companies that do not comply with those legal processes?
Thank you for your indulgence, Mr. Hancock. I think that we all recognise that raising revenue is now a critical task, given the serious problems with the public finances. We should start by cracking down on the people who do not pay the taxes that they should pay.
3.40 pm
Mr. David Gauke (South-West Hertfordshire) (Con): It is a pleasure to serve under your chairmanship for the second time today, Mr. Hancock. I congratulate the hon. Member for North-West Leicestershire (David Taylor) on securing this debate. It is, as others have said, timely and topical, indeed fashionable, although to be fair to the hon. Gentleman, I do not think that anyone would describe him as a slavish follower of fashion, intellectual or otherwise. None the less, it is helpful for us to debate the issue. I know that he has pursued it for some time.
There is a clear consensus that secrecy within the financial services sector and various tax jurisdictions is creating great problems. The public mood has shifted, partly because at a time when most people’s tax burden is increasing, it is essentially unfair that a wealthy minority can avoid their tax obligations. Also, as the hon. Member for Leeds, East (Mr. Mudie) pointed out, the Government are desperately searching for revenue, we are borrowing a huge amount and debt is increasing.
I share the focus of the comments made by the hon. Member for North-West Leicestershire and Christian Aid in its campaign. Secrecy is key. We must find practical ways to improve the exchange of information. In the Crown dependencies and overseas territories, the picture is not all bad. Progress has clearly been made in our offshore financial centres, according to the interim Foot report commissioned by the Prime Minister, on a test of compliance with the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, the International Association of Insurance Supervisors and the anti-money laundering standards published by the Financial Action Task Force. The International Monetary Fund assesses those financial centres as broadly comparable to other jurisdictions and, in some cases, better. It is also worth noting that the G20 assessment for the Crown dependencies suggested that they are substantially implementing the international standards for exchange of information. The overseas territories are committed to doing so, but they have not substantially implemented them yet.
We must not be complacent, of course, and there is clearly a great deal of progress to be made, but as the hon. Member for Twickenham (Dr. Cable) rightly pointed out, terminology is important. What do we mean by a tax haven? I would argue that a tax haven is not simply a jurisdiction with low tax rates. That is a sovereign right. The Republic of Ireland, for instance, was sometimes accused of being a tax haven for having a corporation tax rate of 12.5 per cent. I think that the focus should be secrecy.
Another point of terminology that the hon. Gentleman rightly raised is that there is a spectrum that runs from tax evasion, which is clearly illegal and unacceptable and must be addressed, through tax avoidance to tax planning. I quote:
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