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16 Jun 2010 : Column 172WHcontinued
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?
Mr Gregory Campbell: 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.
Dr Pugh: 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 the right hon. Member for East Ham (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.
Ms Angela Eagle (Wallasey) (Lab):
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.
Dr Pugh: 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 the hon. Member for Wallasey (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.
Nigel Mills (Amber Valley) (Con): 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 the hon. Member for Southport (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.
Dr Pugh: 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.
Nigel Mills: 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.
Ms Angela Eagle: 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 the hon. Member for Southport (Dr Pugh) was worrying about. The hon. Member for Amber Valley (Nigel Mills) is illustrating the fact that we get into difficulties whichever route is taken.
Nigel Mills: 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.
Dr Pugh: 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.
Nigel Mills: 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.
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