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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.
Mr Gauke: 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.
Dr Pugh: 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.
Mr Gauke: 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.
Ms Eagle: 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?
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.
Dr Pugh: 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.
Mr Gauke: 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 31 March 2009, which does not represent the actual losses to the Exchequer from non-payment. Almost all tax owed to HMRC is eventually paid, sometimes within days of becoming due. A proportion of debts outstanding are in staged repayment plans, such as those covered by the business payment support service. Only the tax debt written off as uncollectable by HMRC is an actual loss to the Exchequer from debt. That is therefore the amount that HMRC uses in its estimate of the tax gap, which in the 2007-08 tax gap figures was not £28 billion but £3 billion. Of course, we must take steps to reduce that figure further, and I am keen to encourage measures to do so, but we should get the number right.
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.
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