(11 years, 7 months ago)
Commons ChamberRead Hansard Text Read Debate Ministerial Extracts
Mr Michael Meacher (Oldham West and Royton) (Lab)
I beg to move,
That this House has considered the matter of tax avoidance and tax evasion.
I would first like to thank very sincerely the Backbench Business Committee for giving me the opportunity to raise this issue for debate. Tax avoidance and evasion is a cancer in Britain’s society today. The Prime Minister was right to condemn it as morally wrong and the Chancellor was right to condemn it as morally repugnant. The problem is that the Government’s actions to deal with it have been feeble and do not match those words, if indeed they are not downright evasive, as I shall show.
The extent of tax avoidance and evasion is much disputed, but even the Government admit that, along with uncollected taxes, it reached £42 billion a year in 2009, which is equal to one third of the entire UK budget deficit. Spread over the past six years, it amounted to £228 billion. The Tax Justice Network believes that the true figure might be up to three times higher. For the purposes of this debate and this argument, let us accept the Government’s figure at the moment—it is certainly big enough.
Mr Meacher
I am always ready to give way to the hon. Gentleman on these issues.
Steve Baker
I congratulate the right hon. Gentleman on securing the debate; it was an honour to join him in bidding for it.
I wanted to check where the right hon. Gentleman was getting his figures from. I am looking at the 2011 tax gap document from Her Majesty’s Revenue and Customs. It gives a figure of £35 billion for 2009-10. Where did he get the figure of £42 billion from?
Mr Meacher
I got it from the same source. I thought that the figure for 2008-09 was £42 billion. I shall write to the hon. Gentleman later. The average over the period is, I think, £38 billion and I am sure that the level reached £42 billion.
The Exchequer Secretary to the Treasury (Mr David Gauke)
To be helpful, I should say that I think the right hon. Gentleman is citing the 2008-09 number, while my hon. Friend is citing the 2009-10 number.
Mr Meacher
I thank the Minister for that helpful intervention. Once again, I find myself at one with the hon. Member for Wycombe (Steve Baker).
The haemorrhaging of tax revenues on the scale that I have described matters a great deal. First, and obviously, it is deeply unjust because tax avoidance and evasion are heavily concentrated among the big corporations and the mega-rich. If they pay hugely less than their real liabilities, that must mean that, for any given expenditure, those on average and low incomes have to pay more. That is always unjust, but it is particularly unjust at a time of prolonged austerity.
Secondly, there is the obvious point that if tax avoidance were cut sharply, many of the Government’s cuts in public spending and benefits would not be necessary and, I think, could not be justified. Thirdly, the tax avoidance industry—I do not exaggerate in saying that it is a parasite on the body politic—would be rendered largely obsolete.
The fact that City lawyers and accountants are paid vast sums to get round and neutralise what Parliament plainly intended in its Finance Bills is an open sore that would infect any democratic and fair society. The fact that they are allowed to do it makes monkeys of the Government. The fourth, and very important, point is that if most tax avoidance were stopped—I realise that it will never stop completely—companies would be forced to compete not on the basis of who was best at abusing tax law but on the quality of their goods and services. The benefit for the British economy would be substantial.
What has been the Government’s response? Tomorrow is the last day of the Government’s consultation on what they call their general anti-abuse rule, or GAAR, for tax. The background to that repays some examination. The Government commissioned the Aaronson group—Graham Aaronson is a prominent lawyer—to advise on the construction of such a rule. The group reported last November, I think. Extraordinarily, the report states right at the start that a broad anti-tax-avoidance rule is not necessary or desirable; it should apply only in the most extreme cases, so that for the overwhelming majority of cases circumventing taxes should continue as before.
I should point out that Aaronson has only ever represented companies or persons against HMRC; he has always acted pro the tax avoidance industry and never pro tax. Appointing him is rather like putting a poacher in charge of the grouse moors. Aaronson chose as his adviser Lord Hoffman, the man who killed the Ramsay principle—the general anti-tax-avoidance principle, or GANTIP—in the Westmoreland Investments case in 2001. The Government’s two key advisers on anti-tax-avoidance measures were carefully chosen in the sure knowledge that they would never recommend any such action. Thus, of course, it has proved. The Aaronson report recommended that if a general anti-abuse rule were accepted at all, Her Majesty’s Revenue and Customs should be obliged to consult and get the approval of a tribunal before it could be used against any particular person or company. In other words, the Government’s official tax collection agency should have to get permission from an external body before it could exercise its legal powers. That is an extraordinary proposal. However, it gets worse. The Aaronson group proposed that the tribunal should have three members—fair enough—of whom two should be from the tax avoidance industry. That makes it an open and shut case: the general anti-abuse rule will certainly gather dust on the shelf.
Caroline Lucas (Brighton, Pavilion) (Green)
The right hon. Gentleman is making a compelling case to suggest that the Government are not fully enthused about this kind of idea. Will he give me a sense of where his Front Benchers stand on the matter? I absolutely support his views, but I would love to know whether they are behind him.
Mr Meacher
We have our representative on the Front Bench who will speak about that, but I will come to what I think should be done.
The Government have said that they will accept the Aaronson proposals in full—what a surprise! So the Prime Minister’s boast that he was cracking down on aggressive tax avoidance turns out to be nothing more than a paper aeroplane job devised in the certain knowledge that it will never fly.
After this tragic-comic charade, what will Government’s Bill, scheduled for next year, achieve? If it is used at all, other than as a fig leaf to cover the Chancellor’s nakedness on this issue, I think that it will be drawn extremely narrowly to include only the most egregious and extreme cases of tax abuse. It will exclude national insurance and VAT, which are a pretty large part of the tax system, and will not even regard the shifting of income, profit or gain from one tax category to another in order to gain a tax advantage as being within the definition of tax avoidance. I ask you, Mr Deputy Speaker! Indeed, the fact that the Government’s own economic impact assessment for the proposed general anti-abuse rule states that it will have little or no measurable impact makes it absolutely clear that the anti-abuse rule is just a massive white elephant.
Anas Sarwar (Glasgow Central) (Lab)
I congratulate my right hon. Friend on securing this important debate. He is rightly making a powerful case about tax avoidance in the UK, but does he recognise that it is also a global problem? Recent OECD statistics show that the amount of tax avoidance that takes place in developing countries is three times as much as the global aid budget, and the Government’s recent legislation on controlled foreign companies makes it easier for companies to avoid paying tax in developing countries.
Mr Meacher
I agree. That is a question to which the Minister should reply. What concerns me is that this Government, out of those in all the western countries, particularly those in the EU and the OECD, have been dragging their feet the most on this issue.
Why are the Government introducing this measure? That can only be a matter of conjecture, but I suspect, as does the Association of Revenue and Customs, which represents senior officials at HMRC, that its real purpose is to stop almost nothing while allowing the vast amount of tax avoidance that it will never address to be deemed ethically and technically acceptable when of course it is nothing of the kind—in other words, to move the goalposts even further towards expanding the boundaries of so-called legitimate tax avoidance. I hope that the Minister will convince me and the House that that is not so, but that is certainly how many people read it.
Turning to the point raised by the hon. Member for Brighton, Pavilion (Caroline Lucas), what should be done in place of this mealy-mouthed Government measure? First and foremost, we need a general anti-tax avoidance principle—GANTIP—enshrined in statute. That would allow HMRC to declare null and void any scheme whose primary purpose was an artificial contrivance to avoid tax rather than to act as a genuine economic transaction. I think that most people in this country would agree that that is an extremely fair and reasonable proposition.
That is exactly what my private Member’s Bill, the General Anti Tax-Avoidance Principle Bill, would do. It is due to receive its Second Reading tomorrow and I expect the Government Whips to give it a fair run. It was prepared and drafted by Richard Murphy, one of the founding members of the Tax Justice Network and, I can say without any exaggeration, one of the country’s leading tax accountants. It would overturn the rule in the so-called Duke of Westminster case in 1936, which has underpinned the tax avoidance activities of the accounting, legal and banking professions ever since for three quarters of a century. In effect, there is an economic test at the core of my Bill that can be applied if, having taken into account all the relevant circumstances relating to the economic substance of a transaction, it appears that tax is not being paid by the right person, in the right amount, in the right place, at the right time, or at all
GANTIP is crucial, but other measures are also needed and I will address them briefly. The Government should seek an international financial standard that requires country-by-country reporting by transnational corporations in order to block the immense loophole of transfer pricing. The European Union savings tax directive, which the UK Government have repeatedly tried to water down, should be strengthened to include offshore trusts, which are a favourite tool of the tax-cheating industry. The non-dom rule was introduced in 1799—it is somewhat anachronistic—and the UK is now the only country in the world, apart from Ireland, I think, that does not tax worldwide earnings. It should be abolished.
A much tougher line should be taken on closing down UK tax havens. The UK Crown dependencies hold some $7 trillion of US bank deposits and probably dodge some £30 billion of tax. The Cayman Islands have just 30,000 inhabitants, but they are home to 457,000 shell companies. We should adopt the rule that unless such territories provide full and automatic information on all such funds that can be taxed, any transactions with such tax havens should be declared illegal.
In conclusion, I do not often agree with the Prime Minister and the Chancellor, but tax avoidance is morally wrong and morally repugnant. It is high time that we had in this country a Government whose actions show that they actually believe and support that.
Mr Deputy Speaker (Mr Lindsay Hoyle)
I am going to introduce a 10-minute limit, so we should get everybody in.
Steve Baker (Wycombe) (Con)
I congratulate the right hon. Member for Oldham West and Royton (Mr Meacher) on securing this debate. He has introduced it with the highest standards and in the finest traditions of the House. I know that he feels he is on the moral high ground, and in many ways he is. I hope that the whole House will join me in wishing him the speediest of recoveries from his injuries.
On evasion, Parliament is absolutely entitled to expect the law to be obeyed and its will must be expressed in law. If people are able to behave lawfully but other than in accordance with the spirit of the House, the law should be changed, which is a point that my hon. Friend the Member for North East Somerset (Jacob Rees-Mogg) has made on numerous occasions. I am prepared to accept the possibility that I am the only Member who does not know the tax code from one end to the other. I see that you are nodding, Mr Deputy Speaker, so perhaps I am alone in that regard.
About 12 years ago, when I worked as a software engineer servicing HMRC, I recall setting up electronic checking for certain pay-as-you-earn, end-of-year returns. It simply was not possible to submit a valid expenses and benefits return in 2001. We had to go to some lengths to persuade HMRC that it had to change its rules if it was to have an internally valid submission. Since then, the tax code has lengthened infamously. I may be alone in not understanding the tax code, but it appears that in some instances, HMRC has not understood it either.
My first point is that Parliament’s will must be expressed clearly in the law and that people should obey it. I object to the most complex tax avoidance schemes for two reasons. First, as was set out by the right hon. Member for Oldham West and Royton, if people are setting up sophisticated schemes to avoid the clearly expressed will of Parliament, they are shifting the tax burden on to others who are less able to pay. I agree with him about that.
My second reason was not given by the right hon. Gentleman. My most profound objection is that people quit the moral high ground when they engage in such schemes. They make it more difficult for those of us who believe that low taxes are in the general interest to make our case. They open the door to another industry—not merely the tax avoidance industry—that uses the complexity in our tax system, its opaqueness and its openness to various interpretations to construct a case that discredits not only our tax system, but the rule of law. For those two reasons, I object to the sophisticated schemes that we all know so well.
I will move on to the scale and the breakdown of the tax gap. We had an exchange earlier about the figures. The total tax gap in 2009-10 was £35 billion. Of that, £5 billion or 14% was due to avoidance and £2 billion due to error. The remaining categories were broadly equal. Criminal attacks, evasion and the hidden economy all involve breaches of the law and ought to be pursued in the usual way. I am grateful to the Minister for acknowledging that. The other three categories were a failure to take reasonable care at £4 billion; non-payment, which includes insolvency, at £4 billion; and legal interpretation at £5 billion. Although those figures sound large, we need to bear it in mind that avoidance and legal interpretation, which is a potential source of avoidance, make up £10 billion of the total of £35 billion stated by HMRC.
Caroline Lucas
I share the hon. Gentleman’s opposition to the level of tax evasion and avoidance. Does he agree that it is therefore regrettable that his Government are cutting the number of people working at HMRC by about 7,000? The very people who could be chasing after tax avoidance and evasion are being sacked by his Government and we therefore do not have the resources to go after it. Is that not the worst kind of false economy?
Steve Baker
To return to my earlier remarks, having serviced HMRC as a technical consultant on and off for a very long time, I could give the hon. Lady lengthy examples of enormous waste, partly through people not being given adequate skills. I will not bore her with the technical details, but a job that I could have done in about two days with software was going to be done over the course of six months by a team of 20. That kind of nonsense has to stop. They were doing something by hand that ought to have been done using software. The level of work that people were doing was almost degrading. People must be upskilled so that such nonsense can be brought to an end. I therefore support the Government in their drive to increase efficiency at HMRC.
We all know why tax avoidance happens: people desire to pay less tax. The Government know that. Through forms of tax avoidance that are barely worthy of the name, such as individual savings accounts and pensions, the Government have always deliberately incentivised certain behaviours by creating tax breaks. That is not really the subject of the debate. I mention it only to demonstrate that we all understand that everybody would like to pay less tax. I would be grateful if the Minister confirmed for anybody who is watching, listening to or reading this debate by what mechanism they can make voluntary payments to the Treasury, not because I wish to make one, but because I think that it ought to be established how one could make a voluntary payment if one so wished.
The heart of this debate is the question of altruism. My feeling is that Members of all parties often feel that people constructing sophisticated avoidance schemes are insufficiently altruistic. There is a wide range of perspectives on that. Rarely in this country do we hear the cry, “All tax is theft”, but at one extreme there is the rather childish hysteria of objectivism, which totally rejects all altruism, and at the other there is the altruism of the state collective.
As it happens, I believe that having the state collective as the basis of all altruism is extremely dangerous. I am a great believer in individual altruism, so I say to the wealthy that they should not only pay their taxes as Parliament intends but be altruistic and engage in philanthropy wherever they can. Let us win the moral high ground for lower taxes so that people can give more voluntarily and demonstrate that voluntary individual altruism is a better basis for society than coercion. I believe that liberty is the proper context for all virtue. There is very little virtue in obedience to an inescapable authority or in simply submitting to the pay-as-you-earn tax system, but there is a great deal of virtue in someone making their fortune and choosing to give it away.
There seems to be a suggestion inherent in the debate that people who are wealthy have in some sense done something wrong. If somebody in business has at every step created value for other people without force or fraud, they are justly wealthy. If people believe that wealth has been obtained by criminal acts of force or fraud, criminal prosecutions should be pursued. If people are wealthy because they have made a just profit and created value for society, they should be applauded. If we are to have a free, just and prosperous society, we must reconcile ourselves to the notion that profit is a social good.
An enormous amount of damage is done by misinformation. The Tax Justice Network, which was mentioned earlier, has been discredited in another report, and we could go to and fro arguing about who is right and who is wrong, but it is important that people do not discredit the tax system unnecessarily.
My next point is about the rule of law and the general anti-avoidance rule. I initially ranted about that to the Attorney-General, and he related a case—I cannot recall which right now—indicating that there is a long-standing tradition of HMRC being able to interpret the law in a particular way in order to apply Parliament’s will. I am extremely sceptical of anything that allows the law to be applied retrospectively so that people cannot predict how their actions will be interpreted.
Having visited sub-Saharan Africa, Egypt and Pakistan since my election, I am absolutely convinced that the primary reason for poverty in those places is that they lack the rule of law. We interfere with the rule of law at our peril, and if we are really serious about the prosperity of the poorest, we must ensure that it continues to be possible in our country to invest capital productively to raise real wages. That requires certainty and the rule of law.
What, then, is to be done? I will not even be able to attempt in one minute and 50 seconds to enter into evidence the 2020 Tax Commission’s report on the single income tax, but I encourage the Minister to proceed with radical tax simplification. I believe that much of what we are discussing could be dealt with if taxes were both simpler and lower. At this stage, with the mess that we have been handed, it seems to me that there is no chance of low taxes before the election. I would be astonished if the Government were able to deliver them. However, I encourage them to do everything possible to simplify taxes so that they can be applied equally to all and we can end the discrediting of the law and Parliament that happens when people engage in schemes that are obviously mendacious. I am grateful to the right hon. Member for Oldham West and Royton for securing the debate and hope that we will have a productive exchange of views.
Margaret Hodge (Barking) (Lab)
I, too, congratulate my right hon. Friend the Member for Oldham West and Royton (Mr Meacher) on securing the debate. I welcome the growing public interest in these issues, which is perhaps not reflected in the attendance in the Chamber on a Thursday afternoon. An issue that is sometimes seen as dry and complex and often portrayed as too difficult or obscure for people to get their heads around is now accepted as a matter of great public interest. I welcome the determination of the media in that regard, particularly that of The Times, which has done a good job of investigating the issues and identifying and exposing what is becoming a plethora of tax avoidance schemes that persist in the UK.
Hard-working British families, who have had to cope with a cut in their living standards and less money in their pockets because of the state of the economy and who pay their proper contribution in tax to fund all our collective endeavours and ensure that we have the public services and infrastructure on which we all depend, are rightly angry when they see a small elite in Britain—wealthy individuals and profitable large corporations—avoiding tax and putting so much time, energy and money into finding ways to avoid making their proper contribution. It is a terrible sickness at the heart of our society that too many well-heeled individuals and profitable corporations simply do not accept that they, too, have a duty, coming from their legitimate wealth, to contribute according to their means to the society from which they expect to take according to their needs and their expectations. Too many rich individuals and profitable companies see tax avoidance as clever, cool and worthy of praise and admiration, whereas it is immoral and wrong.
If we are to maintain public confidence in the tax system, it is vital that everyone knows and sees that it is fair, with everyone paying their fair and proper share to the collective purse. Tax avoidance and evasion are important because huge sums are involved. We have had the HMRC estimates and I have seen a Tax Research UK estimate that puts the tax gap at £120 billion. Whichever argument we believe, we are talking about many, many billions. A quarter of that sum is down to tax avoidance and evasion, but we should also have regard to the fact that the Government, in figures published last year, admitted writing off nearly £11 billion of tax that HMRC called “uncollectable”.
When the Select Committee on Public Administration considered how HMRC handled the large tax disputes with major corporations, we found that up to a potential £25 billion of moneys were outstanding to the Exchequer, although I accept that that figure is not precise. That is a huge sum and we need to set it against the cuts the Government have chosen to implement, such as the £24 billion per annum cuts in benefits, tax credits and pensions that hit the most vulnerable in our society.
The PAC considered a range of tax avoidance issues, including how HMRC handles disputes with large companies, the use of personal service companies and how those who engage in business with and make their money out of the public sector arrange their affairs to avoid tax. This autumn, we will receive a report from the National Audit Office on the tax avoidance schemes exploited by wealthy individuals exposed by The Times, which found that wealthy people were too often paying as little as 1% of their income on tax arrangements—for example, the K2 scheme used by people such as Jimmy Carr.
Based on that work, I want to focus on four points on which I think that the Government can take practical steps to tackle and stop avoidance and evasion. First, greater transparency is vital. We know so little and people get away with so much because the principle of taxpayer confidentiality is used and, in some cases, abused to prevent proper accountability to the public by the tax authorities. We uncovered the scandal surrounding the Goldman Sachs settlement because of the brave and determined efforts of one whistleblower. Questions surrounding other deals remain, such as, in the case of the Vodafone deal, whether the amount finally paid was correct and whether it was right for the company to be given extra time to pay. The Government should consider full transparency on the tax negotiations for the FTSE 100 companies. They are publicly quoted companies that publish their accounts, and we know from their accounts how much they pay, so we should also be able to monitor how settlements are reached and why the amounts are determined. People advising those companies use knowledge gained from negotiating one deal to get a better settlement for other clients. The public should also have that knowledge, so that they can consider whether avoidance exists.
Simon Hughes (Bermondsey and Old Southwark) (LD)
I agree with the right hon. Lady and I thank her and members of her Committee for their diligent work. First, have they considered looking at countries that have a full transparency regime for publicly quoted companies? Secondly, will they ensure that no company that does business with the Government can use offshore tax havens in any part of its ownership arrangements? That is currently very common, particularly among public utilities such as water companies and others that supply key, nationally important infrastructure.
Margaret Hodge
The Committee tries to look at international comparators, but it does not do enough such work. The right hon. Gentleman’s second point was to be one of my suggestions to the Government, and I agree with him entirely. My final point on transparency is that there is a belief in the country at large that bigger companies are not treated in the same way as small and medium-sized enterprises, which are struggling and often pursued relentlessly by Her Majesty’s Revenue and Customs. That belief will be shattered or broken only if we have full transparency and people can see that there are no sweetheart deals.
My second point concerns the proper resourcing of HMRC to tackle avoidance and evasion. Of course we want more efficiency from everyone employed at HMRC. The Labour Government cut 3,000 jobs, but I think that was wrong because evidence shows that for every £1 invested in pursuing tax avoidance, £10 is raised from the money collected. We should, therefore, be sensible about how we cut the deficit and we should invest in those areas where we will get money back.
I say to the Minister that it is worrying to see the threshold at which HMRC intends to pursue fraud actions raised because it does not have enough legal resources. It is also worrying that the extra money released by the Government in the spending review is not currently being used because HMRC cannot work out the training programmes that are required to get individuals up to speed for work on tax avoidance and evasion.
John Pugh (Southport) (LD)
One of the reports considered by the right hon. Lady’s Committee contained an acknowledgment by the Treasury that £1.1 billion was lost as a result of premature staff reductions. A report by the National Audit Office gives the figure of £1.1 billion losses to HMRC as a result of accelerating the cuts.
Margaret Hodge
I accept that entirely and it was not a sensible way of proceeding. I also want to mention the quality of staff in HMRC. When we carried out the Goldman Sachs review, it was worrying to find that so few people at the heart of HMRC who were engaged in those negotiations had what was called a “deep knowledge” of tax. They were up against highly skilled, knowledgeable and experienced—and highly paid—people, who were advising companies and high-wealth individuals. We must look at both quality and quantity of staff.
My third point is about the outrage caused by people whose income comes out of our taxes, but who fail to make their rightful contribution. I applaud the way the Government responded to the disclosure that some civil servants have personal services companies, and I hope that their work, and the work done by the Committee to support the report on that, will ensure that such practices no longer exist within the civil service. Evidence from the BBC, however, was shocking. Some 25,000 people working for the BBC are on off-payroll contracts, including 13,000 so-called “talent individuals” who appear on our television screens or on the radio. That is not an acceptable practice—goodness knows how it evolved—and I urge the Minister to take action on that and in local government where personal service companies still exist. I should tell the Minister that, in 2010-11, HMRC investigated only 23 cases of potential abuse of the use of the personal service company vehicle, which was down from 1,000 such cases in 2003-04. There is a resources and priorities issue within HMRC. Those people should set an example and show leadership in the fight against tax avoidance, and we should be able to see that they are doing so.
Equally—this point was raised by the right hon. Member for Bermondsey and Old Southwark (Simon Hughes)—companies that benefit from public expenditure and provide infrastructural services from the taxpayers’ pound should pay their proper tax to the Exchequer. That should be written into the contracts. The problem that the Committee has uncovered most is in relation to private finance initiative projects. An assumption is made by the Treasury in the cost-benefit analysis of whether to go ahead with a PFI project that income will come back to the Treasury through corporation tax, yet all too often the companies that take the PFI contracts or buy them subsequently take their interest offshore. A recent survey by the European Services Strategy Unit found 90 firms in PFI contracts funded by the taxpayer that were based offshore for tax purposes. HSBC infrastructure unit, which has a lot of PFI deals, paid only £100,000 in tax on £38 million in profit—a tax rate of less than 0.03%.
Finally, I agree entirely on simplification. Complexity breeds avoidance and evasion. All Governments are to blame. They might introduce complexities with the best of intentions, but they end up as wheezes for avoidance and evasion. Labour’s film tax credit was a classic example of that.
I urge the Government to stop talking—we all talk the same talk. We must now deliver on simplification and on those simple ways to ensure that tax avoidance is not used as an excuse for cutting public services.
Nigel Mills (Amber Valley) (Con)
It is a pleasure to follow the right hon. Member for Barking (Margaret Hodge) and I join the congratulations to the right hon. Member for Oldham West and Royton (Mr Meacher) on securing this important debate. I have spent a lot of the last few months debating tax—it came up in the Finance Bill and at various other times—which shows how important it is. I promise that I will not list any Take That songs to embarrass celebrities who seek to avoid tax. I got enough flak for that the last time I tried it.
I agree with hon. Members who have spoken that it is absolutely right that the Government do everything they can to minimise tax evasion and avoidance. All hon. Members want everyone to pay the amount of tax they fairly owe, because that reduces the burden on everybody who does so. It is right that the Government take every step they can within the legal powers they have to ensure that that happens.
Hon. Members have discussed how much the tax gap is. The last HMRC figures say that it is £35 billion. I have served on the all-party group on beer, which has inquired into measures to tackle beer duty fraud, so I have been through in some detail the weakness of tax gap calculations. The same issue came up in the Select Committee on Northern Ireland Affairs, which has had an inquiry into fuel duty. There is a problem in calculating how much revenue we do not have—we do not get the revenue, so it is quite hard to know what it would be—but I suspect that £35 billion is not a million miles off either way. I fear that the figure will have increased in the last tax year. I am told that if we look at the difference between 2008-09 and 2009-10, we see that the big reduction was in the loss of VAT, which was probably caused by the slight lowering of the VAT rate. Obviously, the rate has gone up since, so the tax gap will probably have increased slightly.
A report has shown that the UK tax gap is one of the lowest in the developed world—it is about 14% of tax revenue. I believe the gap in the US is somewhat higher, so it is not as if we are the worst in the world or have the weakest regime. We might even have one of the best.
It is important to understand that the tax gap is not entirely due to complicated tax avoidance or deliberate tax evasion. Much of it is innocent error and people lacking care in filing their returns—they do not actively seek to get it wrong. Measures to tackle avoidance or evasion will not close all £35 billion of the tax gap. There is not much we can do to get tax off someone who has gone bankrupt. Perhaps we could do more to prevent the amount of tax they owe from building up that high, but there will always be some loss when a business goes bust before paying its taxes. So we will not get that £35 billion down to zero—this will not be the panacea for the Government’s deficit problems—but it is right that we seek to get it down as low as possible.
I commend some of what the Government have done. Only this week, we saw a press release from the high tax unit showing that it was well ahead of its target and had already saved the Exchequer £500 million. The Government have adopted the right strategy, building on that of the previous Government, to deal with tax avoidance: they get in the disclosure of these ridiculously aggressive schemes, which ought to be closed down, and then they close them down. Then the strategy is to improve and tighten tax legislation for the areas most under threat, so that those opportunities are not there.
I am not convinced, however, that a general anti-avoidance or anti-abuse rule is the right way to go. I have concerns that it would contravene the rule of law. We, in Parliament, should pass laws that are clear, so that everyone understands what the law is, and then we can expect taxpayers to follow it. And if they do not, they can be severely punished. The problem with a general anti-abuse rule is that it allows the Revenue to say, “Okay, maybe you’re within the law, but we don’t think the law should have said what it said, so you should’ve been outside the law, even though you weren’t, and so we’re going to punish you.” I am not sure that we would want to give that power to a state agency in any other field of the law—the power to enforce not the law as we set it but the law as it might think we ought to have set it.
However much we stretch the general anti-abuse or anti-avoidance rule, fundamentally we are saying that the Revenue can tackle abuse that ought to be tackled by saying, “Ignore what Parliament says. Produce something that you think it should have said. And then enforce that.” I worry that that is a step too far—not that most of the people who would be caught would deserve anything less than they get, but the Revenue would be able to raise that stick against all manner of innocent individuals and businesses as well.
I worked as a tax adviser before entering this place. I can assure hon. Members that I was drawing up advance agreements on transfer pricing. I was not engaged in any naughty tax avoidance of any kind. Revenue Inquiries, in using its powers, writes, “Please send me this information. I think this doesn’t work as you say it does. By the way, if you don’t agree, I’ll have to use the general anti-avoidance rule.” And we have this stick being wielded in all manner of innocent situations in which businesses or individuals have got themselves into a complex situation where tax law is not clear, especially if there are a lot of transactions involving overseas parties.
Those individuals might be making perfectly sensible commercial attempts to apply the law as they think it is. They might not be trying to avoid tax but might be trying to be fully compliant, so the possibility of having that stick held over them and being told, “If you don’t pay up, we’re going to throw all these huge things at you,” will rightly concern lots of businesses around the country. We risk using a large sledgehammer, missing the nut and just increasing the burden on taxpayers. We have to look at the downsides of our tax regime appearing too unfriendly and uncommercial. How much investment will we lose if international businesses and individuals think that this is not a great place to do business? We have to be careful, therefore, about how much power we give the Revenue to apply its own interpretation of the law, rather than getting Parliament to do it.
Simon Hughes
I understand all the arguments and have seen the reports about general anti-avoidance measures and so on. Is there not the principle, however, that we should expect everybody, whether individuals or corporate bodies, to pay in tax at least a certain percentage of their profits every year to the Revenue—whether 20%, 25% or whatever—so that people know that they will not be allowed, by clever ruses, to avoid a minimum obligation to the state in which they live and work?
Nigel Mills
I thank my right hon. Friend for his intervention. Although that idea sounds attractive, and although various regimes around the world have minimum profit taxes and things like that, it would add huge complexity to our already too complicated tax regime. What we want is for people to be easily able to work out what tax they owe and then to pay it.
I have tabled amendments to both Finance Bills while I have been here to make the tax regime simpler, so that companies can get their tax profit much closer to their accounting profit. It should be much easier for them to know what tax they ought to pay, and if they have made an accounting profit, they ought to pay tax on it. That kind of reform would be a far better way of going down this line and making the transparency agenda much clearer. We do not need most of the complicated adjustments, reliefs or allowances that were introduced, probably to support well-meaning ideas, over the last 150 years. Our regime is far too cumbersome. It incentivises things that we do not mean to incentivise and penalises things that we probably ought to encourage. If we moved to a much simpler, flatter regime, where what a business reports as its accounting profit is pretty much what it pays tax on, that would be in everyone’s interest. It would reduce avoidance and make it a lot easier for business to comply and a lot easier for the Revenue to see that there was compliance, so that the Revenue’s resources could then be focused on tackling avoidance and evasion, which is what we ought to see.
I would like to use my remaining time on a report published quite recently by the RSA called “Untapped Enterprise”, which I would recommend Members read. It looks at how we can try to move people out of the informal economy and get them to be fully compliant as employers and taxpayers. The RSA’s research and the conclusions it reached are quite interesting. The report says that a significant proportion of new entrepreneurs feel that they need to stay in the informal economy while they test out their business and see whether they can make a profit on it, because they know that once they get caught by all the tax compliance and other reporting requirements, that can take up so much time and money that they might not be able to get their business off the ground at all. Most of them do not stay in the informal economy because they want to avoid tax; rather, they just want to focus on running their business.
Some of the ideas in the report for tackling the hidden economy are quite interesting. It makes the point, which has been raised in the debate, that we need to nurture the concept that paying tax is right and moral, that we get proper value for public services from doing so and that everybody ought to be doing it. The last thing we want to encourage is a situation where people think the Government are against them, that the taxman is an enemy or that avoiding tax is a perfectly sensible, reasonable thing to do because they think, “It’s them versus us,” or, “Every penny I can save is a good thing.” We need to make the case that paying tax is the right thing and everyone should do it.
While I am on this subject, I agree that we need to reform the non-dom rules. I cannot see any justification now for saying that because someone’s father was born outside the UK they do not have to pay full tax, even though they have lived here for 30 years. There should be a cut-off at, say, 10 years, so that once someone has been here for 10 years as a non-dom, they lose their non-dom status and have to start paying tax on their worldwide income. That would be a fair compromise between not discouraging people from coming here in the first place and getting our fair share of tax out of them.
The report also sets out the need to simplify the formalisation procedure. We need to make it simple for people to register their businesses for tax and to start paying. It needs to be simple to work out how much tax is owed. Let us not have people making the excuse that they did not pay tax because they did not know how much they were supposed to pay.
My final point is that we are moving towards a cashless society. It ought to be harder for business to be informal, because it is becoming more difficult for people to pay cash—indeed, I do not carry around a large amount of cash to pay for things with. That should move us in that direction, but we should also say to consumers, “Don’t pay people in cash; don’t encourage tax avoidance.”
Mr David Winnick (Walsall North) (Lab)
I congratulate my right hon. Friend the Member for Oldham West and Royton (Mr Meacher) on initiating this important debate. I hope that I can take up one or two of the points made by Government Members.
The overwhelming majority of people in this country pay tax through pay-as-you-earn, in the same way as we in this House do. In my constituency, the average salary for full-time employment is under £23,000. I think we can proceed on the reasonable assumption that my constituents are not making inquiries about how to set up personal service companies, let alone make offshore tax arrangements. What is at stake, as my right hon. Friends the Members for Oldham West and Royton and for Barking (Margaret Hodge) rightly pointed out, is fairness and justice.
It simply cannot be right for some of the richest individuals in this country significantly to minimise their tax liability. My right hon. Friend the Member for Barking also made the point that it cannot be right that those who receive a very high income—£500,000 or more—pay a lower rate of tax than my constituents who are earning £23,000. It is Robin Hood in reverse. That is why this debate is so important, and I hope that these discussions will not end without further action being taken by the Government.
The Prime Minister tried to make political capital out of the tax arrangements of a particular individual during the recent mayoral election in London, but it was that same Prime Minister who appointed Sir Philip Green to examine Government spending—I suppose we should be grateful that he was not asked to examine tax avoidance. The hon. Member for Wycombe (Steve Baker) said that we should not be unfair to those who create wealth, and that we should recognise their value. I do not dispute that, but I do dispute the way in which those who are heavily involved in industry, commerce or retail arrange their tax affairs in such a way that they pay nowhere near the amount of income tax that they should pay.
Steve Baker
I hope that the hon. Gentleman also heard me say that one of my two reasons for objecting to sophisticated tax avoidance schemes was that they involve people quitting the moral high ground. In a sense, I agree with him on this point but, ultimately, what I want is lower taxes.
Mr Winnick
I take the hon. Gentleman’s point. If we are all for fairness in income tax arrangements, perhaps action can be taken.
I want to illustrate my point about the tax arrangements of the very rich, and I shall return to Sir Philip Green. He is not a non-dom. He resides and works in the United Kingdom, and he no doubt pays a fair share of tax. That is not in dispute. However, the well-known shops with which he is associated are actually owned by his wife, and she lives abroad, in Monaco, where apparently no tax is paid. That is an example involving one person—there are others—that illustrates the unfairness in the United Kingdom. A great deal of revenue is undoubtedly being lost as a result of the arrangements of that very rich individual and others, and I do not believe that that is fair. It seems that, few years ago, Sir Philip paid himself a modest £1.2 billion bonus, a lot of which went through various offshore accounts and tax havens and finally ended up in Monaco, where his wife resides.
My right hon. Friend the Member for Oldham West and Royton mentioned the amount of revenue that is lost as a result of such arrangements; I do not think that the figure he mentioned was disputed. Obviously, we can imagine how that money could be spent on hospitals and other essential facilities. In any case, it is absolutely wrong that there should be two or more different tax arrangements: one for the vast majority of our constituents and others for those who are very well off. That is why these points are being made today, especially from this side of the House.
When the Prime Minister tried to score political points by mentioning a particular candidate in the recent mayoral election, he did not of course mention Lord Ashcroft, a long-time deputy Conservative party chairman. I know that some of the Ashcroft money helped to provide funds for Conservative candidates in marginal constituencies. Lord Ashcroft apparently gave a pledge to give up his non-dom tax status in order to sit in the House of Lords. As far as we know, nothing was signed but a pledge was given, and the current Foreign Secretary, then leader of the Conservative party, was satisfied. We know now—it came out in the last weeks of the previous Parliament—that no such arrangements were made by Lord Ashcroft, who remained a non-dom.
It is interesting to note that in the United States—the least socialist country among all the democracies—no offshore tax arrangements are in place for its citizens. Wherever US citizens work abroad or wherever their money goes, they are subject to US tax regulations. It is very different from here. I must admit to being somewhat surprised when I learned that this was the position in America. All these offshore arrangements, tax havens and the rest simply need to be tackled, although whether this Government will tackle them is another matter.
Let me take up what my right hon. Friend the Member for Barking said. One issue relates to billionaires using these arrangements; another is the matter of personal service companies. I must confess that until someone was appointed to a public institution—a very high-profile one—in 1993, I was not aware of personal service companies, the purpose of which is to minimise one’s tax. I wrote to the director-general of the BBC before the Public Accounts Committee took the matter up. I asked how many of the BBC’s most senior managers—those earning £100,000 or more—had personal service companies. I received a prompt and courteous reply—there was no attempt to evade the question, although I would have used freedom of information facilities if need be—and I was told that there was only one such person. That is one manager, but the different position regarding presenters has arisen from the PAC.
Some of the most prominent broadcasters—not confined by any means to those of the BBC, as there are the commercial channels and others—and some other very prominent people in the media, including some who perhaps have liberal leanings, have arrangements whereby the amount of tax they pay is considerably less than it would be through PAYE. For all I know, there could be complications and administrative difficulties with personal service companies, but it is unfortunate, to say the least, that these highly paid individuals, perhaps receiving £500,000 or over £1 million a year—good people in many respects, I am sure, and very professional, as no one would doubt, irrespective of their private views—use an arrangement that substantially minimises the amount of income tax they pay. That is absolutely wrong.
Mark Durkan (Foyle) (SDLP)
The hon. Member for Wycombe (Steve Baker) complained earlier about misinformation relating to tax avoidance. Was it not misinforming for the Government, at a time of high public indignation, to promise a “general anti-avoidance rule”, but then come up with something that is too narrow and limited to be deemed “general”, too indifferent and inert to be called anti-anything, and far too weak to be regarded as a “rule”?
Mr Winnick
I absolutely agree with my hon. Friend. Of course, I would not expect a Conservative Government to take effective action, and it is most unlikely that they will do so. In fairness to my own side, we took some action in some respects, although I would have liked bolder action. Like my right hon. Friend the Member for Oldham West and Royton and the hon. Member for Brighton, Pavilion (Caroline Lucas), I certainly hope that the next Labour Government—may that come about soon—will be far more stringent in dealing with these matters, which really need to be dealt with.
This country’s tax arrangements seem peculiar and odd, so let me repeat my earlier point. Whereas the large majority of people—my constituents and, I would imagine, the constituents of nearly every Member in the House—pay their taxes according to what has been agreed to by Parliament, there are those, be they billionaires or those whom I have described who earn very large sums, who pay less than what the House has determined. The sooner we end that position, the sooner we can be satisfied that not just our constituents but those with very substantial wealth and those who earn large incomes pay their tax as they should. This issue should continue to engage the House of Commons.
Stephen Williams (Bristol West) (LD)
I am very pleased that we are having this debate, and I thank the right hon. Member for Oldham West and Royton (Mr Meacher) for persuading the Backbench Business Committee to obtain the time for it. I have sat through loads of debates on the general economy, Finance Bills and all the rest of it during my seven years in the House, but we have never really engaged in a debate on the rights and wrongs of the tax system. We have started to get there in today’s debate, although, if I may say so, I did not think that the right hon. Member for Oldham West and Royton quite got there himself. I felt that some of his opening remarks were a bit too aggressive towards the Government. However, I am glad that he initiated the debate, because it is important to debate the definitions of tax avoidance and tax evasion, the perceptions of those quite different issues, and where the wrongdoing actually lies.
This is not about the tax rates that we discuss quite often in the Chamber, and it is not about who is paying their fair share, although I agree with my right hon. Friend the Member for Bermondsey and Old Southwark (Simon Hughes) that there is an important debate to be had about how much an individual and a corporation should contribute to society, and whether there should be a floor below which no one who is making a profit should drop in any given year. What we should be discussing today is payment of what is assessed and what is legally due: no less and no more.
Tax evasion is always wrong. I do not think that that is said clearly enough. It is illegal, and it is a fraud on the public and other taxpayers. It is always wrong, whoever is doing it, and whether a person is squirreling away millions in a secret bank account, paying in cash for work to be done on his or her own house, or paying a guest house owner. We shall all be going to party conferences soon, and I hope that none of our delegates will be tempted to pay guest house owners in cash. Those who do so should know, and should own up to themselves, that they are avoiding the obligation to pay VAT, and that it therefore follows that the person they are paying for the service is not putting the transaction through the books and is evading income tax as well.
Steve Baker
Does my hon. Friend agree that one of the reasons low-paid people evade tax is that taxes on them are far too high? One of the things that we need to do is continue the trend of lifting the lowest paid out of tax altogether.
Stephen Williams
I entirely agree with my hon. Friend. I am sure that he is delighted that his party is in a coalition with mine, because we are indeed lifting more of the low-paid out of tax completely by progressing towards a £10,000 income tax threshold. We should make taxes simpler as well as lower for people on low earnings.
This is a moral as well as a legal issue, and I think that perhaps we should discuss morals more in the Chamber. We all have a duty to pay, and cash in hand actually means cheating your neighbour. I think that, as Members of Parliament, we should be more courageous about making that clear. I agree with what the hon. Member for Walsall North (Mr Winnick) said about Sir Philip Green, but he is an easy target. We should be clear about the fact that if you are evading tax, it does not matter who you are: it is always wrong.
Health issues also arise, relating to tobacco and alcohol. My hon. Friend the Member for Amber Valley (Nigel Mills) mentioned beer duty. I am the chair of the cross-party group on smoking and health, and later this year I shall chair an inquiry into the smuggling trade—particularly the trade in tobacco, but there are cross-over issues involving alcohol. There is a very easy thing that the Government could do about those problems: they could tighten the bonded warehouse regime. There are currently very few restrictions on who can operate a bonded warehouse. Perhaps the Public Accounts Committee could consider that as well. A large amount of tax is evaded through the misuse of bonded warehouses and, as a result, people consume more alcohol and cigarettes and damage their health.
While evasion should be a black-and-white issue—it is always wrong—in respect of avoidance there are many shades of grey, which is a big problem. At the innocent end of the spectrum, tax avoidance is when people plan to pay no more tax than we in Parliament intend them to pay under the schemes we lay out in Finance Bills every year. I assume most of us have an individual savings account. I opened a new ISA earlier this year with Triodos bank, the ethical bank that has its headquarters in my constituency. Some of us signed a joint letter urging all parliamentarians to set an example by moving our money into ethical providers of finance, such as Triodos and the Co-op bank. By investing in ISAs, however, we are, of course, avoiding some income tax on our surplus capital.
I support all the various enterprise incentive schemes to encourage entrepreneurs to set up new businesses. I should declare a former interest, in that before entering Parliament I was a tax consultant working for some of the large firms that the right hon. Member for Oldham West and Royton laid into, but what we were doing was enabling people who were setting up businesses to take advantage of the reliefs his Government had introduced, in order to encourage more such people to take up good ideas, transform them into a business, create wealth and employ people. That is a good thing; that is good tax avoidance in the dictionary sense. Things go wrong, however, when such sensible planning is stretched too far and there are egregious schemes of avoidance, artificial transactions and contrived schemes.
The Chair of the Public Accounts Committee mentioned the very good exposés The Times did during the summer. As well as attacking Sir Philip Green and other fat cats, parliamentarians should make it clear that we condemn similar activities by those who are popular with the public—pop stars in Take That, premiership football players or Formula 1 racing drivers whom we are asked to believe all live in Monaco. These people make huge amounts of money because of the public enjoyment of what they do and they do not need to mitigate their tax below what the people who watch them perform think they have to pay.
What should we do about this? First, Her Majesty’s Revenue and Customs needs to focus much more on tackling avoidance. The headline figure of the number of people who work in HMRC has been mentioned, but how many people work for a particular arm of Government is less important than what they actually do when they are working. I hope the Minister will confirm that the efforts in the HMRC large business units and high net-worth units will be ever more relentlessly focused. The staff must have the appropriate training so they can match the skills levels of the lawyers, bankers and accountants pitted against them, and they must also have the necessary IT and other technical resources.
We parliamentarians have a duty as well. We can change the rates and rules, and we have done that in several Budgets since the 2010 general election. Last year, the Government tightened the rules in order to block a scheme of disguised remuneration, where individuals were receiving loans from their employers that they had absolutely no intention of ever repaying, and thereby were avoiding income tax. However, the Labour Front-Bench team at the time—I do not think its current occupants were part of that team, so I do not hold them personally responsible—instructed all its Back Benchers to vote against that coalition Government measure.
Under this year’s Finance Bill, we are introducing new stamp duty regimes in order to tighten up on the move of people buying properties via corporate envelopes and thereby avoiding stamp duty. The Liberal Democrats, and in particular my right hon. Friend the Business Secretary, called for that at the last election. Avoiding stamp duty in that way will now be almost impossible unless people want to incur an enormous liability in the future.
I listened carefully to what the right hon. Member for Oldham West and Royton was saying about the general anti-avoidance or anti-abuse regime. His words would have had more force if he had at least acknowledged that this Government had commissioned a report by Graham Aaronson. He has been in the business for more than 40 years, so I cannot think of anyone better to chair a committee looking at how we can tighten up on avoidance schemes. At least this Government are introducing an anti-abuse regime. It may not be perfect to start with, but a rule is being introduced. The right hon. Gentleman’s Government had 13 years to do that, but it was persistently ruled out by the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown).
Mark Durkan
Is that observation not a bit like saying that if the Government were looking at creating an anti-strike rule, the person to put in charge would be Bob Crow?
Stephen Williams
Would the hon. Gentleman say that again, as I am not sure that I followed it?
Mark Durkan
On the logic that the hon. Gentleman has just deployed about the most suitable person to be looking at anti-avoidance, given his skills and predilections in that area, would the equivalent for a Government committing to an anti-strike rule not be to put Bob Crow in charge of that exploration?
Stephen Williams
It was the Bob Crow bit that I missed. That may be a fair point, but I would not put Graham Aaronson on the same moral plane as Bob Crow; I do not think that Mr Aaronson has held the public to ransom at various points. However, poachers do often make good gamekeepers. The Government commissioned the report and are acting on it, and they should be commended on doing so, given that the previous Government did nothing to put that in place.
We have talked about the domestic scene, but I wish to say something in passing about our obligations abroad to the developing world. During debates on this year’s Finance Bill, I mentioned how the rules tightening up on controlled foreign companies—that is fine, as it is our responsibility to secure our own tax base—will have unintended consequences for developing countries. It is for the Treasury to work in close concert with the Department for International Development to ensure that every time we change our tax law, we think through the implications that that will have abroad. In addition, some of our expanding aid budget should be expended on training overseas Governments to build up their expertise to make sure that they are able to levy taxes effectively and collect them from the multinationals operating in their countries. I know that a coalition of charities, including Christian Aid, is going to campaign on this issue later this year. I have been working with them, and I look forward to continuing to do so throughout the rest of the year.
Simon Hughes
Will my hon. Friend also encourage the Government to examine anti-avoidance measures involving offshore territories such as those that have been started in countries such as Finland?
Stephen Williams
My right hon. Friend makes a good point. I think that there is a duty on Parliament to make sure that we are clear about our intentions and clear about what is wrong, and on the Government to allocate the resources to catch the people who go beyond the rules.
Frank Dobson (Holborn and St Pancras) (Lab)
I congratulate my right hon. Friend the Member for Oldham West and Royton (Mr Meacher) on persuading the Backbench Business Committee to put forward this debate. It is clear that nobody really knows how much the rest of the tax-paying taxpayers are being swindled out of as a result of tax evasion, tax avoidance and late payment. All we know is that a huge amount of money is not being collected. The question is: whose fault is it?
One of the functions of the House of Commons is to identify who is to blame for waste and inefficiency. On the failure to collect tax we need look no further, as it is mainly our fault as Members of the House of Commons. The rich and the big corporations do not pay what they should, HMRC does not collect as much as it should, and Ministers and officials suggest laws and regulations that do not do what they should, but we pass those laws and regulations. It is our job to decide what tax should be paid, but we tend to forget that it is also our job to put in place statutes and regulations to make sure that the tax we have voted for actually gets paid.
We are pretty good at making sure that most working people pay income tax, national insurance, council tax and, generally, VAT, but when it comes to dealing with large corporations and very rich individuals, our record is, frankly, pathetic. We, the House of Commons, pass statutes and regulations that are simply not up to the job. Government after Government have announced that they are cracking down on tax avoidance and evasion, but the experts in the City keep weaselling away, finding loopholes in the laws we have passed. It is probably true that we will usually be one step behind the City tax advisers, but at the moment we are not one step behind, but stumbling along several laps of the track behind those working the scams in the City.
I believe that this House needs to get its act together. I am not suggesting that we change the way we decide what tax should be levied, but once that has been decided in the usual way, I believe that the practicalities of how it is to be collected should be subject to much better scrutiny and final detailed approval by the House. I suggest that a taxation Select Committee should be established to concentrate exclusively on ensuring that any tax we have voted for is actually collected. The Committee should be able to hire expert advisers and require written and oral evidence from Treasury and HMRC officials and outside witnesses.
The taxation Committee would not need to trespass on the wider aspects of economic and fiscal policy covered by the Treasury Committee. Its sole object would be to formulate new tax regulations and practices in order to give minimum scope for avoidance, evasion and late payment. It should also monitor continuously the effectiveness of any existing arrangements and so keep up with the latest scams. Were the House of Commons, by this approach, to give tax collection the priority it deserves, I believe it would result in much more effective law and practice. Whatever the outcome, it could not possibly be less effective than the present arrangements.
That is not the only problem. Parliament is being denied the right to know what is going on at HMRC. Most of us would agree that most of our fellow citizens are entitled to keep their tax affairs confidential but, like my right hon. Friend the Member for Barking (Margaret Hodge), the Chair of the Public Accounts Committee, I would argue that that anonymity should not apply to major corporations. I remind the House that recently we had the ridiculous situation in which our Public Accounts Committee was told that it could not be told the details and background of the deal that an individual HMRC official had come to with Vodafone because they referred to the affairs of an individual taxpayer. Some people believed that the scam involved Vodafone being let off a tax liability of £6 billion. No one, apart from one or two people at the Inland Revenue and at the company, knows what the truth is. Can we tolerate that lack of transparency and affordability over a sum that is roughly equal to the taxpayer subsidy to the agriculture industry?
I hope that colleagues in all parts of the House see at least some merit in what I am proposing and recognise that we simply cannot go on as we have been doing. Clearly any new arrangements would need to be very carefully thought through, but they really should not be the subject of party controversy. Two of the main rights of a freely elected Parliament are to pass practical and workable laws and to control the raising of tax. We have a duty to the people who sent us here to exercise those rights effectively and so make a better job of it than we have been doing for decades.
Penny Mordaunt (Portsmouth North) (Con)
Over the past few months we have heard much about the morality of paying tax, whether it has been through the pillorying of the rich and famous, scrutiny of the conduct of big business operating in the UK or through the auspices of the Christian Aid tax fairness bus currently touring the country focusing on the conduct of UK businesses operating overseas.
Today there has been much discussion about individuals’ and businesses’ tax obligations to the state for the benefit of one’s fellow citizens. We have not heard much about the state’s obligations towards our citizens and businesses with regard to tax collection, and I want to rectify that today. Paying tax, being compliant and paying a fair amount is a two-way street. It is morally right that we should pay our taxes; evasion and aggressive avoidance are wrong. But just as the Government have a moral duty to spend taxes wisely and get good value from our public services, so, too, HMRC has a moral obligation to the taxpayer to ensure that its requests are reasonable and fair.
HMRC has extraordinary powers, frightening in their extent and enormity, that are enshrined in laws seemingly as complex and wide-ranging as the current tax code. Fifteen years ago, the relationship between taxpayer and tax collector was much more evenly balanced. Now there are punitive penalties for failing to submit returns, even if no tax is due or if HMRC owes the taxpayer a refund. The old tax tribunal system has been replaced with one that is far more rigid and less even-handed, and HMRC is able to issue completely unreasonable tax assessments to force taxpayers, who may have a legitimate dispute, to pay tax that they might not owe while their case is being investigated.
I often think that all that is missing from HMRC is the uniform and that it could be argued that we live in a state of financial martial law. It is time that the debate on the morality of tax turned its focus on those extraordinary powers, which often have a detrimental effect on precisely those citizens who have been absent from this debate so far—those on low incomes, the isolated, the vulnerable and older people.
Our tax code is hugely complex. The most popular edition of the tax guide now has over 17,000 pages; if my hon. Friend the Member for Wycombe (Steve Baker) has not read it, he can comfort himself with the thought that he would have had little chance of remembering what was in it if he had.
The system is especially complex for pensioners. In the last year of the Labour Government, the National Audit Office estimated that some 1.5 million older people had overpaid tax. Those overpayments have serious financial implications for the elderly, whose income is about 25% under the national average. Although the elderly are generally more compliant than taxpayers as a whole, they are often less aware of what they should do to comply and what allowances they are entitled to and they are more likely to face massive life changes such as retirement, bereavement or serious changes to their health that bring with them inevitable tax consequences.
Picture the confusion of the 91-year-old who after being widowed becomes a taxpayer for the first time, or the lady with inoperable cancer, whose husband has Alzheimer’s, pursued for failing to provide tax returns that HMRC had been sending to an address she had not lived at for nine years, despite its being clear that her allowances exceeded her income. Imagine the chaos caused to the life of a widow who received a tax demand for £3,500 as the Revenue had not been collecting tax on her state pension due to the fact her P161 was not sent to her when she retired at 60. Picture the gentleman who was being chased for underpayment wrongly, because neither he nor HMRC realised that he was entitled to the blind person’s allowance.
I applaud the work of Age UK, the Low Incomes Tax Reform Group and Tax Help for Older People. With their help, all the examples that I mentioned were resolved with a happy ending—evidence that the staff at HMRC are perfectly reasonable when these issues are pointed out. However, without that professional help and advocacy, many people end up paying more than they owe, with substantial detrimental consequences to their quality of life. That situation is not acceptable.
The complexity of the tax code and the frequency of HMRC errors mean that it is not reasonable to expect the burden of responsibility for checking demands to lie entirely with those vulnerable people. HMRC must at least have some responsibility for its own mistakes, especially if the consequence to the taxpayer of fulfilling that underpayment would be great hardship and would over the long term be detrimental to the public purse, as we saw with tax credit maladministration under the last Government. I would go further and say that HMRC should have an obligation to ensure not only that codes are correct but that for those on low and fixed incomes allowances are being used and people are as tax-efficient as they can be. That should be a performance measure that we judge it against.
Governments must take responsibility for their mistakes too. The Minister will be aware that I have had correspondence with him on the principle of retrospective taxation. It obviously behoves the Government to close loopholes as they are revealed, or better still to anticipate and remove them during the legislative drafting process. Nevertheless, when a loophole has been found in legislation, it is not illegal for it to be exploited—possibly morally repugnant, but not illegal. When clause 55 of the 2008 Finance Bill was discussed in Public Bill Committee, the Minister voiced the Conservative Opposition’s concern about its retrospective nature. If it was wrong to legislate retrospectively in 2008, it cannot be right now. We must work to close tax avoidance loopholes, but we must consider whether it is morally justifiable to take retrospective action on tax avoidance in the case of relatively low earners who signed up to schemes that were advertised openly and publicly and of which the Government and HMRC were aware.
Finally, I want to raise the subject of digital exclusion, specifically in relation to HMRC’s policy which makes it compulsory for all businesses, including the smallest, to file their business returns online. As a result, the proprietors of many micro-businesses who are unable to use a computer—for various reasons, including disability, age and lack of broadband access—have had to incur often disproportionate costs to employ an agent to file online for them or face penalties for not being able to file by electronic communication. Several proprietors have appealed their penalties, and those appeals are waiting to be heard by the First-tier Tribunal in November this year. The amounts charged are tiny—£100 for not filing online—but the costs to HMRC and the public purse in pursuing these cases are significant. The three lead cases involve older people, all with disabilities, who are unable to file online, and there is no statutory exemption for those with disabilities. There are many examples of otherwise compliant taxpayers being pursued relentlessly for small sums because of their inability to move to a digital channel to transact with HMRC.
The age of austerity and the recent focus on the moral good of paying taxes should not give HMRC any respite from simplifying the tax code, publicising allowances, reducing errors, and supporting businesses in hard times. It is in its interests and everyone else’s that it does so. It is better for the public purse that a business that has been paying tax on time for decades but has fallen on hard times survives and those jobs are kept. It is better for the public purse that an older person has that little bit of extra income to which they are entitled in order to stay well and independent. It is better for the public purse that HMRC’s resources are not taken up with correcting silly mistakes and are focused on tackling high-value evasion and aggressive avoidance.
I congratulate the Minister on the progress that he has made in simplifying the tax code, promoting common sense, and lifting many people out of paying tax altogether. May I urge him to go further, faster for the benefit of the Exchequer and the most vulnerable in our society?
Mr Virendra Sharma (Ealing, Southall) (Lab)
Thank you, Mr Deputy Speaker, for giving me the opportunity to speak in this very important debate.
We all know the context in which this debate takes place. We all speak to and listen to our constituents at our surgeries and in our town centres, and we know that they are hurting as a result of an international financial crisis caused by irresponsible bankers and made worse by a double-dip recession made in Downing street. The majority are hard-working families and individuals who pay their fair share of taxes and play by the rules, and expect others to do the same.
Given the budget deficit and strain on the public finances, it is all the more important to ensure that everyone pays their fair share of tax and that tax avoidance—playing the system and looking for loopholes—and tax evasion by those who engage in criminal behaviour to evade paying tax are vigorously clamped down on.
The vast majority of those engaged in tax avoidance are the rich and wealthy, and there is, rightly and unsurprisingly, a public outcry when celebrities, senior civil servants, business men and others use tax avoidance schemes to avoid paying their fair share of tax like everybody else. It is morally repugnant and obscene for a wealthy celebrity to pay only 1% in income tax.
The Government are right to consult on introducing a focused and targeted general anti-avoidance rule to stamp out such abuses. I fully support such a move. Tax avoidance legislation has become ever more specific and complicated. A GAAR should reverse that situation and allow a better use of HMRC resources to tackle avoidance across the board.
I part company with the Government on their current job-cutting at HMRC. I welcome the extra £970 million that they have put into tax collection up to 2014, but it makes no sense to cut jobs when the Department has been successful in collecting more tax. Over the past five years, HMRC has raised an extra £4.32 billion and the Public Accounts Committee’s report shows that an additional £1.1 billion could have been collected if 3,200 job losses had been avoided. It cannot be right to make job cuts when so much tax remains uncollected.
The Public and Commercial Services Union is 100% right on that and the public will think it a very strange thing to do when 11 times the extra investment that the Government are putting into tax collection was collected by hard-working HMRC staff over the past five years, and when even more could have been collected if the 3,200 jobs had been retained. Why are the Government planning another 10,000 job losses? I ask the Minister to think again. This is an investment that will result in billions for the Exchequer.
One of the jobs that staff saved from redundancy could do is work in my constituency, throughout London and other parts of the country to tackle the so-called “beds in sheds” problem. A minority of unscrupulous landlords are exploiting the vulnerable by renting out substandard outbuildings at extortionate rates and evading tax. My constituents regularly ask me, “Why should these landlords get away with not paying tax like everyone else?” This problem is all part of the shadow cash economy that denies the Exchequer billions in tax revenues.
The Government have given one-off funding to help councils tackle the problem with multi-partner teams that include HMRC officers in addition to UK Border Agency, police and council officers; but to really tackle it, raise some revenue and disrupt the shadow economy, more consistent resources are needed in both financial and officer terms.
Billions of pounds of tax remains uncollected as a result of both avoidance and evasion. I urge the Government to be braver and invest more in HMRC, not cut jobs. The returns are clear, the public accounts are in need of it and the public are calling for it.
John Pugh (Southport) (LD)
I congratulate the right hon. Member for Oldham West and Royton (Mr Meacher) on stimulating this debate. I also welcome the Exchequer Secretary, who survived the ministerial cull. We all welcome his dry wit and expertise. Indeed, I debated this very subject with him in Westminster Hall about a year ago.
As other Members have said, we live in a society where the rights, benefits and privileges that people extract from society are often disconnected from the obligations that they feel towards it. That brings the spectacle of people benefiting from society and thriving because of it, but avoiding contributing to the tax base through either evasion or, more commonly, avoidance. Tax avoidance is a deliberate attempt to frustrate tax law and the intentions of tax legislators. It differs radically from tax evasion, whereby one deliberately ignores or flouts the letter of the law.
There are various remedies for tax avoidance. One, as has been suggested, is to simplify the law to make avoidance more evident and stark. That is what the Mirrlees review was, in part, about. Another remedy, which has been very attractive to people in this place, is to outlaw individual tax avoidance schemes piecemeal. That has been tried in Finance Act after Finance Act, only for further countermeasures to be needed for other schemes. That exercise is a bit like a cat chasing its tail—it is endless. That is why I favour a general anti-avoidance rule and have argued for it consistently in this Parliament and the previous one. That is also why the Government are considering it and why it is in the coalition agreement.
I do not want to comment on Mr Aaronson’s specific proposals, but a GAAR essentially bans schemes that have no commercial benefit other than to frustrate the intent of the law. The right hon. Member for Oldham West and Royton has argued that the progress does not look as though it will be enough. Other people have argued that it goes too far. There are those who believe that we should go only by the absolute letter of the tax law and therefore oppose a GAAR. There are Government Members who believe that. I call such people tax fundamentalists, because they argue that a GAAR would create an element of tax uncertainty and that what is not expressly prohibited should be allowed. They add to that the argument that if we had a GAAR, there would be other disbenefits, such as an increase in litigation and a reluctance to make investment decisions.
More fundamentally, some people argue that it cannot be wrong to do what is not formally and expressly forbidden. That argument is astonishingly weak. It reminds me of the arguments that cropped up during the expenses scandal, when people argued that it was acceptable to buy duck houses or to flip homes because it did not breach a particular rule, even though it frustrated the intentions of the scheme. It is worth noting that there is under-specification in other areas of law, not just in tax law. Disturbing the peace encompasses a number of scenarios, as does defamation in civil law.
None the less, there are ways in which the operation of a GAAR in tax law can be made more certain to address those concerns. The first is through the pre-vetting of tax schemes and disclosure. The previous Government went some way down the road to ensuring that that could and should happen. The second is, during the passage of the legislation, to make clear the intent of the law and what it is contrived to do. The objection about uncertainty is slightly exaggerated. When Tesco set up a holding company in Liechtenstein for its properties, it received no commercial benefit, unless it was in avoiding the property taxes that the Government expected it to pay.
In a recent speech, the Exchequer Secretary spoke about things that would be covered:
“Buying a house for personal use through a corporate entity to avoid”
stamp duty
“is avoidance. Channelling money backwards and forwards through complex networks for no commercial reason…is avoidance. Paying loans in lieu of salaries through shell companies is avoidance. And using artificial ‘losses’ deliberately accrued to claim back tax is avoidance.”
Those examples give a clear indication of the kind of things that should be caught by a GAAR. As my hon. Friend the Member for Bristol West (Stephen Williams) said, we can contrast that with other things that would not be caught, such as charitable tax relief. In that case the Government encourage people to organise their tax affairs in a way that causes a loss to the Exchequer.
We can speculate for as long as we want on the effects of a GAAR, but in some ways we do not need to, because we have a certain amount of evidence to go on. A lot of countries have GAARs in place, and not all of them produce uncertainty and litigation, although some do.
Stephen Williams
I believe that the UK is actually unique in not having a GAAR or a rule that is called something else but is effectively a GAAR.
John Pugh
Yes, and that indicates clearly that legal uncertainty and endless litigation are not central and natural features of a GAAR. They do not happen in other countries.
We cannot excuse a poorly drafted GAAR, so we have to get it right. We cannot console ourselves with the thought that the only victims of a poor GAAR are corporate bodies, high net worth individuals and so on. However, a GAAR is a very important tool, and there remains no convincing general argument against it.
Mr Deputy Speaker (Mr Nigel Evans)
Order. Before I call the Front Benchers, I remind them that it would be appropriate to give Mr Meacher a couple of minutes at the end to wind up the debate.
Catherine McKinnell (Newcastle upon Tyne North) (Lab)
I commend my right hon. Friend the Member for Oldham West and Royton (Mr Meacher) for securing this debate on a matter that we all agree has rightly risen to a high place on the political agenda. There is much that we can agree on today, and I think we all agree that Parliament is at its best when we agree on matters and stand together to improve them.
We have heard well considered and valuable contributions from many respected voices in the Chamber, but I want to pay particular tribute to my right hon. Friend the Member for Barking (Margaret Hodge), whose work with the Public Accounts Committee has helped to shed a lot of light on these issues. She made a powerful and sensible speech.
The financial crisis of 2008 led to a radical domestic and international shift in the approach to tax evasion and avoidance. The lack of transparency in the international financial system was rightly identified as a significant threat to global financial stability, and calls for change rightly came from all sides. The crisis has also led to the significant challenge of public expenditure reduction that we now face, which adds to the urgency of ensuring that every individual pays their fair share of tax and contributes to that effort.
As many Members have said, among the majority of hard-working people who pay all their taxes there is understandably growing hostility towards those who manage to avoid paying their fair share. Given that the Government are facing an increase in their borrowing—it is up by a quarter on last year’s forecast, partly as a result of falling tax-takes—I have no doubt that the issue has also risen high on the Government’s agenda.
The Government have measured the tax gap—the difference between tax owed and collected—at about £35 billion. There has been some debate about that figure today, and there are other estimates. The TUC’s estimate is much larger, as is that of the Tax Justice Network, which puts the figure in the region of £120 billion. We all appreciate that it is not an exact science, but whatever the figure, we accept that a significant proportion of the tax revenue that is due is going uncollected. If we closed the tax gap by half or even a quarter, we would avert real pain and suffering among the most vulnerable in our society, who rely on the services provided through public expenditure.
Members have rightly drawn a clear distinction between evasion and avoidance, and we need to remember that a small minority of people are involved. However, it is clearly not acceptable for those people to think that they can get away with avoiding their obligations if they buy the right advice or pay for sophisticated tax avoidance products.
Like benefit fraud, tax evasion—and avoidance in some cases—undermines the confidence of ordinary taxpayers in the legitimacy of the system. I think we all agree that the world has changed and that there should be no hiding place for tax cheats. The previous Labour Government had a record to be proud of in tackling avoidance, both domestically and internationally. Many of the comments today have paid tribute to that. In 2004, we introduced a requirement to disclose tax avoidance products in advance, to, I remind Members, a storm of protest. In 2009, we strengthened the regime and that has transformed the fight against avoidance—I am sure that the Minister and Members on both sides of the House would agree with that. More than 2,000 schemes had been identified up to March this year, protecting more than £12 billion of revenue.
In 2009, we also set up the high net worth unit and have received the good news this week that an extra £500 million in tax has been identified and recovered. When in government, we also introduced a code of conduct on tax for banks, as well as legislating on debt buy-back and credit loopholes that some companies were exploiting. I know that the Minister recognises the value of the steps we took in government to make progress on this issue and over a 10-year period we recovered more than £16.4 billion in particular targeted tax avoidance measures.
Internationally, as president of the G20 we led a global clampdown on tax havens and offshore evasion. As many hon. Members have said, that is an important aspect of what we must do if we are to close the tax gap. Similarly, I would be interested to hear comments from the Minister today about the measures he is considering to enter into international agreements along the lines of the agreement we negotiated with Liechtenstein and between the UK authorities and Belize. How much revenue does he consider has been saved through those agreements and what plans do the Government have in place to continue that work and to try to shut down some of the avoidance measures and tactics that are being exploited?
In government, Labour also persuaded the OECD to develop best practice guidelines on country-by-country reporting, an excellent initiative that was put on the agenda by international development organisations, particularly Christian Aid, ActionAid and Oxfam. Tax evasion costs developing countries billions of pounds every year in lost revenues and is a barrier to social and economic development, but in the Finance Act 2012 we saw changes to the controlled foreign company rules and many charities have expressed concerns that they will make it easier for UK companies to avoid paying tax in developing countries in which they own subsidiaries. ActionAid estimates the potential loss to developing countries as up to £4 billion a year, whereas the Government estimate is £1 billion. Either way, that change raises huge concerns; steps must be taken to improve transparency and the Treasury must work with the Department for International Development to ensure its commitment to combining tax and development policy. What plans does the Minister have in place to ensure that the new rules will not damage developing countries’ tax revenues? Has he had discussions with the new Secretary of State for International Development or with her Ministers on a joint strategy on this point? If it becomes clear that the changes are enabling and facilitating tax avoidance, what action will he take? At what stage will he check, as this is a matter of some urgency for those who are concerned?
Unfortunately, on a domestic level, the Government’s general anti-abuse rule is unlikely to take forward the battle against tax avoidance. It is disappointingly narrow, designed by its own admission to tackle only the most egregiously abusive tax avoidance schemes, whatever that means. I would be grateful if the Minister clarified that point. The union representing top officials at HMRC, the Association of Revenue and Customs—ARC—has even suggested that it could encourage tax avoidance by implying that anything outside its scope is legitimate tax planning and immune from scrutiny. Will the Minister clarify what constitutes—I quote from the Government’s consultation document—a “wholly unacceptable” tax avoidance scheme, and tell us how “abusive” will be defined? I have read the consultation document and the definitions proposed within it shed little light.
In its draft legislation, the Treasury defines non-abusive schemes as anything that is “reasonably regarded as reasonable”—I am paraphrasing for brevity. That provides neither clarity on the matter, nor armour for HMRC, which is more concerning. We know that one person’s tax planning is another person’s tax avoidance, and even when it is entirely legal, it is considered by many—including the Prime Minister and the Chancellor—as wrong or “morally repugnant”. Will the Government’s proposed legislation help to draw a clearer line? All the moral indignation in the world will not bring in more tax receipts, and clarity is essential.
Will the Minister confirm what proposals there are to levy penalties on those found in contravention of the new anti-abuse rule? There is widespread concern that the proposed legislation is nothing but a toothless tiger, or worse,
“a Trojan horse, which suggests tough action while actually facilitating avoidance.”
They are not my words but those of Graham Black, president of the Association of Revenue and Customs, which represents senior HMRC officials.
I congratulate my right hon. Friend the Member for Oldham West and Royton on his contribution to the debate and on laying his draft legislation before the House tomorrow. His Bill takes a much broader approach, and seeks to tackle not only abuse but more general avoidance, and it lays down the mantle at the Government’s door for them to clarify what they deem to be legally acceptable. It also seeks to give HMRC much wider powers than under the Government’s plan, and I would be interested to hear the Government’s response to the challenge posed by my right hon. Friend.
Finally, as many hon. Members have said, even with a proper anti-avoidance or anti-abuse scheme in place we will require a top-level agency to collect tax. HMRC has recently had a welcome public success in collecting revenue from top earners, but we know that it is struggling to maintain performance against huge job cuts. In May this year the Public Accounts Committee found that an extra £1.1 billion could have been collected if personnel had been left in place, and it called on the Government to consider the true value for money of further cuts. Have the Government done that? What consideration have they given to value for money in terms of personnel and the proposed cuts? If cutting staff means missing out on billions of pounds of tax revenue it is a false economy, and I would be interested to know what assessment the Government have made in the light of the report by the Public Accounts Committee.
Ministers say that they want to eliminate tax avoidance, but with an incredibly narrow GAAR, weak international agreements, and without giving proper resources to HMRC, the Government are not on track to succeed. The nation’s books will be balanced on the backs of the poorest in society, rather than on the rich who will continue avoiding their taxes.
The Exchequer Secretary to the Treasury (Mr David Gauke)
It is a great pleasure to respond to this debate, and I begin by congratulating the right hon. Member for Oldham West and Royton (Mr Meacher) on securing it. This has been a broad and wide-ranging debate, and over the past couple of hours we have discussed the taxation of large businesses and wealthy individuals, taxpayer confidentiality, HMRC staff numbers, a general anti-avoidance rule, and the right hon. Gentleman’s private Member’s Bill, which I am sure the House looks forward to debating tomorrow.
Tax simplification was raised by my hon. Friends the Members for Amber Valley (Nigel Mills) and for Wycombe (Steve Baker), and my hon. Friend the Member for Portsmouth North (Penny Mordaunt) discussed standards of service in HMRC. My hon. Friend the Member for Bristol West (Stephen Williams) raised the topical matter of cash in hand, and perhaps went even further than I did earlier this year in his remarks about negotiating a discount for cash. I suspect all those matters could have filled a two-hour debate in themselves, but let me attempt to address as many of them—and others raised in the debate—as I can.
My first point is that the Government have a strong track record in addressing the full range of avoidance and evasion that results in the tax gap—the difference between the tax that is collected and the tax that is due. We remain further committed to tackling the gap and to reducing that sum over the course of this Parliament. Our intention is that the compliance yield of £13 billion a year, which we inherited, will increase to £20 billion a year in this Parliament.
It is helpful to distinguish between tax evasion and tax avoidance. A number of hon. Members have done so in the debate, but let me underline the point. Put simply, tax avoidance is the reduction of tax liabilities by using tax law to get an advantage that Parliament never intended. As we have heard—not least from my hon. Friend the Member for Bristol West, who brings expertise to these matters—tax evasion is illegally understating tax liabilities. Evasion is fraud and means breaking the law. There is striking unanimity in the House on the need to address both avoidance and evasion, and that the Government should take them seriously. I shall discuss the different responses we have in place for each, and the new directions on tax avoidance that we are considering through consultation.
I should first like to set out a few facts on compliance generally. Last year, HMRC collected £474 billion in tax. The tax gap for the last year for which authoritative numbers were produced—2009-10—was £35 billion. Of that figure, tax avoidance constitutes around 14%, which is down from 17.5% in 2007-08. The tax gap arising from tax evasion is also falling—from 17.5% in 2007-08 to 12% in 2009-10.
I would make two observations on that, the first of which was made by a number of right hon. and hon. Members, namely that the vast majority of UK taxpayers do not avoid or evade tax. The vast majority of taxpayers and our constituents expect us to ensure that as many people as possible pay the right amount in tax. Secondly, although by international standards our tax gap is low, the Government are determined to do everything we can to improve those numbers. That is why we are re-investing more than £900 million to transform the approach to compliance, to close the tax gap, and to enable HMRC to address the serious matters it faces.
The investment is funding a range of measures to widen HMRC’s overall compliance coverage and target the highest risks. It also includes funding for a highly skilled work force. We are increasing the number of staff working on compliance by around 2,500 full-time equivalent positions by 2014-15. Reference has been made to the Public Accounts Committee report that highlights concerns that cuts in the number of compliance staff resulted in revenue in the order of £1.1 billion not being collected in the previous Parliament. Hon. Members are correct that the number of HMRC staff will fall in this Parliament, but the number of those focusing on compliance activities will increase. There will, for example, be more criminal investigators and people working in intelligence to tackle tax evasion and avoidance.
Margaret Hodge
I accept that it is the intention of the Exchequer Secretary to increase compliance activity, but I would like him to address two issues that I raised: first, the fact that HMRC has raised the threshold for taking action on fraud, as a result of which less money will be collected; and secondly that, although he said we needed more highly trained individuals, such training is not taking place, because of the Department’s inability to establish training provision and ensure that people benefit from it and get on with it.
Mr Gauke
I do not accept the right hon. Lady’s point about the increase in the fraud threshold. When I look at some of the work that HMRC is doing—for example, to address inheritance tax fraud—I see a substantial increase in activity. It is addressing far more cases than ever.
I know that the PAC takes a strong interest in training. It is important that staff are trained. People are being moved from other parts of HMRC—for example, from personal tax—into enforcement and compliance. It is important that they are properly trained, however, and that process is going on—progress is being made and the compliance yield is already increasing. Over the months and years ahead, we will increasingly see the benefits of a large and better-trained compliance team. It is absolutely right that the PAC scrutinises this specific point, but HMRC is making progress, and we all want to encourage it to make further and faster progress to ensure that we get the right staff in the right places.
Compliance revenue has more than doubled in six years, and HMRC is on track to bring in about £7 billion in additional tax each year by 2014-15. In addition, on avoidance, HMRC has closed down seven schemes in the past year alone and, since 2010, litigated about 30 direct avoidance cases, with a high success rate. On evasion, HMRC has secured 413 criminal convictions, resulting in more than £1 billion in additional revenue and revenue-loss prevention. Those are significant achievements,
Anyone reading the papers recently might well think that avoidance is rampant. I want to reassure right hon. and hon. Members that that is not the case, and the vast majority pay their taxes without trying to get around the system. Nevertheless, where we and HMRC see people trying to exploit the system, we will take swift action. Currently, there are a minority of cowboy tax advisers—small niche firms selling crude avoidance schemes unlikely to be successful under challenge from HMRC. Many of those who sell those schemes use tactics that border on mis-selling, and their clients can end up shocked when they are later pursued by HMRC over their involvement. The Government recognise the need to do more to target those who market such schemes to protect taxpayers and prevent them from entering into them.
Mr Meacher
Given what is widely accepted to be the unacceptable narrowness of GAAR, why are the Government not prepared to accept GANTIP? It would achieve what the Exchequer Secretary wants, which will not be achieved by GAAR.
Mr Gauke
If the right hon. Gentleman will forgive me, I will turn to that point later, although I am sure the House is looking forward to debating this matter at greater length tomorrow—I know that he is.
These aggressive tax avoidance schemes are the reason we recently launched our consultation entitled, “Lifting the Lid on Tax Avoidance Schemes”, setting out ways to improve the information on avoidance available to the public and making it easier for taxpayers to see whether their adviser has promoted failed avoidance schemes in the past. I have been encouraged by the response of the professional bodies, which share the aim of addressing the small fringe of cowboy advisers who promote such schemes. Some of the criticism of the tax profession as a whole has been unfair, but there is an issue with some aspects of it, which is why we are consulting on what we can do to address the problem and also to expand the regime covered by DOTAS—the disclosure of tax avoidance schemes—which the hon. Member for Newcastle upon Tyne North (Catherine McKinnell), speaking for the Opposition, touched on. She is right that between its introduction in 2004 and the end of March 2012, it resulted in a total of 2,289 avoidance schemes being disclosed to HMRC. That, in turn, has led to more than 60 changes in tax law to stop avoidance.
Steve Baker
My hon. Friend makes his case powerfully, but I am concerned that we are locked into a paradigm of complexity and trying to deal with the consequences of that complexity. Does he share my view that if only we could find a route to tax simplification, we could make some of the problems disappear at source?
Mr Gauke
My hon. Friend is right to say that tax simplification has an important role. I do not think that it is a magic bullet or that it cures every problem, because there will inevitably be some complexity in a modern economy. However, where we can remove some of those complexities and boundary issues, that is clearly helpful. My point is that DOTAS is a valuable part of our tax regime, but we want to improve on it. There is scope for improvement, and more information could and should be disclosed to HMRC to enable it to address tax avoidance.
Let me turn to the GAAR. We are improving how we counteract avoidance once it is detected, through the UK’s first general anti-abuse rule. I note the criticism made by Labour Members, but when they were in power—indeed, some of them were distinguished in the former Government—they refused to bring forward a general anti-abuse rule. The GAAR will specifically target the most aggressive and persistent forms of avoidance without undermining taxpayer certainty or adding undue compliance costs to the tax system. I am confident that, unlike other suggested approaches, the Government’s approach strikes the right balance between protection against avoidance and clarity for taxpayers.
I know that there is an alternative argument, based on the proposal from the right hon. Member for Oldham West and Royton, which was drafted by Richard Murphy, as he said. However, I would make this argument to him:
“I…think that many appropriate checks and balances are built in to the drafting. HMRC cannot use this”—
the GAAR—
“willy-nilly, and that’s right. This should be a tool of last resort and not a battering ram for widespread use.”
Those words are from Richard Murphy, who was commenting on Graham Aaronson’s proposals. I know that Mr Murphy will be following this debate closely, and I think it right that we quote his views thoroughly. He also said:
“Appropriate defences for action are built in. Safeguards to prevent HMRC over-using the provision are included. The result is that the rule will be used against egregious cases, and not be aimed at all tax planning. That’s right: where the law provides for choice, planning is inevitable and right and I for one have never denied that fact.”
Finally, Mr Murphy said this in response to the Aaronson proposals:
“Let’s have no doubt about it: this is a very big step forward for tax justice and I warmly welcome this report and hope it moves rapidly towards becoming law.”
I entirely agree with those comments. I do not, in all fairness, always agree with Mr Murphy, and he does not always agree with me, but on this occasion he is absolutely right to set out the fact that there are safeguards.
I want to let the right hon. Member for Oldham West and Royton respond, but let me quickly deal with evasion. We encourage compliance, while making it clear that if people do not take the opportunity, we will find them and they will be subject to stringent penalties, and possibly prosecution. The measures that HMRC is taking include: 1,000 extra prosecutions a year for tax evasion by 2014-15; an enhanced, state-of-the-art risk profiling tool, Connect, that helps to identify tax cheats by cross-matching data to uncover hidden relationships between people and organisations; campaigns and new policies—such as the contractual disclosure facility—to encourage voluntary disclosure of evasion; specialist staff to provide a single point of contact for the 2,000 largest businesses and to address the growing risk of cybercrime; and taskforces carrying out intensive reviews in high-risk trade sectors.
We are active in tackling offshore evasion activity. That concern was raised by a number of Members. We now have a number of agreements with other tax jurisdictions, including the Liechtenstein disclosure facility, which the hon. Member for Newcastle upon Tyne North mentioned. That will require financial intermediaries to identify those who may have a UK tax liability, and it is expected to raise £3 billion by 2016. More recently, the Government have finalised a ground-breaking agreement with Switzerland on tackling tax evasion. It will apply to UK-based Swiss account holders and is expected to raise £4 billion to £7 billion a year.
Collectively, the avoidance and evasion measures that I have set out today, along with our record on general compliance, show how seriously this Government take any threat to our tax base. We are not complacent, however, and our plans to take a tougher stance on disclosure rules and the promoters of avoidance, to introduce a general anti-abuse rule, and continuously to target those who illegally evade tax all help to demonstrate that fact. I hope that the House will appreciate the steps that we are taking.
Mr Meacher
With the leave of the House, I thank the Minister for his response. As he said, this has been a valuable and thoughtful debate. I also agree that there is general consensus on this matter. No one in the House takes the view that tax avoidance is other than unacceptable. The only real question, which the Minister did not fully answer, is how the measures to tackle it should be undertaken. It is possible that the general anti-avoidance rules—GAAR—are an advance on the absence of any such rules. He quoted selectively from Richard Murphy, but he did not answer my question, which was why, if he was so concerned to reduce tax avoidance as much as possible, he did not think that GANTIP would be far more effective than GAAR. I hope that we shall return to that point tomorrow.
The hon. Member for Wycombe (Steve Baker) made a thoughtful speech, as always, and I welcomed his saying that people should pay their full rate of tax. He even suggested that they should do so voluntarily and altruistically. The trouble is that they will not do so. Warren Buffett is recommending that course of action in the United States, but I have not heard of a single millionaire or billionaire in the UK who supports that position.
My right hon. Friend the Member for Barking (Margaret Hodge) made an important speech, in which she said that the problem was that the rich simply did not see the payment of tax as a responsibility. I recall the words of Jon Moulton, a private equity partner, who complained that his colleagues were paying less tax than their cleaning ladies. That is the problem in this country.
Several proposals were put forward in the debate, but the Minister did not respond to them. I shall return to them tomorrow if I get a chance. One was that there should be full transparency of settlements made by HMRC. We all know the aggravation that was caused by the settlement with Vodafone. That principle should apply to all FTSE 100 companies. It was also suggested that it was counter-productive to cut the number of tax inspectors. Their numbers were cut under the previous Government—wrongly, in my view—and they continue to be cut now. The Association of Revenue and Customs estimates that the amount recovered by tax inspectors can amount to between 30 and 180 times their salaries, so there is a strong reason for markedly increasing their numbers.
The right hon. Member for Bermondsey and Old Southwark (Simon Hughes) did not make a speech, but he made two targeted and relevant interventions. He said that any company that used tax havens should not be eligible to bid for a Government contract. He also suggested that everyone should pay at least a minimum rate of tax—some people have suggested 32%—in order to prevent the situation in which some people pay just 1% or 2% as a result of the diligence of their City lawyers and accountants.
This has been an extremely useful debate. I welcome it and hope the House will take these matters further.
Question put and agreed to.
Resolved,
That this House has considered the matter of tax avoidance and tax evasion.