Charlie Elphicke
Main Page: Charlie Elphicke (Independent - Dover)Department Debates - View all Charlie Elphicke's debates with the HM Treasury
(12 years ago)
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Danny Alexander
No, I will make some progress, because, as my hon. Friend also said, and as the House knows, the Government have already set out plans to reduce the main rate of corporation tax to 23%, but this year’s Finance Bill goes even further for precisely the reasons that he gave.
Clauses 5 and 6 will reduce the main rate of corporation tax to 22% by 2014—a headline rate that is dramatically lower than that of our competitors, the lowest in the G7 and the fourth lowest in the G20.
Charlie Elphicke (Dover) (Con)
On that point, it is incredibly important that the Government are reducing the rate of corporation tax. That is great news for British business. However, British business pays corporation tax. Should not we take proper action against multinationals that rip off our country and do not pay proper taxes, and ensure that they pay a fair share of tax, like every British business, so that we have a level tax playing field for all companies?
Danny Alexander
I am grateful to my hon. Friend for his support for our measures on corporation tax. The fact that they have been welcomed not just by hon. Members, but by the CBI and a range of business organisations—and, indeed, that they have been shown to increase business investment—will help this country retain its international competitiveness, which declined markedly when the Labour party was in government.
My hon. Friend is right that we must deal with tax avoidance by companies, and there are a number of measures in the Bill that are precisely aimed at ensuring that businesses pay their fair share of tax, which I am sure he would wish to support. Furthermore, through clause 180, we are introducing vital reforms to the controlled foreign companies rules, and, through clause 19, a patent box to allow UK businesses to operate in an ever-more globalised world. Hopefully, we will encourage some of the businesses to which he refers to return to the UK. The latter measure has already secured a major investment in this country by a major chemicals company.
As well as creating the competitive conditions for enterprise to thrive, we must ensure that businesses have the support they need to seize the opportunities in the recovery. That is why we are taking action in the Bill to support the small businesses, the start-ups and the entrepreneurs that are critical to creating new jobs in the recovery. Clauses 39 and 40 increase the annual investment limit for enterprise investment scheme and venture capital trusts to £5 million. In that spirit, through clause 28, we are introducing a new scheme—the seed enterprise investment scheme—to encourage further investment in small, start-up companies, which are the kind of companies this country needs more of as the recovery continues. Those are significant steps to encouraging new growth, galvanising new sectors, and broadening access to finance for UK business, helping to rebalance our economy away from its over-reliance on one sector and one region.
We are committed to supporting a private sector recovery right across the UK. Clause 44 introduces a new, enhanced capital allowance regime for businesses in seven enterprise zones in England, three in Scotland and one in Wales.
Rachel Reeves
I believe that a temporary cut in VAT back down to 17.5% and a national insurance holiday for all small businesses taking on new workers are the way to put the economy back on track to recovery.
Charlie Elphicke (Dover) (Con)
How would the hon. Lady pay for those pledges, and how much they would cost?
Rachel Reeves
This Government are borrowing an extra £150 billion because of the costs of their economic failure. The reality is that, with more people out of work and therefore claiming benefits, and with fewer businesses succeeding and paying taxes, this Government are ending up borrowing more, because their risky gamble with their economic policies has failed.
Instead of continuing on the downward path begun under the previous Government, total unemployment has mounted to new highs. It is now at the highest level since 1997. Some 2.67 million people are out of work. More than 1 million young people are out of work. We have the highest level of youth unemployment on record. That is a cruel fate to be inflicting on people leaving school, college and university. Instead of going on to get a job or training, they are being left to rot on the dole queue. The truth is that—just as we on this side of the House, along with numerous independent economists, warned—the Government’s attempts to cut too far and too fast have choked off the economic recovery, squeezing households and businesses and sending unemployment soaring, with the result that, as I said to the hon. Member for Dover (Charlie Elphicke), the Government are now forced to borrow £150 billion more than they had planned.
This lesson is being learned around the world, as over-ambitious austerity plans founder. Last year the OECD warned credit rating agencies which press for rapid fiscal consolidation but
“react negatively later, when consolidation leads to lower growth—which it often does.”
Sure enough, Standard & Poor’s decision earlier this year to downgrade nine of the eurozone’s 17 member states was accompanied by the warning that
“fiscal austerity alone risks becoming self-defeating.”
The International Monetary Fund’s sharp downward revisions of its global growth forecasts—including for the UK—for 2012 was accompanied by a call to “reconsider the pace” of fiscal consolidation. Indeed, the IMF’s chief economist has said:
“Substantial fiscal consolidation is needed, and debt levels must decrease. But it should be…a marathon rather than a sprint”
and cited the proverb
“slow and steady wins the race”.
Our economic performance did not have to be this way. We need only look across the Atlantic to see the benefits of a more balanced approach to deficit reduction, with the US now enjoying steady falls in unemployment and accelerating economic growth. Let me quote the opinion of Adam Posen of the Bank of England’s Monetary Policy Committee. His forensic comparison of the US and UK experiences concluded:
“Fiscal policy…played an important role as well. Cumulatively, the UK government tightened fiscal policy by 3% more than the US government did…and this had a material impact on consumption. This was particularly the case because a large chunk of the fiscal consolidation in 2010 and in 2011 took the form of a VAT increase, which has a high multiplier for households.”
In other words, by hitting households as hard as they did, sapping confidence and sucking demand out of the economy, the Chancellor and his ready accomplice, the Chief Secretary, have got the UK stuck in the slow lane while other key players in the global economy are overtaking us.
Rachel Reeves
That is just not true and it is not accurate. A reduction in VAT helps people who do not pay income tax, which includes the poorest people, and benefits pensioners. The increase in the personal tax threshold does not benefit pensioners one jot, nor people who are not earning enough to benefit from a change in personal allowance. A cut in VAT helps all those people, however, including the lowest paid who will not benefit from the changes to the tax threshold. The right hon. Gentleman is just wrong.
Charlie Elphicke
The hon. Lady can correct me if I am wrong, but my reading of the IFS’s analysis is that it says that increasing the personal allowance just like that would benefit the most well-off, but it does not take into account the fact that the threshold at the 40% rate is reduced down so that the most well-off do not benefit. That is a slight flaw, by my reading, in the IFS analysis.
Rachel Reeves
The analysis of the measures in the Budget shows that the changes to the personal threshold are not a progressive policy, as hon. Members seem to be claiming. In fact, they benefit those dual income households on higher salaries much more than they benefit the poorest people in society, many of whom do not pay tax. Of course, the changes do not benefit pensioners at all as they are seeing their tax allowance frozen. As a result, many pensioners will lose out by up to £83 whereas people who are coming up to retirement will lose out to the tune of more than £300 a year.
The Chancellor of the Exchequer’s new economic model—this idea that we will have a rebalanced economy with lower borrowing, more saving and more investment—has failed to materialise. Indeed, the precise opposite is predicted. Their plan has failed: the policies are hurting, but they are not working. This Finance Bill, which was a chance for the Chancellor and the Chief Secretary to learn the lessons and to start to repair some of the damage that they have done, has been a huge missed opportunity.
Rachel Reeves
I thank my right hon. Friend for that intervention. She is absolutely right: instead of the Government making up policy as they go along, without bothering to talk to anybody who is affected by it, they should have consulted the Charity Commission and the charities affected. The Press Association reports that the Government are doing a U-turn; perhaps we will get clarification on that from the Chief Secretary to the Treasury, if he is bothering to listen to anything that is being said this afternoon. Will he confirm what the PA says—that there is a U-turn on charities tax relief? The fact is that nobody knows: the Government and the Prime Minister do not seem to know what is happening with their own policy, and we have had no clarification in the House this afternoon.
Rachel Reeves
Perhaps the hon. Gentleman has a clue what is going on with the Government’s policy on charities tax relief.
Charlie Elphicke
It is clear that we should crack down on tax avoidance, but I want to know whether the hon. Lady is serious about doing so. Will she condemn the tax avoidance of people such as Ken Livingstone, or is this just more crocodile tears from the Labour party?
Rachel Reeves
We are serious about cracking down on tax avoidance, but tax avoidance is not the same as giving donations to UNICEF, Macmillan nurses, the Red Cross, the National Trust and thousands of charities in this country that rely on the money they get to do their important work, often supporting some of the most vulnerable people in society. If the Government cannot tell the difference between tax avoidance and doing the right thing and supporting valuable charity work, it shows the extent to which they have lost their grip on reality.
Mr Edward Leigh (Gainsborough) (Con)
Everything that the hon. Member for North Ayrshire and Arran (Katy Clark) says would be fair enough if what this Government were doing were any different from what a Labour Government would have been doing at precisely this time. The public sometimes lose track of the reality of the situation that we are in. We politicians talk in terms of billions or—perhaps soon—trillions of pounds, but a constituent put it to me like this, offering a better way of describing our situation. It is as if we were somebody who had an income of £50,000, who had knocked up a credit card debt of another £50,000, and who had promised to repay £4,000 of it but was actually repaying only £2,000. We are in a dire financial situation. I suggest that whoever were in government at this time would be doing much the same. In fact, I suggest that what the Government are doing is the bare minimum necessary to maintain market confidence.
We have had a lot of debate about the ratings agency, and I am sure that the Labour party is gearing up to tease the Government if there is any decline in our rating score, yet if we did anything less than what we are doing to address this deficit, we would be in dire trouble with the markets, and I have no doubt that interest rates would eventually have to rise, with all the consequences we know about for businesses and for ordinary mortgage payers. I therefore do not accept this apocalyptic view of the Government’s proposals. As I say, the Government are doing the bare minimum necessary to maintain market confidence.
I do not accept either the argument put forward by the hon. Member for North Ayrshire and Arran that there is some sort of right-wing plot—that we have been waiting for years for this crisis in order to take a stab at Keynesian politics and that, really, all we are interested in is a slash and burn of the public services. It is hardly a slash and burn, given the sort of figures we are talking about. In fact, Government spending is as high as it has ever been. All we are doing is trying to get to some sort of grip with the deficit.
Personally, I have always argued that the economy would benefit from deregulation and from simplification particularly of the tax system, leaving aside the total size of the public sector. I would have thought that Members on both sides of the House could accept that what is needed is simplification. How, then, are we going to get it?
I spoke in the Budget debate at about 6 o’clock. Such is the complexity of the modern Budget process that it is difficult for people to get a handle on what is going on as it is being enunciated by the Chancellor of the Exchequer. I was teased by one of the Whips because, apparently, precisely as I stood to say that it was a courageous Budget, coincidentally all the press started turning against the Government—and it has been pretty bad ever since. I say that it is courageous because the Chancellor has started to take some difficult decisions to simplify the tax system. We have heard a good speech about charitable giving. So much of the so-called bad publicity that the Government have attracted over the Easter break—whether it be over the so-called granny tax or charitable giving or child benefit or all the other problematic areas—shows that the Chancellor is beginning to try to address these appallingly difficult structural problems.
There has been a lot of talk about the Titanic this week—nobody should worry, as I am not going to repeat the tired old cliché about deck chairs—and I think that the whole structure of the ship is wrong when it comes to the tax system. The ship is unbelievably badly built, and it is gradually sinking under us. What I have found in listening to 28 successive Budgets in this Chamber is that the tax system has become progressively more complex. It was possible 25, 30 or 35 years ago for a Chancellor to come across as providing a reasonably coherent lecture in his Budget statement—we all used to get very excited because tax on whisky or the basic rate of tax was going to go up or down by 1p—but such levels of complexity have been loaded on to the whole tax process that it has become virtually impossible for any Chancellor to come out on Budget day with any coherent proposal that is not in succeeding days unpicked and trashed because of the hundreds of pages of small print. If the structure is fundamentally flawed—it is, I think, the longest tax code in the world apart from India, and one of the most complex in the world—it is virtually impossible for any Chancellor to get a grip on it. I have never made any secret of my personal belief that we have to be prepared to be radical. We cannot just try to improve the structure; we have to go back to first steps and argue what we really believe in. What I really believe in is a much flatter—ideally, flat—rate of tax.
I have recently read an excellent book written by one of our colleagues, my hon. Friend the Member for Stone (Mr Cash), about the 19th century statesman John Bright. He was wholly uninterested in politics, but was a substantial statesman, who continually argued in terms of retrenchment, sound public services and a sound financial system. He said:
“Better teach the people something good for the future than resign oneself to work institutions already in existence”.
I suspect that too many politicians—I do not blame those on the Treasury Bench, as I know what they are paid to do—are fundamentally doing what John Bright did not want to do, which is resign themselves to work institutions already in existence. I think that the purpose of politics, certainly for those on the Back Benches, is to try as John Bright said to try to teach the people something good for the future.
I believe that this idea of a much simplified tax system or a flatter and ultimately a flat rate of tax, which has always been dismissed as an idea of the radical right, is of increasing interest to those on the left. Why? We have heard a great deal about tax avoidance, and the more complex the tax system, the easier it is to avoid it. Every time we try to deal with the problem, we create more loopholes and more difficulties, making it easier for the rich to avoid paying tax. With a much flatter—ideally, flat—rate of taxes, there is no possibility for avoidance. The TUC claims—I am sure it is right; it is not known to be a particularly right-wing organisation—that tax avoidance results in a loss to the Treasury of £13 billion a year from individuals and £12 billion a year from corporations.
To make another left-wing point, some politicians have recently had a bad press; they have been standing for various public offices or arriving in this House with good incomes outside politics, but instead of paying tax like the rest of us at the basic and then higher rates, they have put their money into private companies in order to pay much lower rates. Some politicians in America who have huge incomes, including some bidding to become President, have had a very bad press, as we found that they paid minimal rates of taxation. Why is this? It is because the tax codes in both countries are so complex that the rich and the powerful can always avoid paying tax. They cannot do that, however, under a much simplified tax system.
Charlie Elphicke
Does my hon. Friend not think that politicians should give a lead? It is not just Ken Livingstone who has been egregiously avoiding paying tax. It is clear from the Register of Members’ Financial Interests that some Labour Members have been routing their funds into private service companies. Should that not be stopped; should not politicians set an example?
Mr Leigh
I do not want to ruin my argument and I do not want to lose any support that I might have from my friends on the Opposition Benches by recommending a tax on particular Labour politicians. The trouble is that there is always a huge temptation for anyone with a high income—a politician, an entertainer or a business man—to listen to the advice provided by chartered accountants. They will say, quite rightly, “Oh dear, why is a successful chap like you”—a successful chap like, for instance, my hon. Friend the Member for Dover (Charlie Elphicke), who doubtless has a very large income—“paying all this tax, when you could be setting up a small company and paying about 11%?”
In the past I have argued for a much flatter, ideally flat, rate of tax throughout earned income, but now I will be even more radical, and suggest that there is an increasing case for transposing that to small company income. I am not privileged to serve on the Treasury Bench, and I do not have teams of civil servants to advise me. I constantly come up with ideas such as this during Finance Bill debates, and I can produce figures, but I do not know whether they are correct. I have been told that a flat-rate tax of 22% with a £15,000 allowance would result in a reduction of £63 billion in tax revenue in the first year. Although I believe that the extraordinary savings that would be made through the ending of tax avoidance might well enable us to claw that back, there is no point in my simply going to the Library and then coming up with figures.
I see that the Minister is busily scribbling down every one of my pearls of wisdom at this precise moment. It would be really nice if, rather than just saying at 10 or 10.30 tonight “I thank my hon. Friend the Member for Gainsborough for making such an interesting speech”, he wrote to me in the next week or two, when he has the necessary leisure, telling me—on the basis of the Treasury model—how much of the cost of avoidance could be saved through the adoption of a much flatter, or ideally a flat, rate of taxation, under which it would increasingly not be worth people’s while to try to shift their income from one pot to another. Is that, in fact, such a radical idea? Has it been tried out anywhere else? Well, of course it has.
As I have said, the size of the UK tax code has more than doubled since 1997. The present situation is absurd. The Chancellor is doing his best, but whereas 15% of taxpayers will pay a higher rate in 2012, only 3% paid it in 1978. Graphs showing the rise and fall in people’s incomes according to whether they have one child or more feature extraordinarily sudden and tremendous blips because of the child benefit clawback from people who earn more than £50,000 a year, of which I have been very critical. I do not know whether this is correct, but I have been told that a family with three children and an income of between £50,000 and £60,000 faces an additional effective marginal tax rate of 24%, on top of income tax and national insurance. I cannot believe that the Chancellor wanted to impose such a sudden, steep burden of taxation on middle-income taxpayers.
Many Members favour helping people on very low incomes. I happen to believe that the best way of helping poor people is not to churn more and more tax and benefits in their direction so that they have very high marginal tax rates—as high as 73% in the case of those who increase their earnings if they earn less than £10,000—but to take them out of tax altogether. Let me say to my Liberal friends that the one good thing that they have done in recent years is to present that argument, and I think that they have made their case. An extraordinary burden has been placed on people on lower incomes, who have been taxed far too much far too early.
I believe that my idea of a flat rate of tax is not such a radical or bad idea but one that could appeal across the spectrum, and I urge my hon. Friends on the Treasury Bench to consider it carefully. Otherwise, every time the Chancellor seeks to tamper with the screws and the bolts on the Titanic to ensure that those watertight compartments do not just reach halfway up the forward decks but reach the top so that the thing does not sink, he will produce a Budget that sounds good on the first day but will be unpicked and unpicked.
I think that, rather like John Bright, the Chancellor needs to see that shining light on the horizon. He needs to say, “This is my strategy, this is my philosophy, this is what I want to do. I want to say to the British people that ultimately I will take pretty much the same share of the cake as has been taken in recent years.” We all know that, for all Mrs Thatcher’s reputation for being such a right-wing radical Prime Minister, it was only after many years that, by an almost infinitesimal margin, she gradually reduced the extent of the state’s take from ordinary people. It may be impossible for the Chancellor to make a great deal of difference in those terms, but he can say, “This is my strategy. I want to be upfront and fair to the British people, so that they know exactly where they stand. If you have an income of £300,000, I will take a third of it: I will take £100,000. If you have an income of £100,000, I will take £33,000—and so on across the spectrum.” Then there will not be all the hillocks and valleys and clawbacks and allowances and churning of benefits and taxation.
I am, in a sense, sympathetic to the philosophy behind what the Chancellor has been trying to do with child benefit. Why should middle-income earners pay tax at a certain level and then be handed it back in child benefit? I agree with the Chancellor that that is absurd. However, he got himself into a dreadful mess by taking the appalling step that meant that the moment there was one higher-rate taxpayer in a family, all that family’s child benefit vanished. I thought that that was very unfair on a family in which one person worked and another, usually the wife or female partner, wanted to stay at home and look after the children. I am not suggesting that such an arrangement is better or worse than the other form of family life, but I believe that it is simply unfair, which is why I have argued for a marriage tax allowance.
I will do a deal with the Chancellor. I will give up my campaign against his reduction in child benefit and my campaign against his continued failure to introduce a marriage tax allowance, despite what he said in his manifesto, if he will say to me, “I will get rid of all these allowances, and introduce a greatly simplified tax system which is fair and equitable for all classes of people.”
I agree that there should not be a tax system that distorts people’s choices. I agree that any attempt to influence behaviour through the tax system, whether it affects marriage, children, mortgage tax relief—as in the old days—or, now, charitable giving, will produce perverse incentives. It will cause people to adjust their behaviour to reduce their tax bills rather than doing what is right, and I want people to do what they feel to be right. I want the state to be open, fair and upfront about what it is going to take, and I want the Chancellor to come to the House and say in his next Budget “This is my strategy, and this is my belief.”
I accept that—bravely, courageously, with great difficulty, and in the face of an enormous amount of bad publicity over the last three weeks—the Chancellor has taken the first essential steps towards getting rid of those allowances, and I am prepared to stand by him. I am prepared to be unpopular over the granny tax, because I can see where he was coming from. The Chancellor considered it absurd for people to be paid that allowance. Although it was apparently very popular, when there was talk of abolishing it, no one remembered that it had been introduced by Winston Churchill in 1925. I am prepared to be unpopular by supporting the Chancellor on all those issues if he is prepared to enunciate his philosophy of creating a fairer and simpler tax system. That is a fair deal, I think.
Charlie Elphicke
There is one thing that troubles me. The average income in my constituency is below £20,000 a year, so if one of my constituents gives to charity they are able to tag along the taxpayer to the tune of the basic rate. Is it not a basic unfairness that someone who pays tax at 50% is able to drag along the taxman and the public finances to double the amount that a constituent of mine on an ordinary income is able to? That seems an unfair aspect in the way the relief system has worked in recent years.
Stephen Williams
I welcome my hon. Friend’s addressing the fact that the tax system should be fair in how different individuals get relief for an activity that is to be encouraged. Perhaps the relief on pension contributions ought to be seen in the same light but I think that would be controversial among many of his colleagues. I suppose that the basic principle of gift aid relief, tax relief and what can be recovered by a charity relates to one’s net income and the money that one no longer has. It therefore has to be grossed up by the rate of tax that has already been taken off one’s income before one chose to give that money to someone else. That is the basic underlying logic.
Nia Griffith
That is extremely worrying, because there is not much point in having VAT on anything if it is not collected. Groups in my constituency that want to do up listed buildings, such the Cwrt farm project, with which I have been involved, and the Llanelli Railway Goods Shed Trust, which I chair, care for all manner of buildings in the town. The fact that they will have to pay much more VAT means that they will spend the same amount of money—the amount that they have raised, or that individuals have available to give them—but have less work done. Less of that money will be spent on wages for local people, so less money will be circulating in the local economy. Rather than finding ways of stimulating the amount of work being done, the Government seem to be trying to close everything down and provide fewer and fewer opportunities for anybody to make money.
Practically everywhere I have gone in Llanelli over the past four weeks, I have met people struck by the fact that pensioners are being punished and millionaires are getting away with a tax break. That has incensed everybody from all walks of life.
Charlie Elphicke
Can the hon. Lady tell the House exactly how many pensioners in her constituency who earn more than £10,000 a year will be affected?
Nia Griffith
I can certainly tell the hon. Gentleman that over the whole country, 4.4 million pensioners who earn between £10,000 and £29,000 will be affected, including a huge number in my constituency.
People are incensed—not just pensioners but their friends and relatives. They say, “This is how it’s been since the 1920s, and the change came from nowhere.” Older people like to plan; they tend to be careful and like to know what will happen. In a Budget that was leaked and leaked, this change was just pulled out of a hat like some dreadful spotted rabbit. People were appalled, given all the emphasis that had been put on other measures that might be in the Budget.
Pensioners have to face that on top of losing their winter fuel allowance, which was a universal benefit and very useful for all manner of pensioners. We are talking about pensioners who have put by a little money and made some provision for their old age. They feel aggrieved because they have tried to do the right thing. They have been hit by the VAT rises. They have been lucky that it has been a mild winter this year, but they all tell me, “Look at my electricity and gas bills.” What are the Government doing to control energy prices? Absolutely nothing. Prices have gone through the roof even though the weather has been milder than last year, and pensioners are struggling to pay those bills. Then there is the fiasco at the petrol pumps. People had already been hit by mid-March with very high petrol and diesel prices, when suddenly the Government inflamed the situation by telling everyone to rush out and panic buy. Of course, everyone now faces even higher, inflated prices at the petrol pump.
Pensioners have been hit time and again. For those on a fixed income when interest rates are low, the rampant inflation that we have experienced is particularly hurtful. Again, pensioners have been badly affected. All in all, there is a feeling that the Budget takes from the wrong people. It takes from people who spend their money locally, tend to be careful with their money, and have saved. They spend a certain amount on their grandchildren, but they will have less money to do that—all to fund the cut in the 50p tax rate for those who earn more than £150,000. For some people who earn millions, it will mean that they are not just hundreds but thousands and tens of thousands of pounds better off. That is extremely unfair.
The people I meet ask why that is happening and why we are not all in it together. They ask why the 50p rate is not kept so that there is a fairer distribution of taxes across society.
Charlie Elphicke (Dover) (Con)
It is a pleasure to follow the detailed and forensic speech of the hon. Member for Llanelli (Nia Griffith). However, unlike her, I support the Finance Bill, and hope that it will go further, particularly on business and the reductions in corporation tax. By 2014, corporation tax will be 22%—the lowest rate in the G7. I strongly believe that if the rate is cut, the take is increased. However, in cutting the rate, we also need to take firm action to stop tax avoidance and to have a new tax compact. A low rate means great responsibility, and a greater responsibility to pay the tax that is due. We need business to pay a fair share of taxes, especially multinationals that are located not here in the UK, but overseas. For too many years, they have failed to pay their fair share.
Let me give some numbers. In 1997-98, income tax raised £77 billion a year; in 2008-09, it raised £153 billion a year. In other words, income tax receipts doubled. Let us look at corporation tax. In 1997-98, corporation tax raised £30 billion; in 2008-09, it raised £43 billion, an increase of just a third. How can it be that income tax receipts doubled in the same period that corporation tax receipts went up by only a third? The rate during the period was largely unchanged. The answer is that the Labour Government allowed massive, egregious and unacceptable tax avoidance for a decade on an industrial scale. That is a disgusting record in government.
There was a massive change during that period. With the rise of the internet, tax bases were threatened, but the Labour Government were asleep at the wheel and failed to reform our tax system, and to understand and take into account the new technologies and the new threats to our tax bases.
Let us look at this massive and inexcusable tax avoidance by multinationals. Who am I talking about? I shall give a few examples. In the last financial year, it is estimated that Apple had earnings of about £6 billion in the UK. Apple has an operating margin of some 33%, meaning that profit in the UK would be roughly £2 billion. Tax attributable to UK profits should be roughly £500 million, but how much tax did Apple pay? It paid £10 million—not £500 million. That is unacceptable.
Let us take the case of Amazon. In 2010, Amazon had revenues attributable to the UK of £2.8 billion. It is estimated that it should have paid some £35 million in tax on profits of some £125 million. How much tax did Amazon pay? The answer is nothing.
Bob Stewart
So we are going to sort this, are we? Will it be sorted as soon as possible so that it does not happen again? We must ensure that it does not happen again.
Charlie Elphicke
I am grateful to my hon. Friend for anticipating the next part of my speech, but let me first give some more examples.
Google revenues in the UK were £2.15 billion in 2010. Estimated UK profit was £700 million. How much tax should have been paid? Google should have paid around £180 million, but how much did it pay? It declared a loss of £22 million.
Charlie Elphicke
My hon. Friend makes a fair point. The companies would answer that they did pay the tax required by law, but my response is like the one given by their lordships in, I believe, the Aberdeen case some years ago. Their lordships said that a man is under no obligation to allow the taxman to put a greater shovel in his stores than he must by law, but my argument is that tax law should allow the taxman to put his shovel into stores so that people pay a fair and just share of taxation.
Jacob Rees-Mogg
Can we be clear that the problem is the law and not the avoidance—the avoidance is legal, but the law may be wrong?
Charlie Elphicke
The law requires change. The avoidance might be legal, but HMRC is understood to be investigating a number of those companies. Because of taxpayer confidentiality, we will not know for sure until such time as a case comes before a court.
Let us take the case of eBay. Tax of some £50 million should have been paid on UK profits before avoidance, but eBay actually paid £3.4 million. Facebook should have paid £14 million, but actually paid £400,000. That level of avoidance is unacceptable. This poisoned legacy—the total failure to reform our tax system—left to us by the previous Labour Government is unacceptable. I might, if I am generous, put it down to their obsession with pursuing the prawn cocktail circuit for so many years, in the fear that if they took on business and ensured that it paid its fair share of tax, they would be less friendly with business and have less credibility.
Lorely Burt
I totally agree with every word that the hon. Gentleman has said so far. Does he share my concern that companies operating in developing countries should consider how they pay tax through transfer payments? Developing countries pay more—suffer worse—through not getting those payments from companies that extract their wealth than we get from our ability to tax.
Charlie Elphicke
I thank my hon. Friend for her point. My point, in this case, is that we should widen the anti-avoidance measures in the Bill for our own UK territory to ensure that taxes are paid on trading profits made here. I am not making a case for an extension by proxy of the UK’s substantial international aid budget, which is 0.7% of gross domestic product. If one wants to make the case that it should be more than 0.7%, as ActionAid does, I am sure that they will make it, but I do not want to focus on that issue. I am much more interested in securing our own tax base so that we can get our deficit down by widening the tax avoidance measures in the Bill and extending them to a wider and greater reform.
Owen Smith
I am following the hon. Gentleman’s argument with great interest. Will he confirm whether he plans to vote with his Government on the controlled foreign companies changes that will give a reduction of about £1 billion a year to UK-based multinationals?
Charlie Elphicke
The hon. Gentleman will know, first, that that means that we will get more tax in the UK and, secondly, that we already have a 0.7% commitment to the international aid budget. If he wants to pledge—a spending commitment from Labour of £1 billion or so—to extend that commitment, let him do so. I am sure that the shadow Chancellor would be fascinated.
Owen Smith
No, I am explaining to the hon. Gentleman that the Finance Bill, supported by the Chancellor, contains a measure on changes to the controlled foreign companies legislation that will reduce the revenues to the Exchequer by £1 billion per year—companies in the UK avoiding tax. Is he in favour of that?
Charlie Elphicke
Aid charities have made the case that corporations headquartered in the UK should be paying more tax overseas. That is not our job. Our job is to secure our own tax base in the UK. That is what I want to focus on, and it is what the previous Government totally failed to do over many, many years. If we put a stop to it and raise the due amount of tax from companies not resident in the UK with anti-avoidance measures and proper tax reform, we could have lower fuel duties for hard-pressed families and a lower basic rate of tax—and goodness knows we could even pay down some more of the debt that the previous Government shockingly, disgracefully saddled this country with.
I hope that the anti-avoidance measures in the Bill will be widened in the following way: the first principle is that business tax rates should be low, simple and attractive. Britain should be open for business, but open for business on a level playing field for national and international companies. Businesses should have a social responsibility to pay a fair share of tax. Some object to the idea of morality in the tax system, but this is an issue of corporate social responsibility. Tax avoidance should be dealt with firmly and rules changed to stop the avoidance. I shall come to specific measures in a moment.
For many years, the European Union has consistently and systematically sought to undermine our tax base in its pursuit of a common corporation tax base. We need the EU to support member states in protecting tax revenues rather than undermining them with so-called anti-discrimination rules.
Barry Gardiner (Brent North) (Lab)
Could the hon. Gentleman enlighten the House as to his view of the patent box? The Chancellor first mentioned it in last year’s Budget—I think—although it was Lord Mandelson who introduced the concept in the first place.
Charlie Elphicke
It is common ground on both sides of the House to support the patent box; in fact, I seem to recall the Labour party scrabbling to take the credit for the Chancellor’s implementing it.
Let me come to the next part of my list. Every multinational should be required to publish an effective rate of tax paid on UK revenues—from UK sources, from UK territory and from its UK trade. No Government contract should be awarded to any company that does not pay a fair share of tax in the UK. We need to get tough on multinationals that have taken us on a free ride by using conduits such as Ireland, Luxembourg, the Netherlands or other European jurisdictions for too long. As a former tax lawyer—a poacher turned gamekeeper —I hope that the House will allow me to put forward some proposals for how to change things. The first is to reform the branch tax rules. Amazon will claim not to be here at all—“We’re in Luxembourg,” it will say—yet it fulfils its obligations here and trades here. The truth is that Amazon does business here. In the internet age, we need to widen the branch tax rules to deem a branch for UK-source profits to be in a UK territory. I hope that Treasury Ministers will consider that.
Then let us look at restrictions on deductions such as interest, royalties or management charges—all sorts of costs that are loaded on to companies and declared as deductible items, but then end up mysteriously in Ireland, Luxembourg or one of these other countries. That method is routinely used to depress UK profits. We should pursue substance over form. We should employ “look-through” rules, so that no deduction should be allowed unless tax is actually paid somewhere else. Companies will claim, “Oh, we’re using the Luxembourg tax treaty,” but we have to ask whether the tax is actually paid—that is, is it repatriated to the states where it is actually paid? Invariably, the answer is no. We need far stronger and tougher “follow-through” rules, to follow through the money chain and see whether genuine deductions have been made or whether companies are just using a money box offshore to rip off not just our system, but the states in their home jurisdictions. Often, they do just that.
Next, we should look at how the rules on personal service companies can be tightened up. As I said in an intervention on my hon. Friend the Member for Gainsborough (Mr Leigh), politicians should be setting an example. Indeed, there are too many Members of Parliament with personal service companies—lately on the Opposition Benches, I have to say—who have not been behaving properly, but who should behave properly and pay a fair share of tax. When Ken Livingstone is not weeping crocodile tears, he is busy talking about how everyone else should pay tax but him. That is unacceptable. We need some truth, some reality and some leadership in our tax system. We should not just lecture everyone else, but act differently ourselves. We have had too much acting and too many actors; we need more reality, more substance, and more honesty and straighforwardness with the electorate.
We also need to reform the European Union or renegotiate the procurement and discrimination rules, so that we can properly secure our tax base. The way the European Union has systematically colluded with multinationals to undermine our tax base—costing us even more money than we already have to give it every year, in a big fat cheque that we write out for membership of that organisation—is nothing short of a scandal. We need the European Union to be our partner in ensuring that all companies pay a fair share of tax, not just in the UK but across the EU. We need the European Union to step up to the plate in these difficult times and fulfil its responsibility to help re-secure national tax bases—rather than undermining them—not just for our nation, but for all nations across Europe, which are pretty much all running deficits.
Finally, the principle that I am following is that business should pay a fair share of tax. This is about social justice as much as change and reform of the law. The fundamental deal in the tax compact is this: “A lower rate of corporation tax and lower business taxes, but no playing the system. Take corporate social responsibility to include taxation. Pay up and help us grow the economy and repair our deficit.”
Mrs McGuire
The problem is that the measure was paraded as a bit of camouflage for the reduction in tax for those earning more than £150,000 a year. On the one hand, the Chancellor was reducing tax for the wealthiest, but he was also going to attempt to clobber them. This policy did not come from the heart; it was part of the camouflage being used in the Budget.
There has also been a general sleight of hand over taxation. The Chancellor recently stated that he was “shocked” by how little the wealthy paid in taxes, yet this Budget gives a tax cut to the 14,000 people who earn £1 million a year or more. That will give them about £40,000 each year, while the average family with children earning just £20,000 will lose £253 a year from this April. That is on top of the VAT rise, which is costing the average family £450 a year. Furthermore, another 678,000 people of all ages who are currently paying the basic rate of income tax might feel pretty aggrieved when they wake up to discover that they have been catapulted into the 40p income tax rate, not because they are earning massively more but because the Chancellor has not raised the threshold in line with inflation—[Interruption.] I do not know whether I am interrupting a kind of confab of the horizontal speaking to the vertical on the other side of the Chamber, but I will continue, having drawn attention to the significant noise coming from the other side.
The Treasury forecasts suggest that there will be 5.7 million higher rate taxpayers by the end of this Parliament. That is nearly double the 3.1 million at the time of the last general election and treble the number when Labour came to power in 1997. Of course the whole increase in personal allowance that has been paraded here today is outweighed by the VAT rises, the changes to tax credits and the higher petrol duties. As my hon. Friend the shadow Chief Secretary demonstrated earlier, the average family with children will be worse off—not on the basis of our figures, but on the basis of those of the Institute for Fiscal Studies. The Chief Secretary’s answer to my hon. Friend was both evasive and complacent.
According to Citizens Advice, poorer families that get housing and council tax benefits will be just £33 a year better off when the tax threshold rises because as their income goes up, their benefits go down. For every person eligible to pay tax who also receives housing or council tax benefit, the Department for Work and Pensions will claw back some £187 of the £220 notional annual gain. The Citizens Advice chief executive, Gillian Guy, said:
“Raising the personal tax allowance is an empty gesture for struggling families on low wages who get housing and council tax benefits. For these families, the weekly gain is less than the price of a loaf of bread”.
In the name of simplification, the Chancellor launched his £3 billion tax raid on pensioners over the next four years. The freeze in the personal allowance for pensioners will see 4.4 million pensioners who pay income tax losing an average of £83 a year from next April. People who turn 65 after next year will, of course, lose most—up to £322 a year. The additional age allowance was introduced in the 1920s in recognition of the fact that those who have retired do not have the same capacity to increase their income. It is to the undying shame of the current Chief Secretary—a man for whom I once had some respect when he was a Liberal spokesperson on welfare issues—that he came forward today to try to justify taking money from those pensioners who have no other means of increasing their income, telling them that he was doing it in the interest of simplification.
Charlie Elphicke
I do hope the right hon. Lady will forgive me for breaking into her ad hominem attacks on just about every Government Member, but I point out to her that no pensioner loses any money whatever under these proposals because of the increase in the basic state pension that the Government have put in place.
Mrs McGuire
Frankly, the increase in the state pension came about because inflation was at 5.2% in September and the Government could not get out of it. I do not know whether the hon. Gentleman worked for Grant Thornton when he was a tax accountant, but Mike Warburton of Grant Thornton said:
“The Chancellor is allowing age allowances to wither on the vine. He is effectively phasing them out but there is always a price to pay for simplicity.”
The burden will fall on pensioners with below average incomes. Those are not our words, but those of an eminent firm of chartered accountants.
Mrs McGuire
No, I have been generous enough with the hon. Gentleman.
Also hidden in the statement was the announcement that there would be a further cut in the DWP’s welfare budget. I do not know how many people heard the Chancellor slide over the fact that there was going to be a £10 billion cut in the DWP budget. He did not say where it was coming from; it was left hanging in the air. He made a passing reference to his colleague, the Secretary of State for Work and Pensions, and to what a wonderful job he would do in cutting £10 billion. Where is that £10 billion going to come from? Will Ministers cut the carer’s allowance? Will they make further reductions in housing benefit for those in work as well as those who are out of work? Will there be a further erosion of support for disabled people, including disabled children? Will the Treasury freeze state pensions? Ten billion pounds will not come out of thin air. It will have to be paid for, but so far we have been given no details, or even a broad-brush indication of where it will come from.
My hon. Friend the Member for Llanelli (Nia Griffith) made some valuable points about the stimulation of growth. It is worth comparing what the present Government have done with some of the steps taken by our Government when we were faced with a recession—a global recession, not a recession manufactured in this country. [Interruption.] Did I hear a voice from somewhere?
Jacob Rees-Mogg
That is rather contorted logic. Saying that one aspect of the activities of a big and thriving business has a slightly higher rate of tax and so the business will suddenly not be able to give any money to charity is a leap in logic so great that it can be ignored in this case. However, I did wish to discuss the point about charitable giving, because that is one of the biggest sticks that has been used to bash this Finance Bill and the Budget with.
Charlie Elphicke
Does my hon. Friend agree that it is odd that fish and chips should be subject to VAT but pasties should not? The sausage and egg McMuffin that I sometimes enjoy is subject to VAT, as is my Domino’s pizza and the Indian takeaway I enjoy from the Milaad Tandoori in Deal, but sausage rolls are not. Is that situation not unfair, as it subsidises pasties and sausage rolls?
Jacob Rees-Mogg
I agree with my hon. Friend that VAT is a tax of immense complexity. However, it is an essential tax for the revenue-raising that this country needs and it has to include in it things that all of us like and would rather not be taxed. Equally, it will include things that some of us do not like, do not particularly wish to eat and do not mind how heavily taxed they are. If I am put the question, I would choose a sausage roll over a pasty, but I know that others have different views.
I also want to mention briefly the freezing of the threshold about which the right hon. Member for Stirling (Mrs McGuire) spoke interestingly. Again, the Government were right. Because the big step is being taken to raise thresholds altogether, it makes absolute sense, at no cash cost to any current pensioner, to freeze this level and allow it to even out so that we have one threshold. Every time we have variance in tax levels, be they rates or thresholds, we simply employ more people at Her Majesty’s Revenue and Customs, we have a more expensive cost of collection and we fail to achieve the objective of simplicity across the tax system.
This has been a great Budget and I wish to finish by speaking briefly about this terrible question of tax avoidance. I agreed with my hon. Friend the Member for Dover (Charlie Elphicke) when he cited that notable judge with his phrase about allowing the taxman to take the biggest shovel. If people avoid tax, that is legal because we, as Parliament, have allowed them to do so. The following clauses in part 1 of the Bill allow legal tax avoidance: 13, 14, 15, 16, 19, 20, 38, 39, 40 and 44. All those clauses in the first 50 allow tax avoidance of which the Government approve. We will all approve of some of them, because they allow MPs £30,000 tax free when they leave Parliament, allow cars that must be made secure because people are at risk to be tax free and allow people in particular situations and circumstances to pay less tax than they would in normal circumstances. The enterprise initiatives under clauses 38, 39 and 40 allow investment that the Government want to encourage. Those are all examples of tax avoidance that is liked by the Government.
We have to be fair to taxpayers. We can only expect them to follow the law of the land as it is written—the black letter law of the land. We cannot expect taxpayers to look at their affairs and say that the Government might like them, if they are feeling kind, to pay more tax than they are being asked for. None of us has an obligation to do that and it is wrong and dangerous to elide tax avoidance and tax evasion.