Tackling Corporate Tax Avoidance: EAC Report

Lord Lawson of Blaby Excerpts

Wednesday 30th October 2013 Lords Chamber

[Lord Lawson of Blaby (Con)]

My Lords, I start by thanking my noble friend Lord MacGregor for his outstanding chairmanship of the committee, and for introducing this debate today. He has been outstanding. He has been a friend of mine for a very long time, since before either of us entered the House of Commons, let alone this very illustrious House. Indeed, for part of my time as Chancellor he was my Chief Secretary to the Treasury, and I could not have had a better one. He has proved that he is a man of many talents, because he is as good a chairman of a Select Committee of your Lordships’ House as he was a Chief Secretary to the Treasury.

This report is called, Tackling Corporate Tax Avoidance in a Global Economy: Is a New Approach Needed?. Our answer was yes and the Government’s answer was no. That is a slight difference between us. My noble friend Lord MacGregor, who is a man of great understatement, said that in his judgment the Government’s response to our report was complacent and inadequate, as indeed it was, and in many ways it was also appallingly petty. I will refer to one or two things in a moment, but first let me reflect on why it was quite so bad.

One change that has occurred since my time has concerned me more and more. During my time there were two revenue departments—the Inland Revenue and Customs and Excise. The Inland Revenue was an absolutely first-class department, and it was a privilege to be the Minister responsible for it. Customs and Excise was very different; it was excellent on the drugs side. Its intelligence network, which is of the greatest importance in combating drug imports, and so on, was considerably superior to that of the police. It was also pretty good in its anti-smuggling responsibilities. Where it fell lamentably short of the standards set by the Inland Revenue was on the tax side. What happened is that subsequently, after my time, the two departments were merged and, instead of the standards of the better department being the standards of the whole, it has gone more the other way round. That happens very often with mergers of one kind or another, which look extremely rational but have that result.

Another thing that has greatly weakened tax policy in this country is that, again in my time, there was a very small tax policy division in the Treasury, but there was also a powerful tax policy division in the Inland Revenue. Since then, tax policy has been put entirely in the Treasury. There is now no tax policy division in the Inland Revenue, with the result that people on the policy side know nothing, or very little, or certainly very much less, about how the system works in reality. The knitting together of policy and administration is crucially important. So I am not surprised—although I do not think that it is the only reason—that the Government’s response to our report was so pathetically lamentable. I think that that has contributed to it.

Before I say anything more that my noble friend the Minister might find disagreeable, I will say one thing that pleased me about the Government’s response. Perhaps he would like to speak about it. One recommendation that we made was that the Government should look again at the different treatment of debt and equity capital in a company’s accounts. This completely different treatment, in which there is a tax allowance for interest on debt but no allowance of any kind for the dividends paid on equity, encourages the accumulation of debt. The noble Lord, Lord McFall, mentioned that he was a member of the Parliamentary Commission on Banking Standards, as was I. We made a recommendation on that, because it is real Alice in Wonderland; you have the regulator telling the banks that they must have less debt and more equity and the tax system saying that they must have more debt and less equity. That really cannot be very sensible. Even apart from banks, as the Mirrlees report pointed out, and as we point out in our report, there are very good reasons why this should to be looked at seriously.

I am glad of one good deed in a naughty world. The Government said in their response that they welcome,

“the Committee’s interest in this area. In response to the recommendation of the Parliamentary Commission on Banking Standards, the Government is reviewing the wider case for an allowance for corporate equity. The tax treatment of debt is one of the issues being explored by the OECD BEPS project”.

I am very glad to hear that, and I hope that my noble friend the Minister will tell us where they have got to on that, and what is their latest thinking.

For the most part, I am afraid that this is an extremely disappointing reply—and that is an understatement. I will give the House a flavour of the reply. On our main recommendation the Government say that they,

“do not consider that a fundamental review of the corporate tax system is necessary or would add value at this stage … and to change the rules unilaterally could undermine our attractiveness as a location. Changes on this scale could impose significant transitional costs on HMRC and businesses”.

There are a number of fallacies there. First, it is certainly desirable that we should have in this country as benign a tax regime as we can, consistent with finding the finance to pay for necessary public expenditure. But in my experience, what people look to when they are thinking about where to locate their investment and do business is, first, the size of the market, and how prosperous and good it is; whether the rule of law can be relied on; and whether the overall tax regime is attractive. The personal tax regime has, in my experience, more of an effect in many cases on how people see the jurisdiction than corporate tax or other forms of taxation. They also take into account the social legislation and whether there is too much regulation. All those things are taken into account. The idea that somehow, if we go it alone on corporation tax, we will no longer be attractive, is totally absurd.

We have to go it alone, because there has been a fundamental change in the world economy. Nothing in this world that I have ever come across is all good; there are always some disadvantages. Some of our witnesses tried to pretend that a lot of modern commerce has become dematerialised through the internet age. Nothing could be as material as a cup of coffee, yet Starbucks was among the most prominent of the early users of tax avoidance, which, I may say, is totally legal. That is the point: it is totally and completely legal. But globalisation has changed things—and, overwhelmingly, it has done good. If I had to choose the single best thing that has happened as a result of globalisation, it would be the success of so much of the developing world. The emerging world has really emerged successfully, which would not have been possible without globalisation or the freedom of trade and capital movements. Those private capital movements dwarf aid flows into complete insignificance, as well as being of rather better quality than aid flows. Globalisation has enabled China and a number of other countries, most but not all of them in Asia, to develop in the most wonderful way in the past 25 years. But nothing is without its drawbacks and disadvantages.

The Government have to face up to the fact that globalisation means that the corporation tax system is no longer fit for purpose, and will not and cannot be fit for purpose, because multinational companies will move profits legally to wherever the tax regime is lowest. A number of ill effects flow from this. One is that the Chancellor loses much needed revenue—and I feel for him, particularly when we have a deficit the size of the one we still have, although happily it has gone down a great deal. Loss of revenue is a serious business. A second flaw, defect or downside, as other noble Lords said, is that it brings the whole tax system into disrepute. That is not a good thing at all.

The third thing is that it is grossly inequitable. Although all those multinationals—I have nothing against multinationals—can shift their profits and intangible assets around the world in such a way that they pay little or, in some cases, no UK corporation tax, the backbone of this country is the small and medium-sized enterprises that are national companies, not multinationals. They still have to pay the full rigour of corporation tax. There is no level playing field. It is a totally inequitable system.

What are the Government doing? They are just prancing around and saying, “We are talking about it with our opposite numbers from other OECD countries and other European countries” and goodness knows what. They love going to conferences, and every so often they go to a conference and make a statement that they have reached a great understanding or agreement, but they have not. The system is just the same. The problem is just the same; it has not gone away. Then they say, “We will approach it this way, but we could not possibly take a lead”. God forbid that the United Kingdom should take a lead and introduce a sensible tax system of its own, which would probably comprise—although we do not lay down what it should be—a very low level of tax on corporate profits with a low level of corporate sales tax, because sales in this country are sales here that could be taxed here.

So what is the answer? We should take a lead, but instead, nothing happens. I have to say to the Government, “You’re not even getting nowhere fast; you’re getting nowhere slowly”. This simply will not do. They have to realise that corporation tax in the modern world has had its day as a major source of revenue. We have to find a new system. The modest proposal that we made, which was that there should be a review, is incontrovertible. I hope that my noble friend will sing a different song from the pathetic government response which this committee was accorded.