Tackling Corporate Tax Avoidance: EAC Report

Lord Smith of Clifton Excerpts

Wednesday 30th October 2013 Lords Chamber

[Lord Smith of Clifton (LD)]

My Lords, I thank my noble friend Lord MacGregor of Pulham Market for introducing this debate and for his consistent and exemplary chairing of the committee. I also join with him in thanking our clerk, Mr Bill Sinton, and our special adviser, Professor Michael Devereux.

The very widespread practice of exploiting low-rate foreign tax havens and corporate tax avoidance facilities should be placed in the wider context of the contemporary character of commercial behaviour in the UK and, indeed, in other major western economies. We have witnessed a plethora of scandals in banking, insurance, fund management and elsewhere; hardly a sector remains untouched. All of these scandals derive from the nature of modern business which is based on greed and the quest for quick bucks while ignoring long-term considerations, and has contributed to a mindset that induces corruption, bribery, fraud, insider dealing and other criminal actions. These have been all too little investigated in the past, although the prosecution rate is now increasing, particularly in the United States. The UK has some way to go in order to catch up in this respect.

Turning a blind eye to such illegalities has encouraged a lowering of standards across the board. If criminality goes unchallenged, sailing close to the wind, stretching the rules and following only the letter but not the spirit of the law become par for the course. We live in an economic polity where much, probably excessive, reliance is placed on regulators to monitor activity in the public interest. The system simply cannot cope, and there is hardly a regulatory agency in this country that is fit for purpose. The BBC Trust, the Independent Police Complaints Commission, the Care Quality Commission, the Serious Fraud Office in particular, Ofwat, Ofgem, Ofsted et al have all been subject to severe criticism. Quis custodiet ipsos custodes? is as pertinent a question today as ever and is one that Her Majesty’s Government should seriously ponder. Perhaps the Minister could comment on the merits of this observation. It is a problem that will not go away.

As this report shows, Her Majesty’s Revenue and Customs is also a deficient regulator when it comes to policing tax avoidance by companies. Unlike tax evasion, avoidance per se is not criminal. However, it is unethical and flies quite blatantly against the spirit of the law. Its widespread practice is indicative of the contempt so much of UK business has for high standards and ethical conduct—in other words, contempt for the public in general.

In the report the committee points to the extent of the practice and the deleterious consequences that follow from it, and acknowledges the difficulties of securing internationally agreed rules to minimise it. The report also points to the growing discontent among the public, which the noble Lord, Lord McFall, also referred to. This is all too understandable in a period of austerity. Why should large corporations, which are either resident in the UK and/or making huge profits here, escape paying corporation tax and behaving like good citizens? The report also raises the question of how far HMRC falls short as a regulator, and how difficult it is to assess this given the secrecy in which it operates. It suggests that HMRC’s resources are too meagre for the job it is required to do.

The report questioned the appropriateness of employing secondees from the big four accountancy firms to advise on how best to deal with the problems of tax avoidance, given that these very firms earn considerable sums advising major companies how best to minimise their corporation tax liabilities. As we noted, only two days ago the Public Accounts Committee again questioned HMRC senior staff on the apparent feebleness of its treatment of what Mrs Hodge called the “immoral” tax avoidance schemes employed by Google, Starbucks, Amazon and many others. Accordingly, we recommend that HMRC has better resources, that company tax advisers should be regulated, and that a joint parliamentary committee be appointed to oversee the work of HMRC.

Her Majesty’s Government’s official response to these rather modest proposals, according to my rough calculations, was to “agree” with three of our recommendations and “disagree” with eight, while merely “noting” 11. This tally, which is in effect a complacency index, is disappointing to say the least, as the noble Lord, Lord MacGregor, mentioned. In view of Her Majesty’s Government’s attitude as revealed by this tally, “deplorable” might be a better description. I ask my noble friend Lord Newby whether he thinks that this is an acceptable tally.

Perhaps because of this official complacency, the Independent and its sister newspaper the Independent on Sunday were very recently prompted into a week-long, detailed analysis of offshore tax avoidance by major companies. They concentrated on the quoted Eurobond exemption loophole created in 1984. The papers revealed that the practice is far more widespread than our report showed. More than 30 companies across a wide range of economic activity use the loophole, at an estimated loss to the Exchequer of £35 billion. Companies being advised by the big four accountancy firms to exploit this loophole range across high street retailers, care and health providers, and public utilities in gas, electricity and transport.

While these companies are clearly not model citizens, the former editor of the Independent, Andreas Whittam Smith, concluded last week that Her Majesty’s Government are the real culprits, because they speak with a forked tongue. Using the helpful terminology of Murray Edelman, “exhortatory” political language is used to beguile the public, and to stress that the Government believe in fair taxes and are fully committed to stamping out “aggressive tax avoidance” schemes. However, the Government employ Edelman’s secretive bargaining language of politics to give businesses a nod and a wink that the Government will turn a blind eye to all but the most blatant practices, in order to encourage home and overseas investment. That helps explain the feebleness of HMRC.

Most tax havens are of course British Crown dependencies. If the Chancellor promised to rein them in, he would have a powerful card to play in seeking internationally agreed tax avoidance rules. But I fear that Mr Osborne will not play that card, as he is clearly intent on making the UK itself a tax haven.

What is the result? Business is aware of how low it has sunk in public opinion. Its PR advisers polish up the tried and trusted—at least by them—technique of owning up to shortcomings in a very generalised way, and initiating new dialogues about the need for greater ethical concern. Unsurprisingly, as I speak, this is already being diluted to “integrity”, which is a lesser word in this context. Hence the meeting on 24 October of some 200 senior business executives with religious leaders, headed by Archbishop Vincent Nichols with the support of Archbishop Justin Welby, to discuss the draft for a “blueprint for better business”. I wonder whether they arranged a conference call to seek the views of Sir Richard Branson from his Caribbean tax haven.

In a similar vein, Sir Richard Lambert has been asked to direct a standards board for the banking industry. Although I do not doubt the sincerity of those involved, the truth is that as always their proposals will be but the latest edition of the “Book of Proverbs”. They will have as much practical impact on the pursuit of business life as other such endeavours, from the Cadbury report on good governance in 1992 to the more recent Vickers and Davies reports. Is that too cynical a view? Remember that our report stated that Cadbury had been aggressively avoiding tax for years, long before its acquisition by Kraft. Nothing alters, it seems.

In the light of the Independent’s revelations and the findings from the Public Accounts Committee’s questioning of HMRC officials last Monday, will the Minister say how the Government will adopt a much stronger approach to tax avoidance, or will this be yet more empty rhetoric?