Shabana Mahmood
Main Page: Shabana Mahmood (Labour - Birmingham, Ladywood)Department Debates - View all Shabana Mahmood's debates with the HM Treasury
(9 years, 10 months ago)
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Shabana Mahmood (Birmingham, Ladywood) (Lab)
I beg to move, That the clause be read a Second time.
It is a pleasure to start the Report stage of the Finance Bill, Mr Speaker. We had many good and long debates in the Bill Committee, and I am sure we will continue that trend over the next couple of days.
The new clause, which stands in my name and those of my right hon. and hon. Friends, would require the Chancellor of the Exchequer to publish within three months of the passing of this legislation a report on the additional rate of income tax—the top rate, which was 50p until last year, when it was cut by this Government to 45p. The report we envisage would set out the impact on Exchequer receipts of an additional rate, set at 50p, in the first year of the next Parliament. The Chancellor would also be required to set out the impact of reducing the additional rate for last year, 2013-14, and the amount of income tax paid by all additional rate payers, those with incomes over £250,000 a year and those with incomes over £1 million a year. Finally, the report would set out the impact of the reduction in the additional rate in 2013-14 on the level of bonuses awarded in April 2013 to employees in the financial sector.
Since the coalition Budget of 2012, we have had a number of debates on the Floor of the House and in Public Bill Committee on the Government’s decision to cut the additional rate from 50p to 45p. Indeed, the Minister has referred to such debates being an annual event during the passage of the Finance Bill. Why is it so important that we continue to press the Government on this one decision, made in 2012, after they have refused to listen to all and any attempts to get them to change course? It is because if there is one decision taken by the Government that tells us all we need to know about their priorities and who they stand for, this is it.
The Government who said, “We’re all in it together,” and the Chancellor who promised that he would not balance the books on the backs of the poor, saw fit to give, at a time when ordinary working people were seeing their living standards fall and when the combined impact of tax and benefits changes has left households on average more than £974 a year worse off, an absolutely huge tax cut to the wealthiest in our country. For millionaires, this tax cut is worth an average of £100,000—a vast sum, far out of reach for the majority of working people. So although this may appear to be simply an annual event and part of the House’s debates on the Finance Bill, it is much more than that. This Government made a bad choice—the wrong choice—when they prioritised a tax cut for millionaires while ordinary working people continued to struggle as a result of their decisions, and we will not let them forget it.
Mr John Redwood (Wokingham) (Con)
How does the hon. Lady explain the fact that income inequality rose under Labour and has fallen under the coalition?
Shabana Mahmood
I am pleased that the right hon. Gentleman is here. I recall in the debate in Committee of the whole House that he argued for a further cut in the rate to 40p, citing in evidence the increase in revenues resulting from the cut, but as he should know—I am sure he does—that is a result of bonuses being deferred. I shall return to that point, but I think it tells us all we know about where the Government stand on fairness.
Ian Murray (Edinburgh South) (Lab)
My hon. Friend talks about the amount that may be raised, but rather than having a regular debate across this Chamber about the 50p tax cut and the massive tax cut for millionaires, perhaps the Government could just accept the new clause and bring all the facts before the House?
Shabana Mahmood
My hon. Friend makes an excellent point. We do indeed have a regular debate about the facts and figures—I will come to the detailed data on the yield from the 50p rate later—but if the Government accepted our new clause, much of that debate could be put to bed, especially as Her Majesty’s Revenue and Customs now has much more data with which to produce an analysis that is less flawed than the one in 2012.
David Wright (Telford) (Lab)
Our hon. Friend the Member for Edinburgh South (Ian Murray) makes a good point. When the Government abolished the 50p rate, they made great play of studies they said they had done on the revenue raised. Would it not be perfectly acceptable for them to accept the amendment, so that we could see exactly the impact of their unfair tax changes, because they are clearly showing their colours in terms of supporting the wealthiest in our country?
Shabana Mahmood
I am grateful to my hon. Friend for that powerful point. As I said, I will explore the details in relation to data and the argument over the yield from the 50p rate, but he is right: we cannot continue to rely on a report produced when the rate had been in place for only one year. The Government should accept the new clause and produce a much more comprehensive analysis.
It was the Labour Government who introduced the 50p rate, which came into effect in 2010-11, a decision made after the financial crisis, as we sought to get the deficit down. When this Government came to power they did not say anything in the coalition agreement about abolishing the 50p rate, but in 2011 the Chancellor said that he would ask HMRC to look at the yields from the 50p rate, which was the warning signal that he was looking to cut it. In 2012, with HMRC’s report “The Exchequer effect of the 50 per cent additional rate of income tax” to back him up, the Chancellor cut the rate to 45p.
Why go through the process of looking at yield and getting HMRC to produce a report? Everyone knew that there were not enough data to come to an accurate view about yield because the rate had not been in place for long enough—a point about which I shall say more later. Well, the Chancellor knew that he needed cover for that deeply ideological decision so he was desperate to claim that a 50p rate raised very little money. If he could stand before the House and say that it raised hardly any money at all, never mind the uncertainty and the incompleteness of the data, he calculated that he could justify giving a tax cut to the richest in our country, knowing that on his watch ordinary people—those on middle and lower incomes—would pay the price for his economic plan, which has failed on the terms that he set for himself when he came to power in 2010.
Bill Esterson (Sefton Central) (Lab)
There are 15,300 people in work in my constituency who earn less than the living wage. They have lost out, as have many others, by £1,600 a year since this Government came to power. To them, accepting the new clause would indicate that the Government recognise that tax changes should be to the benefit of everybody in our society, not just a few. Does my hon. Friend think the Government appreciate that, or can she think of another reason why they will not accept it?
Shabana Mahmood
I fear that on previous form the Government will not listen today and accept our new clause. Nothing that has been said in previous debates gives me any confidence that they understand the message that they have sent to my hon. Friend’s constituents, mine and those of Members across the House that a tax cut for the wealthiest is prioritised, while ordinary working people at the lower end of the income scale are worse off.
Steve McCabe (Birmingham, Selly Oak) (Lab)
Does my hon. Friend share my worry that people will think the Government have something to hide, as they are unwilling both to let us see what a 50p rate would raise and to audit party manifestos? Rather than “We’re all in it together,” does it not sound like they are all at it together?
Shabana Mahmood
My hon. Friend makes a powerful point. What do the Government have to hide? The data that we seek would not be difficult for HMRC to provide. It has already conducted one analysis and it is not unfeasible for it to conduct a further analysis, this time based on more comprehensive data, which would clear up some of the issues once and for all.
Mr Iain McKenzie (Inverclyde) (Lab)
Does my hon. Friend agree that by accepting the new clause, the Government would give weight to their often recited argument that the broadest shoulders should bear the greatest burden? The new clause would put the burden on the shoulders best able to bear it.
Mr Redwood
The Government have published all the figures and they show that after the tax cut the better-off are paying more, not less.
Shabana Mahmood
The right hon. Gentleman is wrong. The Government have published one set of figures from only one year’s data. Much more data are now available for a further, more comprehensive review to be carried out, and the Government should do so. If they have nothing to hide, and if they are confident that they have made the right decision, they should submit that to scrutiny.
Returning to data and yield from the 50p rate, we know from the Government’s own assessment that the cost of cutting the rate from 50p to 45p was more than £3 billion, excluding all behavioural changes. In Treasury terms, £3 billion is a big deal, so how could the tax cut be justified? Well, the Government say that most of that potential £3 billion revenue would effectively be lost as a result of tax avoidance, the so-called behavioural change effect. Having assessed revenue lost as a result of tax avoidance and other behavioural change, the Government go on to say that the cost to the Exchequer of cutting the rate to 45p is only £100 million. So, on the Government’s figures, an additional rate of tax set at 50p would raise only £100 million.
Frank Dobson (Holborn and St Pancras) (Lab)
Is it not the case that the very well paid people who got the benefit are a collection of tax swindlers swindling the rest of the taxpayers, and should not everybody in the House be attending to changing the law so that such tax swindling cannot happen in the future?
Shabana Mahmood
I am grateful to my right hon. Friend for his intervention. I was about to come to the topic of tax avoidance, which I hope will answer his question.
Another weakness in the Government’s argument is the proposition that behavioural change, or tax avoidance, means it is not worth while maintaining the rate at 50p. This must be the only example of tax avoidance resulting in a huge tax cut, rather than in Government crackdowns to tackle and fight tax avoidance, which they are normally so quick to say they are doing. The Chancellor is on record as saying that he considers tax avoidance to be “morally repugnant”, but in the case of the 50p rate he rewarded a particular form of avoidance with a tax cut. I wonder if that has ever happened for people on middle and lower incomes. I think not.
The message that this Government have sent out is that if people are sufficiently well off to pay for advisers who can tell them how to avoid paying the 50p rate, and are organised enough and can lobby the Government, they are up for a tax cut, but everyone else, sorry, is simply worse off.
Bill Esterson
Does my hon. Friend agree that the Government also send the message that a tax cut incentivises the wealthy to work harder, but that if everybody else is given benefits that does not work?
Shabana Mahmood
My hon. Friend is right.
The Government always tell us how proud they are of their record on tax avoidance, but how much effort did they put into thinking of ways in which they could protect revenue from the 50p rate? The Government have introduced the general anti-abuse rule, the so-called GAAR, which may have helped. They could have thought about a targeted anti-avoidance rule, a so-called TAAR. They could also have looked to HMRC to do more. I understand that no specific resources are allocated within HMRC to protect revenue from the 50p rate. A range of measures could have been taken to protect revenue. Before rushing to abolish the rate, the Government could and should have looked at protecting that revenue first. They were quick enough to publish an analysis saying that on their evidence it was not raising much money because of behavioural change, but their instinct was not to say, “Let’s look at how we might see off that behavioural change.” They did not commission a report or publish anything on that; they jumped straight to cutting it at the earliest opportunity: more evidence that this is an ideological and political choice made because they wanted to prioritise the tax cuts for the richest, while ordinary working people are worse off.
Steve McCabe
Far from trying to curb tax avoidance, is not the problem that the Govt constantly open up fresh opportunities, such as the shares for rights, which the Institute for Fiscal Studies has called another billion-pound lollipop on the table?
Shabana Mahmood
My hon. Friend is absolutely right. We will debate later the issues in relation to tax avoidance and shares for rights.
The Exchequer Secretary to the Treasury (Mr David Gauke)
The hon. Lady accuses the Government of being ideological here. For the avoidance of doubt, were there to be yet another study that showed that the 50p rate failed to raise any substantial sums of money, would the Labour party still go ahead with an increase in the additional rate of income tax from 45p to 50p?
Shabana Mahmood
Let us see the report. The Minister has had many opportunities in Finance Bill debates where the Opposition have tabled amendments and new clauses calling for such a report. He has not produced one. I have no confidence that he will go away today and ask his officials at HMRC suddenly to produce a report. If he has such a report in mind, he should accept our new clause, and we can then have that debate. We have said that we will increase the rate to 50p. We believe that that can raise money and will be a good part of a much fairer deficit reduction policy.
The truth is that there was no justification for giving a huge tax cut to the richest in our country. We now know that bonuses are up by 83% for those in the financial sector, while ordinary working people are worse off now and will be worse off in 2015 compared with 2010. Wages will be 5.6% down at the end of this Parliament from what they were at the beginning.
The Government have not ruled out cutting the additional rate back down to 40p. We know that this is the ardent desire of many of their Back Benchers. Perhaps when the Minister replies he could tell the House whether the Government are planning any further cuts. They have ducked the opportunity on previous occasions to confirm that they will not go down from 45p to 40p. It will be good to hear from the Minister whether that is the case. The Government’s priorities are all wrong. Ordinary working people continue to struggle with their finances, and the link between the wealth of the nation and the money in people’s pockets and in their household budgets is broken. This Finance Bill does nothing to change the reality of the lives of millions in our country, yet Government Members want to cut taxes for the richest.
Jonathan Edwards (Carmarthen East and Dinefwr) (PC)
The Labour party now proposes a 50p rate for the additional rate. Is that a permanent measure or a temporary measure to deal with the deficit?
Shabana Mahmood
The hon. Gentleman has made that point in previous debates, and I repeat the answer that I gave then. We have said that we would increase the rate to 50p in the next Parliament as we get the deficit down. I could not be clearer than that.
It is the richest in our country who are benefiting the most from the recovery delivered by the Government. The return of economic growth has overwhelmingly benefited the top 1%, as shown by analysis of HMRC figures by the House of Commons Library, which covered the year when GDP growth returned and the top rate of income tax on earnings over £150,000 was reduced. The share of post-tax income of the top 1% of taxpayers—300,000 people—rose from 8.2% in 2012-13 to 9.8% in 2013-14. Yet during the same period, the bottom 90%— 27 million taxpayers—have seen their share of post-tax income fall.
This cut to the 50p rate cannot be justified when the deficit is high and will not be eliminated towards the end of the next Parliament. Labour in government will increase the rate back to 50p to help us to get the deficit down in a fairer way. Just as we have said that we want the Office for Budget Responsibility to have powers to audit manifestos ahead of the next general election, because we believe that that scrutiny will add to public understanding about the choices that are being made—a call the Government only last week rejected—so too we think that a report as envisaged by the new clause would help the public to understand the impact of the top rate of tax so that they can make up their own minds about who is standing up for them and other working people like them.
Mr Redwood
Let me deal first with an old canard from the Labour Benches that is simply untrue and unfair: the idea that Conservatives welcome tax cuts for the rich, but do not think that tax cuts are appropriate for anybody else. Government Members believe strongly that tax cuts work for everybody, and that is why the Government have given back a lot of tax revenue to people on low pay by taking them out of tax altogether. We have supported and welcomed that, and that is where the missing revenue that Labour worries about is concentrated.
Mr Gauke
The important point here is that the HMRC analysis explicitly dealt with that issue. Yes, there will be instances in which sums are shifted from one year to another, just as happened when the previous Government announced the introduction of the 50p rate. People brought forward income at that point. The analysis took those behavioural changes into account and excluded them, and still concluded that the 50p rate was ineffective in raising money. Given that HMRC has already carried out that analysis and reached that conclusion, which is consistent with the academic research in this area, and given that the IFS has said that no substantial sums were involved, would the Opposition be determined to go ahead with a 50p rate even though the evidence suggested that it would not raise money? That seems to be their ideological position. It would be illogical and unfair to reintroduce a tax rate that was ineffective at raising revenue from high earners, that made ordinary taxpayers pay more and that risked damaging growth.
Shabana Mahmood
The Minister will acknowledge that the IFS has said that this whole area would benefit from greater research. Now that HMRC has more data, that research would perhaps produce more accurate results. Will he take that point on board and support our new clause?
Mr Gauke
There is no evidence that HMRC’s original analysis was wrong. When the Opposition announced earlier this year that Labour would introduce a 50p rate, they claimed that a new £10 billion had emerged that had previously not been taken into account. That turned out not to be the case, however; they got that completely wrong. The data still point in the direction that HMRC’s conclusions are as I have suggested, and there is no reason to believe that the analysis was wrong. The fact is that the 50p rate is an ineffective way of raising money from the wealthiest.
Shabana Mahmood
We have had a good debate on our new clause. As I expected, the tone of the Minister’s remarks suggests that he will not take the opportunity to support it, despite accepting the fact that the Institute for Fiscal Studies has joined us in saying that more research, data and analysis are necessary if we are to get a complete answer on the issues of data and yield relating to a 50p top rate of tax. I note that he did not answer my earlier question about that. If he wants to say to the country that his Government have cut the 50p rate with justification, he should not have shown himself to be afraid of such data. The Government should have agreed to the new clause, as its proposals would have settled the matter once and for all. I ask again, what does the Minister have to be afraid of? We will be pressing the new clause to a vote.
John McDonnell
Let us get the figures clear. On the percentage of gross income that goes on taxes, for the bottom quintile it is 37.4% and for the top quintile it is 35%. The poorest pay more.
Shabana Mahmood
I beg to move, That the clause be read a Second time.
We now come to the last of our debates on the Finance Bill today. New clause 12 would require a report by the Chancellor within six months of Royal Assent, setting out further proposals to reduce the tax advantages arising from tax arrangements that are abusive. It makes particular reference to the quoted eurobonds exemption, disguised employment in the construction sector, and the use of dormant companies as a means of tax avoidance. The new clause would require an assessment of the impact of all three on total receipts paid to the Exchequer.
Charlie Elphicke (Dover) (Con)
In relation to eurobonds, I read a report that the shadow Chancellor has suggested that there is £500 million at stake. Will the hon. Lady confirm her understanding of the costings?
Shabana Mahmood
I will turn at length to costings of the abuse of the quoted eurobonds exemption, but it is certainly true that many of the estimates of how much it might be costing the Exchequer have placed the figure at around £500 million.
Let me start with the context and explain the thinking behind our new clause. Public concern about tax avoidance is high, and this is a problem not only for the Government but for parties across the House. The setting of tax rates, decisions about tax reliefs, and the collection of tax are among the most important functions of government. If the system is not working as well as it could be, that needs to be addressed. Over the past couple of years, there have been a number of high-profile media stories focused on the tax arrangements of particular companies and individuals, as a result of which, it is fair to say, public trust in the tax system has been eroded.
The deficit, as we know, is high and will not now be cleared by 2015, as the Government promised when they came to office in 2010. It will not, in fact, be eliminated until well into the next Parliament.
Sir Gerald Howarth (Aldershot) (Con)
As the hon. Lady has mentioned the deficit, would she now like to apologise on behalf of the Labour party for the catastrophic destruction of the public finances in the last Parliament?
Shabana Mahmood
I think the hon. Gentleman and other Government Members should apologise for the fact that their Government have delivered a huge tax cut for millionaires while households are on average £974 a year worse off. That is a deplorable record and the Government should apologise for it.
We have already discussed at length today the fact that ordinary working people in our country are worse off as a result of this Government’s economic plan. As I have said, households are £974 a year worse off as a result of tax and benefit changes, and wages will be 5.6% lower in 2015 than they were in 2010. We also know that it is the richest 1% of the country who have benefited most from the recovery. With working people facing a cost of living crisis, it is vital that everyone pays their fair share and that we restore public trust. When ordinary people are struggling with their household budgets, which are stretched ever thinner, it is understandable that there will be increasing anger if they feel that others are successfully avoiding tax and the Government are failing to do enough about it.
The same goes for businesses, too. We know that small and medium-sized enterprises are struggling with business rates, for example, which have gone up since 2010. Many businesses are now paying more in rates than they do in rent. Businesses that do the right thing when it comes to tax are understandably frustrated and angry when they see others that do not play by the rules, and they are right to think that there should be a level playing field, so that those who do the right thing are not penalised because others get away with not paying their fair share. High-profile cases of tax avoidances have therefore undermined public trust in company taxation and hit businesses that play by the rules.
Our best measure of how well the system is working is the tax gap—which is effectively the amount of uncollected tax in the economy—which has risen under this Government by £1 billion to a total of £35 billion.
Shabana Mahmood
I know the Minister will say that it has gone down in percentage terms, but only by 0.1%. I assume that that was the intention behind the intervention he was about to make.
Shabana Mahmood
Focusing on the actual figure is important. It concentrates the mind when assessing the scale of the task both for this Government and the successor Government in 2015. By anyone’s analysis, £35 billion is a huge sum, which, if collected, would make a very significant difference to the nation’s finances.
Kelvin Hopkins (Luton North) (Lab)
My hon. Friend is making an excellent speech and she is right that this is a large sum of money. It is equivalent to 9p on the standard rate of income tax.
Shabana Mahmood
My hon. Friend makes an excellent point. He is of course right that this is a huge sum of money and that people are rightly concerned that £35 billion-worth of tax is potentially going uncollected in our country.
Ian Swales
I am certainly no defender of the tax gap, and I am on record as having challenged the whole system of tax avoidance many times. However, does the hon. Lady know what the tax gap was in 2010 when the previous Government left office?
Shabana Mahmood
The truth is that any tax gap, however big or small, is unacceptable to the public, and strong action should always be taken to tackle it. I was about to say that I am grateful to the hon. Gentleman and that it was £32 billion. As I say, that is too high, and it has gone up to £35 billion under this Government. These large sums of money shake the public’s confidence when it comes to believing that the Government are doing everything they can to tackle tax avoidance.
Shabana Mahmood
I will take further interventions later, but I want to make some progress.
What else has been happening on this Government’s watch? The Government have raised expectations in respect of some aspects of their tax avoidance policy, but they have not been met. In particular—we have put this point to the Minister on many occasions—the Swiss deal, which was supposed to bring in £3.12 billion, a sum that would have gone some way towards making a dent in the tax gap, has in fact brought in only £818 million. I know the Minister will say that the figures were okayed by the independent Office for Budget Responsibility when the costings were put in the Red Book, but that does not mean that the Minister can simply get away with it. At the end of the day, there is an unexplained and substantial difference between what was meant to happen as a result of that deal and what did in fact happen, raising questions about the substance of the deal.
Another feature of public debate as the issue of tax avoidance has shot up the public agenda relates to Her Majesty’s Revenue and Customs. If we are to close the tax gap, we need HMRC to be as effective as possible. Last year’s Public Accounts Committee report “Tax avoidance: tackling marketed avoidance schemes” found that HMRC did not know how much it spent on its anti-avoidance work and had not evaluated the effectiveness of its efforts. It calls for HMRC to improve its recording and monitoring of the cost of its anti-avoidance work and to set out clearly how it will evaluate its anti-avoidance strategy. This is a substantial gap in knowledge; again, it has a direct impact on the Government’s ability to tackle tax avoidance effectively and thereby close the tax gap.
Charlie Elphicke
It is worth noting that last year tax inspectors collected a record £23.9 billion, about £4 billion of which was from criminals and tax avoiders, so HMRC has been quite effective in collecting that record amount.
Shabana Mahmood
I am grateful to the hon. Gentleman for his intervention, but as I just said, the tax gap has widened: despite those efforts, it has gone up by £1 billion or more.
The Public Accounts Committee also raised concerns about the monitoring of tax relief at HMRC and the Treasury. In 2013, there were 1,128 tax reliefs in the UK taxation system—a number that continues to grow. Tax reliefs can range from fundamental components of the tax system, such as the level of the personal allowance, to tax expenditures with more specific objectives to change behaviour, such as film tax relief. They play an important role in the tax system, but can be abused. Indeed, even in this Finance Bill the Government have had to take steps to close down the abuse of tax reliefs. It is therefore very worrying that the Public Accounts Committee has concluded:
“There is a lack of transparency and accountability for tax reliefs and no adequate system of control, following their introduction. HMRC and HM Treasury share responsibility for tax reliefs, but there is no accounting officer with responsibility for the stewardship of tax reliefs, as there would be for”
other elements of
“public spending. In 2010, HM Treasury committed to developing a framework for the introduction of new reliefs”.
However, no measures have been implemented so far.
In December 2013—this is relevant to what the hon. Member for Dover (Charlie Elphicke) said a moment ago—there were just four full-time officers in the fugitive unit, trying to catch 124 HMRC fugitives. The Government launched a “most wanted” campaign in August 2012, but earlier this year it was found that just four fugitives had been caught since the publication of the list. Moreover, it was admitted that of the 32 “most wanted”, 11 could not be located. If the Government are to support their claim that they are succeeding in the fight against tax avoidance and evasion, they must be able to demonstrate that they will catch those who break and abuse the rules, and will prosecute them to the full extent of the law.
Kelvin Hopkins
Does not what my hon. Friend is saying suggest that there is a cosy relationship between the Conservative party and the very rich? The Conservatives do not want to chase those people, because they do not want to upset their friends.
Shabana Mahmood
My hon. Friend has made his point powerfully, and in his characteristic way.
As we can see, despite the Government’s claims, their record of tackling tax avoidance is simply not good enough in a number of areas. They will say that the avoidance measures in this Bill are radical and bold, and are evidence of a commitment to tackling avoidance. We have supported the measures relating to follower notices, accelerated payment notices and the need to tackle promoters of tax avoidance schemes, although we have questioned the Minister about some of the deeply felt concerns of those who will be affected by the follower notices regime and by accelerated payment notices, which have caused a great deal of debate outside the House. However, although those measures have received the Opposition’s support, the fact is that they are not revenue raisers. They will simply bring in money that the Government were expecting to collect, but which had been clogging up the various back channels and alleyways of the legal system.
Jonathan Edwards (Carmarthen East and Dinefwr) (PC)
The hon. Lady has mentioned a number of measures, and has made some good points. Should not the Government be pursuing large multinationals such as Microsoft and Google, which are not paying a penny in corporation tax?
Shabana Mahmood
I think the Government should adopt an across-the-board strategy. I think they should deal with companies of all sizes, as well as individuals who engage in the various types of tax avoidance and evasion. I have mentioned a number of areas where there is concern about the Government’s action to date, and about their record of being able to narrow the tax gap.
The Government’s other flagship policy, introduced last year, is the general anti-abuse rule. Of course, it will take some time for the GAAR to settle in, as it is a new measure, and it is not yet clear how it will operate in practice, because it has not yet been the subject of a court case. It is, however, striking that no penalties regime associated with abuse falls within its remit. One would have thought that such a regime was a deterrent, and that the Government would want to make it clear that the type of abuse caught by the GAAR—abuse of the most egregious nature—would not be tolerated. However, it seems that an individual who fell foul of the GAAR, having engaged in the most egregious form of tax abuse, would incur no penalty but would merely be required to pay the amount that had been disputed. That strikes me as an interesting omission from the GAAR and the Government’s arsenal of measures to tackle tax avoidance.
Nigel Mills (Amber Valley) (Con)
I think we went through this in the Finance Bill Committee last year. It would be somewhat iniquitous to have a higher penalty for a scheme that complied with the letter of the law but was subsequently ruled out of order by the GAAR than for one that was blatantly outside the law in the first place. I think we should stick to the standard penalties that apply for under-declaring tax on a tax return.
Shabana Mahmood
That may be the hon. Gentleman’s view, but I am simply pointing out that in order to fall foul of the GAAR someone has to have engaged in the most egregious form of abuse. It seems odd to me that falling foul of the GAAR will not therefore attract any additional penalty on top of the tax that is in dispute.
Shabana Mahmood
No, I am going to make some more progress.
Tax avoidance and how to tackle it effectively and thereby close the tax gap remains a real problem for this Government, hence our new clause. We need more action from this Government, and where they fail the next Labour Government will step in. We are pushing the Government for greater action in three specific areas. Let me take each in turn.
Ian Swales
The hon. Lady talks about the next Labour Government. Does she wish to apologise for the slashing of the number of compliance and investigation staff by the previous Labour Government, to the point where this Government have had to add large numbers of people to carry out the work she so much wants?
Shabana Mahmood
Given the cuts at HMRC, this Government’s record on HMRC resources, which is a topic I regularly debate with the Minister, is not one for Members on the Government Benches to show off about.
First, let me take the issue of the quoted eurobonds exemption. That was originally implemented to make it easier for companies to obtain finance from the international bond markets by excluding corporate debt listed on recognised stock exchanges from UK withholding tax. Making it easier for companies to obtain finance on the international bond markets is a legitimate objective that we support. However, as covered in a spate of high-profile media stories last year, the exemption can also be used for tax avoidance purposes, allowing companies to shift profits out of the UK in the form of interest payments, without making any tax payment. As HMRC has noted:
“In recent years a number of groups have issued Eurobonds between companies in the same group, and listed them on stock exchanges in territories such as the Channel Islands and Cayman Islands, where they are not actually traded. In effect, the conversion of existing inter-company debt into quoted Eurobonds enables a company to make gross payments of interest out of the UK to a fellow group company, where otherwise deduction of tax would be required.”
The Government consulted on the issue in 2012, with HMRC proposing to amend the eurobond exemption so it would not apply where the eurobond is issued to a fellow group company and listed on a stock exchange on which there is no substantial or regular trading in the eurobond. HMRC stated:
“The effect of the amended rule would be to leave untouched the quoted Eurobond exemption for the overwhelming majority of Eurobond issues. It would deny the exemption only in the case of intra-group Eurobond issues that appear to be undertaken for the purpose of circumventing the requirement to deduct tax at source rather than being directed at the raising of third party finance.”
Despite HMRC estimating that the proposed restriction could have an extra impact of £200 million a year, in their response, the Government stated that they did not intend to proceed with it. Why not? Well, the Government said they made that decision in the “light of the responses” they received around a number of technical issues and after respondents questioned the positive Exchequer effect set out in the impact assessment.
That is simply not good enough. We say that abuse of the exemption can be shut down and must be shut down. Our proposals will explore removing the exemption where bonds are issued to connected persons, such as where a subsidiary issues a bond to a corporate parent or its private equity fund owners. To minimise disruption to private equity funds using the mechanism to simplify investor rebate claims under double taxation treaties, we would explore either offering an exemption for private equity partnerships where all, or the vast majority of, the ultimate beneficiaries would qualify for double taxation relief, or streamlining the withholding tax rebate process in consultation with the industry. So there is a mechanism to shut down the abuse of the exemption. It could and should have been taken up by the Government.
The estimates of the Exchequer impact of closing the loophole range from £1 billion to the Government’s estimate of about £200 million, with many more commentators saying that they would place it at about £500 million. In a letter to me dated 4 March 2014, the Minister said:
“Some newspapers quoted a figure of £500m for the tax at risk. This appears to be based on the unrealistic assumption that the interest paid out of the UK had not been restricted for tax purposes and that the beneficial recipient would not be entitled to gross payment. You will appreciate that I cannot discuss individual cases, but HMRC has confirmed to me that computational adjustments are frequently made. Consequently, the £500m sum is very wide of the mark. Any change here will not raise any significant yield.”
I was interested in that response, for which I was grateful and which I received after I had tabled a number of questions about the quoted eurobond exemption, because it displayed a concerning lack of clarity. The Minister says that the numbers quoted are “wide of the mark” but he does not say where the mark actually is. That is surprising, given that HRMC and the Minister have examined this in detail and have consulted on it, and given that they tell us that “computational adjustments” are regularly made for it. Despite that, still no figure has been given.
Mr Gauke
In my letter, I also offered the hon. Lady a meeting, attended by officials, to discuss the matter and explain some of these points to her further. I will try not to be personally slighted, but she has not responded to that offer. Why has she not done so? Is it because of the fear that when confronted with some of the challenges in this area she might find that this is all slightly more complicated than she has been led to believe by one or two newspaper articles?
Shabana Mahmood
I am grateful to the Minister for his intervention and I hope he does not take it as a personal slight that I did not, on that occasion, take him up on the offer of a meeting. I will try not to be patronised by the suggestion that these matters are far too complicated for me to understand and that I am getting my information only from newspaper articles.
Mr Gauke
It is quite the opposite: I have absolute confidence that the hon. Lady would have the capacity to understand that this matter is somewhat difficult, but it is often advantageous to speak to the officials who deal with it on a day-to-day basis in order to have a better understanding of it. It would be of benefit to her, and to the House as a whole, to ensure that this debate could take place on the basis of as good an understanding of the matter as possible. By the way, the invitation still stands.
Shabana Mahmood
I may yet take the Minister up on it. But it would be a mistake for him to think that our proposal has been made without consulting experts who are very much engaged on the issue of eurobonds. I am confident that the information we have put out as a result of our business taxation paper, launched yesterday, is accurate and that we have considered the different legal and other ramifications of limiting the abuse of the exemption as it currently stands.
Shabana Mahmood
I am going to make a bit more progress.
Let us say for the sake of argument that the figure is close to the £200 million or so set out in the original HMRC consultation. I was surprised that the Minister did not think that sum would merit action. The tone of his comments to me suggested that he considered that to be a small sum and so it was not worth going ahead with the attempt to close down the abuse of the exemption. I am afraid that, as an argument, that is not something that I am prepared to buy. Why? Well, in this year’s Finance Bill Committee, we have debated and supported a measure in clause 61 on business premises renovation allowances.
Mr Gauke
I would hate it if the hon. Lady inadvertently gave the impression that it was my view that the £200 million was not something that we would seek to address; we certainly would. In my letter to her of 4 March, I said:
“In the small number of cases in which a restriction might be considered appropriate, it was also clear from the consultation responses that the proposal would not be effective in addressing the concerns.”
In other words, the proposal that was consulted on would not have got the £200 million. That is why we did not proceed with it. I want to make that clear, and I am sure that she would not want to give a misleading impression.
Shabana Mahmood
I am grateful to the Minister for that intervention. I was talking about the overall yield. On the difference between the Government and the Opposition in relation to the technical way in which to seek to close down the exemption, the Government consultation looked at situations in which the bonds are not being actively traded. We agreed that that was not an appropriate way in which to close the exemption but, as I have said, we would explore removing the exemption where the bonds are issued to connected persons and, in doing so, we would look at mechanisms to simplify rebate claims under the double taxation treaties and consider, in consultation with industry, streamlining the withholding tax rebate process.
Charlie Elphicke
On these particular provisions, the hon. Lady said that she consulted experts. Will she confirm which particular experts she consulted?
Shabana Mahmood
I would be happy to have a long conversation with the hon. Gentleman about all the different experts, but let me just say that our experts were drawn from across the business and legal worlds. They gave advice and assisted us in thinking through many of the issues related to the abuse of the quoted eurobonds exemption. I will not take this opportunity to put that advice on the record, because I have not sought the permission of those experts to make public some of the assistance and advice that they have given to us. However, our paper is thorough on the issue of how we would seek to close down abuse of the exemption. That tells the House that we have considered these issues deeply, and have thought through all of the problems that might arise from the different attempts to close down the exemption.
I was talking about yield, and how far a potential yield should dictate the Government’s policy in deciding whether to close down an abuse of the system. I referred to the business premises renovation allowance in clause 61. The Government have taken action to close down some of the abuse associated with that allowance, but the impact on the Exchequer was, we were told, negligible. So we see the Government proactively closing down a loophole in which the Exchequer impact is expected to be minimal, but where a loophole exists that is estimated to cost the Exchequer upwards of £200 million a year, they do nothing. How can they justify their decision not to take action to prevent the abusive use of the eurobonds exemption when there are hundreds of millions of pounds at stake?
The potential complexity of the change that would be required is no justification for the failure to act. It has not stopped this Government on other measures, including on the business premises renovation allowance. There seems to be no reason—not money, complexity or anything else—that could stop the Government from acting other than intense lobbying from the affected parties seeking to protect their own interests.
The Government have failed to act, but our new clause gives them the opportunity to do so. If they do not act, the next Labour Government will.
Shabana Mahmood
I want to make some more progress.
Secondly, we want to push the Government to take action on disguised employment in the construction industry. Employers falsely declaring their workers to be self-employed is a long-standing and well-documented issue in the sector. Although there is of course some necessary and genuine self-employment in the sector, employers are currently able to declare someone to be self-employed when they exhibit all of the characteristics of an employee.
That results in three problems. The first is a cost to the Exchequer. The Treasury has estimated that that entailed a static cost of £350 million in 2009 and the House of Commons Library recently produced an estimate of about £500 million. The second problem is that those falsely classified as self-employed are denied their employment rights. That means that workers might work for the same company for several years, effectively as an employee, while not receiving any of the resulting employment rights, such as sick pay, holiday pay and maternity and paternity leave.
Shabana Mahmood
My hon. Friend is absolutely right about the findings of that report and we know that this is a real problem, particularly for people in the construction industry.
Kelvin Hopkins
My hon. Friend is making a very fine speech and I agree with what she is saying. In 1970, I serviced on the TUC construction committee, and a major item on the agenda at the time was bogus self-employment and the loss to the taxpayer. Another point is important, too. They do not pay their national insurance, so they will suffer when their pensions come to be paid.
Shabana Mahmood
I am grateful to my hon. Friend, who is right that this is a long-standing problem for Governments of all colours and persuasions who have for too long been unable to deal with these very serious issues which result in people not being entitled to sick pay, holiday pay, maternity and paternity leave and other employee rights.
The third problem associated with disguised self-employment is that the unhealthy level of self-employment in the construction industry—40% compared with an average of 14% across all other industries—does not offer a sustainable skill supply for emerging growth opportunities or a change in the economic weather. Employers who want to invest in their staff and employ directly are losing out to companies that use payroll companies which, because they are paying less tax, can sometimes offer slightly higher pay to poach skilled staff.
In July 2009, we published proposals to tackle the problems of false self-employment in the construction industry, but it was not until last year’s Budget that the Government took an interest in the problem when they announced that they would consult on proposals to tackle tax avoidance by intermediaries based offshore who provided labour services to UK companies. We are still waiting for the Government’s response to their consultation on onshore intermediaries, which closed, I think, in March.
Last year, the shadow Secretary of State for Work and Pensions, my hon. Friend the Member for Leeds West (Rachel Reeves), reviewed the issue and, based on an investigation of the available evidence and widespread consultation with the industry, we have proposed that workers should automatically be deemed to be treated as employees for tax purposes if they meet criteria that most people would regard as obvious signs that they were employees rather than self-employed subcontractors. It is important to note that the measure would not only close a costly tax loophole but remove a perverse financial incentive for those workers whom most would regard as being in an employment relationship to be classified as self-employed. Such a shift would be good for the construction sector and its work force, too. We want the Government to take further action today to consider the issue and prepare the report envisaged in our new clause.
The third area in which we seek greater action is that of dormant companies. It has been estimated that 30% of all UK companies are not asked to submit tax returns. One explanation that has been given is that those companies are either dormant or are not liable to pay tax in the UK as they trade exclusively overseas. Once companies have declared themselves dormant, they are exempted from filing a corporation tax return for five years. For some companies, that window could be used as an opportunity to trade with tax impunity and yesterday we set out our proposals whereby we will require annual confirmation of dormancy and will further explore the possibility of banks’ automatically informing HMRC when there is activity in supposedly dormant accounts. That would deal with an issue of tax evasion, rather than tax avoidance, but it is important that the tax lost as a result of weaknesses in the rules of dormancy is firmly on the Government’s radar and it has not been to date.
As I have set out, tackling tax avoidance and closing the tax gap effectively remains a top priority for the public. This Government’s record is not good enough. Our new clause pushes for greater action on three important issues and practical measures that can help to close the tax gap. We hope that it will have the support of the House this evening.
Sir Gerald Howarth
I am pleased to take part in this debate—it is the first time I have participated in a Finance Bill debate for quite a long time. I rise to take issue with the hon. Member for Birmingham, Ladywood (Shabana Mahmood), who made a long and interesting speech, about her definition of tax abuse. Indeed, there was no definition of what is considered to be abusive tax arrangements. I think that we have all become lax in our use of language in a matter which is of huge concern to our fellow citizens, for the powers of the Inland Revenue—HMRC—to take money earned by our fellow citizens is an important power and one that should be used very carefully indeed. This House has a responsibility to ensure that these matters are properly debated.
I have to tell my hon. Friends that I am increasingly alarmed by the Government’s rhetoric on what they refer to as “aggressive tax avoidance”. I was brought up to understand that tax avoidance is not only legitimate but, indeed, the duty of the head of every household. It is not their duty to maximise their tax; it is their duty to minimise it. It is our money, which is taken from us by the Government.
Mr Gauke
We have had a lively debate, and I will try to address as many of the points raised as possible in the time available.
New clause 12 seeks to have the Government produce a report on how to reduce the tax advantages arising from tax arrangements that are abusive. I agree that tax avoidance is a key issue, and the Government have made it abundantly clear that we will not stand for a minority of taxpayers continuing to seek unacceptable ways to reduce the amount of tax they pay through contrived and artificial means. That increases the tax burden on the rest of society and creates an unfair playing field for businesses.
Let me explain why I do not think that a report would be beneficial. The Government have taken strong and robust action to tackle avoidance. Since 2010 we have introduced 42 changes to tax law to close avoidance loopholes and make strategic changes to prevent and deter tax avoidance. Those measures include the introduction of a general anti-abuse rule, strengthening the disclosure of tax avoidance schemes regime, clamping down on stamp duty land tax avoidance with a new range of measures —including an annual tax on envelope dwellings—and numerous changes to business tax rules and reliefs to tackle bad behaviour, including misuse of the partnership structure and corporate loss buying.
We are going further. In the Finance Bill we are introducing new measures to put in place tougher monitoring regimes and penalties for high-risk promoters of tax avoidance schemes, and we are introducing accelerated payments and follower notice measures that will give HMRC the power to collect disputed tax bills up front, putting those who try to avoid tax on the same footing as the vast majority who pay all their tax up front.
Let me address the concerns raised by my hon. Friend the Member for Aldershot (Sir Gerald Howarth) and the hon. Member for Linlithgow and East Falkirk (Michael Connarty). The vast majority of people pay their tax up front, but it is possible for people working through self-assessment to make use of a tax avoidance scheme and hold on to the money during the—often lengthy—period where there is a dispute. The law is the law, however, and it is the law that existed when the arrangements were made that continues to apply. We are making a change, however, to say that while there is a dispute, the money should be held by the Exchequer and not the taxpayer, just as happens in many other circumstances where there is a dispute in our tax system. This is money that the individual would have already paid if they had not entered into an avoidance scheme. When completing their self-assessment return, they would have notified HMRC that they were taking part in a tax avoidance scheme under the disclosure of tax avoidance schemes regime, and as I said, the taxpayer can continue to dispute the case and will be paid interest should they win. The rights of the individual are therefore not being restricted. Prudent taxpayers should recognise that tax avoidance carries a significant risk of not working and the tax becoming payable, and they should make plans for such an outcome.
In addition to changes in law, we have invested £1 billion in increasing HMRC’s compliance resource, which has reaped huge benefits. HMRC is ever more successful at tackling the avoidance it sees, and it has an excellent record in litigating the avoidance schemes that taxpayers choose to take to tribunal. It wins about 80% of cases, and persuades many more taxpayers to settle before the case gets that far. Between April 2010 and March 2014, it won 94 avoidances cases in tribunals and courts, and in 2013-14 alone, its 30 wins protected £2.7 billion of tax.
The Government will continue to close loopholes in tax law and introduce strategic responses to tax avoidance across the tax system. We will act robustly to respond to abuses that we see. We consult on those measures where we can, although hon. Members will understand that in certain circumstances we must act quickly to close down abuse, so consultation is not possible. A report will add nothing to the progress that we have made and continue to make. Action is more important. We have proved we are taking action to tackle tax avoidance across the board, and we will continue to do so.
In the time available I do not think I can do justice to the fairly lengthy speech on eurobonds by the hon. Member for Birmingham, Ladywood (Shabana Mahmood), but the £500 million figure that she quoted, which is somehow supposed to be at risk, seems to be based on an article in a newspaper. It is not a figure we recognise. It wrongly assumes that the recipient of the interest would not be entitled to gross payment of interest and fails to take into account the fact that under the UK’s double tax treaties the tax would often be repaid anyway.
I extend again the offer that I made in March to the hon. Lady. I have been a shadow Treasury Minister and I recognise the challenges in developing policy in these areas without access to officials. I would be more than happy to meet her, with officials, to talk through some of the practical points of this issue. I think she will find that that £500 million is something of an illusion. In terms of the practical points that she raised about changing the withholding tax system, I ask her to bear in mind the double taxation treaties. Her proposals might not be as easy as she believes.
The alleged abuse of disguised employment in the construction sector is an important point. Some labour providers have created structures specifically designed to avoid tax and national insurance and gain a commercial advantage over those who play by the rules. The Government aim to put a stop to those practices in the construction sector and elsewhere through the new measures introduced in this Bill to tackle false self-employment intermediaries. They will provide a level playing field for compliant labour providers who help to facilitate the UK’s flexible labour market.
The new measures that we are introducing target structures set up to present workers as self-employed when they are really employees. This has been a growing problem in recent years and has spread from the construction industry to other sectors. That is not acceptable. Workers lose out on their rights, it creates competitive disadvantages for compliant businesses, and ultimately the taxpayer foots the bill. That is why we are acting now to stop the abuse. Intermediaries are the biggest mechanism for delivering false self-employment within the construction industry, and as I have said, the practice is spreading. Tackling employment intermediaries used to facilitate false self-employment will not only more effectively target a sizeable section of the false self-employment in construction—a point raised by the hon. Member for Wythenshawe and Sale East (Mike Kane)—but will stop the spread of the problem to the wider economy.
We believe our proposals are the best way to tackle avoidance in that area. The previous Government consulted on proposals to tackle false self-employment in construction in 2009, which deemed all construction workers to be employed unless they fulfilled one of three criteria. In practice, that would have meant that bricklayers would need to provide their own bricks and roofers would have had to supply their own tiles to be categorised as self-employed. As set out in the consultation response document, analysis suggested that the proposals could undermine legitimate commercial practice and run the risk of capturing genuinely self-employed individuals.
A dormant company is one that is not within the charge to corporation tax at all, whereas the new clause appears to relate to companies that are within the charge but fail to file returns. That is not avoidance but evasion. HMRC uses risk-based procedures and extensive data-matching analysis to identify companies that should have filed returns but have not done so. All such companies are risk-assessed to establish whether they come within the charge to tax. Research suggests that the risk of tax loss is small. HMRC’s activity is carefully targeted, ensuring administrative burdens for compliant customers are minimised while focusing on the non-compliant.
I draw the House’s attention once more to the Government’s strong response to the threat of tax avoidance, including our unprecedented action to close loopholes and provide new tools for HMRC to tackle avoidance. The report proposed by the Opposition is unnecessary and would distract HMRC from delivering on its important work tackling avoidance. I call on the hon. Lady to withdraw the new clause.
Shabana Mahmood
I am disappointed that the Minister will not engage with the practical measures envisaged in the new clause. We have had an interesting debate, but I wish to press the new clause to a Division.
Question put, That the clause be read a Second time.