Criminal Finances Bill (First sitting)

Tristram Hunt Excerpts

Committee Debate: 1st sitting: House of Commons
Tuesday 15th November 2016 Public Bill Committees

[Dr Huq]

Q Several stakeholders who responded to the HMRC consultation—these clever people who know how to get around the rules—argued that a new corporate offence was unnecessary. It sounds as if you take issue with that. Do you think there is enough in the Bill to provide the significant behavioural change that is really needed to drive this out?

Alex Cobham: I think the behavioural change question is really important. There are two elements of it: one is how directly it affects the behaviour of actors involved in the process, but the second is how it affects the wider behavioural change. Over the years, we have had any number of economic models of tax behaviour, all of which have suggested that, in country after country, if we were rational economic maximisers we would be much more abusive about tax than we actually are. The reason for that is that we do not respond just to the risk of being caught and the price of being caught. Paying tax is a social act, and by and large two things drive people’s tax compliance. One is the extent to which tax revenues are redistributed and seen to be redistributed in a fair way—the more you think that, the more likely you are to contribute. The other is your perception of other people’s compliance. If you think that the people at the top—the big companies and wealthy elites—are systematically not paying their fair share, the prospects of you complying as a normal citizen are much lower. Who wants to be the only mug if the big guys are not playing the game?

There is one thing that I think is really important for the Bill. On the technical side we can have concerns about how it is framed, and on the enforcement side we might have concerns whether the resources are actually there to make it happen, but what is perhaps missing from that discussion is whether or not we have consistent reporting about the performance under this measure. If, year on year, we hear HMRC saying, “This is our estimate of the tax gap in this area. This is the amount of evasion we have stopped and the number of prosecutions, the revenue at risk in that area,” then, “This is the number of those cases where we have also gone after the facilitator, and so this is the proportion where we are consistently tracking this all the way through,” what you do, apart from giving HMRC a useful metric to demonstrate progress—if HMRC thinks this is the biggest part of the tax gap, then clearly it needs to be tracking this, showing the reduction over time—it also shows the public this is not just one more piece of tax law that may be more form than substance.

Particularly if you think about the Google tax law, for example, there is a growing sense of a lack of trust among the public that when tax laws are passed they are actually meaningful or meaningfully enforced. This is a great opportunity to go the other way, to make sure from the beginning that you will have that accountability and, to go back to your question, to have that in place in a way that is likely to drive behavioural change both of the immediate actors and facilitators but also of the wider public.

Professor Murphy: Can I make three brief points? The first one is that the law as drafted is going to be very difficult to prosecute. We have seen that from the Bribery Act 2010 on which it is based. The number of prosecutions is likely to be very low indeed. This is a strict liability offence—tax evasion triggers the potential liability. The defence that is provided is that there are systems in place. That means that the company—the corporate entity that permits the action—has a defence available to it. That defence will largely be available only to the biggest companies. They will have systems that can be easily documented. Most money laundering training systems now in place in large companies will provide an automatic defence to them: the defence is that they have the systems in place and that there was a bad apple who did the wrong act. Therefore, I think the chance of prosecutions against large companies under this Bill is remote in the extreme.

I think at most this will reinforce the impression that smaller companies are subject to penalty and larger companies are not. First, the chance of prosecution is low because the amounts of money involved will not attract SFO attention—by and large the SFO goes for high-profile cases and there will not be many here that can be prosecuted. Secondly, the behavioural change resulting from this Bill will be very low indeed. There are vastly better ways to achieve behavioural change in this Bill.

[Tristram Hunt (Stoke-on-Trent Central) (Lab)]

Q One of the attempts to deliver that kind of behavioural change is among the new clauses I am submitting. Will they garner your support for asking the Secretary of State, for example, to make an annual report to Parliament about unexplained wealth orders, to make it a duty to prevent corruption, and to establish quite swiftly a publicly accessible register of beneficial ownership of UK properties? Do you think the good intentions of the Bill could do with a boost to make sure the foot is on the accelerator on some of this?

Professor Murphy: I would entirely agree with a number of points you make. In fact, I would support all those measures. I do not need to comment further; they would all help.

It is clear that transparency is of enormous benefit. The biggest problem with regard to transparency in this country is that 400,000 companies a year in the UK do not file an annual return with the Registrar Of Companies and do not file accounts as required by law. We have no idea what those companies do. They are struck off. It is assumed they have no tax liability, so it is just assumed they have not traded. That is a completely unreasonable assumption for the registrar to make. HMRC does not pursue these companies. I did some research in 2014 on the recovery of penalties imposed on these companies for non-compliance. More than 99% of the penalties imposed were not paid.

In other words, we have an enormous hole in our economy, so we cannot rely upon these systems of registrars and beneficial ownership. The proposed register of beneficial ownership in the UK is simply a voluntary honesty box arrangement, because there are only four extra people being tasked to monitor it. When 400,000 companies do not even file a return, which is where they would disclose their beneficial ownership data, the chance that we will have reliable information is incredibly low indeed. We have to get down to very basic levels to get this right.

I am not saying that the Bill is wrong, but in terms of direction of effort, parliamentary time and resources, there are many more important tasks that would bring about the behavioural changes that Alex has talked about that would encourage compliance.

[Roger Mullin]

Q I have been concerned for some time about the Scottish limited partnerships and similar vehicles. To what extent do you think that there are particular types of business formations that are most susceptible to criminal activity and tax evasion?

Alex Cobham: This is one of the interesting features of the Bill. If the Government were a relevant body, I think the continuing provision of Scottish limited partnerships would make it very easy to prosecute the Government for facilitating evasion. The work of Richard Smith and David Leask, who I think will be giving evidence later, is very clear on this point. Something like one in four limited partnerships in the UK, but about two in three of Scottish limited partnerships, are structured in such a way that one of their partners is an anonymous company registered in a secrecy jurisdiction.

That is the perfect model for unaccountable business, unaccountable ownership of assets and income streams that may be criminal. The effective facilitation that the UK provides in that way is simply unacceptable. What is good about this Bill is a very clear recognition that that facilitation is unacceptable; what is missing is application to the Government themselves. I think the only consistent action would be to make impossible the use of anonymous partners for limited partnerships.

Professor Murphy: I agree with all that. I extend the concern to the limited liability partnership. I have been a partner in limited liability partnerships and they potentially have a very useful commercial role—they are tax transparent in a way that is very important, which is why I used one. The truth is that they are also used extensively by offshore agents, again using anonymous companies, to create structures that look as though they are present in the UK and give them an air of credibility. In fact, they are entirely controlled offshore and can be used for abuse. Both need a significant review. I can see no legal or commercial justification at all for limited partnerships in terms of their current use. Limited liability partnership legislation needs explicit change to make sure that it cannot be abused.