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Finance (No. 2) Bill

My Lords, I will not go down the road travelled by the noble Baroness, Lady Noakes, in commenting on the Budget, except to say that we continue to have low interest rates, low inflation and near record numbers in employment, on top of the longest uninterrupted period of growth on record, as my noble friend Lord McKenzie said. However, it is always a pleasure to listen to those who gave us high interest rates, high unemployment, high house repossessions and run down public services telling us how bad things are today. I wish to comment on two aspects of the Select Committee’s report on the Finance Bill 2006; namely, tax avoidance and missing trader intra-Community fraud, which is sometimes known as carousel fraud. New tax avoidance disclosure rules were introduced in 2004 to check the growth in complex and contrived tax avoidance schemes. As has been said, the rules appear to have had some effect, although tax avoidance schemes using employment-related securities and financial products have continued to be an issue requiring attention. The Association of Chartered Certified Accountants told the Select Committee that: "““now firms have a much higher moral code when it comes to tax issues and tax planning and they seek not to indulge in certain types of tax planning areas where they perhaps otherwise would have done in the past””." Another witness from Revenue and Customs told of a banker who had said that his bank had been wrong-footed for the third time as a result of schemes being blocked following disclosure under the disclosure rules. Consequently, his board was likely to decide not to get involved in aggressive tax avoidance any more. It seems that integrity can be enhanced by legislation and Treasury rules, even if for some it is integrity through gritted teeth. The anticipated revenue yield from anti-avoidance measures alone from all the disclosures made since 2004 is expected to be more than £1.5 billion in the current financial year and more than £2 billion in the next financial year. However, the disclosure rules are also intended to protect revenue, and Revenue and Customs stopped a scheme which would have exploited tax statutes to the tune of up to £4 billion and would have wiped out substantially the tax liability of banks and other financial institutions using it. Further evidence to the committee revealed the existence of a tax avoidance scheme referred to as platinum sponge. Platinum sponge is platinum in suspension, which is normally volatile and thus might be regarded as something not normally tradable. The intention was that platinum sponge would get round the tax rules which tax assets awarded in place of cash only if those assets are tradable. Thanks to the work of the Select Committee, we now know that a lot of platinum sponge is held in bank vaults in Jersey, and huge amounts are held at Schipol airport. Platinum sponge is one example of a form of remuneration designed to defer payment of PAYE and relieve employers of the obligation to account for national insurance contributions. As regards deferment, some of the schemes provide for deferment of tax or national insurance liability for 50 years, which as one witness said, feels like tax avoidance on a pretty grand scale. Another section of the report refers to missing trader intra-Community fraud, or carousel fraud. As has been said, it is the largest single source of fraudulent VAT losses for the UK Exchequer. Losses for 2004-05 from VAT carousel fraud have been estimated at up £1.9 billion, but it is widely accepted that fraudulent trading has grown dramatically in the past year or so, and one newspaper suggested just over two months ago that losses are probably running at up to £5 billion a year and rising fast. However, according to an article published the day before yesterday in the same newspaper, Revenue and Customs now thinks that carousel fraudsters carried out a record £7.4 billion of imports and exports in the first quarter of the year, up from its original estimate of £5.5 billion. That figure represents attempted fraud as opposed to the actual successful theft of VAT, but nevertheless could mean, according to the newspaper’s estimates, losses to the Exchequer of over £10 billion this year, or £20,000 a minute. There are provisions in the Finance Bill that seek to address this problem, which is theft on a grand scale. According to the Select Committee, the projected yield from these provisions is £100 million in the current financial year and £500 million in 2007-08. Whether they will be effective remains to be seen, and that assumes they can be introduced quickly. While in respect of the intended change in accounting procedure, the reverse charge—a temporary derogation from the European Union to cover those goods most frequently used in this fraud—could be agreed fairly soon, a permanent change in the EU’s VAT system to address the problem fully, and requiring the agreement of all the member states of the Council, would take some time to achieve. It would be helpful if, when he replies, my noble friend could say what the current projected yield is from the provisions in the Bill directed against carousel fraud in view of the very recent dramatic increase in such fraudulent trading, which apparently does not even have to involve physically moving goods. In view of the billions of pounds’ worth of theft from the Exchequer seemingly now involved, the figure of a £500 million yield set out in the Select Committee report hardly indicates that the provisions will address the problem. It would be helpful if my noble friend could say what the Government regard as the permanent solution to this problem and whether it would or would not involve harmonisation of VAT rates across the European Union. Perhaps my noble friend could also explain why the fraudsters would not simply switch to other commodities if a temporary derogation to introduce reverse charging for transactions involving goods such as phones and computer chips was agreed by the European Commission. Do we have sufficient staff engaged in combating this fraud? I appreciate that there has been an increase, but if we are still at the stage that each further additional member of staff would recoup more from reducing carousel fraud than their own total employment costs, surely that would be money well spent. No one can accuse the Select Committee of ignoring the serious issues of tax avoidance and VAT theft, and the report is supportive of both the Treasury and Revenue and Customs in their efforts to clamp down on the perpetrators. There is of course a key difference between the two activities since VAT theft is a criminal offence. However, both activities are similar in that they are designed to reduce the amount of money that should be available to the Government of the day to provide the level of public services our society demands and expects. The shortfall resulting from these activities is made up either by other less-well-off citizens paying more in tax or through a lower level of service provision than should have been possible. VAT theft through carousel fraud is a criminal activity, while tax avoidance—certainly on a large and planned scale—is morally wrong since it also has a direct adverse effect on weaker members of the community. Yet we see little attempt to draw attention to what is going on and who is doing it. We have headlines, quite fairly, about levels of benefit fraud and adverse reports about some in receipt of benefits. However, when it comes to white collar fraud or the activities of those who operate in the grey area of tax avoidance, by comparison we hear very little, even though the sums of money involved are often huge. Perhaps the reality is that for too many of those who own and decide what will and will not be reported prominently in our newspapers and on our radio and television stations, cheating or beating Revenue and Customs on a big scale, and thus society as a whole, is not really regarded as a serious crime or morally unacceptable, but rather a clever game played by people with similar lifestyles and income levels to themselves. Occasionally the guard slips and a revealing article appears tucked away in the financial columns. A few days ago the financial editor of the London Evening Standard produced one of his articles knocking the Government. However, within the article he made these comments about investment bankers; the words are his, not mine: "““They are grossly overpaid and often so arrogant they think they are worth the money. They don’t offer much to society and far less than they pretend to the economy because much of what they do adds little or no value—transferring wealth rather than creating it. Their talent for inventing new financial products and structures consists for the most part of devising ways for companies and professional investors to do things which would probably be illegal, and certainly outside their permitted competences, if the companies sought to do them directly””." The financial services and commercial sectors are of course a major asset and source of strength and prosperity to Britain, but they do have their less acceptable face. Those with wealth, influence and standing in whatever walk of life play a key role in setting the standards and markers for society as a whole, and an overwhelming majority of them are worthy role models. However, the Select Committee’s report shows that serious tax avoidance is still alive and kicking, and seems to be regarded by too many as an acceptable way of carrying on. Average increases and overall remuneration packages for those at the top in finance and commerce have for some years far exceeded both inflation and the level of pay increases for those below, and too often the increases seem to be unrelated to achieving challenging performance targets or size of company. At least 650 directors of British companies give their current address as Monaco, no doubt to avoid the Inland Revenue rather than the British weather. While we are told that VAT carousel fraud involves people in the organised criminal fraternity, it is still unclear whether it involves them alone. A message from a minority of greed and avoiding obligations to the society in which they live and work at the expense of the rest of the community is hardly one of leadership or standard setting. The role of Revenue and Customs in helping to check and contain at least some of the excesses of the minority concerned is one I hope my noble friend endorses and encourages, since the work of HMRC also has an impact on the kind of society in which we live and the values it upholds.