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Tax Avoidance and Evasion

I congratulate the hon. Member for North-West Leicestershire (David Taylor) on securing the debate. This is a very topical issue and he presented the case extremely well. Rightly, the focus has been on tax havens—the common theme is secrecy—which my colleague, the noble Lord Oakeshott, called""sunny places for shady people."—[Official Report, House of Lords, 26 March 2009; Vol. 709, c. 772.]" People go to the British Virgin Islands or the Caymans not because they want financial expertise but because they have got something to hide, even if there are other reasons why people want secrecy. The debate is on the revenue side. The hon. Member for Banbury (Tony Baldry) rightly asked for an evidence base. There is fragmentary evidence. Her Majesty's Revenue and Customs estimated three years ago that the British Exchequer was losing something in the order of £10 billion to £40 billion a year—a wide range—to tax avoidance and evasion activities of various kinds. Richard Murphy, who has rightly been praised for his practical work on the matter, has estimated that HMRC is losing something in the order of £18 billion specifically through tax havens. High net worth individuals account for about half of that through legal avoidance; £3 billion is lost through corporates; and the rest is lost to illegal evasion. A lot of evidence has come through in the past few years, for which The Guardian has rightly been praised, on corporate tax avoidance, as distinct from evasion. In 2005-06, a third of British companies in the FTSE 100 paid no tax at all on their profits—none whatever—and a third paid very little. We have an extraordinary state of affairs. The average corporate tax rate for small companies in Britain is 21 per cent., which is supposed to be concessional, but the average tax paid by big companies is 20 per cent., because the latter have access to the lawyers and accountants that the former do not. That is utterly perverse. Before I go any further, we need to clarify the language. We all use the words "avoidance" and "evasion", but there is clearly a continuum—it is not one or the other. On the one hand, there is outright criminal activity, and on the other the form of tax avoidance that all taxpayers engage in when the Government, sometimes rather foolishly, openly give a differential that invites people to take advantage. We had a good example in the Budget: we now have a 50 per cent. top rate tax on earnings, but only an 18 per cent. rate on capital gains tax, which is an open invitation to perfectly law-abiding individuals to turn their income into stocks so that they can pay tax at a much lower rate. We cannot blame people for that. The measure could have been simple incompetence, but it could also have been deliberate. Somewhere between avoidance and evasion is a very grey area, on which the debate has centred. The hon. Member for Great Grimsby (Mr. Mitchell) and the hon. Member for Leeds, East (Mr. Mudie) helpfully described the complex structured arrangements in which organisations such as Barclays engage. I believe that Barclays has 110 specialists working on the absolute edge of the margin between evasion and avoidance, so that they stay on just the right side of the criminal law. They nevertheless have the very clear intention of avoiding paying UK taxes, which is our main concern. The big question that the hon. Member for North-West Leicestershire asked was, what do we do about it? It is partly about taking international action and partly about domestic policy. Internationally, the fundamental issue raised by the G20 was transparency, and he raised two of the three key issues, the first of which is the automatic exchange of information. The current OECD white list is very good at creating transparency, but it leaves substantial hurdles when it comes to getting information from tax havens. Information exchange has to made automatic to be effective. As he mentioned, the Government are resisting such a measure. There are good reasons for resisting automatic exchange in some cases—one would not want automatic exchange of information with, say, Mugabe's Zimbabwe, for human rights reasons—but, as a general principle, between countries that have satisfactory human rights, automatic exchange of information should be the norm. The second transparency issue that the hon. Gentleman raised was country-by-country accounting. As several hon. Members mentioned, it is an issue for the IASB. There is a lot of foot-dragging, and political leadership is needed, but that is the way to stop the systematic abuse through transfer pricing, the manipulation of profits and the minimisation of corporate tax payment. The hon. Gentleman did not mention the third transparency issue, namely the identification of the beneficial owners of trusts and companies. A lot of tax avoidance through tax havens takes place by hiding the names of the ultimate owners. The EU savings directive precludes that, but it is not being enforced. One difficulty that the UK has in being righteous about the matter is that our trust system is incredibly opaque. Many trusts are never registered and other countries might reasonably ask, "Why are the British getting heavy-handed about this when their own system of tax law in relation to trusts is so opaque?" Until we deal with that problem, it will be impossible to crack down effectively on the tax haven system. On the specifics, the Prime Minister has now taken the initiative of writing to all our Crown dependencies and overseas territories and challenging them to come up with standards of behaviour that meet the requirements of the G20 and OECD systems. That is a step forward. One could legitimately ask why he did not take that step 12 years ago, but he has done it now. I guess that he did not introduce the measure earlier partly to protect the City, which has sustained many such relationships, and partly because DFID encouraged many of the territories to get into tax haven activities supposedly as a way of making their economies sustainable. That was foolish, as the hon. Member for Banbury pointed out, but we are stuck with it. What action is going to be taken to follow up that initiative? I have two specific questions for the Minister. First, what sanctions are going to be taken against the seven British territories that are on the OECD grey list which do not even comply with the OECD's fairly modest demands? What powers do we have in respect of those territories to which the Prime Minister has written? I suppose that we cannot be too draconian. Fifty or so years ago, when General de Gaulle was annoyed by the tax avoidance activities of Monaco, he cut the water supply off; by the following day, Monaco complied. We are not in a position to do that, but I assume that sanctions against British territories are available. If so, what are they? Secondly, the three United Kingdom Crown dependencies—Jersey, Guernsey and the Isle of Man—comply to pretty high standards under the OECD rules, but they do not automatically exchange information. What steps are being taken to make them comply with that higher requirement which, I think we have agreed in the debate, is necessary to make the crackdown on tax havens effective? That deals with the international dimension, and I wish to pose a series of questions to the Minister on domestic policy in my remaining three minutes. First, what resources are the Government putting into HMRC to crack down on avoidance activities such as the complex structured arrangements in the banks that have been described? My understanding is that the budget for the relevant department within HMRC was cut by 5 per cent. for the current financial year. Is that true? What is being done to ensure that HMRC is properly resourced to pursue its activities? Is it true, as I have been told, that HMRC is not yet even so much as investigating the information that came to light as a result of the German crackdown on Liechtenstein? That brought to light a lot of British names. As far as I know, they are not being investigated. Is that true? What will be done following the Government's promise to name and shame companies and individuals who are engaged in systematic tax avoidance? What form will that action take and when will it start? Secondly, as the hon. Member for Leeds, East said, we cannot be in a position in which the Government are guaranteeing banks and simultaneously allowing them to participate in tax avoidance activity. There is a lot of ambiguity about that. It is clear that the Government intended that the beneficiaries of the asset protection scheme comply with British tax rules, but in subsequent statements, including to me, the Chancellor has said that it is a separate issue. How separate an issue is it? On the legislative provisions—several hon. Members referred to this—there has been a general expression of belief that we need to move to general anti-avoidance rule processes. What is the Government's time schedule for that, and do they have any specific provisions to introduce a purposive rule in order to ensure that the courts, when dealing with marginal cases, are clearly directed to ensure that companies and individuals seeking to avoid paying taxes are prosecuted? The hon. Member for Great Grimsby correctly described how companies establish subsidiaries for the purpose of avoiding tax. My understanding is that such subsidiaries are required to be disclosed under the Companies Act 2006, but evidence unearthed by newspapers investigating the issue suggests that they are not being registered. They are not compliant with the law. Are the Government investigating the matter? Is action being taken against companies that do not comply with those legal processes? Thank you for your indulgence, Mr. Hancock. I think that we all recognise that raising revenue is now a critical task, given the serious problems with the public finances. We should start by cracking down on the people who do not pay the taxes that they should pay.