The debate on tax avoidance and other compliance issues at the party conferences This is the fifth of a short series of blog articles looking at what we know about the direction of tax policy following this year’s political party conference season. These are based on the extended version of an article by CIOT External Relations Manager George Crozier that appears in this month’s edition of Tax Adviser.
Both the Government and the Opposition announced measures to close anti-avoidance ‘loopholes’ while campaigners kept the pressure on politicians over tax havens and big companies not paying their ‘fair share’.
Still plenty of mileage in closing down ‘loopholes’
“Nothing is certain except death and taxes. And a conference announcement from Danny Alexander on tax avoidance”, is how the Chief Secretary trailed the now customary section of his Liberal Democrat conference address on ‘going after tax dodgers’. He claimed that, thanks to the Government’s efforts, by 2015 HMRC would be ‘clawing back an extra £10bn a year’.
There were three announcements on this front in Alexander’s speech:
1. “Closing the loophole that allows private equity shareholders to siphon money out of their firms while dodging the intended income tax”(Alexander claimed that the “vast majority” of private equity partners were exploiting loopholes that allow them to pay corporation tax of 22% on their earnings rather than 45% income tax; in a strong response, the BVCA disputed that this was a loophole; after the announcement there was a brief consultation on this proposal, which has now closed)
2. “Closing the loophole that allows partners in partnership firms to structure their staff arrangements so that they avoid paying the correct amount of income tax”
3. A new campaign targeting ‘the rogue minority of landlords’ who fail to pay the right tax due on the rents they receive (Alexander claimed there was £500m owed to HMRC)
Not to be outdone, Labour leader Ed Miliband announced at the start of his party conference that a Labour Government would scrap the ‘bedroom tax’ (a cut in housing benefit for social housing tenants deemed to have a spare bedroom) by “abolishing the shady schemes of tax loopholes for the privileged few which the Tories keep inventing.” Specifically these were:
1. “Tax cuts for hedge funds” (Labour would reinstate the stamp duty reserve tax charge, which the Government are planning to abolish. While Labour characterise this as a tax cut for hedge funds the Government argue that it affects pension funds more)
2. “The billion pound black hole created with a scheme for workers to sell their rights for shares” (that is, the Government scheme, which came into effect in September, which involves employees potentially giving up their statutory rights over unfair dismissal, redundancy and flexible working in order to get between £2,000 and £50,000 in shares as an "employee shareholder". If the shares are sold at a profit they will be exempt from capital gains tax)
3. “Tackling scams which cheat the taxpayer in construction” (specifically Labour plans to stop construction firms attempting to reduce their tax bills by falsely listing workers as self-employed. Accusing the current government of ignoring the issue Labour said that the starting point would be criteria proposed by the last Labour government whereby workers would be automatically deemed to be treated as employed for tax purposes if they met criteria that most people would regard as obvious signs that they were employees, rather than self-employed subcontractors)
Balance and transparency
Tax avoidance by multinationals continues to have a high profile on the conference circuit, largely the result of events organised by campaign groups such as ActionAid. Ministers and shadow ministers alike acknowledge that some companies have been unfairly pilloried for taking advantage of legitimate reliefs, but feel that others (unnamed) have deserved the flak they have taken. In terms of currently live issues, transparency is widely seen as key.
Exchequer Secretary David Gauke made this point at an event hosted by the Taxpayers’ Alliance. Challenged by a tax adviser that taking advantage of allowance should not be seen as a sin, the minister said it was unfortunate that some people failed to distinguish legitimate use of allowances from artificial, contrived behaviour. It was important that the debate becomes better balanced, and important that tax advisers contribute to that debate, he said.
Shadow Exchequer Secretary (now Shadow Economic Secretary) Catherine McKinnell made a similar point at the CIOT/IFS fringe meeting at Labour conference. McKinnell criticised some companies for ‘going to extraordinary lengths to avoid paying their taxes’ but said others under attack were making use of deliberate and legitimate reliefs. Others had been pilloried for not paying enough corporation tax when the reason for this was massive investments they were making. There was a need, she said, for balance and transparency in the debate. As a party Labour were undertaking a review on corporate tax. Transparency was key to this, for example through the proposal of country by country reporting.
However McKinnell emphasised the need for policy-makers to take on board the strength of feeling among ordinary people that there should be a tax system which is fair, transparent and offers a level playing field to individual households and businesses. She acknowledged that the UK is generally a tax compliant country but said that this should not be taken for granted. She had noticed a rise in the number of people saying ‘with all this avoidance and evasion going on I must the only mug in town, paying my taxes with no questions asked’. That was, she said, a very dangerous road to go down, and trust needed to be restored.
Labour’s Prosperity and Work Policy Commission is currently consulting on ‘Corporate Tax: Transparency and reform’. The consultation paper states: “We need to look at how the tax system can be reformed to make sure that it works properly in the modern world and for society today and delivers outcomes that are clearly and transparently fair. We also need to reform the rules that allow companies to have a lot of business in Britain but pay little, or no, tax in this country."
Also at Labour conference, at an ActionAid / Christian Aid event, Margaret Hodge MP, chair of the Public Accounts Committee, said Labour “would be mad” not to place tax avoidance at the centre of its campaign for the 2015 general election. She said the issue resonated with the electorate for two reasons. First, because avoidance created “a deep sense of unfairness” at a time when public services were being cut. Secondly, because the sums were “huge”. She was frustrated that Labour had not run with the issue like it should have, in her view. The party should have admitted ‘we got it wrong’ under Gordon Brown’s government. At the same event Ivan Lewis MP, shadow minister for international development, criticised the Government for not having done the groundwork for any serious progress on tax compliance at the G8: “You cannot rock up to a summit and expect to do a deal”, Steven Turner, assistant general secretary of Unite, said tax avoidance, and the promotion of avoidance, should become a criminal offence.
The tax policy paper adopted by the Liberal Democrats in Glasgow included proposals for greater tax transparency from multinationals, country-by-country tax reporting, increased disclosure of intercompany transactions, and publication of tax settlements. It also proposes strengthening the General Anti-Abuse Rule to a General Anti-Avoidance Rule, with a preclearance system.
However there were voices around defending avoidance, if you looked for them. Veteran Conservative MP John Redwood said that people should not get outraged as “this is what companies should do”. He added: “I know there are extremes, but there is a lot to be said for tax competition.” He thought competition might drive corporation tax down to the mid teens. Mark Littlewood, the director-general of the Institute of Economic Affairs, is one of the more outspoken defenders of tax planning on the political scene, and spoke at a number of events over the conference season. He began one typically combative speech with the admission ‘I’m a tax dodger’, though this referred to no more than possession of an ISA and a willingness to bring duty free cigarettes into the country. On multi-national tax avoidance, he took Starbucks as a case study, highlighting that the firm claimed that their brand was a major part of them selling in the UK but was not designed in the UK.
The havens and the have-nots
Tax havens came under fire at a series of fringes held by ActionAid at all three conference (hosted jointly with Christian Aid at two of them) under the title: ‘Tax Havens: Have we done enough?’ At the Lib Dem event a speaker from Christian Aid welcomed recent progress that had brought the issue of tax havens to the front of the G8 agenda but warned that the UK needed to clear up "its own back garden" (Overseas Territories and Crown Dependencies) first. However he was rebutted during questions by Sir Philip Bailhache, Jersey’s Foreign Minister, who was in the audience. Bailhache attacked the panel for distributing "inaccurate information". He said that Crown Dependencies were not tax havens and were "entirely transparent". He explained that all Crown Dependencies had submitted action plans to government and pointed to a recent World Bank report that had praised Jersey's "unparalleled" transparency.
Also at the Lib Dem conference event, Lord Andrew Philips of Sudbury, the vice chair of the all party parliamentary group (APPG) on anti-corruption (and a former tax lawyer), described the impact of tax avoidance as "dire" for the country. He attacked the "artificial" nature of modern banking tools that aided "unscrupulous" tax avoidance and helped Barclays pay just two per cent on its corporate profits last year. His criticism did not go unchallenged though. Again these claims were challenged during questions, with a party member (and tax adviser) in the audience intervening to argue that Barclays paid no tax because of big losses during the financial crisis.
At the Conservative event, the Foreign Office minister with responsibility for the British overseas territories and Africa, Mark Simmonds, said transparency was key in dealing with tax havens and improving tax compliance generally. The Government was consulting on whether beneficial ownership registers should be public rather than just available to tax authorities. (The Government have since announced the UK’s will be.) Simmonds said there were issues around building capacity in developing countries’ governments to enable them to deliver the services to allow people in those communities to benefit from those tax revenues. Tax evasion and competitive tax jurisdictions should not be confused, the minister told the fringe; as there was nothing wrong in having lower tax in one area than another, but there was in harbouring tax evaders. Heather Self, a tax adviser at international law firm Pinsent Masons, argued that developing countries needed to focus on building robust taxation regimes from the ground up, and building stronger systems to make sure tax revenue was not lost. She said it was worth considering whether an excise tax of x per tonne might be easier to collect, for countries reliant on extractive industries.
Labour, meanwhile, are consulting on policy on tax havens. In spring 2013 the party’s Prosperity and Work Policy Commission published ‘Tax avoidance: tax havens’, a consultation paper setting out a direction of travel and containing options for further consideration, ahead of a final policy document promised in early 2014. The paper suggests that Labour “could consider what the UK can learn from [the US Foreign Accounts Tax Compliance Act (FATCA)] and whether there is scope to build upon it in the UK.” It says the party should look at how the UK’s rules on transfer pricing differ from those of other OECD countries. It asks for views on whether a Labour Government should (a) lead by example, prioritising increasing transparency in UK crown dependencies and overseas territories, or (b) focus on reaching international agreement to tackle problems caused by the use of tax havens. The paper picks out resourcing of HMRC as a key issue. The paper sets out four principles which Labour’s ongoing work on tax avoidance should build on. Summarised these are (1) businesses should pay their fair share, (2) the tax system can create incentives such as allowances and R&D tax credits, (3) the need for a competitive system, and (4) international coordination.
Taxman under fire
A number of speakers on the party conference circuit criticised HMRC for being either too weak or too chummy with big business to enforce the tax rules properly.
At an event hosted by Oxfam, on the social impact of tax dodging, former Lib Dem Treasury spokesperson Lord Matthew Oakeshott bemoaned the fact that authorities came down “like a ton of bricks” on illegal tax bills, but not on richer individuals and big companies with corporate tax lawyers and the means to afford to undertake such avoidance. He claimed that lead figures at HMRC had been “far too close” to big business and big accountancy firms, and joked that the tax authorities were like a “fat policeman trying to catch a Ferrari” in pursuing big businesses like Vodafone and Goldman Sachs for tax claims.
Competing with Oakeshott on the metaphor front was another Lib Dem peer, Andrew Philips, who, speaking during the tax debate on the conference floor, said that. as a former tax mitigation lawyer, he thought there was ‘disgraceful’ and ‘immoral’ tax planning going on with inadequate enforcement from HMRC. He quoted someone who was ‘then head of HMRC enforcement’ telling him HMRC needed to be given the tools to do the job (it was unclear how long ago this was). ‘It’s David without his sling versus Goliath’ was Phillips’ assessment of the fight between the Government and tax avoiders.
It wasn’t only Lib Dem parliamentarians who were critical though. Labour’s Margaret Hodge, chair of the Public Accounts Committee, used a fringe meeting to repeat calls for HMRC to take a tougher approach, taking some companies to court to test the legality of their methods, naming and shaming the worst offenders, and demanding greater transparency from Companies House. Andrea Leadsom MP, a Conservative member of the Treasury Committee, said that HMRC rather than big businesses was to blame for the row over corporation tax payments. Leadsom said that the problem was "our own incompetence" which needed to be addressed.
The divides between the parties on compliance issues are narrower than might be anticipated. The strongest rhetoric tends to come from the left and from backbenchers rather than ministers and their shadows, but broadly speaking the agenda here is the same for all parties. All support the OECD’s Base Erosion and Profit Shifting project and a register of beneficial ownership for companies, for example.
The main areas where there is some difference between the parties are:
General anti-avoidance rule (ie a strengthening of the current anti-abuse rule): The Lib Dems favour one, many in Labour are sympathetic, while the Conservatives are unsupportive
Country by country reporting: favoured by Labour and the Lib Dems, but the Conservatives are unconvinced
‘Shares for rights’ and stamp duty reserve tax – not really avoidance (though there is potential for abuse with the former) but Labour classify both as loopholes. Both Labour and the Lib Dems oppose ‘shares for rights’, the Conservatives support. Labour want to keep stamp duty reserve tax, the Conservatives to scrap it
More realistically the extent to which this is an issue at the election is likely to come down to whether the public perceive that the Government are doing 'enough' in this area, which is likely to come down to the media profile of the issue more than anything else.
CIOT External Relations Manager
Monday 18 November 2013