Opposition day debate: Parties cross swords over tax gap

The debate on 25 February 2020 took place on a Labour motion –

That this House notes that the tax gap, the difference between the amount of tax that should be paid to HMRC and what is actually paid, has been estimated at between a minimum of £35 billion and £90 billion; believes that successive Conservative governments have failed to address tax avoidance and evasion while making savage cuts to public services and undermining the social security net; further notes that the Tax Justice Network has described the UK as backsliding on financial transparency; is concerned by reports of the Conservative Party’s links with individuals and companies that have engaged in tax avoidance; and calls for the proper funding of public services after a decade of austerity and for robust action to tackle tax avoidance and evasion.

Topics addressed by speakers during the debate included inheritance tax ‘loopholes’, regulation of enablers of avoidance and tax advisers more generally, making tax digital, HMRC office closures and the loan charge.

Opening speech: John McDonnell, Shadow Chancellor

McDonnell claimed a better alternative to austerity was to ensure that the UK had a fair taxation system to fund our social infrastructure, and to borrow to invest in physical infrastructure. The Government’s alibi for austerity was the global financial crisis, even though government spending was never a cause of that crash, he argued, stating that a fair taxation system starts with ensuring that people and corporations pay their taxes.

When Kevin Hollinrake (Conservative) interrupted to say the top one per cent of earners in this country now contribute about 29.6 per cent of all taxation, whereas in 2009-10 the figure was only about 25 per cent, McDonnell replied that the figure relates only to income tax; when we take into account overall taxation we see that the poorest-paid in our country are paying about 40 per cent of their income while the richest are paying around 34 per cent of their income.  

Paul Blomfield (Labour) intervened to claim the UK is losing over £1 billion of tax that should be due on UK earnings from just five of the biggest US tech firms. McDonnell replied the current approach to the taxation of such digital multinational companies destabilises the whole process of tax collection and undermines confidence in the system, and also undermines confidence in Government overall. He pointed to analysis by Tax Watch UK that suggested the top five tech companies alone avoided around £5 billion in UK tax over the last five years.  McDonnell complained about ‘secret sweetheart deals’ between HMRC and tech giants, that he said had only been made public as a result of tax justice campaigners. On the planned digital services tax, he lamented that it is aimed only at digitalised business models, and that it is hard to administer and impractical and set at a ‘pitiful’ two per cent tax rate. He added: ‘if the Government drop or delay the digital services tax, as is rumoured, it will effectively be another tax giveaway to powerful multinationals’.

Non-dom status is another tax giveaway, McDonnell went on to say. “The Government now will claim they are abolishing non-dom status, but actually it is being kept intact for a significant number of years.” Fully abolishing the status of non-doms could raise £1 billion for our public services, he sighed.

The shadow chancellor cited Tax Justice Network research as showing the UK has been ‘backsliding’ on tax transparency. He continued: “There has been a history of failure to clamp down on the enablers of avoidance and evasion, including the auditors and, yes, the lawyers. There has also been a history of failure to recognise how the City of London is complicit in the financial misconduct affecting the global south when it comes to tax collection and the hiding of taxation. To collect taxes we need tax collectors, yet HMRC has seen its staff numbers plummet from 105,000 in 2006 to 65,000 in 2019.”

McDonnell called for a stronger public register of trusts and beneficial ownership of companies. “[T]he current register of trusts... is not truly public and the penalties for non-compliance pathetic. The current register of who controls companies is not being verified properly and has a high threshold for disclosure.” There should be a clampdown on enablers through the introduction of stronger laws on facilitating tax evasion and harsher penalties for those who promote schemes, he added. He also called for a plan to increase targeted audits undertaken by HMRC to capture the nearly £3 billion owed by self-assessment taxpayers.

On freeports the shadow chancellor argued that they relocate simply jobs and investment, rather than creating new jobs and investment. Far too often, they become hubs for the abuse of workers’ rights and tax evasion, he said.

Opening speech: Steve Barclay, Chief Secretary to the Treasury

Opening for the Government, Chief Secretary to the Treasury Steve Barclay said that since 2010, the Government has introduced more than 100 new measures to tackle tax avoidance, evasion and other forms of non-compliance. In 2018-19, HMRC brought in an additional £34.1 billion that would otherwise have gone unpaid, including £1.8 billion from the wealthiest individuals and £10 billion from the largest businesses, he said.

The minister said that the UK’s tax gap is now at 5.6 per cent—lower now than at any point before 2010 (in 2005, under a Labour Government, the tax gap was as high as 7.2 per cent, he stressed). This has been achieved through a mix of enforcement action for those seeking to avoid payment of what is due and through reform. The Government have an important role in helping more individuals and businesses to get their tax right first time, he said. At any one time, HMRC is engaged with half the UK’s largest businesses, he said, and the Government has introduced specific measures to shape behaviours, such as the diverted profits tax. “Attitudes in large companies are changing”, he claimed.

Dame Margaret Hodge (Labour) intervened to urge Barclay to enact country-by-country reporting. In response Barclay pointed to the automatic exchanging of financial account information under the common reporting standard and an increase to the penalties and consequences for those who devise, enable or use tax avoidance scheme – but he did not answer Hodge’s question directly.

SNP’s Chris Stephens complained that HMRC’s wealthy unit currently has 961 members of staff, which is a reduction in 80 posts from its 2018 figure. Barclay said the key issue is ‘how staff are deployed and what technology we are using’. On the wider regionalisation of HMRC, Barclay said it is right that the Government look at what the right estate mix is and at how we can pool expertise to achieve our common goal of closing the tax gap, particularly by using technology.

The chief secretary claimed Making Tax Digital helps firms to get their tax right first time, it saves businesses time and inconvenience, cuts the cost of government; and it makes it easier to tackle fraud, error, evasion and avoidance.

Other Labour speakers

Dame Margaret Hodge said there is a cross-party consensus on many of the issues around tax avoidance and evasion. She led a successful cross-party campaign to make it an obligation on overseas territories to provide public registers of beneficial ownership. She would like to see the implementation date brought forward. She said: “The only way we will start ensuring that digital companies pay the right amount of tax is by implementing country-by-country reporting.” The MP wished companies would be eligible for such tax reliefs only if they showed responsibility in how they behave and in paying their fair share of tax. She closed her speech by asking why there is no register of beneficial ownership of property despite then PM David Cameron promising it five years ago.

On advisers, Hodge said they always get away ‘scot-free’, whoever they are, and none of them is held properly to account. “The law in this policy area is just too weak. In criminal law, we have to prove dishonesty to pursue a criminal prosecution, which is very difficult. In civil law, the penalties are ridiculously low and are limited to the amount of fee that the adviser would have gained.” She urged the minister to bring forward legislation to toughen up the regime.

Zarah Sultana complained about ‘sweetheart packages’ granted to big business and wealthy people – sarcastically calling it a ‘premium service’ - by HMRC.

Kevan Jones explained how people evade landfill tax. He concluded that enforcement is good value for money. If we clamp down on the fraud that is going on, according to the Environmental Services Association Educational Trust, every £1 of enforcement yields as much as £5.60 in return, of which £3.60 goes directly back to the Government, he told MPs.

In an exchange with Kevan Jones, Matt Western said he was concerned that the Big Four accounting firms are ‘a cartel’, arguing that the sector should be broken up. “Those firms, or certainly their UK Arms, account, according to an HMRC report, for half of all known avoidance schemes”, he claimed.

Winding up the debate for Labour, Shadow Treasury Minister Anneliese Dodds said she was was disappointed that the digital services tax will generate, at most, £440 million each year. She also referred to the 2005 study which had reportedly concluded that the big four accountancy firms were responsible for about half of all known avoidance schemes. She called for another HMRC study into this area.

Dodds called for a genuinely publicly accessible register of trusts, with an appropriate definition of ‘legitimate interest’ because the Government ‘have chosen to adopt the most restrictive definition they could’. She also called for ‘proper’, public country-by-country reporting. On shell companies, Dodds said that the Government could have raised £8.4 million each day in fines on Scottish limited partnerships if they forced the publication of persons with significant control of those companies. In 2017-18, only 88 criminal investigations were opened into serious and complex  tax crime, and the number of criminal convictions since 2015 is 22, which is rather different from the 600-plus figure ‘trumpeted’ by the Government.

Other Conservative speakers

Damian Hinds said all countries do some degree of tax competition, either explicitly or implicitly, and our tax regime is one reason why we have attracted many international companies to base themselves here, create jobs and grow our economy. All economies suffer a tax gap, he said, adding that according to analysis by Statista of the total loss, the countries that suffer the biggest loss are the United States, with more than $180 billion; Japan, with somewhere around $50 billion; and France and Germany, with between $15 billion and $20 billion. According to the analysis, the UK was at that time down at somewhere below $2 billion.

Nigel Mills suggested setting a tax gap target to be met by the end of the current Parliament, to give HMRC greater encouragement to introduce further measures, say a ‘relatively gentle’ target of get it down to five per cent in the next five years.

There is no reason why we cannot turn on country-by-country reporting now, said Mills, because it is generally accepted that large corporations around the world have to disclose so much in their accounts to the public anyway and what the UK is asking for is not sensitive commercial data. Requiring company tax returns to be made public would dramatically increase public confidence, he argued. Mills went on to say now would be the time to have a proper look at the general anti-abuse rule to see whether we need to strengthen it and what else we could do. He also called for a full review of what we mean by employment and how we should tax it.

Turning to tax advisers, Mills (a tax adviser before he was elected to Parliament) called for incompetent advisers to be driven out of business. “When advisers are so incompetent that their clients are filing incorrect tax information, or are engaging in such unacceptable activity around tax planning that they should not be allowed to continue, HMRC should refuse to deal with them. We could drive them out of the market and let their clients know that there are responsible tax advisers who will get the calculations right, and they should use them instead.”

The Government use the big four in many ways and take their advice, and it seems wrong that those very companies then go to large multinational companies and others and show them how to avoid tax, said Kevin Hollinrake. We need to see measures on beneficial ownership in overseas territories brought forward to 2023, he said, adding a corporate offence of failure to prevent economic crime and money laundering would reduce the amount of money that is illegally shifted out of the UK into foreign jurisdictions and increase the amount of tax that is paid. 

Welsh Conservative Rob Roberts opined that the vast majority of the public engage in legitimate tax avoidance every day through pensions and ISA investments. We need to change the language we use a little bit to ensure that avoidance and evasion are treated and understood very, very differently, he argued. Describing the tax system as ‘something of a Frankenstein’s monster’ he criticised government for merely ‘tinkering around the edges’. “The wholesale, scrapping and rewriting of the entire system would be absolutely preferable, but it is a massive undertaking that no Government would ever do, so unfortunately we will always be restricted to tinkering around the edges.”

Duncan Baker said we have one of the best tax collection systems in the world. “Before I became an MP, I was in the real world. I was in a business in Norfolk. I recall once opening the post and to my horror seeing that I had a VAT and PAYE inspection all in the space of the same month or so. When my jaw hit the ground, the first thing I thought was, “What have I done wrong to deserve this?” Out came two tax inspectors. They had 50 years of experience in HMRC. They were fantastic people who spent the next week or so giving me a thoroughly good going over; they checked everything from maternity pay calculations to VAT rates on hedgehog food, grass seed and olive trees. I became an expert on zero-rated products—for those who are not aware, I should say that grass seed and hedgehog food are zero-rated. I am still none the wiser about olive trees being standard rated. The real excitement during that process came with the added knowledge that gingerbread men are biscuits and are zero rated. If we dab a bit of chocolate on their eyes, they remain zero-rated, but do not give them any more chocolate buttons, as they then become standard rated. I joke, and people may wonder why I am talking about this, but I do so because it highlights the real facts. This is a real situation going on up and down the country every day, where businesses and individuals are checked to ensure that they are paying their fair rate of tax—and it works.”

Baker stressed the distinction between tax avoidance and tax evasion. “Companies are not evading tax; they are avoiding it. That is where the legislation needs to be corrected, which is what this Government are doing.”

Gareth Bacon went in search of the origin of the £90 billion tax gap figure quoted by Labour in their motion. The only place he had found it referred to was in a blog by one-time Jeremy Corbyn adviser Professor Richard Murphy. He noted that the IFS had described Murphy’s estimate of the corporate tax gap as ‘likely overstated (possibly by a wide margin)’. Bacon praised the Government’s record on tackling avoidance before concluding with some thoughts on off-payroll working, citing constituents’ concerns which “include reports that clients are already beginning to refuse to engage as a result of the complexity of the rules, and that projected earnings are being drastically reduced without the receipt of equivalent benefits or protections as salaried employees.” He said that the Government were right to look at reforms, but “it is extremely important that in seeking to close those loopholes the Government avoid unintended consequences that limit our future competitiveness.”

Anthony Browne, former chief executive of the British Bankers Association, claimed banks play a very active role in tackling tax evasion. For example, he led the industry push for a common reporting standard, adopted by the OECD as a global practice. He also said: “It is an offence against any sense of fairness, and certainly against the public purse, that incredibly profitable global companies, such as Amazon, Facebook and Google, pay minimal tax in the UK because of the way they arrange their internal finances. It is unfair on their rivals whom they compete with, and it is unfair on taxpayers and those who use public services.”

SNP speakers

SNP lead economy spokesperson Alison Thewliss complained the tax system in the UK is hugely complex. Every Finance Bill that comes along adds layers of complexity, leaving a taxation system that is unwieldy and difficult to understand, and even more difficult for the Government and HMRC to control. It leaves loopholes that incentivise tax avoidance and evasion, she said. Instead of simplifying the tax system, the government has introduced policies such as the IR35 tax rules.

In particular, noted Thewliss, Tax Justice UK had published a report highlighting the worrying scale of loopholes in inheritance tax. “On the basis of HMRC figures, it states that the vast majority of those tax breaks go to properties worth more than £1 million; and that is over and above the usual inheritance tax allowance. Instead of benefiting small farms or family businesses, the tax breaks constitute a massive tax giveaway to those who are already very wealthy.”

No UK Government have yet created a comprehensive anti-avoidance rule, lamented Thewliss, and she reiterated SNP’s call for a ‘root-and-branch’ review of the entire tax system. She called closing local HMRC offices an entirely counterintuitive action, adding that this was a time of growing complexity, and investment in staff and expertise at HMRC is crucial. Without that expertise, the UK Government are leaving themselves open to a further loss of tax revenue and further potential evasion and avoidance as we head into Brexit, she forecast.

On the loan charge, Thewliss said HMRC should recoup unpaid tax while avoiding the unacceptable risk of bankruptcy and homelessness, and if HMRC cannot deliver that, an independent arbitration mechanism should be used.

Chris Stephens informed MPs that there are 961 full-time equivalents in HMRC’s wealthy unit, as opposed to the 1,400 full-time equivalents who are hired by the DWP to tackle social security fraud. Let us contrast the figures. Social security fraud is estimated at £1.2 billion, yet the Department has more resources to tackle that matter than HMRC’s wealthy unit has to tackle tax avoidance and evasion. Legislation and regulation are badly needed, but they can work only if HMRC is properly resourced, he charged.

Scottish limited partnership are harming the good reputation of Scotland’s financial services sector, noted Peter Grant, building on a theme Thewliss had also raised. On the loan charge, he said he has seen worrying reports recently suggesting that HMRC is offering an easy ride to the companies that have made billions out of advising their clients to go into these schemes in return for co-operation – ‘basically, this is about shopping their own clients to HMRC’: “Again, the little guy gets done and the big guy—the big business—gets off scot-free”.

Lib Dem speakers

Proposed sanctions and anti-money laundering legislation would give Ministers powers to scrap existing EU regulations and replace them with UK laws, said Sarah Olney, Lib Dem business spokesperson. She is concerned that enthusiasm among some on the Conservative Benches for a bonfire of regulations (a “Singapore-on-Thames” style, low-tax, low-regulation UK economy) will result in these new regulations been watered down. Her party wants an extension of the register of beneficial ownership to all British overseas territories. Companies that do not voluntarily disclose this information should be barred from bidding for government contracts, she said. Before she was elected as MP, she worked as a financial accountant for Historic Royal Palaces, responsible for implementing MTD. She concluded that the implementation was held up significantly by very poor drafting of the legislation that introduced it.

Government response: Jesse Norman, Financial Secretary to the Treasury

Responding to the debate, Financial Secretary to the Treasury Jesse Norman attacked the Tax Justice Network report cited by Labour, saying it ‘generates absurd outcomes’ because the findings are ‘based on an entirely flawed methodology which accepts the proposition that the UK is one of the least secret jurisdictions in the world’. The diverted profits tax and the digital services tax are examples of activities that we are undertaking in order to improve compliance, he said.

On the loan charge he observed that, “when he came to consider the loan charge, Sir Amyas Morse focused on the earliest date on which he believed the charge could be properly validated in law. That date was December 2010. In other words, we supposedly had 10 years of loan charge non-compliance under the Labour party, which received no legal justification or support. I do not actually believe that that is true. HMRC was correct in chasing ​those people as it did, and that will be proved, but the fact is that Sir Amyas himself has pointed to the slapdash manner in which the last Government addressed this whole issue.”

On public registers of beneficial ownership, Norman said the law enforcement agencies need to have access to the information they need to tackle money laundering. Norman said beneficial owners of overseas entities register will be the first of its type in the world and we will go further to increase transparency in the UK property market.

Responding to concerns raised in the debate the minister added that HMRC carries out a detailed check of each claim for creative sector tax relief, and that large businesses are subjected to an exceptional level of scrutiny.

The motion was defeated by 322 votes to 236.

By Hamant Verma