Catherine spoke to a number of Opposition amendments to the Finance Bill yesterday (17th April) in her role as Shadow Exchequer Secretary – covering the impact of tax avoidance here in the UK, and on developing countries abroad. The amendments were defeated by the Government. Catherine’s speech is here:
Catherine McKinnell (Newcastle upon Tyne North) (Lab): It is a pleasure to serve under your chairmanship, Ms Primarolo. I rise to speak in support of the Opposition amendments to clauses 203 to 212, which relate to the Government’s proposed general anti-abuse rule and the wider issue of corporate tax avoidance and its impact. I stress “abuse” because people use the terms “avoidance” and “abuse” interchangeably. However, we need to be clear that this is about an anti-abuse rule, rather than a general anti-avoidance rule.
Before turning to the clauses and our amendments, I want to put on the record our deep concern at the delay in the publication of the final guidance notes on how the general anti-abuse rule, or GAAR, will operate. The guidance was initially expected to be published alongside the Finance Bill on 28 March but was published only on Monday—two hours before Second Reading and just two days before we consider the GAAR-related clauses in the Bill this evening. It is clearly important that the recently formed GAAR advisory panel sought to get the guidance right and to amend and improve it appropriately. That is a view backed up by the Economic Affairs Committee in the other place, whose report last month on the draft Finance Bill stated:
“Our witnesses stressed the importance of the guidance from HMRC and the Advisory Panel on how the GAAR would apply so as to minimise uncertainty. We wholly agree. We recognise that progress is being made in drafting this guidance but are concerned that our witnesses felt it was far from acceptable as it stands.”
We therefore welcome the fact that amendments were made, but surely it is vital that Members have sufficient time properly to consider the final guidance, in advance of the GAAR provisions being considered in this House. The Treasury Committee has already raised directly with the Chancellor the question of Members’ ability properly to scrutinise the Bill within the timetable provided by the Government. It described it as
“an important issue of principle going to the heart of Treasury Ministers’ accountability to Parliament.”
I am therefore keen to put my deep concerns about this issue on the record. Sufficient time has not been provided for Members to consider the guidance and any amendments required to the primary legislation as a result.
At a time when living standards are being squeezed, Government borrowing is up, growth forecasts have been downgraded again, the public services upon which people rely are being cut or threatened across the country, and ordinary people are being asked to pay the price of the Chancellor’s economic failure, there is understandable anger about the unfairness and injustice of people working hard and paying their fair share of taxes, while they hear almost daily about the complex lengths to which a small but significant number of multinational corporations will go in order not to do so.
Kelvin Hopkins (Luton North) (Lab): My hon. Friend will have noticed that The Times reported today that the International Monetary Fund is so worried about the direction of Government economic policy that it fears for the long-term future of our economy. The Government are wrong and they have to change.
Catherine McKinnell: I am pleased that my hon. Friend has raised that issue and reiterated the difficulty the Chancellor faces in pursuing, with such a one-direction approach, his clearly failing economic policies. He refuses to change course, even though the economy clearly shows that his approach is not working, as does the impact on ordinary people up and down the country. Instead, he is ploughing on for political reasons—because he simply cannot lose face by changing direction.
Let me return to the principal issue. It is right to raise the impact of tax avoidance on public services, which are suffering as a result of the tax gap.
Stephen Phillips: If it is so important to impose an anti-abuse rule such as that which the Government propose to introduce, can the hon. Lady explain to the House why the Labour Government, who were in power for 13 years, did absolutely nothing in that regard?
Catherine McKinnell: That is clearly untrue. The Labour Government had a proud record of tackling tax avoidance at every level. We introduced endless targeted measures that brought in an additional £16 billion of revenue. We introduced the disclosure scheme, which, as the Minister will say, has been highly successful, which this Government are building on and which brought in an additional £12 billion of revenue. I shall take no lessons from those on the Government Benches about tackling tax avoidance, because although the Government talk tough the action is yet to be seen on the ground.
Clearly it is unfair and wrong that companies can avoid tax on profits that have been generated from economic activity in the UK. I am sure that we can all agree on that. The profits have been generated by hard-working UK tax-paying consumers and businesses with what appears to be one rule for those at the top and another for everybody else.
There will sometimes be good reasons for companies to pay little or less tax. Some firms invest large sums in research and development, assets and infrastructure. That must be celebrated and acknowledged, but people are rightly entitled to ask what is going wrong when a company can make sales of £1.2 billion and describe itself to investors as profitable yet report no profit in the UK. It totally undermines the concept of a level playing field when good British companies pay their fair share on profits generated in this country whereas others seem to get away with not doing so.
As we all know from our constituency postbags, people are angry about the devastating consequences of tax avoidance not just on the UK and our public services but on developing countries, with multinational giants using tax havens and artificial corporate structures to shift profits offshore and away from the places where they were generated.
We have heard much tough talk from the Government about their apparent determination to tackle tax avoidance. Before us today we have the coalition’s flagship policy on this issue, the general anti-abuse rule. Announced in the 2012 Budget and building on the 2011 report by Graham Aaronson, QC, the GAAR will apply to income tax, national insurance contributions, corporation tax, capital gains tax, inheritance tax, petroleum revenue tax, stamp duty land tax and the new annual tax on enveloped dwellings. I welcome the statement on page 4 of the guidance that was finally published, which suggests that the GAAR
“rejects the approach taken by the Courts in a number of old cases to the effect that taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means, however contrived those means might be and however far the tax consequences might diverge from the real economic position.”
That is a significant advance on the current situation, but, in the Treasury’s words, the GAAR is intended to address
“artificial and abusive avoidance schemes but without creating uncertainty for business investment”
and will attack
“only those schemes that are the intended target and not a broader spread of business arrangements.”
The Budget 2013 policy costings documents suggested that the GAAR
“would be highly targeted on abusive avoidance that has abnormal features”
and goes on to suggest that the people affected are likely to be those involved in “highly contrived tax avoidance”. Mr Aaronson believes that the GAAR is
“clearly intended to apply only to egregious, or very aggressive, tax avoidance schemes”.
Indeed, clause 204(2)(b) refers to the use of “contrived or abnormal steps” to obtain a tax advantage. Those are definitions that I would say—many would agree with me—are highly subjective and require greater clarity in the final guidance. As the Chartered Institute of Taxation pointed out before the guidance was published, how does one interpret “abnormal” and to what extend does the term “contrived” cover what many tax experts would think—rightly or even wrongly, in many people’s view—is simply tax planning? Page 23 of the final guidance, published on Monday, simply states:
“The words “contrived” and “abnormal” are not defined, and therefore will be applied in their normal sense.”
What deterrent effect is the narrowly defined GAAR expected to have? As the Government’s flagship policy for tackling tax avoidance, what dent will it make in the tax gap—that is, the difference between the tax collected and the tax that would be collected if everybody complied with the letter and the spirit of the law? Table 2.1 of the Budget 2013 and HMRC’s recently updated impact note on the GAAR estimate that it will result in additional revenue of £60 million in 2014-15, rising to £85 million in 2017-18. Those are without doubt notable sums of money, but let us remind ourselves of the tax gap. HMRC’s most recent estimate for the period 2010-11, considered by some to be relatively conservative, stands at £32.2 billion. HMRC believes that about 14% of that can be accounted for by tax avoidance activity, which means £4.5 billion to £5 billion a year.
Kelvin Hopkins: Richard Murphy, in particular, has estimated that the tax gap is at least £120 billion and according to some estimates it is much larger than that. The official figures really show only a fraction of the truth.
Catherine McKinnell: There are varying views on the tax gap and how it is calculated. Clearly, it is difficult to calculate accurately, because we are effectively calculating something that does not exist. It is tax that HMRC has been unable to collect, so it will always be an estimate. I use the HMRC figure because it is the minimum—it is what it believes and it is a conservative estimate. The Tax Justice Network calculates the gap at £120 billion. Whatever the actual sum, the GAAR and the £60 million and £85 million that it is intended to bring in are simply a drop in the ocean, and many people have described it as that. It is tinkering around the edges of what is legal.
There has been extensive discussion about the proposed GAAR’s strengths and weaknesses, both in this House and elsewhere. I acknowledge that the Government have taken steps in response to consultation submissions to reduce some of the ambiguity of the earlier GAAR proposals. For example, they have attempted to define the so-called “double reasonableness test” so that we can have a better understanding of how to assess, in HMRC’s words, whether arrangements can
“reasonably be regarded as a reasonable course of action”.
Again, the word “reasonable” is highly subjective and open to interpretation. Many, including the Opposition, still believe that the GAAR is too narrow and that, as it tackles only the most egregious schemes, cannot be regarded as general at all.
Other concerns have been raised about the chair, the panel and the manner in which they will be appointed. The chair has been appointed and will appoint his panel, and it is they who will interpret what they believe to be reasonable. What a tax expert considers to be reasonable might be regarded differently in the eyes of a member of the public. Indeed, many tax experts will differ on what they believe to be reasonable tax planning, as opposed to something egregious that would fall under the GAAR. The concern is that the GAAR is so narrow in tackling only the most egregious schemes that it could hardly be considered general at all and should perhaps be called the AAR instead. As has been mentioned, it also risks tacitly legitimising any tax planning or avoidance that does not fall within its remit, making it even harder to tackle the avoidance problem. Those arguments should be seriously considered. The problem was neatly summed up by the former president of the Association of Revenue and Customs, Graham Black, who stated that the GAAR is a
“Trojan horse, which suggests tough action whilst actually facilitating avoidance.”
A further issue, raised by the Institute of Chartered Accountants in England and Wales, is the international legality of the GAAR in relation to the UK’s double tax treaties, particularly with about 100 non-OECD countries where the GAAR could effectively and unilaterally override the UK’s international obligations. There remain serious concerns that there is no specific penalty regime for the GAAR, so it would be helpful if the Minister, in addition to addressing the concerns I have already set out, could tell us how he intends to ensure that this GAAR is not just a toothless tiger.
I am keen to emphasise that we are willing to support the Government in introducing the GAAR, but for the reasons I outlined we are not convinced that this version is up to the job. One of our key concerns should surely be the fact that there appear to be no arrangements to monitor, determine or measure whether the GAAR is actually working as intended or whether, as we fear, it fails in its aims. HMRC’s recently updated impact note on the GAAR simply states:
“Consideration will be given to evaluating how effective the GAAR has been at discouraging as well as stopping abusive avoidance schemes.”
However, the Select Committee on Economic Affairs in the other place made a clear recommendation for an independent post-implementation review after five years. The Committee stated:
“It would be for consideration whether such a requirement should be built into the legislation, or failing that, a firm Ministerial commitment should be made in the House of Commons at the time the legislation is being considered.”
That time is now, I suggest to the Minister.
Like the Association of Accounting Technicians, the Opposition agree that there should be such a requirement, but like the Chartered Institute of Taxation we believe the review should take place before the five years suggested by the Economic Affairs Committee. Given the seriousness of the problem, the ever-increasing pressure on the Government’s finances and the result of the Chancellor’s failing economic plan, we believe we need an earlier review of the success or otherwise of the Government’s key policy for tackling tax avoidance. Our amendment 8 proposes a maximum two-year gap between Royal Assent to the Bill and the review. I look forward to hearing from the Minister whether he is prepared to commit to such a review, particularly in light of the concerns expressed at the beginning of my submission about the lack of time afforded by the Government’s publishing the guidance so late for proper scrutiny of the legislation.
Perhaps the key concern about the GAAR relates not to its implementation but to the Government’s tendency to promote its provisions as some sort of panacea for dealing with the problem of tax avoidance. My right hon. Friend the Member for Oldham West and Royton (Mr Meacher) raised that concern. I spoke earlier of the justifiable anger about the impact of the problem, particularly of corporate tax avoidance, both on the UK and on developing countries. In continuing to talk up the potential impact of the GAAR, the Government are failing to communicate that it will not deal with many of the issues that members of the public are concerned about. Indeed, the Economic Affairs Committee, which provided valuable scrutiny of the Bill and the GAAR, stated in its report that
“Ministers should make every effort to explain the aims of the GAAR and the reasons why it cannot apply in many of the ways public opinion would prefer, so that unrealistic expectations are banished.”
The Chartered Institute of Taxation commented:
“The Government should be careful not to overstate the effects of the GAAR, raising expectations which will later be disappointed. Many of the examples of ‘tax dodging’ highlighted by the media and campaigners would not be caught by the GAAR. It is important to be clear from the outset what the GAAR will, and will not, achieve.”
The ICAEW stated that
“the GAAR is aimed at countering abusive arrangements and will not fix everything. There remains also uncertainty as to what it will and will not catch.”
The Association of Accounting Technicians remarked:
“We do not see the GAAR as a bulwark against the perceived and real abuse of the UK tax system by multinational corporations. The only way to tackle the growing concern that the UK and many Governments have is by bringing international law up to date, making it fit-for-purpose for the 21st century…The AAT supports Lord MacGregor (Chair of the Economic Affairs Committee) in his demand that the Government make it clear to the public that the GAAR is ‘narrowly focused’ and will not meet ‘public expectations’ of bigger levies on international firms.”
The impact note supports that view in terms of the revenue that the Government expect from the measure.
The Opposition agree with all those comments. Indeed, we think the Government should go further on this critical and pressing issue, which is why we have tabled further amendments. The time for tough talk on tax avoidance is over. We and particularly the developing world need real concrete action now.
Earlier, I outlined the impact of tax avoidance on ordinary UK taxpayers and good British businesses who are paying their fair share but see others going to great lengths to avoid doing so—thus contributing to the tax gap and undermining a level playing field for firms. I briefly touched on the devastating impact of tax avoidance overseas, and I welcome the Chancellor’s confirmation in this year’s Budget that he intends to build on Labour’s legacy by meeting the target of spending 0.7% of gross national income on overseas aid. However, we know that aid alone will not be enough.
Developing countries desperately need to be able to raise more tax revenues to invest in reducing hunger and becoming more self-reliant. Aggressive tax avoidance activity is so significantly reducing the ability of developing country Governments to tackle issues such as hunger, and to invest in the vital infrastructure that we all take for granted, that the OECD estimates those countries lose three times more to tax havens than they receive in aid each year.
Fiona O’Donnell (East Lothian) (Lab): Does my hon. Friend agree that the measure is a gift for the Chancellor to satisfy the lack of enthusiasm among many of his Back Benchers for 0.7%?
Catherine McKinnell: Indeed. That very thought was going through my head. We must be serious about the impact we can make as a country to support developing countries. We should do everything we can, not just giving aid and making sure that it is utilised in the best way, but also enabling developing countries to support themselves as best they can. The Enough Food for Everyone IF campaign states that
“dealing with developing countries’ corporation tax alone could raise enough public revenues to save the lives of 230 children under the age of five every day.”
That is a powerful statement and a powerful tool is within our reach.
The Opposition believe that the first step to tackling the issue, and to creating a fair taxation system, is to put an end to tax secrecy. We need concrete proposals from the Government to demonstrate how they intend to put the issue at the top of the G8 agenda, starting with the requirement suggested by our amendment that HMRC should work in conjunction with other G8 countries to bring forward measures to require multinational groups to publish a simple, single figure for the amount of corporation tax they pay. That is the purpose of our amendment 4. Yet, while the issue of tax avoidance and tax transparency can clearly only be properly dealt with at an international level, we believe the UK should be leading the way, demonstrating its determination to take meaningful action on tax transparency here at home. Therefore our amendment 5 would ensure that commitment was there, regardless of progress at an international level.
But tax transparency should not be restricted to the UK and other G8 or OECD countries; it is needed now, more than ever, in the developing world. The Prime Minister and the Chancellor have frequently stated their commitment to championing tax transparency during the UK’s presidency of the G8. They are on record as being committed to ensuring that developing countries also benefit from any reforms, yet with the exception of a relatively small pot of money for capacity-building work, the measures to combat tax avoidance in the Bill before us do nothing to assist poorer countries. So while the Government are determined that Labour’s disclosure of tax avoidance scheme requirements cannot be extended to include subsidiaries of UK companies operating in developing countries, the Opposition believe that the Government should at least commit to reviewing how a requirement for UK companies to report their use of tax schemes that have an impact on developing countries could be enacted. Surely it is the least that the Government can do.
That review, called for by our amendment 6, should of course include considering how the Government would take steps to notify developing countries’ tax authorities of tax schemes that have been identified, to assist in the recovery of that tax. I am quite sure that that proposal will at least have the support of Liberal Democrat Members on the Government Benches, given that their party’s spring conference passed a motion effectively calling for the same measure just last month.
Stephen Doughty (Cardiff South and Penarth) (Lab/Co-op): My hon. Friend has made very strong arguments. Will she join me in commending the work of organisations such as ActionAid, Global Witness and the Tax Justice Network, who have done excellent work in exposing a number of examples of corporate tax avoidance in countries such as Zambia, particularly resource-rich countries, and the devastating impacts those are having? If we did not have those stories out there, we would not be aware of the scale of the avoidance that is going on and the impact that it is having in those very poor countries.
Catherine McKinnell: I thank my hon. Friend for that intervention, which is powerful in itself, but also very much reinforces the argument that we on the Front Bench are making today: that we have the means within our grasp to make a difference to that situation. I hope that the Minister will provide some reassurance today, and that we shall get some Liberal Democrat support for our amendments, which seek to make a real difference on the ground. [Interruption.]
Returning once again to an amendment tabled by the Opposition last year—and I might say amendments tabled by Liberal Democrat representatives last year but which were withdrawn at the last minute—we believe that changes to the controlled foreign company rules introduced by the Finance Act 2012 should be properly monitored for their impact on developing countries. Many charities have been concerned that the CFC rule changes will make it easier for UK companies to avoid paying tax in developing countries in which they own subsidiaries. While the Government have estimated the potential loss to developing countries at £1 billion, which one would think would be enough, ActionAid believed it could be as high as £4 billion a year. So what we really need is for the Government to undertake a proper assessment of the impact of the changes on the overall tax take of developing countries since last year, and our amendment asks for that to take place.
In conclusion, we will support the Government’s legislation, brought forward today, to introduce a GAAR. However, we believe, along with my right hon. Friend the Member for Oldham West and Royton (Mr Meacher), who has tabled his amendments as a suggested alternative to the GAAR, that the Government’s GAAR has many potential flaws.
The Exchequer Secretary to the Treasury (Mr David Gauke): Does the hon. Lady support the new clauses tabled by her right hon. Friend the Member for Oldham West and Royton (Mr Meacher)?
Catherine McKinnell: We support our amendments that we have tabled, and I have presented very clearly the reasons why we support them. I will go on to say why. We support the GAAR and we welcome its being put in place, but we want to see how effective it will be and we will continue to monitor it. We hope that the Government will accept our proposal to come back and report on progress within two years, so that we can continue to monitor its effectiveness and rectify, hopefully, some of the flaws that we see will hinder its effectiveness in tackling this problem. So we call on all—
Stephen Doughty: In terms of who will be supporting which amendments, was my hon. Friend not surprised a moment ago to hear comments from a sedentary position from one of the Liberal Democrat Ministers—in fact an International Development Minister—saying that she doubted their support? Having read previous Liberal Democrat policies on this area, I have to say that over the years they have been fairly progressive and very extensive. Was my hon. Friend not surprised to hear those comments?
Catherine McKinnell: I am very shocked to hear of those comments. I missed them at the time. If the Minister wants to explain her position or the Liberal Democrat Front-Bench position on these amendments, I will be glad to hear it.
Andrew Stunell (Hazel Grove) (LD) rose—
Catherine McKinnell: Does the right hon. Member for Hazel Grove (Andrew Stunell) wish to intervene?
Andrew Stunell: With the permission of the Chair, in a minute or two I hope to be able to tell the House fully.
Catherine McKinnell: Excellent. I am grateful for the right hon. Gentleman’s intervention. We look forward to clarification of the Liberal Democrats’ position on the issue, and we hope it does not go the same way as their mansion tax vote went earlier, when they voted against their own policy for the second time in the House.
I call on all right hon. and hon. Members to support our amendment 8, which would monitor the impact of the GAAR and ensure that the Government take genuine action towards securing the tax transparency and fairness that the world needs in this 21st century. We also seek to test the will of the House by pressing our amendment 6 to a vote, to determine whether the House will commit to ensuring that we do all we can in our power to tackle tax avoidance that is damaging not just to the UK, but to developing countries.
I finish by reiterating briefly concerns that I have expressed on several occasions in the Chamber and elsewhere about the huge number of challenges facing HMRC, highlighted recently by yet another scathing report from the Public Accounts Committee. The very body on which the Government rely to tackle tax avoidance is being seriously undermined by devastating budget cuts of £2 billion over this Parliament and the loss of 10,000 staff. These cuts will be a false economy if they hamper HMRC’s ability to collect the billions of pounds in avoided tax, and all the tough talk, strategies and moral indignation in the world will not deal with the problem of tax avoidance if HMRC simply does not have the capacity and resources it requires to do the job.