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You are here: Home > Speeches >  Backbench Business Debate

Corporate Tax Avoidance

Mr Richard Bacon (South Norfolk) (Con): It is a great pleasure to take part in this debate, and I commend my fellow member of the Public Accounts Committee, the hon. Member for Redcar (Ian Swales), on bringing forward this debate. I was interested in his exchange with the hon. Member for Brighton, Pavilion (Caroline Lucas) on having a set of general anti-avoidance rules. Her view was that it is best to have a set of principles, because principles are less easy to bend than rules.

I am not quite sure that I agree; whenever I hear anyone talking about principles, I hear the voice of Oscar Wilde saying, “If you don’t like my principles, I have others.” I fear that if there were a general anti-avoidance principle, as long as it were justiciable, which it would be, it would just create more work for lawyers. I do not think that there is a simple way round this, other than simplicity. I shall come on to that in a minute.

I do not normally take too much notice of the handouts for these debates, but I thought I would take a look at today’s, just in case. I was struck by the words at the beginning, under “points to make”:

“Tax evasion is morally wrong as it means that law-abiding people face higher taxes to make up for the lost revenue.”

Right there, in the first sentence, is the confusion that is so widespread that the difference between tax evasion and tax avoidance has almost disappeared—so much so that I wonder whether I was dreaming when I used to think that there was a clear division between the two. Of course, tax evasion is not just morally wrong; it is illegal. That is the central point. Tax avoidance is not illegal.

I shall quote from the National Audit Office report, “Tax avoidance: tackling marketed avoidance schemes”, which provides a handy definition. You drove through a lot of the legislation on this in the previous Administration, Madam Deputy Speaker, though you have probably forgotten much about this. The report says:

“HMRC’s working definition of tax avoidance is ‘using the tax law to get a tax advantage that Parliament never intended’. Unlike tax evasion which involves fraud or deliberate concealment, tax avoidance is not illegal. However, it often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage.”

That gives rise to the question: how can it be that tax avoidance has grown so much, and how can it be that we have the distinct impression—the Treasury might try to deny it, but I believe that there is evidence for it—that there has been simultaneously a cosying-up to a large number of bigger corporate taxpayers, and tightening of terms applying to, and greater aggression from HMRC towards, small businesses in our constituencies?

The best example of cosying-up that I can think of is the deal with Goldman Sachs. Some years ago, a number of investment banks—around 22 of them—came up with a scheme for avoiding national insurance contributions by ensuring that many of their highly paid employees were technically employed by a company registered in the British Virgin Islands. It was a very contrived scheme, and HMRC challenged it. Indeed, 21 of the 22 investment banks involved caved in eventually and paid the money due.

One did not, and that was Goldman Sachs, which continued to pursue its position for many years until, in October 2005, HMRC wrote it a letter, warning it that unless it played ball, it would eventually be liable for all the interest due on the back payments as well.

The case continued for many years, and in 2009 there was an important Court of Appeal judgment that was favourable to HMRC, which made it all the more surprising when HMRC did not pursue the matter more vigorously.

It came out in the PAC’s hearing on the subject that the permanent secretary for tax—the head of HMRC—was unaware of the warning that HMRC had issued in a letter to Goldman Sachs in October 2005 until I told him about it. That rather makes one worry about whether HMRC has the right skills in the right places. Indeed, that was the central burden of the National Audit Office report, “Core skills at HM Revenue & Customs”, published on 2 December as HC 1595.

The report makes pretty grim reading. It makes it clear that

“HMRC does not yet have a strategic and systematic approach to its investment in skills”,

and because HMRC is so decentralised, it cannot ensure that there is alignment, at a high level, of investment in skills with its business priorities. To quote the report:

“As well as having limited information on its investment in skills, HMRC does not, at the level of the organisation as a whole, know its current skills gaps or gain an early warning of future skills gaps.”

The report continues:

“there is no clear line of sight from HMRC’s Executive Committee to business areas that would enable the Executive Committee to evaluate whether business areas are delivering expected business benefits from their investment in skills”,


“Problems are slow to be resolved. Many of the points in this report were raised by HMRC’s own reviews in 2008 and 2009, but HMRC has not made the changes needed.”

The report goes on; I could quote much more, but I am trying to be brief. The issues that we face to do with corporate tax avoidance are fundamentally around complexity. The reason we have had an increase in tax avoidance is that we have had an increase in complexity. The only cure for that is much greater simplicity.

I mentioned earlier that I have seen evidence of a tightening of the attitude of HMRC towards small business customers. Recently, a bookkeeper came to see me in my surgery; he does the accounts and tax returns for a variety of small businesses, from corner shops to companies with a £10 million or £15 million turnover—everything from small manufacturers to fish and chip shops. He came to see me because he was concerned about the change in HMRC’s behaviour; it was becoming more and more aggressive. He had clients who had had to lay people off in order to pay tax bills, and with whom HMRC was not making the time-to-pay arrangements that are certainly made available to some larger companies. Vodafone’s is a classic case; although it had £10 billion on its balance sheet, it was given five years to pay the tax liability resulting from the dispute to which the hon. Member for Redcar referred.

I do not think that the solution that we saw in the case of Starbucks, which gave evidence to the PAC, is the right one. Starbucks made the bizarre announcement that it would pay £10 million in corporation tax in each of the next two years, whether or not it made a profit. That is not the way forward.

As for the idea that companies should pay corporation tax because the mob has turned on them, the spotlight is on them, there is public relations attention on them, and they think they have to make an announcement and do something, that is a bizarre way of arranging our tax affairs. The way to do it is for companies to obey the law.

Mr Field: If Governments are inactive on this front, what action does the hon. Gentleman propose taxpayers should take, other than that mob action?

Mr Bacon: Governments should take notice when they see outside 100 Parliament street, the headquarters of HMRC, large crowds of riot police—there are photographs to that effect, which can easily be found on the web. When Governments see such a thing happening, they should sit up and take notice that the system is not working and that it is not fit for purpose.

I understand the burden of the right hon. Gentleman’s question. I understand why people are so angry and feel that they need to do something. There are many people, including those who have given their lives and those who have fought overseas on behalf of this country, who probably would have had better equipment if more tax revenue had been collected—if more of the tax revenue that should have been paid was paid.

It is not always a case of the tax not being due. If HMRC does not have the resources in the right places to check whether the tax is due or not, it may indeed be that corporations are acting illegally, that what they are doing is evasion and that they are getting away with it. That is why it is so important that HMRC is able to have the right management information at the top level so that it can align its investments in skills and in people with its business priorities in a way that currently, as is clear from the NAO study, it is unable to do.

I believe that the solution to all this must be much greater simplicity, and I mean radically greater simplicity. The time for tinkering is over. It was Einstein, I think, who famously once said that the definition of insanity is to do the same thing over and over again and to expect different results. It is time that we got different results and we will get them only by taking different action.

7 January 2013