7 Jan 2013 : Column 83

Ian Swales: I certainly have something to learn. I hope that the right hon. Member for Oldham West and Royton (Mr Meacher) will speak about his Bill later.

We should play the tax avoiders at their own game. If their UK accounts show virtually no profit, are they robust enough to deal with for the long term, and do they have the right ethics to work in our public sector? There is a big drive in manufacturing at the moment—the desire for “Made in Britain.” Perhaps it is time for Government procurement to work on a “Paid in Britain” basis. Small and medium-sized UK companies who are doing the right thing have a clear disadvantage when bidding against the tax-avoiding giants. I am convinced that doing public sector business with tax avoiders does net damage to our economy. Government action could mean that companies quickly change their behaviour. When I suggested such a step to Google at the PAC hearing, the signal was quickly picked up, with an article in the trade press.

The Government have enormous power to require those seeking grants or contracts to reveal the tax structure of their UK entities. When making their choice, decision makers could then include the bidder’s tax arrangements. The National Outsourcing Association supports such a move, which is surely part of getting the best value for UK taxpayers when spending their money. To those who cry “EU bidding rules,” I say that it is right to look at both costs and potential tax income. Who can stop countries demonstrably making the best value choice in the national interest from an open process?

The issue is not party political. MPs on both sides of the House want action. The problem is urgent, huge and growing. The more companies and their advisers see what others are doing, the more the leakage becomes a flood. Only a select few will be able to keep their heads above water, and it will be the smaller, independent companies who are overwhelmed. We cannot rely on pleas for morality or altruism. Companies play by the rules set in this House and the enforcement we put in place to back them up. Just last week the Prime Minister said that the issue is a top priority. Tinkering will not do. Now is the time for radical action.

7.6 pm

Mr Frank Field (Birkenhead) (Lab): I have three points to make, but I begin by expressing my anger at companies who take us and the Government for fools. We have a fairly united view about welfare abuse. I should like the Government to enact measures that reflect the sense of urgency the country feels about people who similarly abuse their tax position.

The Government’s fiscal crisis is of long standing. In the vast majority of the 60 years since 1948, Government accounts have been in deficit. We have developed a habit whereby Governments are elected to implement programmes for which they have no intention of raising the necessary tax revenue. In only a handful of the years since ’48 have Government budgets been in surplus; for the rest of the time they have been in deficit, and under Tory periods the deficit was twice as large as during Labour years.

We habitually have real difficulties in raising revenue to support the level of expenditure taxpayers would like to see. We know that the position will get worse in the

7 Jan 2013 : Column 84

future, and I shall give two examples of where it will harden. Let us look at long-term trends in revenue in relation to the tax on fuel. We know that thanks to more efficient fuel use, the revenue gained by the Exchequer from tax on fuel will fall dramatically. At the same time, there will be pressure on Government budgets from demands for the health service and pensions, and it is not impossible to envisage that by 2060 they could be taking half of the total.

We hold this debate at a time of crisis, but not the immediate crisis about the deficit with which the Government are trying to grapple. There is a longer term crisis, because as a nation we have grown accustomed to demand far more than we are prepared to pay in tax. I have three suggestions for the Government about what they could do to convince taxpayers, as well as the House, that they are as serious about clamping down on tax abuse as they are about clamping down on other forms of abuse in our public finances.

The first suggestion is that we issue kitemarks to companies that Her Majesty’s Revenue and Customs believes have paid their fair share of taxes. We would then develop a “white list” of companies with which we know it is safe to trade, and would have warnings about those with which it is not safe to trade, or would know that if we did trade with them, we were aiding and abetting the crimes that they were committing against the commonwealth of taxpayers in this country.

Secondly, I make this plea: why cannot the Revenue be more bold in exposing companies that it believes are abusing their position and fiddling their tax rates? Might not that threat, certainly if carried out, concentrate the mind of many companies and get them to start behaving better, to the good of taxpayers?

My third suggestion relates to a point on which I do not agree with the hon. Member for Redcar (Ian Swales), whom I congratulate on his contribution; I do not think that we have the time to wait for groups of countries to behave, let alone to get the European Union to agree on a common stance. Let us look at those who are outside the European Union. Norway, for example, has to pay to trade within the European Union. Why cannot we say to companies such as those that the hon. Gentleman listed, “If you wish to trade in this country, you have to pay a fee, which will be more than we would gain from you in taxes if you paid corporation tax honestly”?

We might start with companies—coffee houses and so on—that could well find that other companies could substitute for them. There would be no diminution of the public good if we could not go to Starbucks. The country would not come to a standstill. We would not have breakdowns if we could not buy Starbucks coffee—there are plenty of alternatives—and we might begin to turn the tide in favour of honest taxpayers and against those who are taking us to the cleaners. I would be greatly interested to hear how, if the Government wish to be taken seriously on the subject, they will respond to those proposals, and other proposals that I know right hon. and hon. Members wish to put to the Government in this debate.

7.12 pm

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

7 Jan 2013 : Column 85

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.

7 Jan 2013 : Column 86

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 to do with 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.

7 Jan 2013 : Column 87

Mr Frank 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.

Several hon. Members rose

Madam Deputy Speaker (Dawn Primarolo): Order. It is necessary to have a time limit in the debate as more Members are standing to indicate that they wish to participate. The time limit will therefore be eight minutes per Back-Bench contribution, starting from the next speaker.

7.21 pm

Mr Michael Meacher (Oldham West and Royton) (Lab): I sincerely congratulate the hon. Member for Redcar (Ian Swales) on securing this debate, which has been much needed for a very long time. He raised a series of important issues and I strongly endorse the gist of his recommendations. I shall explore a little further the reasons why the tax system has been corrupted in the way that he suggested, and therefore what needs to be done.

A conventional view and a charitable view is that the Government do the best they can, but are outgunned and outmanoeuvred by all those smart tycoons and multinationals who employ an army of accountants and lawyers to run rings round the flat-footed regulators and tax inspectors who are always behind the curve. That is, in my view, a pastiche of the truth. The reality is that Government, as I will show, far from cracking down on tax dodgers, not only turn a blind eye to all but

7 Jan 2013 : Column 88

the most egregious examples of tax misfeasance, but actually promote some of the most brazen examples of tax avoidance. I will come on to that.

This is scarcely surprising when the whole apparatus of tax policy has been captured by the corporate interest. The so-called clamp-down which the Government are promising will be run by the former City corporate tax lawyer and former Tory special adviser, Edward Troup, who is now in charge of tax at HMRC. It will be overseen by the HMRC chairman, Ian Barlow, who ran the most aggressive tax avoidance schemes for KPMG. Even the HMRC’s ethics committee is chaired by Phil Hodkinson, who is a director of the Resolution insurance company based in a tax haven. All that tells a pretty clear story.

As we all know, corporation tax avoidance has become a hot political issue only as a result of the relentless highlighting of it by analysts such as Richard Murphy of Tax Justice Network and journalists such as Tom Bergin of Thomson Reuters and Richard Brooks of Private Eye, as well as campaigners such as UK Uncut. Why is it left to voluntary campaigners to nail the tax dodgers who are cheating honest taxpayers and the Revenue out of, according to the Government, £35 billion to £40 billion a year? That is equal to about a third of the total deficit and the sum is probably a considerable underestimate.

One answer might be that the banks, which are by far the biggest tax dodgers, pay half the Tory party funds every year. [Interruption.] The Minister should not just shake his head. These are facts which are highly relevant. The multinational companies, which are the second biggest tax dodgers, pay most of the rest. If, instead of all the rhetoric that we get from the Prime Minister and Chancellor about moral repugnance and abhorrence, the Government were seriously concerned about stopping industrial-scale tax avoidance, let them answer three questions. If the Minister wants to answer them in my time, he is very welcome to do so.

First, since we all know that the really big numbers are not the tiddly Jimmy Carrs of this world but the transfer pricing by multinationals, why do the Government not bring in country-by-country reporting, which at a stroke would put a stop to the artificial switching of tax liability to low tax jurisdictions for no other reason than simply to avoid tax? I do not know whether the Minister wants to answer. Perhaps he will.

Secondly, since many, if not a majority, of the world’s most used tax havens are UK-controlled overseas territories and Crown dependencies, why do the Government not close them down? Why are not all such countries and territories—the Cayman Islands, the British Virgin Islands, Bermuda, Jersey and so on—required automatically to hand over details of income, assets and finance structures such as trusts to the UK authorities? This is the point that the hon. Member for Redcar made. If territories fail to comply, why do the Government not refuse to recognise the validity of any financial transactions emanating from them, as well as through domestic tax law, making it far harder, which the Government could well do, to get money into the recalcitrant tax havens in the first place?

The simple answer is that the Government could do that perfectly well and very effectively, but they will not do so because they do not want to, because their corporate and financial backers would scream blue murder if they

7 Jan 2013 : Column 89

ever tried to do so, and this is a very feeble Government, who are quite willing to bash the weak through benefit cuts but are not prepared to stand up to the strong.

Simon Hughes (Bermondsey and Old Southwark) (LD): I have great respect for the right hon. Gentleman, who has been consistent in pursuing the issue, but his last criticism is completely ill-founded. I do not speak as somebody who backed the previous Tory Governments or the previous Labour Governments when they failed to deal with the issue for years and years. Looking objectively, I have seen far more action from the Treasury under this Government than I saw under 13 years of the Labour Government whom he supported.

Mr Meacher: The right hon. Gentleman, whom I respect, wishes to raise a partisan issue when we are discussing something of much greater importance. Perhaps I can satisfy him by saying that I entirely agree with him. New Labour was just as bad as the Tories and I fully recognise that, but let us turn to where we are and what we ought to do about it.

The third question is this: if the Government are serious about tackling tax avoidance, why are they cutting the number of tax inspectors, many of whom recover more than 100 times the cost of their salary? In 2010 there were 68,000 of them. There are now far fewer. The problem is that when the Chancellor gives his dog-whistle that Britain is open for business, part of that coded message is that Britain is open for tax avoidance, and there will be far fewer tax inspectors nosing about and prying into shady practices.

While the Government have ostentatiously avoided all the actions that will end the transfer of tax avoidance, the truth is even worse. They are now drawing up measures which, frankly, will rip the guts out of the laws that safeguard the nation’s corporate tax base. They have exempted from tax multinationals’ foreign profits, but allow tax relief for the costs of funding them. In effect, that turns the UK itself into a corporate tax haven, which incentivises multinationals to shelter income offshore and to place real business overseas, using the UK as a worldwide platform for tax avoidance.

The Government are now going even further with the CFC—controlled foreign companies—rules. From January 2014, multinationals that open a finance subsidiary in a tax haven will have their corporation tax, as staggering as it may seem, reduced from the current 23% to 5.5%. In future, therefore, multinational companies really need not bother with tax avoidance any more, because the Government are serving it up to them on a plate.

The latest wheeze that the Government have come up with is the patent box. If a company has a product with a small patented component, it will qualify for a 50% cut in its corporation tax—that is 10% from April 2017—not only on that product but on the whole of its profits.

A third example is the general anti-avoidance rule, which the Government portray as their flagship measure against tax avoidance. Actually, it is the reverse. By being narrowly drawn it will block the worst kinds of tax avoidance, but by the same token—

Madam Deputy Speaker (Dawn Primarolo): Order.

7 Jan 2013 : Column 90

7.31 pm

Karl McCartney (Lincoln) (Con): I congratulate the hon. Member for Redcar (Ian Swales) on securing this Back-Bench debate on corporate tax avoidance. It is an important subject that has been dangerously blurred by some of our colleagues. I want to say at the outset that I find myself far more concerned about the way in which Government spend our money than about how they collect it. If spending were controlled, or had been—I give the example of the last Labour Government—the collection problem would be vastly reduced. I believe that my Government have taken such sentiments to heart and we are actively reducing spending to aid our country in difficult economic times.

I certainly think the approach of the Chairman of the Public Accounts Committee, the right hon. Member for Barking (Margaret Hodge), and others who have swallowed her line, misses two simple and quite fundamental points. First, the tax on shareholders is inseparable from company tax and is quite high. While companies are literally separate legal entities from their shareholders, they are in effect tax collection agencies for Governments to tax the profit stream which in effect belongs to their shareholders. That profit stream is not just taxed by the corporation tax payment on which all of this debate is focusing. In reality, the profit stream belongs to the shareholders and it is taxed not once by corporation tax, not twice by corporation tax and income tax, but three times, once as corporation tax, once as income tax on distribution, and finally with capital gains tax, or inheritance tax, on retentions as a proxy for the capital gain.

I have a sound mathematical example in my notes that might well lose some Opposition Members, so let me just outline that on £100 of pre-tax profit, with corporation tax and other taxes taken into account, the Government take £52.91 in tax paid. Some of this amount comes from income that can be deferred, but it is a tax that is ultimately not avoidable, other than perhaps by devices such as the trust of the right hon. Member for Barking for her shares in her family company, which one presumes is morally fine with the Opposition Members who have followed the debate so far and so must be okay. But that near £53 from £100 does not sound very low to me, especially given that the Government scrapped indexation relief on capital gains at a time when they are clearly targeting higher inflation. Perhaps more importantly though, what incentive is such a tax on profits to entrepreneurs? What encouragement do such figures give to those involved in setting up and driving forward young businesses, or those entrepreneurs thinking of taking that big first step into the world of small business and working for themselves?

Secondly, is it wrong for companies to avoid tax? Janan Ganesh in the Financial Times has written well on this particular issue, but I would draw hon. Members’ attention to one of his main and salient points for this debate with which I agree. The Starbucks precedent—and by association, one might say, any future pressure on Google, Amazon, and historically some of the mobile phone companies and indeed perhaps most notoriously the Guardian newspaper group—is a dangerous one. Tax should be a matter of law not moral persuasion. If any Government want Starbucks or any other corporation to pay more tax, let them pass an appropriate piece of legislation. Otherwise tax payment will become a matter

7 Jan 2013 : Column 91

of public image and impact, and I imagine that very little tax will be paid by the maker of the polystyrene cups, which we may never have heard of. Do we really want to travel down “The X Factor” road of choosing something, indeed policy setting in this country, making important decisions based on fickle public opinion on the hoof?

Mr Bacon: While my hon. Friend is right that it should be a matter for law, not for moral persuasion, PricewaterhouseCoopers’ request of the Government, in the consultation that took place last year, that they should do more to clarify what constitutes unacceptable tax avoidance versus what constitutes acceptable tax planning, places a burden on the Government to be clearer about their own intentions.

Karl McCartney: My hon. Friend will be pleased to know that I agree with him. I will mention PricewaterhouseCoopers shortly.

The objective of business, any business, is not ostensibly to do good or to pursue corporate social responsibility; it is to do business and make money for the owners and/or shareholders. Directors of all small, medium, large and multinational companies have a fiduciary responsibility to maximise gains for that company’s owners, including minimising the tax paid. Any diversion of company management from that objective is wrong as a matter of law and dangerous as we move forward in the 21st century.

John Christensen of the campaign group Tax Justice Network made a true claim when he said that the figures highlight that tax avoidance by large businesses has become a “much bigger issue” over the past 10 years because of the “enhanced relationship” policy put in place. That policy was put in place by the then Labour Prime Minister, Tony Blair, and his then Chancellor and ultimately successor as Labour Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown).

The problem is perhaps exacerbated in that we have a very complicated tax system. The previous Labour Government did nothing to uncomplicate matters. In fact, they set up a whole new industry making it more complex. What we need as a country, and for us to remain an economic powerhouse on the world stage, is much greater tax simplicity and lower tax rates.

I am pleased that the Government are consulting on a general anti-abuse rule, the GAAR, targeted at artificial and abusive tax avoidance schemes, with a view to bringing forward legislation later this year. Echoing my earlier statement, Mary Monfries, head of tax policy and regulation at PricewaterhouseCoopers, has also been quoted in the media saying with regard to our tax system that “simplicity is key”. She described complexity as a

“key problem with the current tax model”,

adding that the GAAR should

“help to act as a disincentive”


“abusive, extreme tax avoidance arrangements”.

But I also believe that some of my colleagues are being disingenuous with the great British public in that the vast majority of multinationals mentioned are not

7 Jan 2013 : Column 92

breaking any laws and, as the Government make the law, it is their own and our fault if companies use the rules in place to minimise their tax. Our tax legislation is huge and very complex, so any shortcomings are down to Government failure to create and implement the right tax framework.

The multinational aspects of tax collection and avoidance can be solved only by international bodies working together. That will not be easy for any of my ministerial colleagues to achieve I am sure, but as for any avoidance by UK companies, we do not perhaps need this debate now, as the GAAR legislation will, we trust, come into force during the next tax year. Surely that is the mechanism to stop so-called unacceptable tax avoidance that the hon. Member for Redcar seeks to debate this evening. Many private sector individuals in business may view this debate and other pronouncements by some hon. Members as politicians just diverting public opinion away from their own shortcomings by encouraging media interest in the tax avoidance issue. As politicians we organise the rules and therefore as long as what the companies do is legal, morality surely does not come into it much. Google, The Guardian, Amazon and others are perhaps insulated in that they have little direct competition in the services they provide, so no incentive to make voluntary tax payments as they have avoided such sizeable payments for a number of years. But Starbucks is now paying reportedly quite sizeable sums of voluntary tax, not for moral reasons but to protect its brand and customer loyalty—that is, to protect its profits.

Bob Stewart: Surely if a company is making a voluntary contribution of £10 million a year, it must be making very much more than that, and be doing that only because it hopes to get off the hook, and that is something that we must legislate on.

Karl McCartney: My hon. Friend makes a good point. I agree that such a company is probably making a lot more in profit than £10 million for the next two years.

A potential solution is perhaps not to hound companies that legitimately use the tax laws as they are, but to make the tax system such that there is no benefit in tax avoidance—that is, reduce corporation tax rates and the complexity of the system, whilst at the same time cracking down hard on those who are abusing the tax system. This, for those in the Chamber who are technically minded, is known as the old carrot and stick approach.

We want multinationals to headquarter in the UK. Frankly, I cannot complain if they organise themselves to pay the lowest legitimate tax that they can. What I am more interested in is that they bring their jobs and spending power to our shores. It fills our restaurants, houses and shops. It provides secondary support service employment across a plethora of sectors in Great Britain.

Let us not be negative this evening, because that will put businesses off coming here, which is the exact opposite of what we want. We want the whole world to know that Great Britain is a superb place to start up, locate or relocate a business, and with the Conservatives in government we continue to be Great Britain. We can all help to send out the message that we welcome international businesses—even Starbucks, Amazon, PayPal and Google—to our shores and would like them to bring more of their business to the UK. We are a

7 Jan 2013 : Column 93

country that is determined to drive down tax rates, as demonstrated by our recent corporation tax reductions, undoubtedly a feather in the jaunty cap of the Chancellor and the Treasury team. We are a great place to do business.

It is telling that employment tax brings in 5.4 times more revenue than corporate tax—£259 billion versus £48 billion—so let us focus on those things that create more sustainable jobs, the positives. One of the Government’s main roles is to make the UK the best country in the world to do business in. Everything else will be easier if we can achieve a massive influx of foreign companies moving their bases and thus employing more people here.

I believe that populist politics masquerading as morality is a Lib Dem trade mark that would inevitably lead us into a vicious spiral, one that is downward and certainly not a virtuous circle. We know that the Lib Dems are desperate to be popular. They often say anything on the doorstep, often expressing views that are diametrically opposed to those of their neighbours in order to garner votes, as anyone who has canvassed after them will know. That cheapness was amply demonstrated by their head of communications—presumably the paper clips organiser—who last month supposedly leaked instructions to Lib Dem Members of this House to monster the Conservatives, people like me and my fellow cuddly Conservative Back Benchers, in their vicious pre-Christmas briefing.

The Liberal Democrats might hanker after a yellow paradise of sand and yellow sun, but it is a very small yellow island they currently inhabit, surrounded by very deep and clear blue water. I think they know that it is likely to become a smaller island. They need to mature as members of the coalition Government. They need a dose of reality over the next two and half years. We are not some paradise or utopia—this is the real world.

I am conscious that my time is almost up and so will conclude. Of course all the Conservatives on the Government Benches want our country to have the most competitive corporate tax system of any major world economy. By doing so we will ensure that our country’s economic recovery will be private sector-led, but we expect those corporate taxes to be paid, regardless of where any larger international firms that do business here might be based or have business operations. A need for fairness and reasonableness from both sides seems to be most apt. In that respect, I am particularly pleased that the Chancellor recently announced extra investment in the part of the Inland Revenue that tackles tax avoidance by multinational companies.

7.42 pm

Jim Sheridan (Paisley and Renfrewshire North) (Lab): I rise as a sponsor of early-day motion 867, which deals with the behaviour of Google and its tax avoidance statements. As the sad person I am, over the festive period I took the opportunity to catch up with the work of some of our Select Committees, particularly the excellent work of the Public Accounts Committee, chaired by my right hon. Friend the Member for Barking (Margaret Hodge). Having watching Committee members try to get reasonable answers out of some of the big corporations, I can understand their frustration. In my view, they treated the Committee with contempt, simply smirking when asked any serious question. Likewise, when Google

7 Jan 2013 : Column 94

representatives appeared before the Culture, Media and Sport Committee, of which I am a member, the public affairs spokesperson, whom I am reliably informed is a former No. 10 adviser, when asked any serious question, replied, “That’s above my pay grade.”

It seems to me that those large corporations are treating Parliament, and indeed politicians, with utter contempt. We are well aware of the statement by Google, but there is also the statement from the chief executive of WPP, who said that corporation tax paid was largely “a question of judgment” and that it paid it more out of a sense of corporate social responsibility. Experience tells me that we should not hold our breath if we are waiting for corporate social responsibility.

There is a serious problem, and in order to solve a problem we must first look at its size. General corporation tax receipts from big businesses have dropped from £26 billion in 2000-01 to £21 billion in 2011-12, a 20% decline but a 65% increase in profits. In October 2012 companies paid £7.8 billion, down from £8.7 billion in October 2011. The Office for Budget Responsibility predicted that corporate tax receipts would grow by 4% this financial year, but they are actually down by 10%. HMRC estimates that the tax gap—the difference between what should be received and what is received—is £4.1 billion. That would pay the salaries of 153,000 nurses or 164,000 police officers, or for 430,000 nursery places. Indeed, if the Treasury closed the tax gap, it would cover almost a third of the expected deficit for 2012-13. As has already been alluded to, 98% of FTSE 100 firms have at least one subsidiary in a tax haven. The cost of tax havens is estimated at £160 billion annually. That is in excess of all the aid flowing now.

There is hope, hopefully. The Chancellor has pledged more resources for the Organisation for Economic Co-operation and Development to create a levy catching earnings of multinational firms. Indeed, he has announced an extra £77 million a year for two years to fund more HMRC staff to pursue companies that are not paying their taxes. However, his close friend the Chief Secretary to the Treasury, the right hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander), said that we should not name and shame firms that avoid tax as that would breach taxpayers’ confidentiality. To return to a point made earlier, I think that we should be looking at fair tax in the same way we looked at fair trade.

The well-respected organisation Christian Aid has put out a briefing highlighting the headlines of tax avoidance and some statistics to go with it. A recent study has shown that in excess of £13 trillion might be hidden in tax havens beyond the reach of tax authorities. The cost to developing countries is estimated to be £160 billion annually, which is far in excess of the global aid flowing at the moment. A recent UK survey showed that 56% of adults polled believed that tax avoidance was morally wrong and 74% felt that the Prime Minister should be demanding international action to tackle tax evasion and avoidance. We look forward to the G8 summit in Ireland, where the Prime Minister and the Chancellor have promised to take the whole question of tax extremely seriously.

Caroline Lucas: I am grateful to the hon. Gentleman for giving way and for his words on fair taxation. Does he agree that transparency is an absolutely fundamental

7 Jan 2013 : Column 95

principle at the heart of fair taxation and, in that respect, does he agree that the Government should be supporting country-by-country reporting, as set out in my private Member’s Bill, the Tax and Financial Transparency Bill, in the previous Session? Is that the kind of measure he would support?

Jim Sheridan: We need transparency in the system, because if we do not have transparency we will not be able to find out where the problem is, so I would fully support such a private Member’s Bill.

I will move on to what is commonly known as the people’s game: football. The Independent on Sunday has conducted an investigation into “Football’s tax shame”. It states:

“Britain’s Premier League football clubs are awash with money. They pay star players £250,000 a week, and turn over £2.2bn a year. Yet records show they paid only £3m in corporation tax last year… according to analysis of their most recent accounts.”

That money comes from the spectators, the hard-working men and women who buy the products and go to the games. The article continues:

“This is an effective tax rate of 2 per cent. Equally startling is that a profit of £150m made by eight clubs is all that the Premier League has to show for a turnover of about £2.2bn a year. Five clubs, including Manchester United, Newcastle United and Tottenham Hotspur, paid no tax at all, despite a combined surplus of more than £70m. Blackpool, relegated from the Premier League last year, paid just over £100,000 on profits of £21m—a rate of 0.5 per cent. The club was able to pay minimal tax on its substantial profits because of the effects of a £6.7m loss the year before. The club also donated just over £5,000 to charities. Of the other profitable elite clubs, Arsenal had the biggest potential tax bill—£7m on group profits of £36.6m—but paid less than half a million pounds while deferring more than £6m. West Bromwich Albion topped the company tax table, paying £1.8m on £18.9m profits. The club accounts of those that made a profit cover the financial year 2010-11, with the exception of Manchester United and Arsenal, which have both recently published their 2011-12 accounts. None of the clubs has acted illegally and all of them pay big sums in PAYE and other taxes.”

We should not buy the argument about the complexities of the tax system being the reason people do not pay their taxes. There is nothing complicated about saying to big corporations, “If you make and sell your products in this country, you pay the appropriate tax.” That is not too complex, and that is the road we should be going down.

7.50 pm

Mark Field (Cities of London and Westminster) (Con): I congratulate the hon. Member for Redcar (Ian Swales) on initiating this very important debate, although I must confess that I did not agree with everything he said. I am rather concerned by the strongly anti-business approach to this issue shown by certain Members.

I have a great deal of sympathy for the leaders of all the political parties in formulating what would be regarded as an adequate response to the hot potato of corporate tax avoidance. In today’s 24/7 media world, there is a constant demand on political figures to provide a running commentary on populist media campaigns following the high-profile cases to which the hon. Gentleman referred, including global businesses such as Google, Amazon and Starbucks.

7 Jan 2013 : Column 96

I can fully understand the temptation to brand this as a moral issue, appealing to corporates’ consciences when the legislative framework has failed, but it is a temptation that we in politics should try to avoid. In sparking a debate on morality in relation to the payment of tax, I fear that elite politicians open up a dangerous flank, because it suggests that the Government are either impotent or are being disingenuous in their outrage. That applies to Governments of all colours. After all, Parliament must ultimately set the rules within which companies operate. As my hon. Friend the Member for South Norfolk (Mr Bacon) said, the precedent that has now been set, with Starbucks paying an amount of tax that it alone has determined sufficient publicly to salve its conscience, is a very odd one.

I am very concerned about the whole idea of mob rule. I am sorry that the right hon. Member for Birkenhead (Mr Field) is not in his place. He speaks eloquently about issues such as immigration, and he would be unwise to think that mob rule is a way of dealing with immigration problems, for example. We must recognise that we are a democracy and that this is the forum within which the rules should be made. We should not try to inspire mob rule, whether on the payment of tax or for any other purposes within our society.

I have lost count of the number of times that media commentators have remarked that they would be delighted to apply the same approach to their own tax affairs by paying what they feel like rather than what the Government demand of them. However, I have a much wider concern—that investors will begin to sense that UK policy on tax and regulation is becoming ever more arbitrary, governed more by sentiment and the news cycle than by the strict rules that should be enforced by HMRC and ultimately by the courts. The UK should be proud of its traditional place as a bastion of commercial certainty attracting investment from every corner of the globe, and, as my hon. Friend the Member for Lincoln (Karl McCartney) pointed out, that will be undermined by high-profile rows such as this.

That is not to say that all is well. As we saw in my own constituency with the protest outside St Paul’s cathedral only a year or so ago, there is deep-seated concern that the rules of capitalism are being skewed. None of us should take this issue lightly, not least—dare I say it?—Conservative Members, as middle-class Tory voters often feel most strongly about it. To focus on arbitrary media campaigns or to invoke mob rule, as several Members have, is entirely the wrong way forward.

Too often, as my hon. Friend the Member for South Norfolk said, coalition Ministers have conflated the concepts of avoidance and evasion in debating taxation policy. The ideal solution is for aggressive tax avoidance schemes to be stopped in their tracks before they are marketed. That requires constant dialogue and the re-establishment of trust between HMRC and tax intermediaries. As a matter of urgency, therefore, the Treasury needs to promote a much better and more extensive pre-clearance regime to allow companies, individuals and tax advisers to road-test their proposed schemes. HMRC must start investing more time in developing and managing relationships with accountants and tax lawyers.

Meanwhile, the Treasury is committed at the time of the next Finance Bill to introducing general tax anti-avoidance provisions. It is clear that any such general power of anti-avoidance will feature some retrospective

7 Jan 2013 : Column 97

taxation. That is wrong in a free society, and it will risk further damaging our nation’s reputation as a free, open and transparent place to set up, develop and run businesses.

Ian Swales: I hope that the hon. Gentleman did not interpret my remarks as being anti-business. Does he not worry about the competitive situation if certain companies get away with these practices and are then competing with other companies that do not have the ability to do so?

Mark Field: I do. Andy Street, the managing director of John Lewis, has made that point, but it obviously applies to many of the smaller independent companies. I represent a central London seat where a lot of big businesses are based and operate. Nothing is more important than encouraging independents, whether they are restaurants, wine bars or book shops, rather than just relying on big multinationals. No one wants to see all our high streets entirely dominated by large international corporations, many of which may involve themselves in what is currently regarded as aggressive tax avoidance.

John Pugh: The hon. Gentleman said that retrospective taxation is a threat. Does not the previous Government’s pre-approval scheme, which puts proposals through the Treasury to find out whether they are sound, get round that and remove that fear?

Mark Field: Not entirely, because it does not work as well as it should. There is no doubt that this is going to be a much more high-profile issue, and I will be interested to hear what the Minister has to say about my suggestion.

The underlying lesson is that the UK tax code and regime remains far too complicated. The godfather of tax avoidance is complexity and uncertainty in the system. When even tax experts find it impossible to understand the workings of the tax code, people begin to question whether everyone is really paying their fair share. This, in turn, creates a sense of greater acceptability in the avoiding and evading of tax. Furthermore, a complicated and opaque tax system will always be vulnerable to misrepresentation, particularly by the media, and that again weakens confidence and encourages further avoidance. People think, “If Amazon can get away with not paying its fair share, why should I bother to stump up?” I can understand why that is a general sentiment, but it frustrates many of the corporates that, as the hon. Member for Redcar said, have paid in an open and transparent manner and will ultimately undermine their whole business framework.

Government can make piecemeal efforts to address particular instances of avoidance—they can play catch-up to a certain extent—but responses tend to involve making the entire system far more complex, thereby reinforcing the very factors that have driven avoidance in the first place, displacing the activity and giving rise to a whole set of new avoidance techniques. Instead, the Government need to take an entirely different and fresh approach. They should look at how they can overhaul the entire system so that avoidance and evasion offer a similar, smaller reward and will therefore be seen as far less acceptable. Fundamentally, that can mean only lower taxes and a radically simplified tax code. For example, a single income tax applicable to income, however it is received, at the same single rate is the best way of

7 Jan 2013 : Column 98

stripping out of the system any incentive to avoid income tax. A simpler tax code would also free up HMRC resources to concentrate on tackling the real problem of tax evasion while making transgressions easier to identify.

It has been a pleasure to make a brief contribution to this debate on an important issue to which we must all return. However, I am concerned that too much of the rhetoric coming from this place almost suggests a sense of powerlessness that gives rise to the view that there is an aggressive anti-business approach in this country. We do need to have a thriving business sector. Global businesses can, of course, choose where they locate their business. We should be proud in this country of having a track record of being open to business, but I also accept that we want to ensure that businesses pay their fair share, because we have a huge deficit and a huge debt that has to be paid off if we are not to burden future generations.

I hope that we will look at the whole issue with that in mind, but above all I hope that the Minister will take on board the idea that HMRC needs to have an approach that is much more open to the pre-clearance I referred to. We must also, as a matter of urgency, look at the complications in our tax code that are allowing some of the high-profile avoidance to take place.

8 pm

Sheila Gilmore (Edinburgh East) (Lab): From the beginning of this debate until the point when the hon. Member for Lincoln (Karl McCartney), who is not in his place, spoke, I wondered, given that we were all so agreed, whether there was any point in our having a debate. That prompts the question why we, collectively, have not dealt with the issues sooner if we are in so much agreement. However, we have different views about tax and they underlie many of the issues.

One such view is whether there should be tax at all. There is a tendency in Britain and, I suspect, a lot of other countries, but not all, to see tax as inherently a bad thing. If that is the case, it then becomes legitimate, according to many people, to find ways to minimise either one’s individual personal tax burden or a business tax burden. I believe, however, that tax is inherently a good thing and that it is right that we as a society pay in what we can afford in order to provide the kind of social and other services that we want in a civilized society. It would help if we took the view that tax is not inherently bad, because once that stance is taken all kinds of things flow from it.

Another issue that we have come up against is tax simplification, as if that is the answer to a lot of the problems we face. I briefly studied tax law—it was not my favourite law subject, although I did win a class medal in it, somewhat to my surprise. As I understood it then—this did not happen yesterday; it is not something new—much of the reason for having a lot of complexity in tax law was precisely because people were constantly finding loopholes.

If the answer is simplification, can we be satisfied that complicated ways around it will not be quickly found? The law, perhaps, follows clever tax lawyers and accountants—not the idea that we have made our tax book and tax code so complicated—and that is why people get to the point of saying, “Well, we’ve got to

7 Jan 2013 : Column 99

have complicated tax avoidance.” It is a question of where we think the starting point should be. There appears to be a view that the starting point should be that the law is too complex and that if we somehow made it simple, people would no longer seek to avoid tax.

There is a clear legal distinction between tax avoidance and tax evasion, but perhaps the time has come to think about where we place the line. I agree with those Members who have said that it is important that we and the law are clear and that people know where they stand. We cannot have a system that allows people to say, “I don’t particularly like this or that kind of scheme.” The other side of that coin seems to be to allow companies to decide how much they want to pay, rather than how much they should pay. We might need to think, at another time, about drawing a line with regard to what constitutes tax evasion and tax avoidance. Aggressive tax avoidance, which has been described, might actually be tax evasion and not just a very clever way of avoiding tax.

It is interesting that many of the companies that we talk about a great deal have bad practices in other respects. Only a few months ago, we heard not only that Starbucks was not paying a great deal of corporate tax, but that it was seeking to reduce the working conditions of its own employees here in the UK. Usually, we are told that that is necessary because companies are not making a profit. In this case, Starbucks appears to be making a profit, although it is not always accountable here, yet it wanted to reduce the conditions of its own employees. Bad practices, therefore, go beyond tax.

In a global economy we need to look at things internationally. The Government have said that they will use the next few months as an opportunity—in the G8, for example—to try to make some progress. I hope that that will be the case. If we need international clarity and transparency and proper accounting, we should do it. It cannot be right that it is possible for companies that are clearly profitable here—they are not unprofitable—to be able to siphon profits away through schemes such as brand purchasing and loans, which mean that they are paying interest rather than making a profit. If those are avoidance schemes and if we cannot deal with them in our country, we must do so internationally.

If we are all able to sign up to a certain level of consensus—it may not be universal in this place—we need to introduce the necessary legislation for the UK in this year’s Finance Bill. We should all sign up to that. It is not good enough to come back from international conversations and say, “We had some discussions and made some progress.” We need to set some clear targets to end some of the practices. If the UK does that today, other countries might take note and do so tomorrow.

That leads to another international dimension—the problems that many developing countries face with regard to tax. They, too, suffer deeply from the way in which income profits are manipulated and moved out of their country so that, despite the fact that production is taking place in the developing country, the profit appears to be made elsewhere, usually a tax haven with a much lower rate of taxation. Developing countries probably suffer from that more than we do. They are trying, as they have been asked and told to do, to raise themselves up, not rely on aid and get going with their

7 Jan 2013 : Column 100

own businesses and industries, but if so much tax is not being paid in those countries, they will probably end up not making the progress that they need to make and we might end up having to give them further aid. Those developing countries also need us to act.

8.8 pm

Mr Nick Gibb (Bognor Regis and Littlehampton) (Con): I pay tribute to the work of the Public Accounts Committee, particularly its questioning of executives from Starbucks, Google and Amazon on 12 November. I will focus on just one of those companies: Amazon.

I preface my remarks by paying tribute to the brilliant service that Amazon provides. It has made buying books far simpler and cheaper for millions of consumers, myself included. The speed of delivery and its innovative logistics make it a company about which there is a huge amount to admire. The question, though, is: which company? The way in which Amazon is structured means that, when I buy a book from Amazon, I am in fact buying it from Amazon EU SARL, a Luxemburg company. The profit on the sale of a book belongs to this Luxemburg company, notwithstanding the fact that Amazon owns no warehouses in Luxemburg and that the book, if it is in English, will have been sent from one of Amazon’s eight warehouses in the UK. Amazon.co.uk Ltd, a UK company, is just the service company for the Luxembourg company, fulfilling a customer’s order on behalf of Amazon EU SARL. Therefore, although Amazon’s sales in the UK are in the billions of pounds, the sales income of the UK company is just £207 million.

The technical thing that the tax planners at Amazon are keen to avoid is creating what the tax authorities call a permanent establishment of the Luxembourg company in the UK. If the UK tax authorities perceive there to be such a permanent establishment, all the income of the Luxembourg company that relates to that permanent establishment would be taxable in the UK. When I drive up the M1 and see the huge Amazon buildings that package and dispatch millions of books a year, I cannot help thinking that they look pretty permanent, but technically they are not. There will have been great effort and attention to the detail of the documentation to ensure that the warehouses are the operation of the UK service company and that all Amazon’s property and activity in the UK relate to that service and not to the activities of the Luxembourg company.

Mr Bacon: When my hon. Friend sees those buildings, do they move slightly each time? Are they on wheels?

Mr Gibb: My hon. Friend makes a good point. Everyone knows that this structure is a legal fiction. All the real economic activity for the transaction of my book purchase takes place in the UK. Andrew Cecil, the director of public policy at Amazon, in his evidence to the Public Accounts Committee, said that Amazon.co.uk is the trading name of the Luxembourg company. Therefore, although it sounds as though I am buying my book from the UK company, in fact I am not. However, according to the e-mail that I received in December confirming a book order that I made, if I want further details on my statutory rights, I should contact Amazon.co.uk customer services at 2 to 4 Waverly Gate, Edinburgh. The trading name for the Luxembourg company therefore has premises in Edinburgh. Does that not sound like a permanent establishment of the Luxembourg company?

7 Jan 2013 : Column 101

Paul Farrelly (Newcastle-under-Lyme) (Lab): I am glad that the hon. Gentleman has chosen to talk about Amazon, because it gives me the opportunity to pay tribute to my great friend and former journalistic colleague, Ian Griffiths, who wrote the seminal investigation on behalf of The Bookseller in The Guardian in April, which showed that Amazon had made £7.6 billion of sales in the UK but had paid zero corporation tax because of the Luxembourg structure, even though the warehouses are here. I am sure that the hon. Gentleman will come on to this, but does he think that it is right that the tax playing field should be levelled, because booksellers and record retailers are going out of business day after day in this country?

Mr Gibb: That is why this issue is so important. It is not just about the corporate tax base, which is hugely important, but about the competitiveness of British-based businesses.

Another thing that I found odd about the Amazon structure was that the accounts filed at Companies House report that the company has 2,265 employees, which is vastly different from the 15,000 employees that Andrew Cecil told the Public Accounts Committee Amazon employs in the UK. The other strange thing about Amazon’s group structure is that even the Luxembourg operation, with its €9 billion turnover, appears to have made a post-tax profit of just €20 million.

As we have seen with Starbucks and Google, profits can be siphoned off from individual jurisdictions by payments for intellectual property rights through royalties or technical fees. Starbucks pays a royalty of 6% of its turnover to its company in the Netherlands. Google also pays for the use of its technology. Although that technology was developed in California, the rights to use it outside the USA are held in Bermuda.

Much of this area of law is governed by a network of double tax treaties, of which the UK has signed more than 100. They are based on a model double tax convention that was agreed at the OECD and have been highly effective in boosting worldwide trade and overseas investment over the decades. Britain benefits hugely from that network of treaties. We have £10.9 trillion of investments abroad, which generated £188 billion of income in 2011. The Government are therefore right to want to tackle the problem of corporate tax avoidance through international negotiation. As the Prime Minister wrote in his letter to G8 leaders on 2 January:

“in a globalised world, no one country can, on its own, effectively tackle tax evasion and aggressive avoidance. But as a group of eight major economies together we have an opportunity to galvanise collective international action.”

One such action is the OECD’s study into the transfer pricing aspects of intangibles. In its discussion draft, snappily entitled “Revision of the Special Considerations for Intangibles in Chapter VI of the OECD Transfer Pricing Guidelines and Related Provisions”, published in June last year, the OECD concluded:

“It should be emphasized that not all intangibles deserve separate compensation in all circumstances, and not all intangibles give rise to premium returns in all circumstances.”

In other words, the OECD is coming to the view that the huge royalty payments that some international groups make their overseas subsidiaries pay to their home country or to tax havens may no longer be allowable against tax in the overseas jurisdictions. However, the OECD,

7 Jan 2013 : Column 102

by necessity, moves slowly. Speedier action could be taken by the UK tax authorities by speeding up transfer pricing inquiries. It is therefore welcome that the Chancellor has allocated additional funding to HMRC to do that. HMRC could also take powers to require companies to disclose in advance all international connected party payments and to supply the associated documentation. There could be tougher penalties when a company’s tax return is wrong because of over-aggressive transfer pricing.

I conclude by touching on a wider issue relating to corporate tax avoidance: the ethics of companies and their boardrooms. In our everyday lives, we are all governed by a sense of morality, not just by law and regulation. Corporations are artificially created legal personalities. The morality of a corporation is determined by its board—by both executive and non-executive directors. It is no good for individual companies or for free market capitalism, which I support passionately, if directors interpret their role too narrowly. Too often, people who sit on company boards fail to ask the simple and straightforward question that governs moral behaviour: is this the right thing for us to do? Too often, directors seem to take the view that their fiduciary duty as directors stops at the maximisation of shareholder value, but section 172 of the Companies Act 2006 makes it clear that the duty of a director to promote the success of the company must be subject to a number of wider considerations including

“the desirability of the company maintaining a reputation for high standards of business conduct”.

I question whether the directors, including the non-executive directors, of the three companies so ably questioned by the PAC were fulfilling that duty.

Action needs to be taken to ensure that the corporate tax contribution of a multinational to a nation’s Exchequer is broadly consistent with the level of economic activity in that jurisdiction. We need to ensure that that action does not hamper world trade: it must be multilateral, but it needs to be swift. There are measures that HMRC can take in the meantime to ensure that it has the intellectual resources to match those of the international accounting firms. There are also questions that the boards of corporations need to take seriously as business leaders and members of society.

Mr Deputy Speaker (Mr Nigel Evans): The time limit is now seven minutes.

8.18 pm

John McDonnell (Hayes and Harlington) (Lab): The hon. Member for Redcar (Ian Swales) set the scene exceptionally well and went through all the points that have been reiterated by others.

I want to take up one point. I chair the cross- party parliamentary group of the Public and Commercial Services Union, which represents 50,000 of the 54,000 members of staff in HMRC—in other words, tax inspectors. I echo the simple point made by my right hon. Friend the Member for Oldham West and Royton (Mr Meacher) and the hon. Member for South Norfolk (Mr Bacon): if we want to collect the taxes, we need the staff to do it. If HMRC is to do that efficiently, it also needs those staff to have the appropriate skills and resources. I have raised that matter consistently on

7 Jan 2013 : Column 103

behalf of the PCS parliamentary group over the past decade, and particularly over the past seven years, as have other Members.

When HMRC was created by the merger of Customs and Excise and the Revenue, we had a debate in the House for which I think there were little more than half a dozen Members in the Chamber. However, there were staff cuts of 3,000 overnight, and a further 12,000 within six months. A process called the lean system was introduced, producing the first industrial action in the Inland Revenue’s existence, so there was an element of demoralisation.

In 2005 there were 97,000 staff in HMRC, and by 2015 there will be 55,000. The Government have recognised that further investment is needed, for which I am grateful. They have provided £900 million for reinvesting in tax collection and recently pledged another £77 million over the next two years on top of that, but that does not make up for the £3 billion of cuts in the October 2010 statement. That means that there will be another 10,000 jobs cut from HMRC by 2015, which is ludicrous and completely counter-productive.

My right hon. Friend the Member for Oldham West and Royton made the point about how much each tax inspector brings in in proportion to their salary. The cuts and tax office closures seem to be undermining the very system that we want to make effective in delivering the tax that we need and tackling the scandals that have occurred. There is also real anxiety about the use of private companies in the tax collection system, which the Government have developed. I urge the Government to rethink the whole process of investment in HMRC for the long-term future. It has lost staff and is losing skills, which is undermining its ability to undertake the work that we ask it to do.

The hon. Member for Redcar mentioned the awarding of contracts to companies that we then discover avoid their taxes. I raised that matter under the previous Government. I found it bizarre when the private finance initiative scheme was introduced and the Inland Revenue offices were sold off to Mapeley, and then leased back from that company, only for us to discover that it was using a tax haven and not paying tax itself.

The hon. Gentleman also mentioned Capgemini. Let us get on the record what has happened in that case. Capgemini and Accenture are the two IT companies with which HMRC has contracts, and both were recently identified as avoiding tax themselves. Capgemini, the lead contractor on the £8 billion Aspire contract, paid only £308,000 of corporation tax last year on £38 million of profits—less than 1%. That company is employed by HMRC but avoids the tax that HMRC seeks to use it to collect. It is extraordinary. Accenture, which has a £9.6 million contract with HMRC to supply technical support, managed to reduce its tax bill to 3.5%, paying only £2.8 million in tax on nearly £82 million of profits in Britain last year. It was employed by HMRC and awarded a massive contract, and then used those resources to avoid paying tax. You couldn’t make it up, but it is happening regularly. As the hon. Gentleman said, the Government should introduce some principle to ensure that when we award contracts to such companies, we are at least confident that they are not in the tax avoidance business.

7 Jan 2013 : Column 104

We need to ensure that the staff of HMRC have the tools to collect tax effectively. As the hon. Member for Lincoln (Karl McCartney) said, we cannot criticise others if the House itself does not fulfil its own responsibility of ensuring that we have effective legislation that the staff can use to collect tax. That is why we should listen to the experts—the HMRC tax inspectors—when they advise that the Government’s proposed general anti-abuse rule will not be effective and instead advise support for the Bill tabled by my right hon. Friend the Member for Oldham West and Royton to introduce a general anti-avoidance principle. Their view is that we need to return at least partly to the Ramsay principle, which was a decision of the Lords in 1982, overturned in 2001, that at least led to some commitment to the anti-avoidance principle in law. It laid a duty upon directors to abide by that principle.

The hon. Member for Cities of London and Westminster (Mark Field) said that we should not drag this into being a moral issue, but it is a moral issue. When my constituents pay their taxes in the pay-as-you-earn system, they expect others to make their fair contribution as well, yet the Public Accounts Committee has effectively exposed scandal after scandal. I understand why UK Uncut is occupying premises and taking direct action. That is the only way to publicise what companies are doing.

We have been at this for a number of years in the House. I hosted what I think was the first meeting in the House with Richard Murphy and John Christensen of the Tax Justice Network, when the issue was not particularly popular. It became popular and had resonance when UK Uncut took direct action. We have a responsibility to our constituents to ensure that the balance is redressed, by providing resources for HMRC and putting in place appropriate legislation so that it becomes effective as a tax collector once again.

8.25 pm

Nigel Mills (Amber Valley) (Con): It is a pleasure to speak in yet another tax debate—we seem to be having more and more of them as the months of this Parliament go by. This is an important issue, and the debate is about corporate tax avoidance, not just corporation tax avoidance. We can sometimes drift into focusing on tax on profits and miss out on the avoidance of VAT or payroll tax, which we could more readily do something about.

The publicity on the issue has had some positive impact, because it has probably discouraged a lot of businesses from entering into aggressive or artificial avoidance schemes. That has to be welcomed on one level, but we do not want to go so far that we start to do damage. The last thing that we want to do is deter international investment in this country. After all, the Government have set out to make ours the most attractive corporate tax regime in the G20. There has been great progress on that through rate reductions, and I believe that after the latest reduction we are about fifth in the G20. However, when we consider the effective rates that people actually pay, we are down to about 15th because of the complexities of our system. There is still a lot of work to do to make our system an attractive one that encourages investment both internationally and domestically.

7 Jan 2013 : Column 105

We have to be careful that we do not drift towards having a tax regime that ceases to be based on a clearly advanced and published rule of law and is instead based on arbitrary decisions, with the Revenue having the power to ignore the law completely or rewrite it retrospectively, or if that fails, to bully people into paying a bit more tax until we think it is about right. After all, corporation tax is on profits for tax purposes, not on profits for accounts purposes, and certainly not on sales for accounts purposes. It is worrying that people seem deliberately to confuse the matter, talking about a company with a turnover of £1 billion paying only £500,000 of corporation tax and saying that that is a low percentage. That percentage could be completely irrelevant, because if it has made no profit, it will pay no corporation tax. We need to be accurate and focus on a different issue.

There are some aggressive avoidance schemes that are intended to exploit UK domestic law that we can tackle. The Government are tackling them, and I believe they have announced some more rules today to do so. We need to be as proactive as we can on those schemes, and that is where the general anti-abuse rule has a role to play. I am a sceptic about that. I am not sure I like the idea of giving any government bodies the power to implement something that is not law, but which they think ought to be. We are here to make laws; they are there to implement the laws we make. If we get the laws wrong, we should sort that out and improve our processes, not expect those bodies to find a way of fixing the problem retrospectively.

However, a lot of the avoidance we have been talking about involves transfer pricing. We are an international economy and we want to remain one. One of the things we are focused on is trying to encourage exports—we want people to invent and design things here, and then export and license them and get royalties and sales back. However, we will not win if we start an international war to see who can clobber royalties the most or put up the biggest barriers to trade. That would be a suicidally stupid thing to do.

Paul Farrelly: One example of where the Government have quite sensibly changed the taxation regime is their approach towards remote gambling, where they are moving towards a “point of consumption” basis. We might argue about what profits should be taxed, but the principle is that the bet is taxed where it is “consumed”—that is, where the good or service is consumed—not where the business is accounted for. Does the hon. Gentleman agree that that is a model we might follow in order to repatriate other tax revenues?

Nigel Mills: Yes, I do. Indeed, I think we will end up travelling in that direction, because corporation tax rates will be in some kind of global race to the bottom—as we reduce ours, people will follow suit, which will lead to revenues falling. However, it is right to say that if something is sold to a UK customer, the VAT on it should be accounted for in the UK—in fact, what we are talking about is like a trading activity. To be fair, if I rang a random business in Botswana tomorrow and said, “Can you send me a widget you’ve made?”, and that business did not regularly sell anything to the UK, I suspect we would not be too worried, but sales of

7 Jan 2013 : Column 106

things regularly marketed into the UK should be accounted for here and VAT should be paid. I think we are moving towards that system, which is absolutely right.

To return to my thread, it is not in our interests to encourage some kind of global race towards tax barriers, withholding taxes or whatever else. The right hon. Member for Birkenhead (Mr Field) was talking about some strange tariff for international companies to come and trade here, which would be crazy—certainly illegal and probably economically suicidal. We do not want to end up in that sort of mess.

We should not vilify the payment of royalties, management fees, design fees or even interest. What we need to do is ensure that those payments are not excessive, either individually or collectively. One of the things I fear, having worked in the industry, is this. At times, it is easy to say, “That fee’s okay, that fee’s okay and that fee’s okay,” but then we forget to look at the overall situation in the UK and reflect on the fact that no one would operate a business if the most they could ever make was a 1% margin on turnover in a very good year, while regularly making a loss in an average or bad year. That is not how to trade: these things have to be looked at as a whole, to try to ensure that the profit expected in an average year is reasonable enough for a business to want to operate in that territory.

That point can easily be lost, so what the Government can do to try to improve the situation is this. First, we need global rule changes to try to make internet-based business fit our tax systems. What we are trying to do, not just in the UK but globally, is make a tax system from the 1940s and 1950s—or even earlier—work for a different model of business. I remember that even when I started work a lot of my clients were inbound investors who actually made stuff in the UK and sold it just in the UK. That is not how things work now: people make stuff in low-cost territories, market it globally and administer that regionally. I do not think our system can be made to work in the current situation, where we have Amazon. There is a global need for reform.

However, we can do more on transparency. As I said earlier, we ought to require large corporates to file their tax returns with their annual accounts. People might say, “We have taxpayer confidentiality,” and yes, for individuals we do have that. However, we make companies file accounts and show what their profits are. What is the harm in making them show how they got to their taxable profit and the tax they paid? That would add transparency and show that the vast majority of corporates are not avoiding tax at all, but trying to do the right thing and making use of the different calculations that exist for tax. I have moved amendments in this place proposing to move our corporate system much closer to one based on accounting profit. We do not need all the different tax schedules—we probably do not even need a capital versus revenue divide. We can get our tax system much closer to one based on accounting profit, which would stop all these fears that some people are avoiding tax when they are perhaps not doing so. It would be much harder to implement complex transactions if that were in the accounts published. Indeed, we are talking about the profit that a business is judged on by lenders and the markets.

We could go so far as to say that all multinationals had to disclose all their cross-border transactions with related parties. A lot of companies used to do that in

7 Jan 2013 : Column 107

their accounts. They would list the royalties that they had paid to the US, for example, and the management fees that they had paid to Japan. We could get back to that. It would not be too difficult for a company to say that it had paid a royalty of 6% on sales to the United States. That would aid disclosure. There are practical measures that we could take to improve the situation without ending up with some kind of awful taxation baseball-bat regime that would put people off investing here at all.

8.34 pm

Dan Rogerson (North Cornwall) (LD): I pay tribute to my hon. Friend the Member for Redcar (Ian Swales) for securing the debate, and for the work that he and his colleagues on the Public Accounts Committee do on our behalf to delve a bit deeper into these issues. It is also a pleasure to follow the hon. Member for Amber Valley (Nigel Mills), who made a lot of sensible points.

The hon. Member for Lincoln (Karl McCartney) was a little strident earlier, when he sought to have some political fun within the coalition. I am sure that hon. Members from Northamptonshire would have been proud of him. I thought he was being rather ideological. The Conservatives used to be the party of pragmatism, but his message was that there should be cuts at all costs, and that implementing cuts was the virtuous thing to do. I disagree with that. I believe that if there is something good to be done and the Government have the money to do it, they should spend that money on behalf of the people to try to achieve that goal. I do not think that there is anything inherently good in cuts, but the Government are trying to cut the deficit that we inherited, because it has burdened the country and future generations with huge interest payments and threatened to destabilise the economy. It is therefore the right thing to do.

Pretty nearly all the parties in the House agree that the deficit needs to be reduced over a certain period, but if we are asking people to contribute to that through cuts or through paying tax elsewhere, they need to know that everyone is making a fair contribution. That is understandable. Even though UK Uncut sometimes takes an extreme position and oversells the contribution that could be made to the economy by dealing with this problem more equitably, there is a core of truth in what it says, which is that some organisations are using expensive advice to ensure that they get away with not paying the same contributions as everyone else. As the hon. Member for Hayes and Harlington (John McDonnell) said, those who pay their taxes on a more straightforward basis want to know that everyone else is making a fair contribution.

We represent a diverse economy here in the UK. I represent a small business economy in which it is incredibly difficult for retailers to survive. The hon. Member for Cities of London and Westminster (Mark Field) talked about not wanting our high streets to be homogenous, but we need to be sure that there will be some sort of high street left. I am sure that most of us will have done some online shopping, because it is convenient and helpful, but it cannot be right for small, local businesses to compete under a completely different set of rules from those used by multinationals such as Amazon.

7 Jan 2013 : Column 108

We have heard that this is not just about corporation tax, and that the problem exists in relation to other taxes as well. We need to look at the matter across the piece. My hon. Friend the Member for Redcar made that point very well when he framed the debate.

We know why companies avoid paying tax. It is rational behaviour, and we cannot knock them for doing it. An industry has grown up around it because it is legal, rational behaviour. Governments of all political colours have sought to exploit this and to push behaviour in a certain direction. An example is waste policy and the effect of the landfill tax regime, which was used to push behaviour in a particular way. We all bear some responsibility for how we set the terms of the tax regime, but we can also set the culture. The hon. Member for Bognor Regis and Littlehampton (Mr Gibb) mentioned boardroom culture earlier, but this is about the culture of society as a whole. The fact that we are having this debate today is a positive thing. This is not about populism; it is a genuine response to concerns expressed by people who want us to articulate their views.

The coalition has acted to make corporation tax more reasonable, but that will work only if people actually pay it. The trade-off involves ensuring that we have a tighter regime. I agree that we should not move towards a bargaining system in which the final arbiter is public opinion. That is certainly not the way to run a tax system. I praise my right hon. Friend the Chief Secretary to the Treasury and his colleagues for investing in the areas of Her Majesty’s Revenue and Customs that carry out such work, because that is where the battle must be fought and won. Yes, the solution involves the legal framework, but it is also about HMRC having the resources to implement the measures.

It is no accident that we are in this situation. Previous Governments have preferred not to discuss the matter, because big business has a seat at the top table and has been able to lobby effectively. It has made the case that everything it does is good and everything it touches turns to gold, and that it should therefore be left alone to get on with it. I think the culture has changed at this time of austerity in favour of delving a little deeper and saying, “No, that is not the case. Where you do good, we will be partners in rewarding it and ensuring that our economy works, but where you are trying to pull one over on us, we will invest in the resources through HMRC to get the job done.”

The hon. Member for Hayes and Harlington was absolutely right to highlight the closure of tax offices under the last Government. I lost the battle to save my local office in North Cornwall, even though our compliance officers had a great deal of skill at doing such work. If it had been argued that their work could be done more efficiently so that the bigger corporations could be looked at, we could have retrained those people and they could still have been based out in the regions—as Amazon showed, it does not really matter where people are based; the trade will keep coming if things are managed effectively. It is a great shame that we lost that expertise, but that is now ancient history, as we are where we are.

It is clear that the sums involved are highly significant and that previous Governments have been too timid in tackling the problem. We are now having an open and public debate—both here tonight and out in the country—which I welcome. I look to the Minister to set out his

7 Jan 2013 : Column 109

determination to tackle the problem, invest the resources in HMRC and ensure that we tighten up the regulations where possible.

Karl McCartney rose

Dan Rogerson: I am afraid that I cannot give way.

Significantly and finally, we must work with our international partners to set up an international framework for a culture in which companies pay for the profit they make and work effectively and in harmony with Government to achieve prosperity in the way that most people would expect.

8.41 pm

Stephen McPartland (Stevenage) (Con): I congratulate the hon. Member for Redcar (Ian Swales) on securing such an important debate. I listened with great interest to the comments of my hon. Friends the Members for South Norfolk (Mr Bacon) and for Bognor Regis and Littlehampton (Mr Gibb), who eloquently described the differences between tax avoidance and tax evasion, and how the lines between them have been blurred. Tax evasion is clearly wrong, illegal and unfair to the rest of society, as everyone else has to pay more in taxes to make up for those who do not pay their fair share. We cannot have mob rule and, as explained by my hon. Friend the Member for Cities of London and Westminster (Mark Field), we cannot have anti-business sentiments.

Just before Christmas, there was an explosion of public interest after the Public Accounts Committee named and shamed some well-known companies that used transfer pricing to offset their tax liability here in the UK, basically to avoid paying tax. I am aware there is a strong argument that the tax authorities in the UK could do more to enforce tax payments. The Government have done a lot of work on tackling tax avoidance—so much so that I fear the general anti-avoidance rule that will be introduced might be too severe and end up penalising the sole trader and small and medium-sized enterprises more than the larger corporates.

My interest in tackling tax avoidance stems from a meeting I had with Christian Aid supporters in my constituency last September when the tax justice bus tour visited Stevenage. The tax justice campaigners believe that tax dodging by international companies costs the UK around £35 billion and developing countries an estimated $160 billion a year. Just imagine the dramatic difference such a huge sum of money would make if it were available to invest in public services, infrastructure and other vital services essential for economic growth—both at home and abroad.

There is growing anger and concern at the fact that some large companies are hiding behind complex accounting rules that may be strictly legal, but are considered to be unethical by the public. The problem of the missing billions in tax is not just a problem in the UK; it is worldwide, and it does the greatest damage to poor and developing countries that cannot stand up to massive corporations.

I know that Governments from all around the world will agree with the sentiment of greater tax transparency, but they will struggle to introduce it as every nation competes in the global race. I welcome the Prime Minister’s initiative to make tackling tax avoidance a priority as

7 Jan 2013 : Column 110

the UK takes over the presidency of the G8, and I would urge him to convene a cross-Whitehall meeting with tax justice experts and campaigners to identify what this policy would look like in practice.

There is real concern and feeling in this evening’s debate about the fact that transfer pricing seems to be at the heart of the problem, so the draft Finance Bill could include some measures to try to create enforcement in respect of transfer pricing and to stop the problem. However, despite the best of intentions, I believe that in the end it will be up to the companies themselves to lead the way and they will only do that if their customers—the British public—drag them kicking and screaming towards tax transparency and a fairer tax system for us all.

With that in mind, in October or November I wrote to the chief executives of all the FTSE 100 companies asking them individually whether they were willing to pledge their support for corporate tax transparency, and whether they would support a new international accounting standard for country-by-country reporting. The current international accounting standards only require multinational companies to report accounts on a global consolidated basis, which makes it incredibly difficult to know where taxable economic activities are occurring and where profits are declared. Companies, particularly multinational corporations, move billions of pounds of profit between jurisdictions in order to reduce their tax bills, and large companies are allegedly manipulating their centres of interest through the use of holding companies, offshore accounts and intellectual property rights.

Whether this is tax avoidance or tax evasion, whether it is illegal or immoral, the British public and most Members of Parliament believe that it is wrong and should be stopped. A recent inquiry by the International Development Committee recommended legislation

“requiring each UK-based multinational corporation to report its financial information on a country-by-country basis. Such information should include the names of all companies belonging to it and trading in each country, its financial performance in each country, its tax liability in each country, the cost and net book value of its fixed assets in each country, and details of its gross and net assets in each country.”

I believe that the only way of resolving the problem is to introduce greater transparency, and Members will be pleased to learn that, in the interests of transparency, I am publishing all the responses that I have received on a website that I launched today: www.taxchallenge.co.uk. The first 15 responses from the FTSE 100 are now live, and many more will be published during the coming days and weeks. The responses have been wide-ranging. HSBC has offered to help design a tax transparency standard, BT and others have welcomed the transparency initiative—although not the means—and Hargreaves Lansdown has questioned the value that it receives for the taxes that it pays. My hon. Friend the Member for Lincoln (Karl McCartney) spoke about that eloquently earlier today.

Paul Farrelly: One of the reasons for the Government’s intention to change remote gambling taxation is the fact that all the companies bar one have gone offshore. That one is Bet365, which owns my local team, Stoke City. It is staying here because the Coates family believe in paying their taxes—they paid £130 million last year through Bet365—and in creating local employment.

7 Jan 2013 : Column 111

Does the hon. Gentleman agree that all the companies in his survey should wholeheartedly follow their example, and that the National Association of Pension Funds and the Association of British Insurers should try to ensure, on our behalf, that shareholders encourage them to do so?

Stephen McPartland: I do agree, and I firmly believe that most employees in most of the FTSE 100, the FTSE 250 and other companies in the United Kingdom would expect their employers to pay their fair share of tax in the UK. They all have very devolved and developed corporate social responsibility projects and organisations, and they want to understand what British customers, employees and consumers want them to do. They are very conscious of their brand.

The new website—www.taxchallenge.co.uk—gives Members’ constituents an opportunity to sign a petition calling for greater tax transparency, so that everyone will know which FTSE 100 companies are willing to sign up to tax transparency and which are not. Every one of us can then decide individually whether the biggest companies in Britain really care about the poorest in our society, at home and abroad.

8.48 pm

Jackie Doyle-Price (Thurrock) (Con): I am very pleased to follow my hon. Friend the Member for Stevenage (Stephen McPartland). I think that his excellent initiative will do much to provide transparency, and to enable consumers to make informed decisions. If there is one thing that the debate has shown us, it is that consumer power is perhaps the most effective weapon that we have when it comes to ensuring that companies pay their fair share of tax.

I pay tribute to my hon. Friend the Member for Redcar (Ian Swales) for securing this important debate. Let me say for the benefit of some of my colleagues that I am happy to refer to him as my hon. Friend, and that I am gratified to see that so many of his own colleagues are present. That contrasts markedly with the attendance on the Opposition Benches.

As my hon. Friend the Member for Redcar will know, the debate was prompted partly by the work of the Public Accounts Committee—of which I am proud to be a member—and its work on tax avoidance by global companies. Our report at the back-end of last year found that HMRC’s performance in that regard was perhaps not as good as we would have liked.

I shall concentrate on some of the wider lessons learnt from the inquiry about how to make the UK tax system efficient and effective, while remaining competitive. I would like to associate myself with the comments made by my hon. Friend the Member for Cities of London and Westminster (Mark Field) and others about the debate becoming unduly political and playing to the gallery. It is good politics to attack global names as tax dodgers in the media, but we have to be careful about the messages we send out to potential investors in our country. I am pleased that, in the main, this debate has been a lot more mature than the debate that has played out in the media.

7 Jan 2013 : Column 112

Members will know that the Committee heard evidence from Google, Starbucks and Amazon. We looked at the extent to which they exported their profits to more favourable jurisdictions and whether those arrangements could be described as fair. In that respect, the evidence supplied by Amazon was the least convincing—that has very much been the flavour of this debate. Those of us who have used Amazon—I am sure that many of us have—think we were dealing with a company in Slough, and those of us who visited our local post offices over Christmas would have seen just how much business Amazon was doing, yet, despite booking billions of pounds of sales through the UK, it pays less than £2 million in corporation tax, as has been said, with the profits being exported to the parent company in Luxembourg on more favourable terms.

Before we get too excited, we need to recognise that this is one of the things the European single market contributes to achieving—a company, wherever it is based in Europe, can sell across member states. The question is why, when Amazon has so much business here, it has chosen not to locate here. Ultimately, there is nothing wrong with trying to limit tax liability. After all, that money is earned and owned by the individuals and business; it does not belong to the Government. We need to look at what more we can do to encourage those firms to be more honest in their reporting of how much money is made here. In that sense, I associate myself with the comments of my hon. Friend the Member for South Norfolk (Mr Bacon): this is about simplicity of the tax system.

Paul Farrelly: Does the hon. Lady agree that it is not just a case of headline corporation tax rates—for instance, ours compared with Luxembourg’s—but about the special deals that those companies can do with the authorities in Luxembourg, the Republic of Ireland or the Netherlands, through which they pay very little tax and export their profits to tax havens? Does she agree that we need to do more at European level to ensure that those sorts of special deals do not happen in one jurisdiction in a way that disfavours another jurisdiction?

Jackie Doyle-Price: I suspect this will be a rare occasion, but I totally agree with the hon. Gentleman. The important point to which he alludes is that we cannot afford to take unilateral action in this area. We live in a global marketplace, and in reality some countries—even members of the EU—are perhaps less honourable in their dealings under tax treaties than we are. We all need to be a lot more savvy and a bit more mature about what will make our tax system more efficient and competitive, and that comes down to simplifying rates.

The hon. Member for Newcastle-under-Lyme (Paul Farrelly) mentioned the sweetheart deals made by other countries. In that respect, I would like to highlight the issue of Google. Google is an internet firm, but the language of the internet is English, so why would a company such as Google choose Ireland over Britain? It can only have been because of the offers made to it. Again, we need to use the institutions of the EU to ensure a level playing field and a genuine single market. We need to recognise that companies will locate where they like and make sure that everybody is doing their bit to ensure a genuinely competitive market between states.

7 Jan 2013 : Column 113

In response to the comments of my hon. Friend the Member for Stevenage, I mentioned the issue of consumer power. Perhaps the most telling thing about what has happened since the PAC’s inquiry is how Starbucks has reacted. Amazon and Google are in near-monopoly positions, so competition cannot make them change their behaviour. There is no doubt that the negative publicity Starbucks faced following our inquiry forced it to make its gesture of offering to pay more corporation tax. We are in the bizarre position where that company seems to behave as if the amount of tax it pays is very much a voluntary contribution. It is incumbent on the Treasury and HMRC to make it clear that such a practice will not be tolerated.

I wish to highlight another issue that the Committee found when it examined Starbucks and the more sinister impact it had on the marketplace here in the UK. This comes back to the degree to which the ability to export taxes on profits enables these companies to engage in anti-competitive behaviour. Despite the phenomenal growth in the presence of Starbucks throughout the UK, we were told throughout our inquiries that Starbucks had made no profits here. We were also told that Starbucks was committed to expanding its operation, as its presence in the UK was important to it. Those two statements simply do not add up. If we look a little more deeply, we find that it seems the most significant losses were run up during a bidding war with Coffee Republic for certain sites on our high streets, with the result being that Starbucks entered into more expensive contracts for property and Coffee Republic was reduced to having a mere fraction of the stores it had had hitherto. So we are talking about a global provider engaging in very aggressive anti-competitive behaviour against a home-grown provider, and the tax system, in effect, subsidising it to do so. I would like the Minister and the Treasury to reflect on the extent to which that sort of behaviour gives unfair competitive advantages to foreign providers.

I am running out of time, so I shall just come back to one point: we cannot afford to act unilaterally. I call on the Government to make full use of relationships in the G20, the OECD and the EU to lead a global effort to tackle these unfair and uncompetitive practices.

8.56 pm

Charlie Elphicke (Dover) (Con): It is a pleasure to speak in this debate, and I congratulate my hon. Friend the Member for Redcar (Ian Swales) on securing it. I wish to discuss an area that has not been so deeply explored this evening, although it is the area where we are not as powerless as we are in so many areas of this debate because of international obligations. I wish to focus on companies in receipt of money from taxpayers under Government contracts.

I have undertaken a study of technology companies that benefit from taxpayers’ money under Government contracts and have found that Oracle, Xerox, Dell, CSC and Symantec paid no corporation tax whatsoever last year, despite earning more than £474 million from Government contracts and having a UK turnover of £7 billion. Overall, my study of 10 technology companies in receipt of more than £1.8 billion of taxpayers’ money found that they paid just £78 million in taxes on UK earnings of just over £17.5 billion of turnover. On the basis of group profitability—we are looking at the consolidated international group here—the 10 technology

7 Jan 2013 : Column 114

companies would have made more than £3.3 billion in profits in the UK, resulting in a tax liability of £879 million. The UK tax actually paid was just £78 million, so, according to my research, the tax gap was £801 million.

We are seeing big business tax avoidance on an industrial scale. To me, it is unacceptable, unethical and irresponsible. Hard-pressed families are struggling to get by and to pay their taxes—and they do pay their taxes—so it is quite wrong that highly profitable businesses abuse our tax system. We urgently need reform. No Government contracts should be awarded to businesses that are fleecing our tax system, and the Government should examine how much UK tax companies pay when deciding who gets plum Government contracts. If taxpayers’ money and a Government contract are being awarded, we should look at the taxpayers’ money we are paying out and the tax money that we get back when we assess the value for the nation of awarding a particular contract. If, for example, a Government contract for £500 million is awarded to a computer company, it should be asked what tax it pays. If it pays zero tax in the UK, and another company is paying £40 million in tax in the UK and says that it will do the work for £520 million, the balance of best value shifts. We should consider the question holistically, rather than simply thinking about how much the contract should be let for.

Ian Swales: The hon. Gentleman refers to a point that I made. Does he agree that if we are asked to give a Government contract to a company that makes no profit, we should take a view about that company’s long-term future? We should play it at its own game and ask whether, if it does not make any money, it will be around for the long term.

Charlie Elphicke: My hon. Friend makes a powerful point, but we all know the reality. We all know that companies are using Luxembourg sandwiches and parking profits in Bermuda while claiming that they are sending them back to the States, as the IP suddenly is not in any intellectual property territories outside the United States. I find that unacceptable.

Let us take Oracle as an example. The company had a turnover of about £1.4 billion and a global operating margin of 32%, so its UK projected profits should have been about £446 million. Its declared profits in the UK, however, were basically nothing and it did not pay any tax whatsoever. I regard that with concern, because its Government contract earnings were about £42 million.

Even more concerning was the fact that a small amount of tax was paid by Microsoft, which is interesting as it has about £700 million from Government contracts and paid £19 million in the UK on a turnover of £2.35 billion. It has a global operating margin of 40%, so if we apply the consolidated operating margin to the UK we can see that its projected profits in the UK would be about £945 million. Its projected tax would have been about £246 million. I am not saying that Microsoft should not have some wriggle room for the fact that its IP was generated outside the UK, but when we award Government contracts we should take into account how much tax will be paid in the UK by the person to whom it is awarded. There are difficulties with that under European procurement rules, but we could have a box on the procurement form asking how much corporation tax and how much in PAYE the

7 Jan 2013 : Column 115

company anticipated paying in the UK in relation to that contract. That would enable us to assess best value in awarding Government contracts. We could and should consider that.

I am particularly concerned about IBM, which turns over about £4 billion in the UK but has a global operating margin of 16%, which means that its UK projected profits should have been about £642 million. Its declared profits in the UK, however, were about £327 million. Again, the tax gap is substantial and rather than the projected UK tax take of £167 million, only £41 million of tax was paid. We have a shifting and sliding in that the amount of tax we are getting is rather less than one might expect, even if we take into account the question of IP being based elsewhere and not being generated in the UK. We need to consider that more deeply and should consider the whole question of royalties paid for IP as well as licensing fees.

We should see how we can make the corporation tax system in this country flatter and much simpler by getting rid of a lot of the deductions that enable our tax system to be flouted. That would bring the rate down and give the UK a system with even lower tax than we already have.

I pay tribute to the work that the Government have done; I am merely trying to advance the argument, the discussion and the debate. We have a Chancellor who has started to take real and positive action in the OECD to start the discussion on how to change the international rules. We have a Prime Minister who is leading an international summit in Northern Ireland and making tax, including international tax, a key priority. The Government have taken tax very seriously, and rightly so. Over the past 15 years, the amount of income tax paid by the working nation has gone up by about 80% whereas the amount of tax paid by business has gone up by just 6%.

The previous Government were very keen on the whole prawn cocktail circuit; they were keen to be close to big business and to let it off the hook. It is well known that the former Prime Minister and his adviser, now the shadow Chancellor, were keen that the Revenue took a softly, softly approach to big business. I think we all feel that it has gone too far, and it is time to take international as well as domestic action and to be much firmer on big businesses that do not pay their fair share.

We have a deficit to clear. We need the revenue, so we need to be firmer, but we also need a system that has a level playing field, where there is a lower, more globally competitive rate that makes it more attractive for businesses to set up and trade in Britain whether they are domestic or foreign. The way forward is to start an honest and open debate about bringing in a flatter tax system in the UK and taking the rate of corporation tax right down, so that hopefully it will be even lower than in Ireland.

9.5 pm

Stephen Williams (Bristol West) (LD): Much of the debate so far has been about the domestic impact of corporate tax avoidance, and rightly so. Safeguarding the UK tax base and watching over how the Government spend its proceeds is one of the primary duties of the House of Commons, over which you preside, Mr Speaker.

7 Jan 2013 : Column 116

I begin by mentioning some of the international tax impacts of corporation tax avoidance. Over the last year, I worked closely with ActionAid and Christian Aid to highlight how multinational companies divert their profits all around the world and avoid paying tax in the countries where they derive much of that money, particularly in the developing world. It is entirely appropriate that a great deal of our increasing budget for international development is spent on upgrading the capacity of developing countries to safeguard their tax base, so that they build expertise in their equivalents of HMRC to make sure that they can stand up to multinational companies.

I endorse what the hon. Member for Stevenage (Stephen McPartland) said earlier, when he referred to the report of the International Development Committee. One of the things we need as a country in terms of our corporate law is country by country reporting so that we can see clearly, whether as shareholders, Government, consumers or citizens, where UK-based companies are earning their profits, where their economic activities take place and, more importantly, how much tax on those activities is being paid and where.

We are concerned about UK-based companies that have huge UK activity but apparently pay little UK corporation tax. Several companies were highlighted in the course of our debate; Starbucks was one of them. Several months ago, I was the first Member of Parliament to criticise the UK operations of Starbucks, so I was pleased that the chief executive of Starbucks UK, Mr Kris Engskov, came to see me in my office in Portcullis House and used all his Arkansas charm to run through some of the corporate numbers line by line to persuade me that the company was doing nothing wrong. I have to take at face value what he said about high rental charges in the UK, although they do not seem to affect competitors in the field. None the less, Starbucks structures its international corporate affairs so as to minimise its tax liabilities. If royalties are paid on the brand of a company that originated in Seattle, yet the brand value lies in the Netherlands and the cup of coffee is bought elsewhere in Europe, where even with the generosity of the common agricultural policy we do not grow coffee, it is obvious that aggressive tax planning is taking place. Consumer pressure has led Starbucks to seek to make voluntary tax payments.

Several Members mentioned Amazon. The hon. Member for Bognor Regis and Littlehampton (Mr Gibb) described in some detail what Amazon does. I disagree that the company has a novel business structure that has enhanced the book-purchasing experience. I have never bought a book from Amazon. The company has in essence developed older business models, such as mail order and telesales, which have been around for half a century. There is nothing particularly innovative or transformational about it, yet we are asked to believe that there are huge amounts of intellectual property and that royalty and interest payments are needed to have what appears at first inspection to be an artificial structure, contrived for tax rather than business purposes.

Of course, Amazon also damages the high street, and the principal reason I have never bought anything from it is the loss of bookshops from all our high streets. It structures its sales via Luxembourg because the corporation tax rate there is 21%. Over time, the coalition Government will reduce the differential between that country and the

7 Jan 2013 : Column 117

UK; it was 7% in 2010, but that will be eroded. Perhaps at some point Amazon will ship its books and DVDs from some other lower-corporate-tax haven.

What would my Liberal Democrat colleagues and I like to happen, so that we can tackle the problem? First, we need the right resources in Her Majesty’s Revenue and Customs. I listened carefully to Labour Members earlier, when they lamented the reduction in HMRC’s total staffing numbers. Of course we all lament the fact that cuts have to take place, but what is more important is not the total headcount of a public sector organisation, but what people are doing in it. What HMRC needs is specialists and forensic accountants to tackle these complicated transactions. That is why I am pleased that, in the autumn statement, the Chancellor announced extra resources in that area, and that we would look at transfer pricing. The second thing that I would like is the introduction of a general anti-avoidance rule—something for which my colleagues and I have called many times in the past few years. There will be legislation on that later this calendar year.

Thirdly, there needs to be much more transparency about the deals that HMRC is striking with several international companies. I am talking about the sorts of issues frequently raised in the pages of Private Eye; Vodafone is a classic example. We often see people who might be characterised as benefit scroungers named and shamed in the press, and it is right that that happens. I would like much more transparency about the deals being done with large companies, with regard to how much tax is at stake and what deal has been arrived at.

Fourthly, and more importantly, we need more international action through the European Union. It is ludicrous that corporation tax rates vary so much in what is supposed to be a single market, and within the OECD, in the model tax treaties. They are double taxation treaties that are meant to prevent double taxation of the same profit by more than one country, but they are being used for the perverted purpose of avoiding tax altogether. We need to get to a system in which the commercial substance, rather than the legal form, is looked at closely by tax authorities, and that is what ends up being taxed.

9.12 pm

Stephen Lloyd (Eastbourne) (LD): I pay tribute to my hon. Friend the Member for Redcar (Ian Swales) for securing this debate. I am well aware that many of the companies mentioned today have not broken the law, but they have broken the spirit of the law. We know that, HMRC knows that and, most important, the public know that. Companies such as Amazon, which has been mentioned frequently this evening, and which paid a tax rate of just 2.4% in 2011, have outraged the British public in recent months, and rightly so. These companies have used the vast resources at their disposal to bypass the tax system, while taking a great deal of money and profit from their UK customers. At a time of such tough worldwide economic circumstances, that is nothing but an insult to the hard-working individuals and businesses who pay their fair share of tax, who understand that we all need to contribute, and who appreciate that, whatever the partisan nay-sayers may say, we are all in this together, because that is the only way that we will get through our desperately indebted situation. Some companies understand that, and some do not.

7 Jan 2013 : Column 118

Let me read a brief quote from two companies’ corporate social responsibility promises on their websites; the companies are in the same sector. The first company says it

“will be accurate and truthful in representing business transactions to government agencies.”

Some hon. Members may have already identified that this CSR missive is from Starbucks. Did it understand that we all need to contribute? Of course not. The whole country probably now knows that since 1998, despite expanding at an incredible rate to almost 800 stores UK-wide, the parent company paid just £8.6 million in tax over that whole period, having racked up more than £3 billion in sales. It said that was because the company failed to make a profit. That not only absolutely beggars belief, but insults the British public, for one very simple reason: many Starbucks stores are franchises, which means that such rapid expansion could only have happened because the parent company promised, and delivered, real profits to the independent franchise owners.

Starbucks has not so much been failing to tell the truth to us or to its franchisees as telling a whopper of such magnitude that it is almost funny. Its clearly nonsensical distance from reality could become a catch phrase equivalent to Baldrick’s “I have a cunning plan”—a great catch phrase which we all know because it is so completely disconnected from reality, similar to Starbucks’ “Trust me, we only made £8.5 million profit over 14 years, while expanding to every high street in the United Kingdom,” except, of course, that it is not funny. It is contemptuous of its franchisees, the public, the taxpayer and its suppliers. The behaviour of Starbucks and other such companies represents the contemptuous face of global capitalism—a pernicious, ugly underbelly beneath the glossy, shiny exterior.

We all know, and it has been discussed this evening by numerous colleagues across the Chamber, that the rules around globalisation mean that companies can switch accounts from country to country to hide their real profitability from the tax man. This makes it difficult for HMRC to challenge the corporate giants, but there is an upside to the whole tawdry affair, and it has been mentioned this evening: the public have the power, and did they not show it with their boycotting of Starbucks coffee shops? I pay tribute to the previous speaker, my hon. Friend the Member for Bristol West (Stephen Williams), who played such a key role in the boycott of Starbucks. In a very short time his campaign had well over 10,000 members of the public determined to call Starbucks to account, and they did—a fantastic effort all round.

I would not want anyone in the Chamber to think that I am anti-business. Nothing could be further from the truth. In my constituency, Eastbourne, my No. 1 priority since the general election has been growing the town’s economy, because to me it is all about jobs and communities, be they local or national. That makes companies which avoid tax through legal loopholes even worse. Their lack of any sense of community integrity or community responsibility means that they do not pay their way.

I am not here just to condemn, so here is an excerpt from my second company’s vision: “We understand the need to incorporate environmental, social, ethical and consumer concerns into the heart of our business operations”. Who is that? Same industry, similar scale

7 Jan 2013 : Column 119

and, one could say, similar vision; the difference is the tax take. The second company has paid £34 million in tax over the past two years, compared with Starbucks’ grand total, as I said earlier, of £8.6 million over 14 years. Starbucks paid one quarter of the amount over a period seven times longer. That is deplorable. Hats off to Costa Coffee, which is the second company. It paid its dues, so it deserves the recognition.

The public have power if they choose to use it. Another example is a company called Fruit of the Loom, a clothing manufacturer which summarily decided a few years ago to close a factory in Honduras and sack all the employees, after the 1,200 workers there formed a union. A boycott of the company’s products took off in the US and subsequently the UK. This initiative cost the company dear, not just in reputation but on the bottom line. After $50 million in lost trade it saw the light, reopened the factory and gave the reinstated workers $2.5 million dollars in compensation. That is what I call people power.

The Government’s additional investment in specialists in HMRC will increase the tax take significantly over the next few years. In the final year it will be £9 billion more than a couple of years ago. In addition, we should name and shame. I disagree with one of my colleagues who said earlier that we need to be careful about going down that road. I agree with those Opposition Members who said that we need to name and shame and harness the power of the public. The public are ready for that and they have the power. I believe fundamentally that tax avoidance is immoral. It may not be against the law, but it is wrong.

9.19 pm

John Pugh (Southport) (LD): I congratulate my hon. Friend the Member for Redcar (Ian Swales) on introducing this important debate. I begin with the slightly shocking confession that I recently bought a cup of coffee in Starbucks at the Leicester Forest service station. I had no alternative. I am afraid that on that occasion caffeine addiction overcame moral outrage.

I want to take head on some of the concerns about the general anti-avoidance rule that have been raised by hon. Members, because I have a long-standing interest in this going back over several Parliaments. I have observed at close quarters Labour’s approach, which was basically to spot an abuse and legislate against it. Owing to the efforts of Madam Deputy Speaker, the right hon. Member for East Ham (Stephen Timms) in particular, and the right hon. Member for Wentworth and Dearne (John Healey), that produced some quite commendable stuff. Those efforts were often buried quietly away in a Finance Bill or obscure statutory instruments.

Now, because resources are short, we need to get in expected tax revenue far more than we ever used to because, brutally, the alternative is deeper cuts, but even in those days the post hoc approach was seen to have its weaknesses. It was seen to be shutting the door after the horse had bolted; an endless chase against some pretty sophisticated opponents and some horrendously complicated schemes devised by clever and extraordinarily well resourced people. Dealing with avoidance in that way led to a more complicated tax code, which, as we

7 Jan 2013 : Column 120

have all acknowledged, is already complex enough. That is why I welcomed the introduction by Labour of the vetting and pre-approval scheme, which has not been mentioned much today. The duty to disclose was introduced by the last Government and it was a good and commendable move, but it is also why I argued in favour of a GAAR in the face of some scepticism. Some scepticism persists, and I want briefly to address that.

The main argument against the GAAR is that it will lead to tax uncertainty and so make tax planning and investment decisions more difficult. After all, many of us take steps to defray tax liability—to organise our affairs, quite legally, to minimise tax—and we need to be sure that these arrangements will not be retrospectively penalised. Let us not be hypocritical about it either: as a country we are not averse to encouraging foreign nationals to avoid their domestic taxation regimes and come here and invest here. This argument about certainty is a little overblown. In many walks of life, the law seeks to inhibit genres and types of behaviour without always being over-specific or utterly specific, and yet we all cope. There is the tort of nuisance, but not a complete list of actionable nuisances. Dangerous driving is entirely contextual and is not defined by road speed. When I go out on the town, which I all too rarely do, I do not have a pocket list of what counts as disturbing the peace. Without the law being absolutely specific, in many contexts we manage with tolerable certainty and without rampant and obvious injustice.

The Chancellor certainly believes that there are arrangements that the Treasury and tax planners can identify as egregious tax avoidance schemes—I think those are his words—and that we all ought to identify as out of order, whether or not they are formally outlawed. One thinks of profitable companies in the UK using their profit to repay a pointless loan to an associated company in Luxembourg; or people who are in all respects BBC employees taking their wages as a contractual payment to their company whose sole function is to receive that payment; or business men who instead of a pay increase receive a pension contribution to a pot with surprisingly quick draw down facilities. All are very obvious attempts to frustrate the intentions of the Treasury, and so the Government, and so the nation. There is no doubt that the Government want profits and employment taxed and not disguised.

If one simply hid one’s money, it would be described as tax evasion. If one cloaks it as something else, it is very similar and has to be described as egregious tax avoidance. It not only ignores the intent of tax legislation in a way that, say, putting money into research and development does not, or having some of one’s wages paid to a charity does not, but it manifests the fundamental and second feature of egregious tax avoidance: it has no business purpose beyond frustrating the intent of tax legislation. If a business asks itself whether a scheme frustrates the intention of tax law and whether it would be used if it did not do so, it should really have no doubt about whether it would be caught by a GAAR.

There is an interesting parallel with the situation we found in this place in 2009 during the expenses saga. The media and the public managed quite satisfactorily to distinguish between proper and improper use of the second homes allowance by considering its purpose. To plead that egregious behaviour could be excused by

7 Jan 2013 : Column 121

being within the rules was sufficient for neither MPs, nor the public. If tax planners, having asked the right questions, are still in doubt, they can acquire even greater certainty by using the HMRC pre-approval scheme, which will presumably put all concerns to rest. If even then they are still worried about what will be the general effect on commerce, they can simply look at other regimes and what might be achieved there.

Although it is a classic saying that only two things are certain in life, death and taxes, I would argue that the proper functioning of commerce requires any tax burdens to be reasonably probable, not absolutely certain. To insist on absolute certainty as a precondition of a GAAR is simply wrong. Fundamentally, recognising the intent of tax law and not frustrating it is a good thing, and if people have an issue with that, the way to change it is not to engage in subterfuge but to seek to change the law democratically.

9.26 pm

Simon Hughes (Bermondsey and Old Southwark) (LD): This has been a really good debate. I pay tribute to my hon. Friend the Member for Redcar (Ian Swales) for going to the Backbench Business Committee and persuading it, with the support of some of us, that this is a debate we ought to have. We are on the centre court at the beginning of a new year, and I think that the Exchequer Secretary and his colleagues will be aware that this issue will remain an important one for the Treasury and the Government for the second half of this Parliament.

We have heard valuable contributions from among others my hon. Friends the Members for Bognor Regis and Littlehampton (Mr Gibb), for Stevenage (Stephen McPartland) and for Dover (Charlie Elphicke) and the right hon. Member for Oldham West and Royton (Mr Meacher), who is not currently in his place. We have paid tribute to others who have been part of the culture change, such as ActionAid’s tax justice campaign, people such as Richard Murphy and journalists such as Ian Griffiths and others who have ensured that we confront the issue.

My constituents, like yours, Mr Speaker, and others, will see posters reminding them that they have until 31 January to complete their tax returns if they have not done so already—MPs included. We all understand that there is a civic obligation to pay tax as individuals, but we all expect, particularly in times of austerity, that there should also be a corporate obligation to pay due tax, and that is what the debate is about. If we are encouraging people to be entrepreneurial and to start their own businesses, it is not a great encouragement for someone who wants to set up a coffee shop, a book shop or a garage, for example, to think that they will have to pay tax while some great international company might put them out of business or prevent them from gaining a foothold in the market by avoiding paying. It is about justice between small and medium-sized enterprises and big international enterprises.

There is a UK obligation, because some of the companies that offend most use tax havens that are UK Crown dependencies. Bermuda, the British Virgin Islands, the Cayman Islands, the Turks and Caicos Islands, Guernsey, Jersey and the Isle of Man feature regularly as places where the system is abused. There is clearly both a

7 Jan 2013 : Column 122

national obligation—we can do things ourselves—and an international obligation to act, and I am grateful that the Prime Minister understands that, as do others, and that it will be on the agenda for the G8 summit in Fermanagh later this year.

As I made clear earlier, when intervening on the right hon. Member for Oldham West and Royton, it was not really fair to criticise this Government on corporate tax, because all recent Governments have been very weak on it. The right hon. Gentleman conceded that new Labour had been poor and criticised it equally. I compliment the Government on their investment in additional effort in the Treasury on this issue, on the commitment to implement the anti-abuse rule later this year, on putting the subject on the international agenda and on making the UK more competitive for business to provide a disincentive for trying to fiddle the system. In particular, I congratulate my right hon. Friend the Chief Secretary to the Treasury on picking up on an idea I have lobbied him about a great deal: making sure that the Government look at those companies with which they, and local government, do business and ensuring that we do not give Government money to those who do not pay their taxes properly; it is exactly the right principle that they should not get contracts from the Government either. Of course, there have also been bilateral agreements with other countries.

Let me flag up one main area and one subsidiary area —in relation to the tax treatment of interest payments—which I ask Ministers to look at. Traditionally, interest has been seen as the cost of doing business while dividends are seen as the distribution of profits. For that reason, under accounting rules, interest payments are deducted from operating profits before corporation tax is paid, while dividends are distributed after tax has been paid. Debt can be used to strip out cash generated by companies and to move it offshore before it is taxed. There is also a large problem with private equity funds buying companies, making those companies take on a lot of debt, and using the cash to pay off the loans that they took out to buy them in the first place, so that they can end up owning a company for a fraction of its real price. Companies receive a huge tax advantage from the ratcheting up of debt.

In the finance sector, that is called creating a more efficient capital structure, and people will say that they are just working within the structure put in place by the Government. However, it has a huge effect on the businesses concerned and on the economy as a whole, as well as on the Treasury. It is not about efficiency, because the companies affected are often left seriously weakened and at risk. Many operate on the margins and are unable to withstand any financial shocks. That magnifies the impact of recent downturns. Comet is a recent example of the consequences of excessive borrowing. The increase in debt gives companies far less freedom to invest in new machinery or to make other capital investments, and that holds back growth.

Charlie Elphicke: If we believe in deleveraging the economy and deleveraging business, should we not put equity and debt on a similar footing?

Simon Hughes: That is a valid point.

As well as tax treatment of interest payments being an unfair incentive to avoid paying due taxes, shareholder

7 Jan 2013 : Column 123

loans are a particularly iniquitous example of these practices. That is my second and subsidiary point. Where owners of a company are receiving interest payments, they can manipulate the interest rates in order to remove their tax liability. The current transfer pricing rules are supposed to stop that, as they prevent a company from lending to a subsidiary at a higher rate than the market rate, but what is the market rate in a negotiated transaction between two parties that are, as it were, two sides of the same coin?

I want to give three examples of companies involved and then conclude with some proposals to add to those of my hon. Friend the Member for Bristol West (Stephen Williams) and others. I have often cited in this House the water industry in general and Thames Water—the local water company here, and a monopoly—in particular. In 2012, it paid £500 million in interest, which accounted for the vast majority of its operating profit of almost £650 million. In the same year, it paid no tax and instead received a tax credit of £38 million. In the previous year, it paid just £500,000 in corporation tax despite showing an operating profit of £600 million. Half its debt has been issued through its finance subsidiary in the Cayman Islands. Put simply, Thames Water raised the debt and gave the cash to Macquarie, which is based in Australia, so that that company could pay off the loans that it took out to buy Thames Water. The level of debt in the company is now equivalent to 90% of its value. Arqiva, which has Government contracts, receives annual revenues of about £1 billion a year, holds £3 billion in debt, and has an interest rate of 13%, which is extraordinarily high for a monopoly infrastructure provider. Boots, now Alliance Boots, has escaped paying £500 million in tax through a complex arrangement of companies.

I hope that in the forthcoming Budget Ministers will look at the tax treatment of interest payments and, specifically, do what countries such as Germany do in limiting the amount of interest payments that can be deducted before tax, adopting the earnings-stripping rule which applies there and elsewhere. I also ask them to consider whether that should be further dealt with if the company uses a tax haven, to address the question of UK dependencies, and to have an annual debate, as part of the Budget, on how to avoid such abuses of the tax system.

9.34 pm

Catherine McKinnell (Newcastle upon Tyne North) (Lab): Let me take this opportunity to wish you, Mr Speaker, and colleagues throughout the House a happy and productive new year.