This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by David Gauke, Exchequer Secretary to the Treasury.
It’s a great pleasure to be here today and to have the opportunity to talk to so many representatives from the country’s leading businesses.
In recent years we’ve all witnessed the economies of the world develop closer ties. Flows of capital and finance are now far less restricted by national borders, and there’s been a rapid increase in the number of large businesses, large brands and large multi-national corporations.
Britain, like many countries, has profited from this evolution. But this shouldn’t be a cause for complacency.
We recognise that the world is becoming an ever more global marketplace, and it’s therefore essential for us to look at new ways to attract business from abroad.
And in Britain, the tax system has an important role to play.
So today, I’d like to outline our plans for Britain’s tax system…
…and also address some of the popular misconceptions that I’ve heard about tax policy; tax administration; and the relationship between HMRC and large businesses.
It’s fashionable amongst some to argue that if only the Government and HMRC squeezed businesses harder, our deficit can be dealt with. I want to take on this argument.
Fiscal policy and tax gap
Restoring our nation’s finances to a sustainable footing is the most important issue facing our economy.
Tackling the deficit is the only way to prevent higher interest rates, rising inflation and higher taxes in the future.
And, as events in Ireland demonstrate, the consequences of a lack of fiscal credibility can be enormous.
Despite this, some people said when we came to power that we would have to make a choice…
…a choice between dealing with our debts and supporting economic growth.
This is a false choice. Deficit reduction is the essential precondition for sustainable growth - you can’t have one without the other.
But while tackling the budget deficit is unavoidable.
The decisions about how to do it are not.
There are choices. And we’ve had to make them.
We’ve chosen to concentrate our efforts on cutting public expenditure, as opposed to increased taxes.
But I know that when facing difficult decisions on public expenditure, some may have felt that the easiest way out would’ve been to rely much more on taxation - and, in particular, squeezing more from business.
A minority of commentators have fancifully suggested that this wouldn’t even involve raising rates. That all our problems could be solved by simply eliminating the tax gap - the difference between what is paid in tax, and what should be paid.
I’ve seen some rather alarmist figures being put forward about the scale of the problem in the round, and I think it’s important that the public doesn’t get seduced by this wishful thinking.
It does no-one any good to exaggerate the scale of the tax gap, or generate confusion about its nature. Despite what some individuals may think, we can’t magic away our debts by collecting supposedly unpaid amounts of tax that, in reality, don’t even exist.
I’ve seen some external tax gap estimates of up to £120 billion - three times HMRC’s own figure - based on rather far-fetched assumptions.
These are particularly egregious in the area of corporate avoidance.
First, people’s rhetoric seeks to gloss over the relative proportion of the tax gap that is attributable to large business.
Second, their own estimates have looked at the statutory rate of Corporation Tax, and the effective rate, and classed the difference as avoidance. They’ve chosen to ignore the fact that much of the difference can be explained by double taxation relief, capital allowances, R&D tax credits, and other legitimate reliefs.
So yes, while we can’t afford to ignore the issues of evasion, fraud, or avoidance for that matter, our strategy for addressing these issues will be grounded in reality, not hearsay or creative accounting. Let us ensure that this is an informed debate, based on the facts.
Over the next four years we’ll be investing £900m in HMRC, much of it to tackle criminal behaviour and evasion.
At the same time, we also want to improve HMRC’s operational capacity to identify and discourage tax avoidance.
But as I’ve said, tackling the deficit won’t be achieved by simply closing the tax gap, and there’s no use pretending otherwise.
We need our economy to grow, for the private sector to take the lead, and for tax policy to support this objective.
So another, related, myth I’d like to dispel is that we need higher rates of business taxation. That we can balance the books on the backs of British business.
The reason this argument gains support is that people often see large companies as separate to the rest of society. The belief here is that businesses are not people, they don’t have families, and surely no-one will suffer if you tax them a little bit more.
In reality, business and society are inextricably linked.
Yes, companies are not people.
But higher business taxes will ultimately be paid by a combination of employees (with lower wages and salaries), consumers (through higher prices), or shareholders (with lower dividends). And in an open economy, such as ours, it will probably be the employee who loses out.
So as a Government we’re not interested in large hikes in business taxation. This wouldn’t be in anyone’s interests.
We need to make our tax system competitive once again - to attract new investment to Britain, and help drive the private sector recovery.
If we look back to 1997, the UK had the tenth lowest main rate of corporation tax among the current EU27 countries.
By the time we came to office, we’d slipped to twentieth.
Other countries had cut their rates further and faster than we had, with the UK’s competitive advantage being slowly eroded away.
That’s why we’re cutting Corporation Tax to 27 per cent in the next year, with a one per cent reduction in each of the following three years…
…taking us down to 24 per cent.
This will be the lowest rate of any major Western economy, one of the most competitive rates in the G20, and the lowest rate this country has ever seen.
But of course, we’re not so naive as to think that the competitiveness of our tax system is about reducing rates in isolation.
It’s also about how we tax, the rules that are in place, and what this means for different types of enterprise.
For years, businesses have complained about the tax treatment of overseas subsidiaries. Saying that our rules on foreign profits are outdated, and bear little or no resemblance to the modern business environment.
So we’ve launched two separate consultations to be completed by next year’s Finance Bill - one on interim improvements to the Controlled Foreign Company Rules and the other on the tax treatment of foreign branches.
This is ahead of the full reform of the CFC regime, which will be completed in Finance Bill 2012.
It’s our intention to adopt a more territorial approach to taxation, one that properly reflects the times we live in and how businesses now operate.
We know how important these reforms are to business and I appreciate that you’re all waiting for details. It’s been 20 years since the last set of substantive reforms, so I’m hoping you won’t begrudge us a few more days.
We will publish further details on these reforms next week, to give you a sense of the direction we’re heading…
…to show how we will create the most competitive corporation tax system in the G20.
We also want to create a simpler tax system, one that better serves Britain’s businesses.
I was surprised by the findings of the Office for Tax Simplification, who recently published a comprehensive list of all the reliefs and exemptions that currently exist.
It’s striking that when they began this process in the summer, the general view was that our tax system contained around 400 reliefs.
Their assessment shows that we actually have more than a thousand.
Now many of these serve a useful role in our tax system, but it’s not unreasonable to ask if at least some of these reliefs are truly justified.
And while the OTS is playing a valuable role in improving the stock of UK tax law…
…we recognise that we’ve also got to watch the flow of new measures.
We have to be careful with proposals that deliberately use the tax system to distort choices or try to manage business investment decisions…
…to avoid a situation where tax policy becomes a bidding war, as various sectors seek preferential treatment at the expense of wider business interests.
We want a tax system that is far less complex, but this is not just our responsibility.
The number of clauses and exemptions in the tax code is partly the result of Government measures to tackle avoidance.
Businesses can help reduce this complexity by working with the Government - to improve the stock of tax law and help reduce the opportunities for avoidance. And by refraining from aggressively pursuing avoidance.
Your reward will be a simpler, more stable tax system - one with lower headline rates.
Because it’s important for all that we have a tax system that works, that is sustainable. Both for HMRC and also the businesses it serves.
It will make Britain a more attractive place to do business - to invest and to locate.
If big businesses are fundamental to the workings of the wider economy, they’re equally important to the Exchequer. It’s a fact that just over half of all tax receipts in Britain are collected from around ten and a half thousand of the country’s largest businesses.
That’s why HMRC’s relationship with these businesses is so vital, and why I fully support the work of the Large Business Service.
So the final misconception that I want to address is the belief that cooperation between HMRC and big businesses is a one way street…
…where business gets all the benefits, leaving the Exchequer to pick up the bill.
Working with businesses is the most effective way to improve tax compliance - it helps bring swift resolutions to enquiries; enables both parties to identify and address tax risks; and reduces the potential for error.
Since rolling out the service, HMRC has dramatically reduced the number of minor open issues - which, historically speaking, have been a particular concern for large businesses. In April 2007, for instance, the Large Business Service had almost 5,000 small open issues, but two years later this figure was down to just 150.
Now agreeing the ‘right amount of tax at the right time’ is a key aspect of HMRC’s work. We all want to minimise the scope for disputes wherever possible. But realistically, there will always be questions over what is the ‘right amount of tax’.
These disputes can be very expensive - lasting several years and generating eye-watering legal fees. As well as being unproductive, these costs fall on both sides of the table. This means that we have a double interest in reducing them. Not just to cut HMRC’s costs, but to reduce the costs incurred by the taxpayer, as well as the costs to business.
So while, as a Minister, I don’t know the details of individual cases, I was pleased to see HMRC recently achieve the largest cash settlement in the department’s history.
This has bought in extra revenue that has sat in financial purgatory for numerous years, and shows the department and business working to resolve long-outstanding issues.
That’s why - rather than join a bandwagon with those who would question HMRC’s direction of travel in this area - I want to see HMRC build on the way it manages relationships with large businesses.
The costs of this are relatively small compared to the combined benefits for both parties.
A competitive tax system is not just about lower headline rates, it’s also about the way you tax, and the relationship you have with business.
Tax policy making
A further aspect of this is how we make tax policy as a Government.
We need a more competitive tax system, a simpler tax system, one with fewer exemptions and fewer reliefs. And this requires change.
But interestingly, businesses also tell me they want a more stable tax system.
As a Government, we’ve taken this as a call to create a more transparent framework within which tax policy is developed…
…a framework that will improve the quality of tax law and the way tax policy is made.
Back in July, we published a draft of the Finance Bill, which was later debated in Parliament this autumn. And on the 9th December we’ll publish most of the contents of the next year’s Finance Bill, to allow for wider scrutiny.
This is all part of a more deliberate approach to making tax law. And at every stage of the process we want to involve businesses and tax professionals in our decision-making.
This was part of the approach we set out in our discussion document - Tax Policy Making: a New Approach - published alongside this year’s June Budget.
And following the publication of the document, we’ve undertaken an extensive programme of engagement on the way that we make tax policy.
We’ve met with over 40 representative bodies and tax practitioners - including lawyers, accountants, and tax managers.
Between now and the end of the year, we’ll be looking at all the advice we’ve received, and considering how it can help inform our approach to making tax policy in the future.
And we’ll continue to seek feedback on the way we make tax policy - to give greater certainty; to strengthen the relationship between business and the Government; and to create a more efficient tax system.
So, to conclude.
I’d like to reiterate that these are difficult times for our country…
…and that we’ve had to deal with some ill-founded misconceptions:
That we can ignore our problems, and not tackle our debts.
That by focusing on closing the tax gap, we can escape hard choices on public spending.
That we can balance the books on the backs of business, and still have a private sector-led recovery.
And that HMRC’s relationship with business is all give and little take, not one that provides benefits for both parties…
…but we haven’t let this distract us from our ambition to create a better business environment.
To deliver a more competitive, simpler, and more stable tax system in the future.