This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by the Exchequer Secretary to the Treasury.
Thank you for inviting me to speak here today and on an issue that has shot up the political agenda in recent years, tax avoidance.
And it’s not surprising that it’s become such a salient issue. In the aftermath of the biggest financial crisis in almost 100 years, we are all, Governments across the world, tackling the largest debt mountains on record.
Events over the summer have demonstrated just how significant a task that is. Equity markets across America, France, Japan, Germany and even China displayed a degree of volatility that we have not seen since 2008.
Across the Eurozone, Governments continue to struggle to establish the credibility of their deficit reduction plans. And of course, in the US, we’ve had the historic downgrading of that country’s debt by Standard & Poors.
The scale of sovereign debt and the concern over economic growth lie at the heart of these events, fuelled by uncertainty about the ability of political leaders across the globe to take the decisive action that is required.
Fiscal consolidation is an economic imperative. To reassure markets that the Government can pay its way. But also to provide a solid foundation for growth because ever increasing debt only leads to higher inflation, higher taxes and higher interest rates.
Tackling the deficit and balancing the books is an absolute pre-requisite for growth.
When we came to Government we inherited the largest peace time deficit on record, we were borrowing one pound for every four that we spent, and we were teetering on the edge of a brewing sovereign debt storm. It was an utterly unsustainable path.
And it meant that we had to undertake the toughest Spending Review in decades. But we didn’t shirk our responsibilities. We set out plans to eliminate the structural current budget deficit by 2015. And that has entailed difficult, often unpopular, but absolutely necessary decisions to restore confidence in our economy.
And the last year has vindicated our approach. Following the Spending Review, Standard & Poors took the UK off the negative watch that we had inherited and in recent weeks, UK gilt yields have fallen to near record lows.
Taxation and spending
But fiscal consolidation also begs the question, where should the burden for consolidation lie? Spending, or taxation?
In our spending review we were clear that the burden would fall on spending cuts…restoring spending as a share of the economy to a level closer to its historical average.
All the international evidence and experience suggested that consolidation through spending restraint would be more likely to promote growth, than consolidation through tax hikes.
Promoting private sector growth as a route to economic recovery is a central plank of our deficit reduction strategy, and we have to ensure that we create the competitive and business friendly environment to realise that. That means a competitive tax environment.
When we came to Government we had to reverse the steady decline in UK competitiveness that had scarred the last decade. In 1997, the UK had the tenth lowest main rate of corporation tax in the EU. By the time we came to office, we’d slipped to 20th. That’s why we are cutting corporation tax to 23% by 2014, the lowest rate in the G7.
And the same goes on personal taxation, including inheriting the 50p tax rate which we have been clear is only a temporary measure. We understand that high tax marginal tax rates are not good for the UK.
In fact on my way here I saw a poster for a new Scorsese documentary on George Harrison, the so called “quiet Beatle”.
And for the Beatles aficionados amongst you, George Harrison was also the one who penned the Beatles hit “Taxman”, with the famous last line “Yeah, I’m the taxman…and you’re working for no one but me”.
But what the song doesn’t mention is that in the days of Harrison, Lennon, McCartney and Ringo…Governments would happily impose very high marginal tax rates but also turn a blind eye to avoidance… that was the tradeoff.
Since then however, and rightly, the trend has been to lower rates, a broader base, and vigilance on avoidance.
And it’s the same logic that runs through our approach to tax. We want to create the most competitive tax system in the G20 whilst protecting the tax base. That means clamping down on tax avoidance and worse still, evasion.
But aside from the economic and practical side to taxation and tax avoidance, we can’t ignore that it’s also an emotively charged political question.
After all, tax is an intensely personal experience… it hits home with every pay check, every business filing, and it provokes opinion in a way that only a handful of economic issues can.
When we faced the pressing need for fiscal consolidation we faced as much of a political question as an economic question.
Questions of taxation are intimately tied to questions competitiveness but also questions of fairness.
And when we face the economic situation that we do, when we have to reduce the largest peacetime deficit on record, at a time when we are all pulling the country towards economic recovery… it is only fair that we all pull in the same direction.
A fair tax system means that businesses and people must pay what they owe. We have to close the tax gap.
And let me start with tax evasion.
Our views are clear: tax evasion is morally repugnant. It amounts to little more than theft from law-abiding citizens. Citizens who face higher taxes to make up for lost revenues siphoned off to hidden, off-shore, accounts.
And we will clamp down on it.
Only two weeks ago we initialled an agreement on a historic deal with Switzerland to tackle offshore tax evasion. An agreement that will recover billions of pounds of unpaid tax, and that will make sure that tax is paid in the future on investments in Switzerland.
No longer will tax cheats be able to hide the proceeds of tax evasion in Switzerland.
This agreement with Switzerland does not cut across the EU Savings Directive. Rather the agreement builds upon it whilst tackling some of the issues that have been identified with the operation of the Directive.
Work on a new EU Savings Directive continues and the UK continues to support that work.
But this is only the start.
We need to build on this. We need even greater international co-operation to keep sustain our efforts against tax evasion.
I hope that, and I encourage, HMRC and other tax administrations to work together vigorously to pursue remaining tax havens.
We must continue to do more to increase international pressure on tax havens that refuse to cooperate.
The number of places to hide money from the taxman is shrinking.
We are also investing in our own strategic defences against evasion and the more difficult and nuanced issue of avoidance with a renewed focus on the core elements of prevention, detection and counteraction.
As part of that, we have already committed to reinvest over £900 million in HM Revenue & Customs over the next four years with the aim of bringing in around £7 billion each year in additional tax by 2014-15.
Investment that will fund a range of measures including significantly increasing coverage of the mass market and tackle organised crime.
HMRC will also create a new taskforce of skilled investigators who will use data regarding offshore accounts to target those that evade or avoid UK tax.
Only last week the Chancellor wrote in the Observer newspaper condemning evasion and avoidance, reinforcing our commitment to clamp down on both.
And in fact a user of one of the Stamp Duty Land Tax avoidance schemes contacted HMRC after he read the article.
Not to complain, argue, or circumvent, but actually to admit that he felt uncomfortable with the arrangements that he’d entered intoand that he needs to pay the stamp duty owing on his property … he even said that it was the Chancellor’s article that made him see the light. So we’re clearly having an impact.
Ultimately however we believe that the best way to tackle avoidance is to focus our efforts on prevention rather than deal with this problem once it has occurred.
One option we are exploring is the potential for a General Anti-Avoidance Rule, and whether such a rule could be framed to meet the objectives of deterring and countering tax avoidance in a fair way.
In December last year I asked Graham Aaronson to lead a study into the potential use of a GAAR in the UK tax system.
That study group will be reporting their findings to me by the end of October and we’ll be considering the outcomes as part of our Budget decision-making process.
We have committed to further, formal consultation if we decided to further develop this work.
And consultation is not mere window-dressing - sometimes it means changing our proposals or withdrawing them completely where they do not meet the UK’s best interests.
That is why I announced to Parliament today the Government’s decision not to proceed further with the consultation on tax treaties and not to include the proposed legislation in Finance Bill 2012.
But prevention of avoidance isn’t all about legislation and rules. It’s also about HMRC’s approach to its customers that present the highest risks.
At its core it is about working with businesses in a constructive and cooperative manner to prevent avoidance. This is the central ethos of our approach to tax avoidance.
Indeed, though their High Risk Corporates Programme, HMRC have reduced the backlog of outstanding tax issues and have reduced avoidance activities by major companies.
Earlier this year the National Audit Office estimated that the programme had brought in a yield of over £9bn to March 2011.
Nevertheless, whilst we believe that “prevention is better than cure” we must be prepared and able to deal with avoidance when it occurs.
At Budget 2011 we closed a number of loopholes involving stamp duty land tax and others schemes to disguise remuneration that will together bring in around an additional £1 billion each year.
And we have also stopped one of the biggest sources of abuse that we had inherited from the previous Government whereby some of the richest people in the country shifted around their income to exploit the capital gains system to pay a lower rate of tax.
That’s another £1 billion saved for the taxpayer.
And we are preventing tax avoidance with the same vigour at the international level.
Through Joint Audits with foreign tax authorities, we are working together with representatives from other tax authorities to deliver a new level of collaboration and cooperation to tackle tax avoidance and improve tax administration.
By encouraging tax authorities to work in tandem, Joint Audits are expected to improve case selection, reduce the customer burden and help reduce the potential for double taxation.
It’s still early days for Joint Audit and we will be looking to learn from our pilots.
On the other hand, the Joint International Tax Shelter Information Centre is nearly 7 years old.
Conceived in 2004 by the Commissioners of Australia, Canada, the United States, and HMRC’s Permanent Secretary for tax, Dave Hartnett, JITSIC is a real step change in international efforts to identify, understand and address tax avoidance.
And with participation of delegates and observers from Australia, Canada, the US, Japan, France, Germany, the Republic of Korea and now China, JITSIC has come of age.
By hosting international secondees to supplement the work of their home tax administrations, JITSIC more effectively identifies and curbs cross border tax avoidance by operating more effectively through double taxation arrangements.
Most of the cases that JITSIC looks at are immensely complicated, and by facilitating information exchange and capitalising on shared expertise it means we can more quickly clarify the real risks, uncertainties and arguments on cases of avoidance.
It means that we can more easily overcome knowledge barriers that can often make investigation difficult…barriers such as a lack of knowledge on each other’s regulatory and commercial constraints, let alone each other’s tax systems.
And in many cases such investigation do confirm that avoidance is present.
But importantly for business, this is not simply a witch hunt. There have been a number of cases where involvement of JITSIC has in fact resulted in a decision that there is no avoidance. Transactions were conducted for entirely reasonable commercial purposes.
Further still, we fully understand business anxiety when it comes to information exchange through JITSIC.
That is why we have always stressed the importance of operating within bilateral treaties, and it has been a requirement of all representatives that they have Competent Authority status and are experienced tax professionals.
We have very strict controls on information exchange and we always err on the side of caution.
Ultimately, JITSIC helps to ensure a level playing field between multinational corporations and indeed between multinational corporations and domestic ones.
And since 2009, JITSIC’s work programme has expanded to reflect issues of interest in other international groupings such as the OECD Forum on Tax Administration.
These have included issues arising from the economic crisis, offshore arrangements, transfer pricing and High Net Wealth Individuals.
OECD’s aggressive tax planning directory
Looking more widely, the UK, represented by HMRC, has long been an active member of the OECD’s various tax forums and working parties.
One of the ways in which we do this is through membership of the steering group for the OECD’s Aggressive Tax Planning directory, which enables countries to identify and respond to emerging tax risks by sharing information on trends and new developments in tax avoidance.
Earlier this year, HMRC brought together senior officials from more than 20 OECD countries in central London, to share current ideas and experiences regarding disclosure initiatives, along with other recent developments in the area of anti-avoidance.
The UK has also recently contributed to an OECD study on the tax treatment of losses across the large business sector.
The study looked at tax schemes which involve the artificial creation and exploitation of losses and examined the way in which countries detect and respond to them.
These are all powerful examples of ways in which Governments, through their tax administrations, work together to address common tax issues and risks.
Closer co-operation tax administration to tax administration, and closer engagement between tax administration and business is essential to tackling tax avoidance.
Both what we are doing domestically and what we are doing internationally has relied on constructive dialogue between authorities and businesses to provide greater clarity and swifter resolution.
Yes we can try to tackle avoidance through layer after layer of law, regulation and guidance…but that comes at the cost of efficiency, simplicity and competitiveness
With ever increasing complexity of business and personal tax affairs, increased international cooperation between tax authorities, and between tax authorities and businesses is the only solution to effective avoidance prevention.
We’ve come a long way in recent years to tackle avoidance, and in the current climate, as we tackle deficits across the world, the economic and political imperative has never been more pressing.
I am fully supportive of the work of HMRC, JITSIC, and the OECD, and I look forward to working with you all in the months and years to come.