This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by Exchequer Secretary to the Treasury.
I am very pleased to have this opportunity to address such an important audience on such a significant issue. The debate on tax and, in particular, the tax paid by large companies is an intense, passionate but complex one, so I welcome the chance to set out where the Government stands on this debate.
In very simple terms, businesses and individuals should pay the tax that is due under the law. Where taxpayers engage in artificial or contrived behaviour to reduce their tax liability, we will take action to ensure that such behaviour is fully scrutinised by HMRC or, if appropriate, change the law.
I will set out later, further details of the action we are taking to address aggressive avoidance behaviour. But I wanted to make clear from the outset that we are serious about those who dodge their responsibilities, because I also want to make clear that this is a Government that believes in a competitive tax system. One that is an asset to the UK, not a liability. And I see no contradiction between those two positions.
Our objective for the UK tax system is both clear and ambitious. We want to establish the most competitive tax system in the G20 - not only to attract businesses here, but also to help the enterprise that already exists.
That is why we have cut corporation tax, so that we are set to have the lowest rate in the G7 and will be just one per cent away from the lowest in the G20. That is why we have reformed the CFC rules, so that companies are moving their head offices to, rather than away from the UK. And that is why we are introducing the patent box and making our R&D tax credit regime more generous, ensuring that the UK is an attractive place to invest for innovation.
These are significant reforms which will assist in achieving growth and creating jobs in the years ahead. We have delivered those changes at a time of austerity and with little mainstream opposition. Other countries, I know, envy what we have been able to achieve.
But we should wary that those who, in the light of current concerns about corporate tax avoidance, argue that there is an easy answer to high levels of borrowing - simply ‘tax companies more’.
Of course, companies already pay a huge amount in tax. Something like 60 per cent of all tax revenue is paid by large companies, if you take into account corporation tax, business rates, employers NICs, plus income tax, employees NICs and VAT.
When this argument is made though, the response is ‘hold on, it’s the consumer who pays the VAT in higher prices and the employee who bears the burden of income tax and National Insurance Contributions’.
And that is a perfectly good point. Of course, it is helpful to have a tax system that encourages investment and job creation but it is true to say that VAT and income tax are ultimately borne by people and not companies.
But then again, so is corporation tax.
The burden of corporation tax will ultimately fall on a combination of shareholders and employees and consumers. For an open economy like the UK, the academic research suggests that employees would bear much of this burden. This is because corporation tax reduces the return on capital, which in turn reduces investment that can flow elsewhere. The reduction in investment reduces productivity gains and that will feed through to individual salaries.
Corporation tax does have a place in a modern tax system. Last year it brought in £40bn to the exchequer. But if we are uncompetitive, it can be a barrier to investment, job creation and growth.
We need to recognise that many businesses operate in a global environment. In many cases, businesses can choose where to invest. We want them to invest here. That is why we have been determined to ensure that tax is not a handicap in the global race for growth.
And, by the way, that is why, when developing tax policy, listening to the views of taxpayers and their advisers is a perfectly sensible and reasonable approach.
So we are very far from being an anti-business Government. Indeed, it is in part the concern that confidence in our tax system - and the contribution that business makes to our economy - is being undermined that means we are determined to address the issue of aggressive tax avoidance.
Aggressive tax avoidance can add to the complexity of our tax system, as detailed anti-avoidance rules become necessary to protect revenues from complex and contrived arrangements.
It can create economic distortions, if a business has a competitive advantage by acting more aggressively in exploiting a loophole than its competitors.
It can be unfair, resulting in other taxpayers shouldering the bill for those dodging their responsibilities. (This sense is particularly acute when we are making difficult decisions on tax and spending).
And the perception of aggressive tax avoidance can create a climate that is anti-business and make it harder for those of us wanting to ensure our competitiveness.
So how should we respond?
The first point is that we must make sure that HMRC has the capability to collect the tax that is due.
My view is that HMRC’s performance with regard to collecting tax from large businesses is under-appreciated.
Since 2006 they have collected £29 billion in additional compliance revenue through their large business service and in particular, £4.1 billion has been raised since 2008 through increased efforts in tackling transfer pricing.
HMRC’s use of intensive relationship management, tailored to risks, has been endorsed by the OECD in its recommended approach to aggressive tax planning, and is increasingly being followed by tax administrations around the world.
The complexity of many of tax cases and the large amounts involved often make this the most cost-effective way to improve tax compliance while at the same time supporting business. So for the largest two thousand corporations in the UK, we have dedicated HMRC relationship managers.
This strategy has been very successful. By supporting these organisations - and ensuring rigorous compliance - they garnered positive feedback from business, while also helping HMRC to maximise revenues by recovering the right amount of tax.
For example, HMRC has tackled the most serious avoidance cases amongst large businesses through dedicated task forces - enabling them to resolve over 1800 outstanding tax issues, and bringing in additional revenue of nearly £16 billion since this approach was established.
Naturally, we want to build on this success, which is why we announced last year that HMRC would receive a further £77 million in new investment by the end of 2014/15 to expand its anti-avoidance and evasion activity.
Part of this funding will go directly towards tackling tax avoidance by multinationals. It will be used to expand HMRC’s risk assessment capability across the large business sector and to increase its specialist transfer pricing resources to speed up its work to identify and challenge multinationals’ transfer pricing arrangements.
But it is important to realise that HMRC can only collect the tax that is due under the law.
And the law in this area is not simply a domestic matter. As with most major economies - the tax system in the UK is consistent with internationally agreed OECD guidelines.
I know that there are international concerns over whether the current corporate tax rules manage to properly capture the profits generated by multinational companies in the jurisdictions where their economic activity is located.
But any reform in this area will require sensible, informed, constructive discussion. It is an issue that all countries are facing, and politicians need to work with each other across national borders to develop the appropriate solutions.
The UK’s G8 Presidency will focus on strengthening international tax standards and working on greater information exchange to tackle tax havens.
Over recent years the G20 has made significant progress in promoting tax transparency and tax information exchange in particular, to tackle cross-border tax evasion. This has produced an international standard on tax transparency which jurisdictions are actively judged against.
There are growing instances of bilateral agreements being signed which will lead to much greater levels of automatic tax information exchange.
As referred to by the Prime Minister in his speech in Davos, the G8 could look to make the most of these developments through consolidation of bilateral approaches, building on the progress that the G20 has already made.
As you will be aware, at the G20 meeting of Finance Ministers last November, the Chancellor issued a joint statement with the German Finance Minister calling for concerted international cooperation to strengthen international tax standards as a first step in promoting a better way of dealing with profit shifting and base erosion of corporate tax at the global level.
The UK, together with France and Germany, has offered additional resources to the OECD to support rapid progress in this work, and they will be reporting to the G20 finance ministers on progress later this month.
I am not today going to set out today the details of our precise ambitions for the G8 presidency and beyond. But what we do want to see - one way or another - is an international tax system that more demonstrably taxes economic activity where that activity occurs.
So how should business respond?
First - and I wouldn’t say this, wouldn’t I? - businesses would be well advised to be cautious in their tax planning approach. Clearly, the degree of scrutiny of the tax that businesses pay has never been greater - whether from HMRC, Parliament, the media or the general public - and aggressive behaviour carries a significant reputational risk.
Second, and this gets me to the heart of this morning’s conference, be prepared to make your case. More than ever, businesses need to justify the taxes that they pay not just to the taxman but also to the public more widely.
I know that this is not always easy. The temptation to keep one’s head down, to hope that the public’s interest will move on, to believe that this is an unwinnable argument can be strong.
I also appreciate that some commentary in the press or Parliament can miss some of the complexities of the tax system. Or, let’s be honest, some of the basics as well.
I am aware that there are times where turnover is conflated with profits. Or that a low amount of tax paid in a country is taken to be proof of aggressive tax avoidance behaviour, even if there is a perfectly good explanation.
The reality is, that in order to work out what a business should pay in tax, one needs a great deal of information and a great deal of expertise. That’s why HMRC has 1200 highly skilled people working on the tax affairs of the 800 largest companies in the UK.
But that does not mean that businesses cannot do more. To explain, to justify and, at times, to educate.
This is a vital debate for our country. The voices of those businesses who contribute to growth, pay their taxes and don’t aggressively avoid, need to be heard.
Our national interest would be best served by a debate that is better informed. That won’t happen if businesses fail to engage in that debate.