Good morning. I am delighted to be back again at Policy Exchange to discuss an aspect of tax policy. On this occasion, the important and topical issue of tax avoidance.
At a time of economic difficulty, when tough decisions have to be made on public spending and when the burden of taxation remains high, there is little sympathy for those who do not make their full contribution. For those who work hard and pay their taxes, it is galling to see others shirk their responsibilities on either front.
But for there to be a sensible public debate on this complex issue, it is crucial that we understand the facts and the UK’s position. Tax avoidance is not a recent problem. In the fourth century AD, the Roman Emperor Valens had to make it illegal for individuals to sell themselves into slavery to avoid tax. And while this particular ruse seems to have fallen out of fashion, there will always be some who seek to shirk their civic duty. Just like every country at any time in the history of government, there is still work to do to ensure every pays what they should. But it is important to get a sense of perspective on our position - both in the context of recent history, and internationally.
While there is reason to be more optimistic and more grateful than headlines suggest, we are building on the work we have already done to make life difficult for those who artificially and aggressively reduce their tax bill. Today, I can announce a consultation on proposals to crack down further on those that seek to push abusive tax avoidance schemes and make it easier for taxpayers to identify such schemes when they are on the end of a hard sell by a dodgy promoter.
First, it is important to recognise the scale of the problem. Last year, HMRC collected £474 billion in tax. The tax gap - the difference between what is owed and what is collected - is about £35 billion. Tax avoidance (as opposed to tax evasion, the hidden economy, criminal attacks and other aspects of the tax gap) accounts for just 14 per cent of this gap - around £5 billion or about 1 per cent of total liabilities. While that may be too high - being as it is more than zero - evidence suggests it’s probably one of the lowest in the world. That’s because, contrary to some claims, the vast majority of UK taxpayers do not aggressively avoid tax; and yes, that includes the vast majority of wealthy individuals and multinational corporations, as well as the vast majority of ordinary working people and small businesses.
If anyone is tempted to believe that tax is optional for the wealthy, remember that The top 1 per cent of individuals by income pay 26 per cent of all income tax, and the top 0.1 per cent (just 30,000 individuals) pay around 11 per cent. Large businesses pay around 60 per cent of all taxes in the UK, but account for around only a quarter of the estimated the tax gap.
And where HMRC finds tax avoidance, it takes action - many who have been investigated have been disappointed when the false claims that it is soft on the rich and powerful turn out to be unfounded.
For those not immersed in matters relating to tax, the debate on tax avoidance can be a confusing one, not least because the term ‘tax avoidance’ can be used somewhat loosely.
Legitimate use of reliefs is not tax avoidance:
Claiming capital reliefs on investment is not tax avoidance - when those reliefs were introduced precisely to encourage the investment in question.
Claiming reliefs against double taxation is not tax avoidance - when the alternative would be taxpayers paying tax twice on the same income.
Claiming back tax on legitimate charitable donations is not tax avoidance - any more than ticking the ‘gift aid’ box is.
Not paying tax on your pension contributions is not tax avoidance.
Taking out a tax free ISA is not tax avoidance.
Clearly, the examples I have listed represent perfectly reasonable tax planning - making use of reliefs for the purpose they were intended, and ensuring one pays only what one is liable for.
Now I would hope this would be obvious to anyone who understands the purpose of reliefs. Yet some estimates of the tax gap count use of these reliefs as ‘avoidance’.
That is what avoidance is not. But artificial structures that aggressively exploit reliefs contrary to parliament’s intended purpose through contrived, artificial schemes fall very clearly into the definition of avoidance.
Buying a house for personal use through a corporate entity to avoid SDLT is avoidance.
Channelling money backwards and forwards through complex networks for no commercial reason but to minimise tax is avoidance.
Paying loans in lieu of salaries through shell companies is avoidance.
And using artificial ‘losses’ deliberately accrued to claim back tax is avoidance.
These kinds of schemes are where we are focussing our efforts, and they are all, to borrow a phrase from the Chancellor, ‘morally repugnant’.
These schemes damage our ability to fund public services and provide support to those who need it. They harm businesses by distorting competition. They damage public confidence. And they undermine the actions of the vast majority of taxpayers, who pay more in tax as a consequence of others enjoying a free ride.
Now those who have engaged in tax avoidance have received their share of public scrutiny recently, to say the least. But often it is the firms that market such schemes that are the root of the problem. Some firms will adopt tactics that border on mis-selling - promising large tax savings, and saying the arrangement is unlikely to be challenged. Those who enter into the schemes are often shocked to find that HMRC pursues them relentlessly. Often they lose a lot of money, a lot of time, and their right to confidentiality due to the resulting tax tribunal. Just this month HMRC won a long-running legal challenge against a large avoidance scheme first marketed ten years ago by a ‘big four’ accountancy firm that ultimately gave nothing for the substantial fees that those participating paid for it.
There are those who may argue that “if it doesn’t involve lying to the Revenue, it’s OK” regardless of how artificial or contrived the arrangements may be. But for most people in the tax world, there has always been such a thing as a “smell test”. Where the tax consequences of an arrangement are so clearly contrary to the intentions of Parliament, where the nature of the arrangements so clearly lack a commercial, non-tax rationale and where the result looks “too good to be true”, most reputable advisers would say that the arrangements stink - and stay well clear.
But for the taxpayer, there may be times when it is not clear if an arrangement is legitimate tax planning or contrived avoidance. It is up to us as Government to make clear the features of dodgy schemes so that taxpayers can take ownership of their affairs and know that HMRC will challenge aggressive tax avoidance in all its forms.
Today we consult on ways to improve the information available to the public on avoidance. Publishing warnings for all to see, and making it easier for taxpayers to see if their adviser has promoted failed avoidance schemes in the past.
The tax avoidance landscape is changing, and it is important that we adapt as it does. I am glad to say that the mainstream view within the tax professions is that contrived avoidance schemes are bad and have no place in an honest, reputable firm. I welcome the recent comments from senior figures in the industry that confirm this - Michael Izza’s statement, on behalf of the Institute of Chartered Accountants, that there is no place in the profession for those involved in egregious schemes; the warning from the Solicitors Regulation Authority, that SDLT avoidance can damage a professional reputation; and the denunciation of those who push abusive schemes by Patrick Stevens of the Chartered Institute of Taxation. Through today’s consultation, I hope we can continue to work closely with professional organisations to ensure that together we stamp out practices that harm the reputation of the industry, as well as the pockets of the honest majority of taxpayers.
That is the view of the mainstream. But we face a problem with a minority - the ‘cowboy tax advisers’. Small, niche firms peddling crude schemes that are unlikely to be successful once they are brought to HMRC’s attention. There has been some excellent coverage in the Times of the sort of thing I am talking about; the so called ‘K2’ scheme, for example, in which a shell company gives out payments described as loans in lieu of salaries.
These firms behave differently to the well-established, reputable advisory firms. They change name frequently to avoid detection; they include ‘fighting funds’ in their fees - pre-empting an inevitable clash with the authorities, and often do not comply in full with HMRC’s disclosure rules.
It is these organisations in particular that we need to raise public awareness of. If I find out my builder has changed trade names three times, avoids informing the planning authorities, and includes in his fee a ‘litigation fund’, I might be tempted to find another builder. But all too often there is not the same awareness around tax advisers.
If there is one lesson to be learnt from the cases exposed in recent newspaper reports, if a tax adviser tells you something that sounds too good to be true, it probably is too good to be true.
So one of the major parts of our consultation looks at how we can make people aware where a company has previously peddled schemes that have been successfully challenged - so that they know there is a strong chance that no good will come of it.
And we are also consulting on how we strengthen our disclosure regime, looking at how the descriptions of schemes covered might be reformed to ensure we capture more, and that we can crack down on those who flout the rules. The Disclosure of Tax Avoidance Schemes regime, DOTAS, has assisted HMRC greatly over the years - closing off around twelve and a half billion pounds in avoidance opportunities. But as the avoidance landscape changes, so must it
We have already extended DOTAS to make it stronger and more effective. In 2010 and 2011 we implemented a number of improvements to the system requiring promoters to provide client information. And this year we legislated to allow HMRC to flush out users of certain SDLT avoidance schemes more effectively.
And the major reforms to the system we consult on today can, informed by our responses, place DOTAS once again at the forefront of anti avoidance measures globally. These and other proposals consulted on will:
Strengthen our descriptions to ensure we close the net around the few schemes that are not already captured.
Clarify what needs to be disclosed.
Require higher quality information on how schemes work.
Require a named individual to take responsibility as promoter for the scheme.
Demand better disclosure of those who use suspect arrangements.
Take further steps to inform the public of the genuine dangers of entering into such arrangements.
Ensure taxpayers know it is in their interests not to go near them.
And tighten the screw on those who refuse to co-operate.
I am confident that we can work with those parts of the industry that act with honesty and integrity, and with everyone else with an interest in promoting fairness and transparency in the tax system to bring about the change we need. We welcome views from representative bodies, tax agents, businesses and individuals, and I would encourage all of you with an interest to offer your thoughts.
There are some who might say that consultation documents on tax administration are often an effective cure for insomnia, but this is one consultation that will keep the promoters of aggressive tax avoidance schemes awake at night.
And while we look at how to strengthen the regime, we will continue to tackle aggressive avoidance wherever it occurs.
Reinvesting money to make sure we stay on top of the fight - £917 million in additional resources committed towards tackling evasion and avoidance over the spending review period, which will bring in around £7 billion per year in additional revenue by 2014.
And last month, we issued our consultation on a General Anti-Abuse Rule, aimed at deterring and tackling abusive schemes with a new rule that is effective against the most egregious arrangements.
It will act as a further deterrent to those engaging in abusive schemes, and improve our ability to secure payment of the right amount of tax.
But it’s important to realise that there is no tax avoidance ‘magic bullet’. No single rule can ever wipe out avoidance completely. The benefits of a GAAR will be considerable but its full effects will take time to be realised, and we should remain ever vigilant against wider forms of avoidance that do not fall within its scope.
Through the steps we are taking, we will build on the excellent compliance record that HMRC has:
Moving swiftly to advise ministers to close 7 tax avoidance schemes successfully in the last year alone -schemes that exploit loss reliefs, or claim relief twice for the same expenditure, for example.
Establishing the High Net Worth Unit in HMRC, to manage the affairs of individuals where the most tax is at stake, ensuring that those who can most afford to pay contribute what they should.
Compliance yield doubling in 6 years
And this month’s closing of the ten year-old scheme I mentioned earlier, used by around 200 wealthy individuals, which will mean recovery of around £90 million of tax at risk. This is the latest in a long line of successful challenges - including a scheme closed in April saving £117 million, and one last year involving allowances of around £1.8 billion.
It is this kind of activity that ensures that avoidance does not pay - upholding the wisdom of the vast majority of those - rich or not, who do not engage in it.
As a result, our compliance record is one of the best in the word. The tax gap in the U.S. is around 14 per cent, compared to 8 per cent here.
It is unfortunate that HMRC’s achievements are sometimes not only under-acknowledged, but undermined by ill informed criticism.
There are those who claim that HMRC is soft on big business. But this ignores the facts that:
£29 billion in additional compliance revenue has been collected since 2006-07 through the Large Business Service, excluding some exceptional items.
Over eleven and a half billion pounds of this was saved through the High Risk Corporate Programme in the last six years.
And, as was demonstrated in February when an aggressive debt buyback arrangement was closed down, HMRC takes decisive action when large corporates engage in contrived tax avoidance.
Instead, the press coverage tends to focus on accusations of ‘backroom deals’ which allegedly cost the exchequer billions. One such accusation in a magazine resulted in the formation of UKUncut. There were protests and arrests and increasingly hysterical accusations as others joined the bandwagon.
HMRC’s strict statutory duty of taxpayer confidentiality meant that it was very constrained in what it could say publicly about the affairs of specific taxpayers and had limited ability to defend itself.
But on this occasion, the NAO commissioned a review, led by Sir Andrew Park, of tax settlements with large businesses. Sir Andrew concluded that all the settlements reviewed were reasonable and the overall outcome for the Exchequer was good. The NAO went on to say that ‘the resolution of the issues [by HMRC with the companies in question] is welcome’. In the case that has attracted most publicity, Sir Andrew suggested that there may have been grounds for the taxpayer not to be liable for £6 billion, as is routinely reported, nor £1.2 billion (as was the amount settled) but nothing. It is a shame that the media coverage of the positive findings of the report has not been as prominently or as widely reported as the discredited claims that a business was let off billions.
Companies must pay tax in accordance with the law, just like individuals. But it must also be accepted that the tax affairs of companies are often more complex than the tax affairs of individuals. Companies - especially large multinational companies - will have profits and pay taxes in many jurisdictions. As a matter of policy decided by Parliament, our tax system contains characteristics, such as capital allowances, R&D tax credits and interest deductibility that will mean that a company will often pay tax at an effective rate lower than the headline or statutory rate. The fact that that happens is not in itself evidence of avoidance on the part of the company, nor incompetence on the part of HMRC. Parliament can change those characteristics, although in doing so it would have significant implications for the UK as a place in which to do business.
Of course, HMRC tailors its responses to different taxpayers, based on their needs and behaviours and the risks they pose. So it’s inevitable that HMRC needs to take a hands-on approach in some cases, and doing so saves the public millions in legal fees and lost revenue. But let me be clear - when they do so, they are nothing but even handed. HMRC’s aim with any taxpayer is to ensure they each pay the tax they owe and receive the reliefs to which they are entitled, minimising compliance costs and uncertainty through early and open dialogue where there are issues to resolve.
This government has led the charge on ensuring that we keep the UK competitive with lower tax rates for everyone who contributes. That purpose, and the debate around it, is often obscured by unsubstantiated claims and wild accusations from the political fringes. Anyone who thinks that we happily pass up the opportunity to raise revenue while increasing our popularity has probably never met a Treasury minister - or perhaps even a politician. And they’ve certainly never met an HMRC tax inspector!
But we are still determined to do more to maintain a level playing field for all taxpayers, and stop those who seek to game the system at the expense of others. The actions we are taking and our consultation today should reaffirm our determination to ensure that everyone pays their fair share, whether companies or individuals. I hope that with the co-operation and input of all who have an interest in seeing a fair and transparent tax system, we can deliver a system that is robust to those few who might exploit it.