This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by the Exchequer Secretary to the Treasury.
I am grateful to have the opportunity to address this timely conference. As you will all be aware, it is difficult to read a newspaper at the moment without reading a story about the amount of corporation tax paid by one or other large multinational company. Matters which were once seen as obscure – like the nature of transfer pricing arrangements or the meaning of ‘permanent establishment’ - now feature in the mainstream media. The public care more deeply than ever that we do not have a tax system that permits free riders.
This debate has significant implications in terms of reputation in three areas. There are the reputational implications for specific businesses – and indeed business as a whole – as a consequence of stories of tax avoidance.
There are the reputational implications for our tax system with the general public. A successful tax system must maintain public confidence. The perception that others can avoid their responsibilities can damage that confidence.
And there is a third reputational area that should not be ignored. If there is a view that strong action against tax avoidance is incompatible with a competitive tax system, there is a risk that the UK will not be seen as being open for business by those whom we want to invest in the UK. I will argue that it is possible to seek to ensure businesses pay the right amount of tax but also that we have a competitive tax system. But that does depend on how we, as a country, respond to that debate.
Before turning to those reputational matters, it is worth addressing the question ‘why has tax avoidance become such a prominent issue now?’ Many of the high profile cases relate to tax behaviour which goes back many years. Almost every tax professional will tell you that individuals and companies behave less aggressively than they did ten years ago. And yet the level of public scrutiny ten years ago was much less.
[And] I think there are a number of reasons why this issue has become so prominent now:
- the difficult financial situation in which many individuals and companies up and down the country find themselves
- the understandable sense that many people are paying a great deal of tax
- and the government’s efforts to reduce our very large deficit which means that difficult decisions on tax and spending have been made
And the public’s acute awareness of all those issues – coupled with the fact that the vast majority of people pay the tax that they owe, on time – means that when certain individuals or companies aren’t perceived to be contributing their fair share to the public purse, there is understandable public anger.
Where those concerns are justified – where avoidance is taking place – it is our priority to take action.
Tax avoidance can add to the complexity of our tax system, making detailed anti-avoidance rules necessary to protect revenues from complex and contrived arrangements.
Tax avoidance can create economic distortions, if a business has a competitive advantage by acting more aggressively in exploiting a loophole than its competitors.
And tax avoidance can also be unfair, resulting in other taxpayers shouldering the bill for those dodging their responsibilities. (This sense is particularly acute when we are making the difficult decisions on tax and spending I highlighted earlier).
So we are making a concerted effort to crack down on any avoidance we identify domestically. Many of you will be aware of the changes we’ve introduced – including increased HMRC spending in tackling avoidance and evasion and new legislation – to do so.
On top of that domestic action, we’re also making a real effort to ensure that the international tax system delivers tax on the right amounts and in the right places.
We’ve made progress in our work with the G20 on Base Erosion and Profit Shifting; and the Prime Minister has made clear that increasing international transparency will be a key theme of the UK’s G8 Presidency.
In an article in the Wall Street Journal a week ago, the Prime Minister particularly focused on how tax authorities can be better equipped to tackle to tax avoidance – with better global reporting and better access to information on who actually owns and controls each company.
Of course, there is an oft touted idea that countries or governments face a choice between being in favour of dealing with tax avoidance or being in favour of tax competitiveness; the idea being that companies will avoid operating in strict regimes.
I don’t agree. My experience in this role has taught me that reputable companies want to operate in jurisdictions where competitive tax rates are properly enforced.
Indeed, an environment based on consistent application of the law – as opposed to special rulings – has reputational advantages. And it’s that type of jurisdiction that we’re creating in the UK.
In short, we’re trying to rebalance the tax regime to make it an asset for the country and to ensure that it supports – rather than hinders – growth and investment;
And the measures we’ve taken over the last three years – on corporation tax and CFCs, R&D credits and the Patent Box – have been specifically designed to let global companies know that the UK is a good place to bring their businesses.
So let me make one point clear. When we bring in a tax relief we want companies to use those tax reliefs. They are entirely legitimate, they are entirely legal, and they shouldn’t – as is sometimes the case – be confused with tax avoidance.
For example, making use of the Patent Box to apply a 10 per cent corporation tax rate to those profits arising from the development and exploitation of patents is not tax avoidance. Nor is pointing out that the Patent Box will reduce the tax bill for a business promoting a tax avoidance scheme – despite what some commentators appear to suggest.
The Patent Box is about competitiveness. It is because of the Patent Box that GlaxoSmithKline is building a new factory in Cumbria and expanding its operations in Scotland, which will create up to 1,000 jobs.
Likewise, applying a 10 per cent ‘above the line’ credit for investing in research and development is not tax avoidance.
And claiming capital allowances which recognise asset depreciation is not tax avoidance.
But if any company purposefully misinterprets our laws – contriving a complex string of claims to gain access to reliefs, in order to reduce their corporation tax bill in ways that the legislation never intended – then that is avoidance. And you can rest assured that HMRC will take strong action against them.
So if you were to ask me what I want our tax reputation to be, it would be this:
I want the UK to be known as a country that offers competitive tax rates, which make us an excellent place to invest and employ. But I also want us to be known as a country that deals effectively with any aggressive avoidance. And that – I think – will be a real improvement on the tax reputation we inherited.
How then, do I think businesses and companies can improve their tax reputations?
First – and I would 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, I think businesses should be prepared to make their case. More than ever, companies need to justify the taxes that they pay not only to the taxman but also to the wider public.
I know that this isn’t always easy. The temptation to keep one’s head down and 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.
I know 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 an innocent explanation.
And 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. And that’s why the publication of lots of raw data doesn’t necessarily help anyone work out the correct amount of tax due.
But that does not mean that businesses can’t do more. To explain, to justify and, at times, to educate.
I said at the outset that we have worked hard to improve the UK’s tax reputation as a place to do business. And when I’ve spoken to international colleagues they’ve often been very surprised – I could even say jealous – of the fact that we’ve been able to make changes like lowering corporation tax levels with very little political or public opposition.
But if there is a widespread public perception that businesses already don’t pay tax at sufficient levels, then such changes would be much harder to carry out. In fact, there could even be calls for tax on businesses to move in the opposite direction. A reaction that would cost us jobs and investment.
Sir Roger has mentioned/will no doubt mention that the CBI recently published seven draft principles on tax, which it is encouraging all UK businesses and companies operating in the UK to follow.
The government welcomes the publication and we look forward to the development of this business led initiative.
We understand that the aim of the Statement of Principles is to enable all businesses to demonstrate their commitment to responsible tax planning rather than debating issues of morality versus legality. And that to me, this seems like a very good way to take the debate forward.
I’m wary though that we shall also be taking the debate forward in our panel session.
Because this is vital debate – ensuring that we can help ensure that there is public confidence in the tax system and ensuring that the UK is a good place in which to invest. So I shall be interested to hear the thoughts of my fellow panellists.