This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by the Exchequer Secretary to the Treasury.
Good morning, and thank you for inviting me to speak here today.
It’s almost a year I since spoke to the Hundred Group on its last Total Tax Contribution report. And once again, I am grateful for the work that PwC undertakes to shine a light on the complex, and as we’ve seen over the last year, contentious issue of business taxation.
As everyone here knows, these are extremely tough times not just for the UK, but the global economy.
At home we continue to tread the difficult path to cutting the record deficit that we inherited two years ago.
And we remain committed to that cause. Tackling the deficit is our number one priority.
It’s a vital precondition to restoring confidence, safeguarding stability, and simulating the private sector investment, innovation and enterprise that we need to drive our recovery.
It’s economically vital.
But it’s politically vexed.
Fiscal consolidation requires sacrifice from all of us as we tighten our belts in austere times.
And when it comes to considerations of tax, it requires that all of society…individuals, families, and businesses all pull in the same direction and pay our full and fair share to tackling the deficit.
It’s why we have put such a premium on ensuring that HMRC has the capacity, tools and freedom to collect what we are owed.
Clamping down on criminal evasion.
And tackling the more complex and nuanced issue of tax avoidance. In particular, when it comes to large businesses.
Taxation of business
You’ll all be aware, and many may have experienced first-hand the speculation, accusation and misinformation when it comes to questions of taxation of large business.
In the current economic climate their remains an undercurrent of distrust for business and private enterprise…a sentiment that this Government rejects.
But there are still those that would seek to tackle the deficit on the back of business, through high and suffocating levels of tax.
As if business was distinct and separate to the rest of society,
As if business can in isolation carry the burden to tackle the deficit.
It’s an argument that betrays a fundamental mis-understanding of a free, open and competitive economy.
As everyone here knows, business and society are inextricably and inescapably linked.
Businesses provide services to consumers, work for employees, and dividends to shareholders.
Higher taxes on profits simply make the UK business environment internationally uncompetitive…
And yes, as we have heard, businesses collect and pay a huge amount in tax. But ultimately higher taxes will fall on employees through lower wages and salaries, consumers through higher prices, or shareholders through lower dividends.
All taxes are paid by individuals and households in the end.
To put it simply, as Winston Churchill once said: “A nation trying tax itself into prosperity is like a man standing in a bucket trying to lift himself up by the handle.”
It’s why this Government is committed to creating the most competitive tax system in the G20 right here in the UK.
Cutting corporation tax to 23% by 2014. The lowest rate in the G7, and the fifth lowest in the G20;
Moving towards a more territorial system of taxation by reforming the taxation of foreign branches;
And reforming outdated Controlled Foreign Company rules.
All to encourage the world’s most innovative, ambitious and successful firms to locate themselves here in the UK.
Hundred Group and large business
As the PwC report details, those businesses that are already here are a critical part of our economy.
The Hundred Group alone employs over 2 million people across the UK, paying or collecting almost £70bn in total tax receipts for the Exchequer.
In fact, the total tax intake of the 10,000 largest businesses in the UK accounts for around 60% of the Exchequer’s revenue.
And looking at corporation tax alone, in 2009-10, the 400 largest companies in the UK paid almost £18bn, accounting for 46% of the total intake.
A vital contribution to our ambition to tackle the deficit.
One that has been rashly dismissed in some of the more vigorous media commentary in recent months.
Tax avoidance settlements
I’m sure you’ll all be aware of the pressure that HMRC has come under in recent months with respect to its work with large businesses to collect revenue, and reach settlements on disputes.
It’s unsurprising, and indeed I think it is right that at a time when we have to account for every penny spent, and collect every penny owed, that Government and HMRC come under ever closer scrutiny.
But it’s one thing to scrutinise, it’s quite another to scaremonger.
Unfortunately, we’ve seen HMRC singled out for particular settlements, but of course completely unable to defend itself because of taxpayer confidentiality.
We are wholly and completely committed to protecting taxpayer confidentiality. It’s a fundamental principle that underpins tax systems worldwide.
Taxpayers need confidence that information they give HMRC will be protected in order to encourage frankness, and allow revenue to be gathered efficiently.
But in some ways it’s because of that commitment that current debate on tax in the UK has become so distorted and detached from reality.
For instance, I’ve seen external estimates that the UK tax gap is as much as £120bn - more than three times HMRC’s own figure - and based on far-fetched assumptions.
For example, the methodology for calculating the level of corporation tax avoidance results in the legitimate use of allowances and reliefs, expressly permitted by Parliament, contributing to the tax gap number.
And more recently we’ve had speculation that the tax gap attributable to large businesses is as much as £25bn.
A figure that doesn’t represent actual tax owed, nor unpaid tax.
It is in fact the sum-total of estimates that HMRC make to assess maximum potential liabilities before investigations have even begun.
It’s the first step to identifying and focusing resources on cases where the potential tax liability could be greatest.
And often, once full investigations have been held…
…once you consider reliefs such as double taxation, capital allowances, R&D tax credits, and other legitimate tax reliefs…
…the actual tax liability is much less than the initial estimate, or in fact, that there is no tax liability at all.
Of course, these are complex issues, but the mis-representation and inaccuracy that so often distorts reporting on tax affairs is damaging and irresponsible.
These statistical howlers and misrepresentations merely belittle the good work that HMRC does, in an extremely difficult task, of great importance for the entire country.
Securing a fair tax system, ensuring that everyone pays their full and fair share, and protecting the tax base from aggressive avoidance.
It’s why yesterday the Government took the decision to close two aggressive avoidance schemes, in one case, with full retrospective effect.
It’s an action that the Government has not taken lightly. But given the potential tax loss and the history of avoidance in this area, the decision, with its retrospective effect, is entirely justified, and will ensure payment of over half a billion pounds in tax.
It’s a bold step, demonstrating our commitment to tackle aggressive and artificial avoidance.
But it’s also the backstop deterrent, rather than the constructive cooperation that is at the core of our approach to large business tax avoidance and settlement.
Large business strategy
Rules, regulations and penalties can only go so far to tackling avoidance, and resolving disputes.
Tackling avoidance rests ultimately on trust, transparency, and cooperation.
Helping to settle accounts in real time, often before they are even finalised.
That’s why through its resource intensive, relationship management approach for its largest customers, HMRC is bringing an unprecedented level of constructive cooperation with business to settling tax disputes.
And HMRC is using its in-depth understanding of these customers to tailor its response to the risks they pose.
And the results speak for themselves.
Between 2007 and 2011, the number of minor issues in the Large Business Service fell by 98%;
And the number of issues that dragged on beyond 18 months fell by 70%,
Businesses benefit from a better relationship, but the Exchequer also benefits from a bigger haul.
In 2010-11, HMRC secured an additional £14bn in compliance revenue, and almost £8bn of that came from large businesses.
We are committed to building on that success. Ensuring that HMRC has the capacity to protect our tax base, and reach swift and fair settlements when disputes arise.
It is only by ensuring that businesses, small and large, pay the taxes that they owe, and ensuring that the Exchequer collects the taxes that we need, that we can sustain a competitive tax system.
It’s why we are bolstering HMRC’s capacity to do just that…
…reinvesting £900m in HMRC over the Spending Review period to bring in an additional £7bn per year in compliance revenues by 2014-15.
And £850m of that additional revenue is expected to come from large business as we invest in retaining specialist staff and skills in HMRC’s large business teams.
Investment that will keep HMRC at the vanguard of international efforts to improve tax collection from large businesses.
An approach that has been championed by the OECD, and has been increasingly adopted by other countries, including the US.
And an approach that keeps the UK open for business, but not for avoidance.
Reforms to HMRC governance
But we know that there is more that we can do to communicate that success to the wider public.
We know that we still face a substantial challenge to change perceptions and build public confidence in HMRC’s process for resolving tax disputes.
That’s why yesterday HMRC announced new governance arrangements for significant disputes, to provide greater transparency, scrutiny and accountability.
The new arrangements mean a new Assurance Commissioner will be appointed, with an explicit challenge role, to ensure that tax settlements respect that the interests of tax payers at large.
And it means there will be much greater transparency on the settlement process, with a new code of governance to ensure that sufficient challenge is built into that process.
They are reforms that meet legitimate concerns that have been raised on transparency and accountability.
And they are reforms that should help defuse poisonous elements of the current debate that are simply motivated by anti-business sentiment.
Challenge for business
But it’s not up to Government alone to reframe that debate.
It’s up to businesses themselves to lead from the front.
It’s up to business to engage in the debate about the benefits we will get from a more competitive tax system;
To be more upfront and transparent in setting out the tax it pays;
And to challenge and rebut some of the questionable accusations that are being made.
Individually, it may seem best to duck the debate, but collectively we risking losing the voice of business altogether.
It is impossible to miss the intense scrutiny that tax affairs have come under in recent years by pressure groups and newspapers.
And I firmly believe that it is in business’ long term interest to engage with that debate.
To set out and explain your position.
To open yourselves to greater scrutiny.
To demonstrate just how critical your success is to the prosperity of individuals and families across the economy.
Engagement and transparency will help address the myths and confusion on tax, feed a more informed debate, and result in a simpler, more efficient and less costly tax system to the benefit of everyone.
Reports such as the Hundred Group Total Tax Contribution are a welcome initiative, and help put businesses on the front foot.
And I said last year, it’s a constructive contribution to the debate, and another step in the right direction.
But it has to mark the start, not the finish. And I welcome and am encouraged by the CBI’s campaign to increase transparency on how much business pays to the public purse.
In the year ahead I hope to see similar initiatives, at company and industry levels, to provide ever more transparency, and build public support for, and confidence in a fair and competitive tax system.