This year’s Autumn Statement will be my eighth major fiscal event – four budgets, four Autumn Statements – since becoming exchequer secretary. Throughout those eight events, the government has been working towards three main tax goals: making our tax system as competitive as possible; taking action to reform international tax rules; and taking action on domestic tax avoidance. None of these goals has been easy.
Given the size of the deficit we inherited – and let’s not forget that our first budget was an ‘emergency’ budget – the idea of lowering taxes hasn’t always been an easy sell. But we’ve always believed that, rather than borrow our way out of a recession, we needed to create an environment in which the country could work its way out of the recession.
I hope that the recent signs of growth in our economy are a justification for the actions we’ve taken. The tax changes we’ve made since coming to office – on corporation tax and CFCs, the patent box and R&D – have been specifically designed to allow home-grown businesses and start-ups to flourish. And to let global companies know that the UK is a good place to bring their businesses, investment and, most importantly, to bring jobs for British workers.
We know that our changes are having a clear impact. They’ve seen companies keep their operations here. They’ve seen companies move their operations here, as has happened with WPP, Rowan and Lancashire. And they’ve also seen companies expand their operations here. The patent box, for example, was crucial in securing an investment of £500m by GSK, which is set to create 1,000 new jobs in Cumbria.
On the patent box, by the way, you may have read about the European Commission arguing that it constitutes a harmful tax practice. But we are absolutely clear that it doesn’t. The UK regime is more tightly defined and imposes tougher eligibility criteria than other measures that are already in operation in the EU. The UK government remains very much committed to its success.
It is crucial that our government recognises that our country needs to be competitive. I know that the UK is a strong competitor. In fact, when I’ve been on overseas visits – like my trip to Japan and Singapore earlier this month, where I spoke to a number of investors in the manufacturing and finance sectors, and my trip to California earlier in the year, where many investors were interested in our tax reliefs on film and TV – I’ve seen that the tax system we’ve created is seen as a real asset to our country. A competitive tax regime can be a very real reason for companies choosing to move here.
The progress we have made was reflected in the KPMG survey on Tax Competitiveness this year. The UK ranked first, ahead of countries including Ireland, the Netherlands and the USA.
And in the World Bank’s Doing Business Survey, in the past two years we have risen from 24th to 14th in the world in the paying taxes category.
But any competition needs to be fair and effectively refereed. The UK government wants a system with simple and fair rules that ensures all taxpayers pay their share.
We recognise that there are some problems – in this area, at this moment. Weaknesses currently exist in the international tax system that can lead to, for example, companies playing different regimes off against one another in order to avoid paying tax on their profits anywhere at all.
Resolving these issues does require international action. I don’t think you can get any clearer indication of a government’s priorities than by looking at the areas in which its prime minister chooses to become involved. David Cameron has always made it clear that two of the key aims of our G8 presidency were, first, to work on strengthening international tax standards and, second, to work with developing countries to help them collect the tax they’re due.
The international tax rules need reforming so that they not only continue to support free trade but that they also ensure that companies pay their fair share of tax.
The UK has taken a leading role on the international stage through the G20/OECD base erosion and profit shifting project that seeks to address these issues. Reform in this area requires multilateral action to ensure that it is effective.
We’re also working to increasing transparency internationally. The recent G8 meeting at Loch Erne called on the OECD to develop a tool for multinational groups to report to tax authorities on where they make their profits – and where they pay their taxes – around the world.
On top of our work internationally, we’re also making great strides on cutting down non-compliance domestically. The government has invested £1bn in additional HMRC compliance activity since 2010. And HMRC is delivering; they brought in over £20bn of compliance yield in the last year alone.
Of course, we, as the government, aren’t the only people taking a firm interest in tax avoidance and aggressive tax planning. Avoidance has, over the past few years, become a huge issue, in the eyes of not only Parliament, but the wider media and the public too. This interest is completely understandable but, as you well know, tax can be as confusing as it is controversial, and in the past few years, the debate on avoidance perhaps hasn’t always reflected that complexity. The debate has, in fact, often been simplified and misrepresented in ways which are unhelpful. Trying to sum up a multinational’s tax arrangements in a sentence, or a headline, can be like trying to sum up the Bible in a tweet. This has sometimes led to cases where behaviour which is perfectly legitimate – or behaviour which is perfectly legal – has been presented in the public sphere as completely illegitimate, or completely illegal.
We’ve seen the conflation of different reliefs and different behaviours. So, for example, some companies have effectively been criticised for claiming capital allowances. We’ve seen the substantial shareholding exemption (SSE) characterised as a loophole that must be closed. Neither of these are helpful at a moment when we’re trying to incentivise investment. At the moment, non-financial private companies in the UK are sitting on cash deposits of over £500bn. It is crucial for our economy, that those businesses invest, and plough that money back into new jobs or new ventures or new machinery. Capital allowances simply recognise asset depreciation, and it is wrong to suggest that companies using them are engaging in pernicious avoidance. The SSE meanwhile is a mechanism – introduced 11 years ago – to ensure that groups of companies are able to invest their capital in the most effective way, and to make sure they don’t find themselves locked into inefficient investments because of the tax cost of exiting.
But it’s not just around capital allowances and SSEs where we’ve seen confusing messages. There are a couple of other oft-repeated myths on which I’d like to provide some clarity.
First, secondees from the ‘big four’ do not have undue influence over HMRC, nor do they come in and draft policy in such a way that – when they return to their parent companies – they can exploit loopholes they’ve created. This accusation of poacher turned gamekeeper turned poacher is a particularly misleading one.
There are currently five secondees from the ‘big four’ in the HMRC business tax division, out of a population of more than 3,400 staff. It is absurd to suggest that they, in some way, put in place concealed loopholes in legislation which can then be exploited by those who have privileged access to the policy making process. As Edward Troup said at the PAC earlier this month, we don’t think there is a shred of evidence for this.
As many of you will know from your businesses, carefully targeted use of secondees can be beneficial in many ways. For instance, a government department might bring in a comms expert from elsewhere to help rewrite a website, or it might bring in an expert bill manager from another department to help get legislation through the Commons.
In this instance, these secondees from the ‘big four’ are very useful for improving the effectiveness of our tax system. By bringing in the people with commercial experience and expertise – the people who use our tax systems day in day out – we can make sure that we introduce measures which can be easily adopted, and don’t create extra administrative burdens on our businesses. And more effectively crack down on avoidance, as we are doing.
It goes without saying that we ensure the right safeguards are in place, so that official information is treated confidentially and conflicts of interest are properly managed.
To rebut a second myth, HMRC does not lack the will or the resources to tackle non-compliance by large companies. Because of the complexities of taxation on big business, HMRC deploys its most senior and experienced tax professionals to man-mark these businesses. In the few instances where a large business is very high risk, they put in place dedicated teams of tax specialists and engage at a Board level. Rather than having a ‘cosy’ relationship, these companies are, in fact, under especially close scrutiny.
The frustrating thing about investigations into these large companies though – and these are often the cases that excite the most interest – is that HMRC officials or spokespersons are not in a position to respond to any specific allegations, as they aren’t allowed to discuss individual tax circumstances.
The cry goes up, ‘why doesn’t HMRC do something about this particular case?’ But the mistake that is often made is that HMRC’s public silence on specific cases is taken as confirmation that no action is being taken. After all, HMRC’s large business compliance operations have raised £23bn in additional revenues between April 2010 and March 2013. This is not a figure that suggests a supine attitude to big business.
A similar point can be made about so-called ‘deals’ done by HMRC and large business. It wasn’t that long ago that allegations were made that HMRC had foregone billions of pounds in settlements. Yet, once all the evidence was made available to an independent expert, Sir Andrew Park, he concluded that the settlements reached by HMRC were reasonable, or even more than would have been achieved if litigated.
I suspect many of the public remember the allegations of sweetheart deals, but far fewer would have noticed that such allegations were subsequently discredited. We don’t do sweetheart deals in the UK. We have a transparent approach where everyone gets equal treatment under the law.
Let me be absolutely clear about where I stand on all of these issues. Wherever behaviour is outside the law, and where arrangements are being made with the specific intention of avoiding tax, action will be taken. Not only are we making a concerted effort to crack down on any avoidance we identify domestically, we’ve also been leading the way internationally – through G20 and the OECD – on issues like base erosion and profit shifting. No UK government has ever done more to address tax avoidance.
But when legitimate and legal tax behaviour is wrongly presented to the public as illegitimate, or illegal, it can have a very damaging impact.
‘What’s the problem?’ some people might ask. ‘Surely it keeps individuals and companies on their toes? If they know they’ll be under this scrutiny, surely they’re less likely to do anything suspect?’
But what we have to remember is this: if companies are worried that their reputations will be unfairly damaged because perfectly legal and perfectly legitimate behaviour might be presented to the public as something different, it is quite understandable that this could put them off moving here, or investing here, or creating jobs here.
So, we are taking tough action on tax avoidance. But we must also recognise that if the debate is driven by myths and misunderstandings, we could risk jobs and investment in the UK.
As we move forward, in the 18 months that now lie between today and the general election, you can expect us to continue to pursue the same goals we have since we came to office.
We will continue to make our tax system as competitive as possible – one that encourages companies to stay here, to move here, and to expand here.
We will continue to take action to reform the international tax rules, through the OECD and the BEPS project. We will continue to take action on domestic avoidance, by making it more difficult to avoid paying tax, and by making sure that those who do are duly dealt with.
By pursuing these three goals, as we’ve done since we first came to office, we will create a tax system which is competitive, robust and fair – a tax system that is an asset for our country and supports, rather than hinders, growth and investment.
This comment is an abridged version of the exchequer secretary’s speech to delegates at the recent Tax Journal conference. The full text is available from the Treasury website.
