The need to clarify tax governance

Monday 28th May 2018

stephen-hammond

 

 

Stephen Hammond, a member of the Treasury Select Committee and Conservative MP for Wimbledon

On a weekly basis, Jeremy Corbyn expresses faux anger about tax cuts for millionaires and tax havens. In his view, the richest homebuyers are not paying stamp duty, foreign oligarchs are not paying Capital Gains Tax on property disposals, companies are paying lower tax in locations of their choice and many are using the “Mayfair tax loophole” – all outrageous!

However, in reality, all of those evasions or examples of gaming the system are no longer possible.

Since 2010, George Osborne, and now since 2016, Philip Hammond, have introduced measures to attack evasion, aggressive tax planning and increase compliance. As a result, in the last seven years, HMRC has secured approximately £160 billion in additional revenue.

To achieve that, the Government have closed loopholes with 40 tax changes. Thanks to that work, the UK now has the lowest tax gap in the world – the difference between tax due and tax collected. The UK is also the only country to measure and publish tax gaps every year. There is still more to do however, so the Government have announced a further 35 tax changes to tackle evasion and avoidance which are forecast to raise over £18.5 billion by 2021/22.

The language of tax allows for much confusion. Tax evasion, aggressive tax avoidance, tax avoidance, non-compliance and gaming the system are terms which are often interchangeably used. We need to distinguish those terms and the activities they imply.

Everyone has a legal duty to pay the tax that they owe on activities which generate income or gains as defined by the tax location where they are resident. Failure to do so is illegal. Non-compliance, or tax evasion, is the construction of one’s affairs in such a manner as to not pay the tax liability legally required and/or failure to pay the amount. That is clearly wrong.

Aggressive tax avoidance and gaming the system are in the grey area of being against the “spirit of the law” or what the law is perceived to intend. Usually, those terms cover the situation when tax affairs are organised to exploit exceptions in the law which were not intended or foreseen by the authorities. I once heard a tax official say that those activities were against the “spirit of the law”. That highlights the problem facing Governments and legislatures when making law. Citizens must obviously follow the law, but if a tax activity is not liked by HMRC and the Government, is widely perceived by them to be wrong or against the spirit of the law but is legal, then ultimately it is allowable. The Government has a simple option in that situation: legislate to stop the activity and ensure future legislation is not exploitable in that way.

That can most easily be ensured by a rate of tax that is considered fair, not punitive, and a system that is simple to understand and comply with. Under the last Labour Government, the tax rulebook tripled in size, so it is little wonder that loopholes became available! Under the Conservatives, the rate of Corporation Tax has fallen to 19 per cent and the tax collected has risen from £35 billion to £53 billion.

Recently, the Treasury Select Committee had a session on tax, focussing on overseas locations. Inevitably, we had a section on the revelations of the “Paradise” and “Panama” papers, which are superficially shocking. However, as was explained by the experts, an ex-HMRC official and a Treasury official, most of the revelations were historic and referred to activities that mostly ceased over a decade ago. The schemes described have largely been eradicated now. Furthermore, it is the transparency brought about by international standards since 2005 that have allowed investigations such as those

Historically, it is, of course, true that a number of locations were, to all intents and purposes, tax havens and the privacy provided by these locations was the lifeblood of tax evaders. But, today, most of the UK’s Overseas Territories and Crown Dependencies have more demanding disclosure and beneficial ownership rules than the UK itself and the USA. Even so, we should not be complacent. HMRC have asked the International Consortium of Investigative Journalist, to see the papers in order to check for any wrongdoing, while the Government is extending the time limits to at least 12 years for HMRC to assess offshore tax cases.

The UK Government can take credit for its leadership in international tax governance. It is essential that citizens, corporations and trusts pay the correct tax liability in the correct jurisdiction. Equally, it is incumbent on governments to proscribe those activities they do not wish to occur, simplify their tax systems and make their tax codes accessible and understandable.

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