We now know that the ‘tax gap'-that is, the difference between how much tax should be collected and how much is collected-rose from £31 billion in 2009-10 to £33 billion in 2011-12 and further to £34 billion in 2012-13, (which is the latest year for which the information is available).
There are two implications arising from this huge and worsening ‘tax gap. Firstly, the shortfall means that there is less money to support our public services and the public finances. Secondly, it undermines trust and confidence in the system itself. Ordinary citizens and small businesses paying their taxes deserve to know that the same rules apply to the very wealthiest individuals and the global corporations as to them. Disabled people and job-seekers facing sanctions and enforcement action for breached of benefit rules deserve to know that they are treated no worse than tax evaders. Yet in the case of files relating to the HSBC bank, for example, following the revelations of malpractice which were first given to the Government in May 2010, just one out of 1,100 people who have avoided or evaded tax have been prosecuted.
A sense that there is ‘one set of rules for the richest and most powerful, and another for everyone else' is a dangerous one. All businesses and all individual taxpayers need to know that the tax system is based on a level playing field, that nobody is getting away with gaming the system, and that when the system is being gamed we have robust measures to deal with it. That is profoundly pro-business and it is also in the interests of individual taxpayers, UK plc and our economy as a whole.
And whilst a ‘tax gap' existed long before this Government was elected, and some people have sought to avoid or evade taxes for as long as taxes have existed, the context has changed for the worse. The aftermath of the global economic crisis, austerity and a series of media disclosures about the low tax bills and complex avoidance schemes of multinationals and high net worth individuals have led members of the public to question the system like never before.
The controversy engulfing HSBC is but the latest of many examples, but it is deeply alarming. My colleagues in the Labour Treasury team have called upon former Treasury Minister and HSBC Chief Executive Lord Green and the Prime Minister to make a full statement about Lord Green's role at HSBC and his appointment as a Minister. It is why we regret the failure of the Government's deal on tax disclosure with Switzerland, which has raised less than a third of the amount promised. It is why we welcome the proposals of charities and campaigning organisations for an anti-tax dodging Bill; and call on the Government to clamp down on tax avoidance by introducing a penalty regime for the general anti-abuse rule, which is currently too weak to be effective. This would include closing the Quoted Eurobonds exemption loophole, thus ensuring that hedge funds trading shares pay the same amount of tax as other investors, introducing deeming criteria to restrict false self-employment in the construction industry, and scrapping the ‘shares for rights scheme', which the Office for Budget Responsibility has warned could open a new tax avoidance loophole costing £1 billion.
Last week's Financial Times report on tax avoidance and tax collection compared the Government's anti-avoidance measures for companies with the measures Labour put in place to tackle corporate tax avoidance during its time in office. It found that the tax collected by the Government's measures was going to be 90% lower than under measures introduced by the previous Labour Government, saying:
"Measures put in place by Labour during its 13 years in power to counter corporate tax avoidance are projected to raise ten times as much over the next four years as those introduced by the current coalition government."
Writing in the Financial Times, Paul Johnson of the Institute for Fiscal Studies has said that, "just as concern over tax avoidance is at its highest in living memory, just as government ministers are falling over themselves to condemn such behaviour, that same government is trumpeting a new tax policy that looks like it will foster a whole new avoidance industry. Its own fiscal watchdog seems to suggest that the policy could cost a staggering £1 billion a year, and that a large portion of that could arise from ‘tax planning'."
We also need a public form of country-by-country reporting on corporate profits. In government, we would seek an international agreement on public forms of such reporting. At present, the agreement arising from the base erosion and profit-shifting process is to make country-by-country reporting available to tax authorities, but we believe that there is a strong case for the information to be made public. We will seek a multilateral agreement, but if that is not possible, we will discuss with business in this country the best way to introduce a public country-by-country reporting format on a unilateral basis.
• take further action to stop employment agencies from exploiting tax relief through the use of umbrella companies,( raising £400 million a year ).
•force the United Kingdom's overseas territories and Crown dependencies to produce publicly available registers of beneficial ownership. The current Prime Minister has been writing to the Crown dependencies and overseas territories, saying that they need to move forward with a publicly available register of beneficial ownership, but nothing has happened. Ed Miliband announced at the weekend that we would seek a blacklisting of overseas territories and Crown dependencies if there was no movement on a public register of beneficial ownership within six months of the election of the next Labour Government.
• tackle the use of dormant companies to avoid tax by requiring them to report more frequently.
• introduce penalties for those who are caught by the general anti-abuse rule, giving the plan teeth by introducing a tough penalty regime, with fines of up to 100% of the value of the tax that was avoided.
• close loopholes on stamp duty that allow the hedge funds to avoid paying hundreds of millions of pounds in tax through intermediary relief.
• close loopholes that allow some large companies to move profits out of the UK and avoid corporation tax. (According to HMRC, the tax loss from that loophole is around £200 million each year, and it has been reported elsewhere as £500 million).
• make tax havens which have links to the UK put company ownership information in the public domain.
• scrap the failed shares for rights scheme, which the Office for Budget Responsibility warned could enable avoidance and cost £1 billion.
• ensure stronger independent scrutiny of the tax system, giving new powers to the National Audit Office and placing new responsibilities on the Chancellor and chief executive of HMRC to report annually on their efforts to tackle tax avoidance and to reduce the tax gap.
I hope this gives you a clear sense that tackling tax avoidance and evasion will be a very high priority for Labour- as tough action is needed now more than ever before.
Karen Buck MP