Treasury Select Committee Hearing

2 February 2016

Speaking notes prepared by Richard Murphy FCA

Professor of Practice in International Political Economy, City University, London

and

Director, Tax Research LLP

NB: These notes were produced in a hurry and have not been edited: they will include typing mistakes and some straightforward errors. If in doubt, please ask for clarification. 

The answers are prepared in response to the Treasury Committee's briefing note, here.

• 1a. To what extent has the Treasury complied with the principles of tax policy set out in the annex?

• Be Fair
  
  There is no evidence it has achieved this goal
  • The burden of tax is shifting from capital into labour
  • There has been undue emphasis on increasing indirect tax charges whilst reducing corporation tax
  • Inheritance taxes have been reduced at a time of increasing wealth inequality
  • Capital gains tax exemptions e.g. For entrepreneurs have increased beyond anything tgat can be economically justified
  • The Google tax settlement reinforces the belief that there is one rule for large companies and another for small
  • Tax offices giving people access to support have been closed and the tend is getting worse
  • Most people are hanging on phones forever to get tax help
  • The pursuit of tax credits appears to be of much higher priority than pursuing big business.
  • There is an overwhelming sense of unfairness.

• Support growth and competition

• Supporting large business at the expense of small business creates an unkebpvel playing field tgat hinders competition
• UK official support for tax havens undermines the competitive status of the majority of UK businesses
• The failure to properly appraise the tax gap or collect tax returns from approximately 1 million UK companies a year undermines confidence in the fairness of the UK tax system and hinders the creation of the level,playing field competition needs
• The failure to require all companies, whatever their size, to report the tax that they owe denies businesses the information they need to compete when perfect information is the ore-condition if effective markets

• Provide certainty

• There is little legal clarity in
  UK tax law because
  • We do not provide a clearance system in most cases, even if paid for
  • We do not publish HMRC opinions on how they think the law works
  • The court system only provides clarity years after it is needed
  • We do not produce purposive tax legislation
  • HMRC / HMT guidance on draft tax legislation is usually of poor quality and often does little more than restate the law, giving almost no indication as to why it is written and what it us meant to achieve.
  • Tax offices have been closing denying ordinary taxpayers with access to the help they need.
• Tax law is not simple
  • Simplicity may be an illusory goal but should be aimed for
  • It does not happen because we do not have a comprehensive general anti-avoidance principle of the type the late Rt Hon Michael Meacher presented to the house during the last parliament
  • We d not have purposive tax law
  • HMRC is reluctant to publish guidance in difficult areas of law
  • UK most of all we do not have simplicity because a complex society where people want choice of action requires a complex tax system to reflect those choices: tax should not constrain choice
• Targeting
  • The Diverted Profits Tax is a perfect example of a piece of blunderbuss legislation that looks very likely to have missed its intended target but which will cause considerable collateral uncertainty

• Provide stability 

• A great deal of tax legislation responds to abuse. Until abuse can be ended ( and a general anti-avoidance provision would help here) the demand for new legislation will continue
• Social change needs to be reflected in tax law so change is required

• Practicable

• For most people, most of the time, UK tax is practicable now
• Demanding quarterly accounting by business is a disastrous step in the wrong direction on this issue and could lead to gross injustice

• Coherent

• Please read my book The Joy of Tax, delivered to all committee members

• 1b Have the entities involved with tax policy performed adequately?

• HM Treasury

• Hard to be positive
• The corporate tax road map sent out all the wrong signals - using tax as a way of saying the UK is open to business is raising a tax haven flag
• At OECD appeared cooperative but did all it could to undermine the process e.g. DPT
• Has opposed CBC consistently and is now in favour: hard to know what the message is
• Has persistently argued only the largest companies and wealthiest people need tax cuts when these policies have exacerbated wealth, income and competitive disadvantages
• Has consistently blocked EU progress e.g.on the CCCTB
• Has with the FCO, been too lenient on British tax havens
• Has significantly failed to forecast tax revenues correctly, meaning policy co-ordination has been wrong

• HMRC 

• The HMRC boundaries are unclear: policy is announced by HMT and consulted upon by HMRC. The result is confusion as to responsibility
• HMRC reaches out yo far too few when consulting: funds are not made available to those who would wish to comment but are need technical support to do
• HMRC has a very poor record is listening. It took far too long to close the Channel Islands tax loophole for this reason. They are now refusing to receive data on the Amazon and eBay VAT issue that may cost much more than the Google tax settlement. They are profoundly failing in this regard.
• HMRC are refusing to undertake tax gap calculations that they are sufficiently confident to publish and yet publish them as fact: that is profoundly misleading and means they have nit demanded near enough the resources required to run a proper tax system in the UK
• As a matter of fact tax policy delivery has failed in the UK due to the failure of HMRC to deliver the services UK taxpayers expect

• Office for Tax Simplification

• I can only recall it getting rid of some minor tax reliefs such as those on luncheon vouchers
• What is it for?

• Companies House

• Maybe 400,000 companies disappear without trace in the UK each year without filing accounts or paying tax and a blind eye is turned to this. Companies House administers a regulatory environment where no real attempt is made to apply the law and a criminogenic environment is likely to arise as a result, fuelling the UK tax gap

• 1c Does the Treasury have the expertise to design tax policy? Does it make effective use of HMRC advice?

• HMT rarely employs tax specialists
• HMT massively overvalues the advice of theoretical economists, most of whom have never worked in business or taxation and have little or no experience of accounting
• HMT turn over staff far too often
• The UK is critically short of academic tax expertise and hegemony is required of those who are appointed: it is fair to say an IFS / Oxford Centre for Business Taxation view prevails and alternative thinking outside this incredibly orthodox microeconomic paradigm that does not question the basic tenets of neoclassical economics does not exist or is suppressed. If HMRC staff want to progress they conform.
• HMRC has a prevailing top down pro-business policy that is politically determined by a broad anti-tax rhetoric amigo get ministers that gives rise to the Britain is open to business stance that dictates low taxation as a panacea without seeking evidence as to whether that is true. You would have to be brave to challenge it.
• The environment in HMT and HMRC is far too trusting e.g. the assumption that if a company does not submit a tax return it has never traded when there is no reason to think that true.

• 1d. What simplification measures, whether or not previously considered by the OTS need to be on the agenda now?

• The need is not for simplification now: that is a red herring that has wasted far too much effort and sends out the wrong signals
• The need now is to properly appraise and close the tax gap and that requires an entirely different mind set that thinks tax is at the heart of a good society and the delivery of well being for all. The tax simplification agenda is the antithesis of this and assumes tax is an impediment to social progress when right now the exact opposite is the case

• 2a. To what extent is the UK's corporate tax base being eroded as business is increasingly conducted globally?

• The tax base is being eroded internationally. But let me put this in context. I think tax haven based avoidance may cost the UK maybe £5 billion or so a year. That's a lot and should be tackled. But I think the total for tax avoidance and evasion could be £100 billion a year right now, and unpaid tax adds to that bill.
• Again, in context, about half of UK CT is paid by multinationals. If they avoid 20% overall it is unlikely the cost is much more than £5 billion. BUT this impression may change if we had reliable country-by-country reporting data: bank country-by-country reporting data suggested the UK lost out more than expected.
• I suspect some businesses are more compliant than they were. No one now wants to be the next on the front of the FT
• Things like the Fair Tax Mark, signed up to by SSE is indication or progress
• On the record country-by-country reporting will add another significant disincentive: we will see the cheats. It is disappointing it has taken 13 years to get a UK government to back it

• 2b. Are there particular sectors that are more mobile and do those sectors make a disproportionate contribution to overall tax yield? 

• The sectors that are mobile are important but please note three things
  • No company ever really left a country because it had to pay 20% tax: the moves they might make are a sham and would be countered by a unitary taxation system
  • What is truly mobile is cash and portfolio investment: that has to be beaten by significant investment in automatic information exchange and legal entity identification via enforced beneficial ownership disclosure on public record. It is likely that more may be lost to evasion on this issue than to large company tax evasion. Priorities have to be borne in mind
  • Third, if only we controlled our own tax havens properly (Google's unpaid tax ends up in a Bermuda account effectively under the protection of UK law) then we could go a long way to solving this issue

• 2c. What other changes are occurring in the UK tax base, and how should the UK Government react to these changes?

• The failure to regulate the availability and use of limited liability companies and to hold their owners / directors to account for the tax that they might owe is by far the biggest likely problem in the erosion of the UK tax base. Without proper information exchange systems from UK banks to HMRC so that the annual turnover, beneficial ownership and management of every UK company is properly disclosed to HMRC and Companies House this problem, which I think costs the UK at least £11 billion a year (and maybe more) will persist. Our focus on overseas has been useful and appropriate and should continue but we know how to deal with that issue now. We must now address the domestic issue and accept we are not investing enough to solve it.
• The second biggest issue is the failure of HMRC to properly estimate the tax gap. It is implausible that 10% or more of VAT is lost and yet the overall tax gap is much lower than that.
• Third, the problem is tax evasion with regard to VAT on internet supplies: this puts the Google tax into the shade but HMRC claims it has only just noticed it. It took years to notice the Channel Islands tax abuse as well.
• Fourth is tax abuse on capital gains, inheritance tax and other taxes not directly contributing to GDP where many occasions such taxes are little better than voluntary contributions.

• 3a. Given the inevitability of some sort of tax gap and of differences in interpretation of the "correct amount of tax", should the Government address the problem of the shrinking corporate tax base through more radical changes to the tax system?

• A unitary taxation basis is required. See notes below under 3d as to the basis for this and other suggested corporation tax reforms.

• 3b. If so, what type of corporate tax structure could ensure that revenue is collected in accordance with the principles of tax policy and in a way which minimises the risk of base erosion? For example, should business taxation be based on turnover rather than profits?

• There is no case at all for taxing turnover as a an alternative to taxing profits because
  • This is not a tax on profits, and so not a tax on capital
  • The tax would be passed on: VAT increases are
  • It is as a result a tax on consumers and so shifts the whole tax base to them from capital
    • This would increase the regressiveness of the UK tax base
    • In low margin businesses such a tax could massively threaten viability without price increases
    • Those price increases could destabilise the economy
  • It would basically exempt much of capital from tax
    • Interest, rents, capital gains, hedge fund trading, derivatives and others are all subject to CT but are not sales. How would these be taxed in such a system?
  • Small businesses with longer supply changes are likely to see margins squeezed more by such a tax than big business that has shorter supply chains
    • This makes for an unlevel playing field in thee economy and rewards large business for its avoidance
  • Variable rates of tax would create massive gaming / arbitrage / avoidance opportunity

• 3c. Should the Government consider other forms of taxation (such as the proposals of the 2020 Tax Commission) when considering how to raise tax in the future, particularly from businesses and wealthy individuals?

• The 2020 Tax Commission provides enormous opportunity for tax avoidance
• All profits retained in companies would be untaxed
• All capital would be untaxed
• This is not a serious tax proposal
• This is a serious tax avoidance proposal intended to
  • Undermine the state
  • Shift all tax onto ordinary people
  • Increase income and wealth inequality
• The alternative might be the suggestions I made in The Joy of Tax

• 3d. Is there a case for a wholesale review of capital taxation?

• There is a case for reviewing capital taxation

• Corporation tax

• Large company rates need to increase: there is no sign that low rates are delivering growth
• A unitary base is needed for multinational companies
  • Group profit must be apportioned to states on the basis of where their customers, staff and tangible (but not intangible) assets are located. Extraction should be an added overweighted variable for companies in that sector
  • In principle a 1/3: 1/3: 1/3 ratio should be applied unless powerful evidence to the contrary can be supplied
• Loopholes need to be eliminated e.g, R & D relief and be replaced with a proper industrial policy and grants
• Capital allowances should be simplified and be on a straight line basis
• Interest relief should not be allowed unless to a recognised bank. All other interest should be subject to tax withholding at source
• Dividends should be subject to tax withholding at source
• Payments of 'charges on income' (royalties and similar payments) should be subject to tax withholding at source
• Small companies need to be taxed on a look through basis with tax withheld at source at basic rate on profits made. Relief for non-distributed profits should be available but only if it can be shown that the company is not retaining cash
• All companies should be required to file full accounts on public record: it is the price of limited liability
• Companies not filing accounts, tax returns or paying tax should be stripped of limited liability unless the directors and shareholders can prove this resulted from action beyond their control

• Investment income and rents 

• Should be subject to an investment income surcharge so that overall rates paid are akin to those on labour. Pensioners earnings below national average wage would be exempt

• Wealth 

• Inheritance tax should be abolished
• An annual wealth tax is needed and is now viable because of automatic information exchange
  • Undeclared assets should be forfeit to the state
  • Undervalued assets must be subject to potential sale to the state at the undervalued sum
• Capital gains should be charged on death

• Capital gains

• Should be charged at income tax rates
• Should be charged on domestic homes, but this would need to be phased in over a decade or more
• Agricultural property relief should be abolished
• Entrepreneur's relief should be substantially curtailed: there is no evidence that giving tax relief on sale of a business encourages risk taking. It may do the reverse

• Stamp duty

• On sale of domestic property should be abolished
• On shares and other securities should be replaced by a Tobin Tax to encourage long term asset ownership

• 4a. Have the recent initiatives (GAAR, the accelerated payments regime and notifications under the Disclosure of Tax Avoidance Schemes) been effective in tackling avoidance?

• There is no evidence the GAAR has so far achieved anything. I sat in the committee that wrote it and felt the aim was to produce legislation that would never be used, and that is what has happened. In that case the deterrent effect appears to be minimal. We need a proper general anti-avoidance principle that HMRC can use without consulting with the tax profession if we are to get any progress on this issue.
• The accelerated payments regime would appear to have been effective.
• DOTAS would appear to have been a great success: there has been an enormous decline in the marketing of manufactured tax avoidance schemes since it was introduced.
• Labour's announcement of back dated measures to tackle PAYE abuse (the Primarolo Principle) also appears to have been very effective.
• Measures taken against tax havens - especially increasing moves towards automatic information exchange - have been beneficial in tackling tax evasion

• 4b. To what extent will projects such as the OECD's Base Erosion and Profit Shifting (BEPS) project and common reporting standards help in tax collection?

• BEPS is a sticking plaster on a tax system that no longer works. If you base international tax on a fiction that all companies are independent of each other when very large numbers are related then you end up with a make believe tax system that gives rise to fantastical tax charges, as we have seen. BEPS remains committed to this fiction and as such can never work.
• Common reporting standards tackle tax evasion, in the main. They are a major step forward but it is vital that steps are taken to really identify the beneficial owner of companies and property in tax havens or they will be neutered by lack of any useful available information. The risk of this is high. There is also a risk that some valuable steps taken recently in the European Savings Tax Directive may be lost in the move to OECD standards.

• 4c. What further international cooperation is required?

• In very many respects the EU has been the most effective international organisation tackling tax abuse through:
  • The EU Code of Conduct on Business Taxarion
  • The EU Savings Tax Directive that pioneered automatic information exchange
  • Administrative cooperation
  • The drive from the EU Parliament for country-by-country reporting
  • The delivery of the first data on CBC e.g. CRD IV
• We should co-operate much more closely with the EU now on
  • On the Common Consolidated Corporate Tax Base
  • On required changes to accounting standards to deliver full country-by-country reporting
  • On beneficial ownership disclosure
  • On enhanced information exchange
  • On delivery of consistent anti-avoidance measures, including enhanced GAARs
  • On an enhanced Code of Conduct for Business Taxation
• We must engage developing countries in these issues. It is wholly inappropriate that they have been largely excluded to date
  • This requires engagement with these countries via the United Nations Tax Committee

• 4d. March 2015 Budget contained a challenge for the tax professional bodies to take a greater lead in setting and enforcing clear standards around the facilitation and promotion of avoidance. Is that likely to succeed in encouraging more responsible behaviour from tax advisers? Do tax advisers need to be regulated?

• The professional institutes have not covered themselves in glory during the era of concern on tax avoidance. There have been far too many excuses offered, far too much opposition to accounting reform, far too much support for tax havens and a complete lack of willing to penalise members.
• There is no indication of any change in temperament amongst too many professionals (and especially solicitors and barristers who come in for special criticism in this regard) to believe any change is likely.
• The regulation of tax professionals and the enforcement of rigorous standards is another task for an Office for Tax Responsibility

• 4e. What, if anything, should be done to maintain or improve a culture of compliance or a sense of tax morality among the full range of taxpayers?

• Three steps are essential
• First corporation tax reform is essential, not because of the sums involved because of the symbolism of international tax abuse, which is akin to the MP's expenses scandal in this regard
• Second, HMRC has yo be reformed. It cannot be run by a board drawn from big business when there is no confidence in their willingness o pay tax. A top down root and branch reform is needed.
• Third, the tax gap has to be properly assessed and tackled: there is no chance of progress when far too many small businesses know they are competing with businesses who will never pay tax

• 5a. Has the merger of the Inland Revenue and Customs and Excise been a success, and have there been too many subsequent reorganisations within HMRC?

• The merger has been a massive mistake because
  • Of the mock MNC corporate structure adopted
  • The undue influence of big business
  • The promotion to senior positions of people with no knowledge of tax
  • The revolving doors that too many employees have enjoyed
  • The failure to take the tax gap seriously as a result, a culture of sufficiency akin to a monopolists be puniness strategy being the prevailing culture at the top of the organisation

• 5b. Are the Treasury's and HMRC's plans for "Making Tax Digital" (as set out in the "roadmap" published on 14 December 2015) adequately designed and acceptable? 

• It is almost impossible to think how any competent Board could have thought up this strategy
• The demand for four tax submissions a year from business, with likely very heavy penalties attached, is going to breed massive resentment, create serious risk that HMRC will massively misestimate the true income of taxpayers, and encourage a serious risk in tax evasion
• The digitisation of personal tax is exactly not what people want: they want and deserve a person on the end of the phone who knows what they are talking about
• The process is linked to the withdrawal of HMRC from the society it serves: this is the breakdown of its social contract
• The policy reveals an organisation that has wholly lost touch with the essence of its purpose of servicing society to help achieve society's objectives.
• This policy is utterly unacceptable

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