I've been\u00a0challenged\u00a0to suggest five steps that could be taken now to tackle tax avoidance, given that the topic is in the news.<\/p>\n
First of all, let's be clear why this issue is important. I estimate tax avoidance\u00a0<\/a>costs\u00a0the UK \u00a325 billion a year. I stress, that's an estimate. That means it's an informed guess - I'm not saying this figure is right.\u00a0What\u00a0we do now\u00a0know though\u00a0is that it is substantially more realistic than the\u00a0government's\u00a0own estimate of \u00a35 billion.<\/a>\u00a0That is why this issue is \u00a0now\u00a0under\u00a0discussion. When George Osborne now admits that \u00a0just 20 taxpayers may be avoiding \u00a3145 million between them \u00a0we know that this issue is of enormous economic consequence.<\/p>\n So, these are my top five ways of tackling tax avoidance, each if them in short summary:<\/p>\n 1. Introduce a proper\u00a0general anti-avoidance rule<\/strong><\/p>\n This is a\u00a0perennial demand of mine and is absolutely essential \u00a0if we are ever going to be tax avoidance.<\/p>\n A\u00a0general anti-avoidance rule \u00a0is essential once we realise that all tax regulation is written and it is an inevitable fact of life that words have uncertain meanings, however \u00a0much we like to deny it and however hard Parliament works to try to define them in taxes acts. \u00a0That means all tax law is open to abuse if the only basis on which it can be interpreted is the strict meaning of words, which cannot be known until a judge has ruled on the issue. \u00a0So, we need a better basis for interpretation and that is to look at the purpose of the law, and the intention of the taxpayer and then decide if the two coincide. \u00a0If they do, then everything is fine. If they don't then quite clearly action needs to be taken.<\/p>\n Now, no one wants a general anti-avoidance rule which gives a tax authority complete right to decide when, if, and how somebody should pay tax. There is obviously massive uncertainty in that as well. \u00a0But thankfully we have a precedent for such a \u00a0general anti-avoidance rule, and it was, curiously, created by the House of Lords. \u00a0In 1982 the House of Lords ruled upon a \u00a0case and \u00a0their resulting decision came to be known as the Ramsey principle. In order for the Ramsay principle to apply, there had to be:<\/p>\n 1) a series of transactions; which are<\/p>\n 2) pre-ordained; and<\/p>\n 3) into which there are inserted steps that have no commercial purpose apart from tax avoidance.<\/p>\n Under Ramsey the artificial step inserted for tax avoidance was ignored when calculating the tax due\u2014 effectively delivering a general anti-avoidance principle.<\/p>\n Unfortunately, the Ramsey principle was largely overturned in a subsequent decision of the House of Lords in 2001, \u00a0and \u00a0that is one reason why tax avoidance has become so rampant in the last decade. \u00a0Now we need it back, and a general anti-avoidance rule that would put it into UK law is now essential.<\/p>\n I stress of the current proposal from the government \u00a0for a general anti-avoidance rules nothing like this at all and I explain why here<\/a>.<\/p>\n 2. Country-by-country reporting<\/strong><\/p>\n A very welcome development over the last few weeks has been the increase in discussion of the impact of transparency upon tax avoidance. \u00a0 \u00a0There seems to be almost universal agreement that most people are embarrassed about \u00a0being found to be tax avoiding. \u00a0As a result there also seems to be near universal agreement that the more information there is on public record about a tax payer's affairs the less chance there is that they will undertake tax avoidance activity.<\/p>\n My estimate of tax avoidance splits into two near equal parts. One half relates to the activities of individuals and the other to the activities of large companies. \u00a0By definition there are many fewer large companies than there are individuals and each of those companies also pays (or should\u00a0usually\u00a0pay) a great deal more tax than any individual, and so also has a great deal more opportunity to tax avoid. As a consequence, demanding transparency from multinational companies who have greatest opportunity to use tax havens \u00a0and their associated arrangements to avoid their tax obligations in the UK is the obvious place to start with a transparency agenda.<\/p>\n Large companies do, of course, have to prepare and publish their accounts, but those accounts do not at present include \u00a0any indication at all of what a multinational company does in each and every country in which it operates. So we have no idea of what its sales are, what its profits are, how many people it employs or at what cost, \u00a0and most importantly of all, of course, how much tax it pays \u00a0in each and every country in which it operates.<\/p>\n Country by country reporting by multinational companies<\/a> would solve this problem. Those companies would then have to publish a profit and\u00a0loss account showing all the above noted information for each and every country in which they operate. As a result we will know precisely what they do in the UK, how much tax they pay here and how much in addition that they don't pay here because we will know how much of their profit is shifted into tax havens.<\/p>\n There is an\u00a0official\u00a0 proposal for a form of country by country reporting before the European Parliament at present, but it \u00a0only relates to the extractive industries. \u00a0This is not therefore something that is now on the fringes of debate. The OECD is looking at it, the International Accounting Standards Board is looking at it and so is the European Union. \u00a0In that case it is time to put pressure on all these bodies to introduce a comprehensive country by country reporting requirement to reduce the tax avoidance activity of multinational corporations to the benefit of this all. \u00a0There is more information on this issue here.<\/a><\/p>\n 3. \u00a0Increasing the number of staff at HM Revenue & Customs<\/strong><\/p>\n A lot of tax avoidance is complicated. It takes time to investigate it, time to assess it, time to react to it \u00a0and time to push through the resulting demand for additional tax due. All that time has to be undertaken by real people, sitting in real offices, doing a real days work on behalf of the UK. They are employed by\u00a0H M Revenue & Customs, \u00a0and yet right now far too many of the people employed by our tax \u00a0authority are facing the risk of redundancy.<\/p>\n I'm well aware that the government says that it is investing up to \u00a3900 million in additional \u00a0funds to tackle tax avoidance but that has to be set \u00a0against the background of \u00a33 billion of total cuts to the budget of HM Revenue & Customs over the life of this Parliament. \u00a0You cannot tackle tax avoidance and cut the resources available to address this issue at the same time. \u00a0As a result it's now essential that we change our attitude towards spending on staff at HM Revenue & Customs and not see them as a cost, but to see them as a revenue generation opportunity, with the people in question being gainfully employed to ensure that there is a level playing field on which all business in the UK operates where no one gets an advantage by tax cheating to give them an unfair benefit in the marketplace. \u00a0There is in this a double\u00a0benefit. We get a more efficient, fairer, competitive and vibrant market and we have more tax paid at the same time. This is a pro-business tax policy for the UK.<\/p>\n 4. \u00a0 Reforming small business taxation<\/strong><\/p>\n One of the first objectives of any tax avoider is to get their income out of their hands, where it might be subject to income tax rates of up to 50% present and \u00a0potentially to national insurance charges as well, and into the hands of another person who will pay tax at a lower rate, possibly with no national insurance\u00a0paid. \u00a0That obvious 'other person' \u00a0 is a limited company, and anyone can form such a company for a tiny outlay of under \u00a3100\u00a0 at this point of time in the UK.<\/p>\n Too often this then means that the income that an individual has earned is artificially diverted into \u00a0making payment to someone else, \u00a0or that income from unemployment that should be subject to national insurance is converted into what looks like investment income paid in the form of dividends to which no national insurance applies. \u00a0We now know that thousands of people are paid in this way by the government each year, and there will be tens, if not hundreds of thousands, of people paid in this way in the private sector each year as well. All of this is tax motivated.<\/p>\n I have no desire to impede small-business because it is in many ways the backbone of our economy. Nor do I want to put an impediment in the way of those businesses that really need to raise capital through a limited company, and to retain profits to reinvest in their enterprise. But let's be clear, that is a small minority of companies these days. The vast majority of small limited companies are owned by just one person, have a share capital of under \u00a310, do not retain profit for investment in the business, and are basically the incorporated persona of their owner\/manager. \u00a0We need to recognise this fact and create appropriate structures for limited liability entities for use in the 21st-century economy when at present we are struggling with the legacy of a structure designed in the 19th century.<\/p>\n