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Banking: Tax Avoidance

Volume 709: debated on Tuesday 24 March 2009


Asked By

To ask Her Majesty’s Government what plans they have to legislate on tax avoidance schemes used by banks.

My Lords, since 1997, the Government and HM Revenue and Customs have moved quickly and effectively to tackle tax avoidance in all its forms. Avoidance is not illegal; it aims to reduce tax in ways that may go beyond the spirit but not the letter of the law. The Chancellor has announced a code of practice on taxation for the banking sector so that banks will comply with not just the letter but the spirit of the law.

My Lords, I thank the Minister for that reply. Does he agree that it is crucial to maintain the distinction between tax evasion, which is illegal, and tax avoidance, which is not? If it is the Government’s view that some tax avoidance schemes are objectionable, does he agree that the right course of action is for them to legislate to make them illegal? Introducing a non-statutory code of practice, as the Chancellor of the Exchequer is now suggesting, blurs the crucial distinction between evasion and avoidance and puts company directors, trustees and others in a vulnerable position in the light of the fact that they may not be fulfilling their duties.

My Lords, I agree with the noble Lord that there is a clear distinction between tax evasion and tax avoidance. The authorities pursue with rigour and vigour any examples of tax evasion. Since 2004, we have introduced a system whereby those who are contemplating creative tax strategies or the marketing of those strategies are encouraged to pre-discuss those with HMRC. We have found considerable willingness on behalf of the financial services community to do that. As a consequence, we have stopped tax avoidance strategies that otherwise would have cost the Revenue approximately £11 billion. That is at the heart of ensuring that we respect the spirit of the intent of law and Parliament while recognising that a creative accounting and financial services industry will always explore ways in which it can push against the boundary. The new code, which we are in the course of discussing with banks, appears to be well received by them. They are finding it a good basis on which they can be guided on their future tax planning and tax marketing.

My Lords, I declare a past interest in advising clients, although not banks, on the avoidance of tax—I would have lost most of them if I had not advised them of how best to avoid tax. We know the difference between avoidance and evasion: it is the thickness of a prison wall. But on the question of avoidance, although I welcome the potential international agreement at the G20 on opening-up tax havens and getting rid of the secrecy, does my noble friend accept that that is not the whole answer? At the end of the day, will there not have to be legislation to deal with the whole question of major tax avoidance, whether by banks or anyone else?

My Lords, I thank my noble friend for his questions, which are always well informed. The simple fact is that no single jurisdiction can itself stamp out tax avoidance because there is, as the Prime Minister would say, a race to the bottom in terms of moving business to other jurisdictions through double-dip arrangements and transfer pricing. There needs to be international co-ordination. Over recent months, through the work of the OECD and in the G20 Finance Ministers and central bank governors’ meeting 10 days ago, we have seen a real enthusiasm to get to grips with this issue. There is already evidence in steps that have been announced by jurisdictions as different as Hong Kong, Singapore, Liechtenstein and Andorra to break down some of the previous tax avoidance structures, which were creating such a problem for developed nations.

My Lords, will the Minister assuage the anxiety of many Peers that when it comes to the business of drawing up legislation on tax avoidance and tax havens there are sufficient senior civil servants who are aware of the cover-ups and duplicity in setting up tax havens in faraway islands and inviting the British taxpayer to invest in them? Will he ensure that there is knowledge not only in the Civil Service but in the Government of the tricks, ruses and deceits in this business, the purpose of which is to defraud the British Treasury?

My Lords, the noble Lord, Lord Baker, will know that if it is a question of defrauding, that is tax evasion. I have already commented on that. This morning I met the permanent secretary for tax of HMRC, who assured me that he was confident he had the resources in terms of numbers, skills and attitude to combat the increasingly creative tax avoidance strategies that are being brought forward by professional firms and banking institutions.

My Lords, will the noble Lord indicate whether he believes that the European Union will speak with one voice on this subject in the forthcoming G20 talks?

My Lords, I think there is considerable reason to believe that there is more unanimity on this issue than there ever has been before.

My Lords, the Minister is something of an expert in tax avoidance strategies, or so we read in the newspapers. Can he help the House and explain the difference between strategies designed to avoid or minimise tax for banks and those, say, for reinsurance companies or fund management companies?

I did not see that question coming, my Lords. I believe that the noble Baroness, Lady Noakes, refers to press reports about my involvement in establishing a reinsurance business in 2002. This business was based in Bermuda, although its principal operating company was in the UK. I am no longer involved with the company, but I am pleased to say that it is capitalised on the New York Stock Exchange at more than $2 billion, it employs 550 people, of whom 350 are in the UK, and since inception it has paid $360 million in tax, the majority of which has been paid in the UK at an effective tax rate of 24 per cent compared with UK tax rates of 28 per cent, which I do not think can really be described as tax avoidance.

My Lords, how is my noble friend going to deal with the millions of pounds that have been received from United States investments that have been granted tax relief on the basis that United States tax has already been paid? In the United States, interest payments already have tax relief and there has been double relief that needs to be dealt with. What is he going to do about that?

My Lords, my noble friend raises a fascinating question about a very complex issue. As I have only one minute to answer, I do not think I can do justice to it. However, the UK was the first major jurisdiction to introduce double-dip taxation legislation, which is designed to frustrate people claiming tax credits in two separate locations for the same liability. We are working with other authorities to tighten up control in this area. I suggest to my noble friend that we can seize the opportunity provided by the UK’s chairing of the G20 meeting next week to take a major step forward in pushing towards a more effective, equitable and fair system of domestic and international taxation.