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KEY POINTS
- David Gauke presents the Hardman memorial lecture.
- The Government wants business to grow.
- More corporation tax reform to come soon.
- Tax law must be unambiguous to deter avoidance.
- Certainty and openness.
- HMRC must balance cuts with reinvestment.
‘My purpose today is to communicate clearly some of the more complex areas of tax’, said David Gauke MP, Exchequer Secretary to the Treasury, in his Philip Hardman memorial lecture for the Tax Faculty of the ICAEW on 16 November 2010.
He said that the Government wanted to ‘make Britain’s tax system an asset to our economy once again, as I know everyone here would wish it to be’.
The first challenge faced by the Government was dealing with Britain’s debts; Mr Gauke said it was ‘humbling to enter the Treasury as a minister for the first time and face a situation where the country is borrowing a pound for every four it spends’.
The second challenge was public acceptability, bearing in mind that ‘by and large, the focus of the general public is not on the broad, intellectual coherence of the tax system but, understandably, on the practical matter of how much they – as an individual or a company – pay’.
Then there was ‘the challenge of time’. Mr Gauke said that in ‘our 24/7 news culture… there’s a constant pressure for immediate announcements and rapid impact’.
He added that, when it comes to tax policy, ‘short-term impact is often in tension with fundamental long-term reform’.
The final challenge was trying to balance genuine and open consultation with the desire for certainty.
The minister went on to say that he was attracted to Nigel Lawson’s 1988 Budget, in which the then Chancellor aimed to:
- reduce tax rates where they were too high;
- abolish unwarranted breaks and exemptions;
- make life simpler for the taxpayer; and
- remove injustices from the system.
Mr Gauke said there were five key areas that had to be considered:
- The Government’s approach to corporation tax.
- Creating a simpler tax system.
- Dealing with evasion and reducing tax avoidance.
- Improving the quality of tax law.
- The impact of the spending review on HMRC.
Tax reform
‘We are a pro-business, pro-growth Government’, said Mr Gauke. Furthermore, the world is increasingly a global marketplace, so it was essential ‘to look at new ways to attract business from abroad’.
The tax system plays an important role in this regard, which is why the rate of corporation tax is being reduced to 27% in the 2010/11, to be followed by a 1% reduction in each of the subsequent three years. This would ‘be the lowest rate of any major western economy, one of the most competitive rates in the G20, and the lowest rate this country has ever seen’.
He then moved on to the tax treatment of overseas subsidiaries, and referred to two recently published consultations on interim improvements to the controlled foreign company (CFC) rules and the tax treatment of foreign branches.
He added that the reform of the CFC regime would be completed in Finance Bill 2012.
Asking for patience, so that the Treasury could produce ‘thoroughly worked up proposals that don’t create uncertainty’, Mr Gauke said it was the Government’s ‘intention to adopt a more territorial approach to taxation, one that properly reflects the times we live in and how businesses now operate’.
Further details on these reforms were planned for the end of November.
With regard to tax simplification, Mr Gauke talked principally about the Office of Tax Simplification (OTS). He referred to the list of reliefs and exemptions which it had already published, but added that while it was important to improve UK tax law, it was necessary to ‘to watch the flow of new measures’. It should not be possible to ‘use the tax system to distort choices or try to manage business investment decisions’.
Overall, he said it was the Government’s ‘preference to have fewer reliefs, but lower headline rates, in order to create a simpler, flatter system of taxation’.
Evasion and avoidance
Mr Gauke noted that ‘people in this audience get frustrated when they hear politicians apparently conflate tax planning, tax avoidance, and tax evasion’. He assured everyone that he and his Treasury colleagues knew the difference and recognised that ‘the law legitimately gives scope for tax planning’.
However, he said no quarter would be given ‘to those who squarely break the rules and evade their responsibilities as taxpayers’.
He reminded the audience that the Government was investing £900 million in the Revenue, ‘to tackle criminal behaviour and evasion’, but that it also wanted ‘to improve HMRC’s operational capacity to identify and discourage tax avoidance’.
He realised that Parliament’s intentions were sometimes ‘ambiguous, and that it is not always possible to divine the spirit of the law’, and felt that better tax policy making would be a help.
However, Mr Gauke said further that it was often ‘perfectly clear what the law intends, where reliefs and exemptions are then used in a highly artificial way’, which he said the public did not see as fair.
Equally, tackling avoidance had to be done in a way that does not ‘undermine certainty for business’ and this was one reason why HMRC’s large business service was being extended to more firms.
He also mentioned the banks, saying it was ‘only right’ that they made ‘a full and fair contribution’ and the bank levy would be effective in doing this.
Tax law
Mr Gauke said the Government intended to put predictability and stability first with a framework for making tax policy that is:
- ‘Not haphazard but predictable – based upon a clear strategy that produces greater certainty about the future.
- ‘Not disorderly but stable – focusing on fewer, better developed proposals; getting legislation right the first time round through proper consultation and allowing time for better scrutiny.
- ‘Not opaque but transparent – explaining our rationale, sharing our analysis and our assumptions.’
He said that the Government was keen to ‘involve tax professionals in the decision-making’ because from their experience, they could see ‘the frailties of our current tax system, and have ideas for reforming the processes that guide Government decision-making’.
Following the recent publication of the discussion document Tax policy making: a new approach, Mr Gauke said the Government had met more than 40 representative bodies and tax practitioners and would be ‘looking at all the advice we’ve received, and considering how it can help inform our approach to making tax policy in the future’. This would not be a ‘one off exercise’.
HMRC
Finally, Mr Gauke looked at what the spending review meant for HMRC. At meetings with senior HMRC staff, he had asked them to find ways to make savings, but ‘the emphasis was never on making cuts at any price’.
The Government wants to improve the tax system and recognises that investment is needed for this.
Additionally, the Revenue has a dual role ‘in paying down the deficit. Not just through savings, but also through increasing revenues’ which was why he was pleased that his ‘ministerial colleagues agreed to reinvest £900 million of savings to tackle avoidance, evasion, fraud and criminal activity’.
He realised that many were sceptical that HMRC would be able to make the savings required at the same time as improving services, but he believed ‘the plan was deliverable’.
Mr Gauke concluded that the Government had already made ‘tough choices – but these have been the right decisions for the longer term’.
Overall he wanted the audience to tell clients that ‘this Government “gets it”, that we know what we’re doing and have the interests of business at heart’.
Over to the audience
The trouble with tax law is that it is not clear, said David Harris, barrister.
Furthermore, it does not necessarily mean what HMRC say that it means in their manuals. He also took issue with David Gauke’s lumping ‘avoidance’ together with ‘evasion and criminal activity’.
In reply, the minister said he accepted the difference between avoidance and evasion, but the tax law needed to be developed so it is clear and explicit. One result of high tax rates and complexity was that it encouraged avoidance; the hope was that reducing rates and simplifying the system should also help cut avoidance.
Rebecca Benneyworth suggested that simplicity and fairness in tax are mutually exclusive. The minister disagreed, saying that a complex system meant that only those who can afford advisers can get around it. That was not fair.
Michael Sherry, barrister, referred to the general anti-avoidance rule (GAAR) that was being touted, wondering how this would work. He mentioned that various targeted anti-avoidance rules (TAARs) had been put in place since a GAAR was previously mooted some years ago, but it remained difficult to see where the boundaries lay.
Mr Gauke said there was a range of views on the desirability of a GAAR, and that it was under consideration. However, a GAAR raised questions, for example the effect of clearance rules and whether or not it would provide certainty.
With regard to the Office of Tax Simplification, ACCA’s Chas Roy-Chowdhury asked whether it should be made autonomous. Mr Gauke replied that tax decisions had to be made by elected MPs, but passed the question over to John Whiting, who heads the OTS.
He said the body had to come up with recommendations that ministers would accept and the brief was to be revenue neutral.
Taxation editor Mike Truman asked about HMRC levels of service, in particular what would be a reasonable period for the department to deal with post properly.
As Mike mentioned in his article The red spot, the minister declined to provide an answer but instead said that it should be made easier for taxpayers to get things right first time, without having to contact the Revenue.
The next questioner, Ian Young of the ICAEW Tax Faculty, asked about the minister’s attitude towards co-ordination of taxes within the EU, in particular corporation tax.
Mr Gauke said that while there was scope for co-ordination in relation to evasion, the UK would not be a ‘full-time participant’ in a consolidated tax base.
Finally, Chris Sanger wrapped up questions, asking how the Government would evaluate the competitiveness of the UK’s corporation tax system within the G20.
Mr Gauke said that some matters still had to be addressed, e.g. the CFC regime, but the system would be shown to be competitive ultimately by inward investment from overseas.
Same as the old boss?
The problem is that we have heard these comments, or ones very like them, before. While the changes to corporation tax indicate a clearer sense of direction, the real test will come after the Office of Tax Simplification reports on small business taxation.
Choices will have to be made about whether to create a system that applies a similar rate of tax regardless of the business vehicle that is being used.
That is likely to result in higher tax bills for some, and even to lead (as Rebecca Benneyworth implied in her question) to a trade-off between simplicity and fairness.
Meanwhile, trying to raise enough tax to narrow the deficit is quite enough to keep the Government busy. The problems come when Treasury ministers have too little to do, and can be seduced by the latest fad to change the tax system. It is good to see a promise of stability; it will be even better if it is adhered to.
