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Tax Avoidance

March 31, 2015 4:31 PM

We want a tax system that is simple, competitive and fair. The vast majority of people and businesses in the UK pay their taxes on time and in full, but there are always some who try to get away without paying their fair share. This is morally wrong and damages our economy and public finances.

Liberal Democrat Chief Secretary to the Treasury Danny Alexander has made tackling tax avoidance a top priority and has made progress on many of the issues. Since coming into Government in 2010 he has led a crackdown on tax avoidance and evasion that is closing loopholes and making more people pay up.

Liberal Democrats in Government have already made over forty changes to the law to close loopholes and make big strategic changes to the way tax is collected to ensure fewer people slip through the net.

The changes we have made include the introduction of a General Anti-Abuse Rule (GAAR); strengthening the Disclosure of Tax Avoidance Schemes (DOTAS) regime; introducing a tougher monitoring regime and penalties for high-risk promoters of tax avoidance schemes; giving Her Majesty's Revenue and Customs (HMRC) the power to collect disputed tax bills up front (thus removing the incentive for tax avoiders to delay and frustrate HMRC's efforts to settle disputes); and clamping down on Stamp Duty tax avoidance with a new range of measures.

Another big change was to invest almost £1bn in HMRC to tackle tax avoidance, recruiting 2,500 extra members of staff to work on tackling tax avoidance and opening a new Large Business Directorate last year to deal specifically with the tax affairs of the 2,100 largest firms in the UK. Part of their work will be to enforce the new Diverted Profits Tax, which will counter the use of aggressive tax planning methods used by some big firms to divert their profits to areas with very low rates of tax. We hope this tax will yield an extra £1.35bn over the next five years.

We have also worked internationally to tackle tax avoidance and that this was one of the main goals of the UK's presidency of the G8 group of nations. During our presidency, we won G8 agreement on transparency on the real owners of businesses, as well as getting the Organisation for Economic Cooperation and Development (OECD) to develop a country-by-country reporting template for multinationals to report profit and tax information. Over 90 countries are signed up to the new International Comprehensive Report Standards, closing down options for tax cheats, while around £2bn in previously unpaid tax has been brought in from our new agreements with Switzerland and Lichtenstein alone.

Thanks to the steps we have taken, the tax yield for this year will be around £9bn more than when we came into Government in 2010.

Going forward, Liberal Democrats are determined not to let up in the fight against tax cheats. If we are in Government again our aim is to make progress on this agenda in every Budget and Autumn Statement of the next Parliament. We will continue to invest in HMRC, as we have done in Government, to enable them to do more to tackle tax evasion and avoidance. We will also introduce a range of other measures, including a General Anti-Avoidance Rule, which goes much further than the current anti-abuse rule. We will seek to extend the requirement for country-by-country reporting from banks and extractive industries to cover all UK listed companies. The majority of these proposals will be introduced through the annual Finance Bill, allowing us to take regular action throughout the Parliament.

We're introducing a new tax - the diverted profits tax - to crack down on the use of artificial arrangements used by multinational companies to divert profits away from the UK. From April 1 2015, the tax will come into force with a 25% rate. It will be used to counter the aggressive tax planning techniques used by some big global firms to divert profits to areas very low rates of business taxes. We have forecasted that this tax will raise over £1.35 billion up to 2019/20.

In addition, HMRC has set up a Large Business directorate in to deal with the tax affairs of the 2,100 largest businesses in the UK.

The Liberal Democrat economic plans for cutting the UK budget deficit are based on a further £6n from tax dodgers, and an additional £6bn of tax rises. We would ask those in high-value properties and the banking sector to pay more, rather than ask those on low incomes to accept less. Key tax policies include the following:

For Business:

  • No increase in the rate of corporation tax, but focus on SMEs as a priority for business rates tax cuts, and change in the rules on offsetting interest payments.
  • An increase in the banking levy

For Individuals:

  • Increase in the personal allowance to £11k
  • Mansion tax; levy on £2m+ homes
  • Non-doms: Increase in charge

The Organisation for Economic Cooperation and Development's Base Erosion and Profit Shifting (BEPS) have recently released a number of discussion papers as part of the OECD's programme on international tax avoidance. The BEPS team produced a 15-point action plan in 2013:

1. Address the tax challenges of the digital economy
2. Neutralise the effects of hybrid mismatch arrangements
3. Strengthen CFC (controlled foreign companies)rules
4. Limit base erosion via interest deductions other financial payments
5. Counter harmful tax practices more effectively taking into account transparency and substance
6. Prevent treaty abuse
7. Prevent the artificial avoidance of PE (permanent establishment) status
8 to 10. Assure that transfer pricing outcomes are in line with value creation (8: intangibles, 9:risks and capital; 10;other high-risk transactions).
11. Establish methodologies to collect and analyse data on BEPS and the actions to address it.
12. Require taxpayers to disclose their aggressive tax planning arrangements
13. Re-examine transfer pricing documentation
14. Make dispute resolution mechanisms more effective
15. Develop a multilateral instrument.

The OECD believes these 15 actions will result in fundamental changes to international tax standards, based on three core principles; coherence, substance and transparency. The European Union are also similarly developing proposals in the wake if the G20 meeting in Brisbane.

The introduction in the UK of the diverted profits tax has shown that we can take and will take unilateral action in addressing the tax challenges of the digital economy.

Developing countries arguably stand to benefit most from a number of the OECD action points, particularly when it comes to country by country reporting to tax authorities.

Joe Bourke
Brentford and Isleworth Liberal Democrats