The Blog

We Don't Have to Wait for International Action to Tackle Tax Avoidance

On Monday Ed Balls is expected to deliver a major speech setting out Labour's case on the economy ahead of George Osborne's spending review next month.

On Monday Ed Balls is expected to deliver a major speech setting out Labour's case on the economy ahead of George Osborne's spending review next month.

These two speeches will define the battle lines on the issue which will determine the next election. Labour's task will be to demonstrate that it has a plan to both get the flatlining economy moving again while showing that it will fulfil Ed Miliband's pledge to eliminate the deficit.

With the incomes of most people squeezed by several years in which prices have risen faster than wages, Labour will be especially sensitive to any suggestion that, as it tries to achieve these twin goals, it isn't adding further pressure to family budgets in the form of higher taxes.

So alongside plans to keep spending in check, the party also needs to show that it has an agenda for fair taxation. The building blocks of this are beginning to come into place: a mansion tax to reintroduce the 10p starting rate of tax and a tax on the bankers' bonuses to fund the job guarantee for young people and the long-term unemployed, for instance.

But, as Miliband set out earlier this month, fair taxation is also about ensuring that some wealthy individuals and multinational corporations aren't avoiding paying what they owe. There is, after all, nothing cost-free about tax avoidance: every pound lost to the exchequer this way is one fewer pound to spend on better schools for children or equipment for our military. Or it's another pound of tax that has to be made up from those of us who do play by the rules.

Tax evasion and avoidance have a significant impact on the public finances. HMRC admits to a tax gap of £32bn in 2012. Last year, government wrote off £5bn of tax as being uncollectable, with £10bn more to be written off in future. Such figures underline Margaret Hodge's claim that 'tax avoidance and evasion are endemic among global corporations and wealthy individuals'.

Indeed, as Hodge's sterling work as chair of the public accounts committee has uncovered, the scale of such activities is truly shocking. Last year, for instance, Amazon earned £4bn in sales in the UK, yet paid only £2.4m in corporation tax while claiming £2.5m from the UK government in grants. In 2011 Google's revenue from its UK business was $4bn and its global profits were $9.7bn, but it only paid £6m in corporation tax to the UK government.

The government is right to be concerned about Britain's global competitiveness, and clearly the kind of international action to tackle tax avoidance and evasion it intends to pursue at the G8 this month is vital.

However, international action is not an excuse for inaction at home. It is a myth that cracking down on tax avoidance will cause business to flee the UK: our markets are simply too important for that. As Google's chief executive, Eric Schmidt, himself admitted: 'Google will continue to invest in the UK no matter what you guys do because the UK is just too important for us.' Moreover, ensuring that the competitive rates of corporation tax the UK levies are paid by all businesses is a very different proposition from increasing those rates to levels way above what our competitors charge.

Moreover, as Miliband has suggested, there are measures that we can take at home which don't require international action. Yesterday, Progress launched a Tackle Tax Avoidance charter. It demands the implementation by Osborne now of a series of simple and practical principles and policies to stop this epidemic of tax dodging:

First, transparency: naming and shaming companies and individuals would be a powerful deterrent - many of them care deeply about their reputation in the eyes of consumers, the reason why Starbucks has begun to change its ways - and help challenge the culture of tax avoiders. We could start by opening up the books of FTSE 100 companies.

Second, police the tax system aggressively: HMRC must challenge multinational companies' tax arrangements to ensure they fairly and accurately reflect their economic activity in our country, and mount more prosecutions. We've never taken a single internet company to court to test its interpretation of the law.

Third, ensure we have the right staff with the right skills: HMRC must employ people with experience to keep up with those devising avoidance schemes. Staffing HMRC properly is a brilliant investment: for every £1 spent on staffing we get £9 back in tax.

Fourth, introduce a code of conduct: prevent conflicts of interest so staff from accountancy firms advising government on tax should not devise ways around it. Hodge's public accounts committee has questioned the 'big four' accountancy firms - PwC, KPMG, Ernst and Young and Deloitte. These firms both advise government on tax law and devise ways for companies and individuals to get around it. As she has described, the Treasury recently brought in a 'patent box' tax relief designed to encourage innovation. A tax partner at KPMG was the lead adviser writing the rules for government, and immediately went back to KMPG and marketed the scheme to his wealthy clients as a way to avoid tax

Finally, government should show some leadership: deny public sector contracts to companies engaged in aggressive tax avoidance, while also simplifying the tax code. Business wants simpler taxes and the government claims to, too: so why has the much-vaunted Office of Tax Simplification only got six people working for it?

On Monday evening, Margaret Hodge will join other speakers at a special Progress event examining how government can tackle tax avoidance. You can register here. We've also launched a petition, and are encouraging people to take action now and email George Osborne asking him not only to pursue this agenda at the G8, but to take these immediate steps at home now. You can learn more by visiting our campaign website.

Ed Miliband has rightly recognised that tackling tax avoidance is not only morally right, it's politically potent. In the early skirmishes ahead of the spending review, his pledges to tackle the issue have trumped the government's dissembling.