Baroness Neville-Rolfe (Con)
My Lords, I begin by congratulating my noble friend Lady Coffey on her excellent speech. I eagerly look forward to working with her and taking advantage of both her ministerial and business experience. It is not every day that one speaks after a former Deputy Prime Minister, and I share her love of culture, racing and music. I was pleased to hear her refer to our own noble friend Lady Stedman-Scott and to her time at the DWP, where I undertook a review of the state pension age, which, at the time, was quite widely welcomed. I always wondered who was behind that amusing judgment on Jaffa cakes—now we all know.
I also agree with my noble friend that where companies are headquartered is very important. In my own experience, there are pluses, such as R&D centres and community outreach, which are usually lost when companies move abroad. We need a Government who promote investor confidence and certainty, as my noble friend explained, in order to keep our innovative companies in the UK and attract new ones.
As the noble Baroness, Lady Kramer, did, I thank the noble Lord, Lord Sikka, for initiating this debate. He and I sometimes agree on what the Government are doing wrong, although our philosophies are different. He has set out a coherent set of principles from a left-wing perspective. I think differently, not least because I believe in the importance of the private sector and innovative companies in driving growth, but that does not detract from his consistency and persistence.
For decades, some multinational corporations have funnelled billions of pounds in profits to minimise tax, especially to lower their exposure to corporation tax. This is achieved by various methods. For example, a company may sell intellectual property to a subsidiary in a low-tax country and pay the subsidiary for the use of that intellectual property, or goods and services may be traded between subsidiaries at manipulated prices to allocate profits to the tax haven entity. We have heard examples from the noble Viscount, Lord Hanworth, including the reports this week about the arrangements for the Abramovich yachts. What is the Government’s attitude to that arrangement? That said, it is imperative that businesses and their capital should be able to move freely so that there is international investment and the benefits of comparative advantage are realised.
The previous Government made significant progress in tackling the transfer of businesses’ profits to low-tax and no-tax locations. We constantly stressed our commitment to combating tax avoidance and pledged to raise an additional £6 billion annually. In 2018, we announced a digital services tax to ensure that digital businesses paid tax that reflected the value they derived from UK users, as an interim measure, pending an international agreement to reform the corporate tax framework. I supported it in this House, drawing on my own experience in the retail sector, where the tech giants held an unfair advantage because they did not pay much VAT and had much lower business rates. That reality has not changed. The noble Baroness, Lady Kramer, said that it was the sector of most concern to her.
Then, in 2022, as we have already heard, we confirmed that we would implement the OECD pillar 2 rules for a global minimum corporate tax rate, for accounting periods beginning after 2023. Pillar 2 applies a “global minimum tax” of 15% to the profits of multinational groups whose revenue exceeds €750 million per year. Provision to this effect was included in the Finance Act 2023 and further provisions were included in the Finance Bill 2023-24. As a result, the OBR estimated that the implementation of these reforms could raise £2.8 billion in 2028-29.
Due largely to measures taken by the previous Government, as my noble friend Lord Leigh of Hurley said, the UK has one of the most robust anti-base erosion and profit shifting regimes in the world.
That was the position until very recently. But the US has always been unenthusiastic about this whole process and this attitude is most marked in the Republican Party. The US has very recently withdrawn from the OECD deal in full. This is explosive stuff. US firms are some of the most prominent among those whose activities have caused the problems to which I have referred. The US announcement upends all plans and expectations. There are strong hints that UK interests might be adversely affected as a consequence. For example, our digital services tax and the undertaxed profits rule might be in the present Administration’s sights. The Minister may be able to confirm the sums involved. As I understand it, DST was forecast by the NAO in 2022 to raise £862 million by 2024-25. UTPR is only just beginning to take effect but is due to raise £550 million by 2029-30, according to the HMRC policy paper of last October on multinational top-up tax.
In short, the path along which we were proceeding now looks to be full of problems. An alternative to sticking to these taxes is the risk of costly tariffs if an accommodation cannot be found with the Trump Administration; in other words, the world has changed and we need to reflect how best to respond to this change. What is the Government’s assessment of all this—including my noble friend Lord Leigh’s question about the impact of the future lack of information sharing? How will they respond and, most importantly, how will they protect UK interests? I look forward to hearing the Minister’s thoughts on this extremely important issue.
The disadvantages of corporations shifting profits to low-tax or non-tax jurisdictions are well known; there is no need for me to go on about them, except to say that they represent a serious problem for UK economic interests. These disadvantages apply whatever the US Administration might do, but we now need a fundamental rethink about how we can best deal with these disadvantages in the world as it now is and tackle the problems that we jointly see.
My noble friend Lord Leigh of Hurley has come forward with various alternative proposals on VAT and its enforcement. In 2021, the Conservative Government introduced changes to limit profit shifting, from which the OBR then scored substantial revenue. If there is good reason to believe that these have not been as effective as they should have been, as my noble friend suggested, I would encourage Ministers to look at them again. I believe that his points merit serious consideration.
I had intended to end by outlining how the Government’s recent actions have damaged the economy. It remains true that, by talking the economy down, making large increases in employment taxes and crushing companies under new employment regulations, the Government are making fundamentally wrong and anti-growth choices. The consequence is a flat economy killed stone dead by the Budget—even Tesco followed Sainsbury’s with job cuts this week—and a potentially chilling effect on investment from overseas.
Yet these actions—foolish as they were—are only marginally relevant to today’s subject. It is well-run businesses in a thriving public sector that create jobs and wealth. They rely on the Government of the day to deal with the complexities of international tax and negotiate arrangements that are effective and fair to UK plc. The Trump challenge on tax is serious and I look forward to hearing how the Government plan to address it.
The Financial Secretary to the Treasury (Lord Livermore) (Lab)
My Lords, I congratulate the noble Lord, Lord Sikka, on securing this debate, and thank all noble Lords for their contributions. I also take this opportunity to join others in congratulating the noble Baroness, Lady Coffey, on her maiden speech and welcoming her to your Lordships’ House.
I will seek to set out the work that the Government are doing to uphold internationally agreed principles of fair tax competition and protect the UK against profit shifting by multinational companies. If there are any specific questions raised during the debate that I am unable to answer now, I will happily write to noble Lords.
I start by underlining our commitment to growth—the number one mission of this Government—and how the corporate tax system can help deliver this mission. As the noble Baroness, Lady Neville-Rolfe, mentioned, we had to take some difficult decisions in the Budget last year to restore stability to the public finances. These were not decisions that we wanted to take, but they were necessary to clear up the mess we inherited. We recognise that this has impacted some businesses and has had impacts beyond business, too.
However, in last year’s Budget we also published a corporate tax road map to provide the best possible conditions for incentivising business investment, which is the lifeblood of a growing economy. That road map caps corporation tax at 25% for the duration of this Parliament—the lowest rate in the G7. It maintains our world-leading capital allowances system, including permanent full expensing, and the £1 million annual investment allowance. As a result of permanent full expensing, the independent OBR has forecast that business investment will increase by an extra £3 billion each year. Permanent full expensing solidifies the UK’s position at the top of the rankings of OECD countries’ plant and machinery capital allowances and among the most competitive capital allowances in the world.
The corporate tax road map also maintains generous R&D tax reliefs that will support an estimated £56 billion of business R&D expenditure. It is a road map to provide predictability, stability and certainty to business and investors from around the globe, while generating the revenue needed to invest in Britain. It comes after several years of cliff edges in investment allowances and multiple changes in rate policy, all of which have undermined global confidence in our corporate tax system. Despite the difficult fiscal position, our capital gains tax rate also remains internationally competitive and the current top rate is lower than it was between 2010 and 2016.
The Government’s objective is to maintain an internationally competitive tax system, where businesses pay their fair share of tax in the UK. As noble Lords know, under the current international framework, taxing rights are generally allocated to countries based on where the physical activities of a given business are undertaken. However, businesses rely increasingly on remote business models that allow companies to operate in and make considerable revenue from a market without a physical presence there. This is particularly true of firms providing digital services.
Added to this, business models are increasingly complex and globalised in nature, with businesses often operating in a number of jurisdictions. Intangible assets, such as intellectual property, can also be transferred to low-tax or no-tax jurisdictions more easily than physical goods. These changes are improving competitiveness and dynamism in the global economy, but we now need to ensure that our tax system, much of which dates back over a century, adapts to this changed environment.
According to the OECD, lost global tax revenues now total $100 billion to $240 billion annually—equivalent to between 4% and 10% of global corporation income tax revenues. This is why the Government are committed to addressing unfairness in the international tax system and protecting the UK against base erosion and profit shifting, where it exists.
We have a range of different measures in the UK tax code to ensure that this is the case. For example, measures on transfer pricing ensure that companies do not manipulate prices between related parties for tax reasons. Controlled foreign company rules, which the noble Lord, Lord Leigh of Hurley, mentioned, prevent multinationals shifting profits to low-tax jurisdictions using controlled foreign subsidiaries. Our anti-hybrid rules tackle tax avoidance strategies that exploit differences in the tax treatment of financial instruments or entities across jurisdictions, and our corporate interest restriction rules limit the amount of interest expense that a UK company can deduct from its taxable profits. HMRC conducts rigorous in-depth inquiries to ensure that multinational companies comply with these rules, and it also works closely with international partners to gather intelligence and tackle serious and deliberate non-compliance.
Profit shifting and base erosion is a global issue by its very nature, which is why the UK has supported efforts to strengthen the international tax framework. The most significant of these is the OECD’s inclusive framework on base erosion and profit shifting project, as explained by the noble Baronesses, Lady Coffey and Lady Kramer, and my noble friend Lord Sikka. As other noble Lords have set out, this framework is the result of over 135 countries and jurisdictions working together, and comprises two pillars.
Pillar 1 looks to provide for a more stable and certain international tax system by addressing the issue I raised previously; namely, updating the system of international taxing rights to reflect the digitised nature of the economy. Under plans currently being discussed, a new system would be introduced whereby certain taxing rights are reallocated to market jurisdictions, as opposed to where the company is based.
The noble Lord, Lord Leigh of Hurley, asked about the Government’s position on pillar 1 and the digital services tax. The Government continue to support an agreement on pillar 1 and, as a temporary measure, the UK’s digital services tax currently applies a 2% levy on providers of search engines, social media platforms and online marketplaces, reflecting their UK activities. We look forward to working with the new US Administration to understand their concerns around the digital services tax and consider how these can be addressed in a way that preserves the policy objectives.
The noble Lord also asked about the VAT paid by online retailers. To summarise, as the noble Baroness, Lady Neville-Rolfe, set out, since 2021, overseas retailers are requested to register for VAT on supplies of low-value imports below £135. Where an overseas seller sells goods via an online marketplace, the marketplace is liable for VAT on goods of any value. The OBR continues to estimate that this will raise £1.8 billion by 2026-27.
Pillar 2 of the OECD inclusive framework reforms, also known as the global minimum tax, is already an internationally agreed common approach. It creates fair conditions for attracting inward investment, while protecting countries’ tax bases from large multinationals shifting their profits to low-tax jurisdictions. It does this by requiring multinationals that generate annual revenues of more than €750 million to pay an effective tax rate of 15% on their profits in every jurisdiction where they operate. Where their effective tax rate falls below this, these companies will pay a top-up tax. This effectively imposes a floor on tax competition between jurisdictions.
As the noble Baroness, Lady Kramer, said, the Government are currently legislating for the final part of the pillar 2 agreement through the Finance Bill. The undertaxed profits rule will ensure that firms cannot evade their responsibilities under the global minimum tax.
The pillar 2 agreement is historic in its scope and reach and has been implemented, or is in the process of being implemented, by the UK, all EU member states, Canada, Australia, Japan, New Zealand, South Korea and others. The UK is forecast to raise more than £15 billion over the next six years from pillar 2 to support our public services and help grow the economy.
My noble friend Lord Sikka and the noble Baronesses, Lady Kramer and Lady Neville-Rolfe, asked about executive orders relating to pillar 2. While I know that they would not expect me to give a running commentary on every executive order or decision made by President Trump and his Administration, the UK will of course be open to discussing concerns and ways to alleviate these in a way that upholds the policy aims of pillar 2. To reiterate—here I agree with the noble Baroness, Lady Kramer—this is an international agreement signed by over 135 countries after many years of detailed negotiation. We believe it represents a fair approach to how countries compete for cross-border investment.
The UK operates a comprehensive network of tax treaties to ensure the correct allocation of taxing rights between jurisdictions. Alongside pillars 1 and 2 of the OECD scheme, we participate in a range of other tax transparency arrangements to protect the UK tax base. These include the country-by-country reporting arrangements, which require large companies to provide a detailed report of their income, taxes paid and other financial activities on a country-by-country basis.
We have committed to implementing the crypto asset reporting framework to facilitate the automatic exchange of information on ownership and transactions in crypto assets. The UK is leading international efforts to co-ordinate transparency and the exchange of beneficial ownership, including through registers.
The noble Baroness, Lady Kramer, touched briefly on the Crown dependencies and overseas territories. I recognise that that is a much longer debate but I will briefly say this. The elected Governments of the Crown dependencies and inhabited overseas territories are responsible for many fiscal matters, including tax. They are committed to upholding international tax standards. All Crown dependencies and those overseas territories with a financial centre have become members of the OECD/G20 inclusive framework on base erosion and profit shifting. They have implemented the common reporting standard, and they all meet the standard necessary for the exchange of information on request.
My noble friend Lord Sikka and the noble Baroness, Lady Kramer, asked about country-by-country reporting. As I have said, the Government are a strong supporter of greater tax transparency and efforts to ensure that multinational groups are appropriately taxed in the jurisdictions in which they operate. While public country-by-country reporting could have a role to play in supporting those objectives, the Government believe it is important that any action be co-ordinated at the international level to ensure that it is comprehensive and consistent and avoids competitive distortion.
The arrangements I have already set out sit alongside the steps this Government took at the Budget last year to protect the UK tax base and close the tax gap, which is the difference between the amount of tax owed and the amount that is collected. The measures in last year’s Budget represent the most ambitious package ever to close the tax gap, making sure that everyone who should be paying their tax is doing so. Overall, the package is expected to raise £6.5 billion in additional tax revenue per year by 2029-30. We will achieve that by investing £1.9 billion in HMRC staff and modernised IT systems, including recruiting an additional 5,000 compliance staff. This includes additional resources for HMRC transfer pricing specialists, focused on preventing multinational profits shifting.
I will briefly address the question asked by my noble friend Lord Davies of Brixton and the noble Baroness, Lady Kramer. Our plans include new proposals to close the offshore corporate tax gap. We will consult on lowering the thresholds for exemption from transfer pricing for medium-sized businesses to align with international peers, and we will seek views on introducing a requirement for businesses in scope of transfer pricing rules to report cross-border-related party transactions to HMRC.
My noble friend Lord Sikka questioned the size of the tax gap. The Government have set out data for the domestic tax gap, which has been published online, as well as initial statistics on individuals with undisclosed foreign income. We will continue to be led by this data, and we remain committed to closing the tax gap, both domestic and offshore.
This Government support fair global rules on tax competition which protect the UK against profit shifting and base erosion. Through the action we are taking domestically and through international bodies, including the OECD, we are ensuring that these rules keep pace with the changing nature of global trade and the development of digital technology. In doing so, we are being guided by our number one mission: higher and more inclusive economic growth. That growth must be underpinned by fairness in the global tax arrangements, which is at the heart of our approach, and it must be delivered through a competitive domestic tax regime, which is precisely what our world-leading corporate tax road map will help to achieve.
Lord Leigh of Hurley (Con)
Before the Minister sits down—admirably well within his time—I think his answer in respect of my VAT point relates to NETPs, non-established taxpayers, rather than taxpayers who falsely claim to be in the UK. I invite him to consider that particular point further, because I believe it will raise billions of pounds for HMRC if that loophole is addressed. Secondly, he very elegantly sidestepped the issue of the digital services tax. Again, while the Government are in negotiations with the US, which could stretch on for years, there is an opportunity in the meantime for us to have a look to see what extra revenue we can raise through digital services tax.
Lord Livermore (Lab)
I have set out as much as I am able to at the moment on the noble Lord’s latter point on the digital services tax, but I will happily raise his point on VAT with my colleague the Exchequer Secretary. We will write to the noble Lord on anything that we can usefully add.