Tax Policy & Controversy Briefing | October 2013
An interview with David Gauke, Exchequer Secretary to Her Majesty's Treasury
Why businesses should see the UK tax system as a positive place for locating and investing.
Chris Sanger: The phrase “open for business” has featured a lot in the last year or so. What does this really mean and how does it work in the UK?
David Gauke: I think the first point to make is that we recognize that we are in a globalization era and that there are options and choices for businesses regarding where they locate their headquarters, their staff, their intellectual property and their manufacturing. A number of factors come into play for that, including infrastructure and skills, but one of the key factors is the tax regime. As a country, we are determined to “win the global race,” to use the Prime Minister’s phrase and we want people to see the UK tax system as a positive reason for locating and investing in the UK as well as bringing jobs to the UK and not a negative reason as it has been at times. We’ve made considerable progress on that front, but what drives us is a desire to attract genuine economic activity into the UK and we have put in place, I believe, a tax regime that is very attractive and consistent with that objective.
Chris Sanger: Looking at the overall tax mix and the last budget forecast, by 2017, less than 6% of total taxes will come from corporate taxes in the UK. This is significantly lower than the average 10% that has been reminiscent of OECD countries. Are you happy over this policy choice because it brings in other taxes?
David Gauke: There is a conscious decision here — a policy decision. Analysis suggests that corporation tax is one of the more damaging taxes. Of course, at the same time as making our tax system more attractive in terms of reducing rates, we want an effective regime. Indeed, we’ve strengthened enforcement and have also been one of the lead voices, if not the lead voice, calling for reform of the international tax architecture to ensure that economic activity is taxed where that activity occurs.
We want to ensure that our tax system is efficient and we’re also conscious of the fact that ultimately it’s always real people who end up paying the tax, whether tax is raised at the company level or in some other way. Corporation tax is ultimately going to be paid by a combination of shareholders, employees, suppliers and customers, and we can have a debate as to what the relevant shares are, but in the end, real people pay these taxes anyway.
Rob Thomas: With regard to the architecture of the international tax system and the UK corporate tax road map, I think you’ve used the words “Government remains committed to interest being relieved as a normal business, irrespective of where the proceeds to the loan are put to use.” When I look around the world, in the last couple of years I see many other countries move in reverse to this. Does that still remain a strong policy focus for you?
David Gauke: We remain committed to the roadmap, and its purpose is to provide certainty and stability. What I’ve said on a number of occasions is that we did look very closely at treating and changing the tax treatment of interest payments. For starters, there isn’t a huge pot of money that some people think there might be, which would enable you to, for example, lower the rate, particularly when you start to look at some of the hard cases and potential detrimental impacts on infrastructure.
Furthermore, any change in this area would involve a great deal of uncertainty and, at this moment, additional uncertainty would not be helpful for the UK as a place to do business. So that’s why we looked long and hard and took the decision to maintain the existing regime for the tax treatment of interest.
Rob Thomas: When the UK’s corporate tax roadmap came out, it was pretty much simultaneous to the new approach to policymaking. Are you happy with the results thus far?
David Gauke: Yes, I think it’s had a number of benefits to the UK. First, I think it fits with the roadmap in terms of stability within the tax system. People know much more than they did in the past on where they stand and where the process is and that’s meant fewer surprises.
Second, I think it’s played into producing better quality tax law. We’ve had some really difficult and challenging areas to address, such as reform of controlled foreign companies (CFC) and the introduction of a patent box, which could easily have gone wrong. I’m not saying that the process has necessarily always been smooth and that everybody is delighted with the end result. In particular, the CFC reforms created a significant challenge, but I think we’ve had a process that has benefitted from the expertise that lies outside the Treasury and HMRC. Of course, concern, but particularly when we are reforming the law to attract more investment and more business, it is important to have a proper understanding of how businesses will respond to that change. I think it has enabled us at a technical level to ensure that the law is as thorough as possible and achieves the objectives that we set out.
Rob Thomas: In terms of achieving those objectives, policy is one side of the coin, whereas the smooth and effective administration of the policy is the other. How much does the administration support the objective? Where do you see themes or concepts in other countries that might work effectively for UK taxpayers?
David Gauke: I’m struck when talking to international businesses in particular about how positive their view of the competence of HMRC is. They recognize that HMRC is tough and wants to ensure that the UK Exchequer gets the revenue that it should, but I’m repeatedly told how HMRC has a better understanding of its business than many other tax authorities and that HMRC understands how business works, how it is easier to get an opinion or a decision out of HMRC than it is from other jurisdictions. When you look at the numbers, you can see that HMRC has been very successful in getting more money out of large businesses in recent years. Given this and the fact that HMRC is also getting positive feedback, it seems to me that the approach HMRC has taken in terms of tax administration is also an asset to our tax system and makes the UK a more attractive location. Businesses know where they stand, earlier.
Rob Thomas: At the heart of this engagement is horizontal monitoring or real-time audit route — the enhanced relationship that the OECD has recently refreshed. We sometimes see this enhanced relationship challenged by other commentators, arguing that tax authorities are going soft. This isn’t our perspective — is it yours?
David Gauke: Sir Andrew Park reviewed a number of large settlements, and his review revealed that the HMRC had achieved reasonable, if not better settlements, for the Exchequer. I think that demonstrates that the approach is working. The facts support this view, given the yield that HMRC is achieving when it comes to large businesses and its effectiveness in making sure that business pays tax that is due. I would stress, of course, that we don’t expect that HMRC get more money out of taxpayers than the law requires. So on both policy development and tax administration, our approach is quite clear. We want to tax economic activity that occurs in the UK in accordance with the law, but we also want to have a system that is competitive and conducive to businesses choosing to invest in the UK and employing people in the UK.
The “fair tax” debate
Chris Sanger: What is your opinion on the discussions we see in the press about certain businesses that have paid no corporation tax, for example due to tax depreciation on heavy investment in infrastructure, the taking up of available incentives and so on. What should they be doing, and what should we all be doing in terms of getting the right message out to the media?
David Gauke: Obviously, I don’t want to get drawn into individual cases, but clearly when government and Parliament determines that there should be incentives for investment, such as in the form of capital allowances, it doesn’t seem to me to be justifiable to criticize a company for making use of those capital allowances. That’s acting in accordance to Parliament’s intentions.
I think there is a challenge for large businesses. Understandably, at a time when benefits are being reduced and taxes are higher than people would like, there is a heightened sense of injustice, if there is a perception that someone is not paying the tax that is due. I think in that environment it’s necessary for businesses to be prepared to communicate and that’s not always easy. Tax is a complex matter, but businesses need to be prepared to go out and explain why they pay the tax they pay and that it simply isn’t reasonable to look at, for example, turnover and then corporation tax payments and reach a conclusion from that. One can see why people jump to particular conclusions, and I think it’s for businesses themselves to do more to explain. If only one side of the argument is heard then people will automatically assume that businesses have reduced their corporation tax payment through some artificial behavior and that’s not necessarily the case.
Rob Thomas: Where do you see that line between center ground of tax planning to access available incentives and unacceptable structuring?
David Gauke: I would focus on where behavior is contrived, where it’s artificial and where it’s not driven by commercial purposes. If a company gets a loan from a parent company because it’s a cheaper rate, then that seems to me to be one thing, but if it’s a very contrived arrangement, purely driven by reducing a tax bill, then that’s another.
Chris Sanger: That’s a good link to the UK’s new General Anti-Abuse Rule (GAAR). Can you talk about the rationale behind it and how you see it developing? Could you touch on how it’s been designed and where you see it going as well as the protections that have been put in place?
David Gauke: I think there’s been a debate as to whether we should have a GAAR for some time. The previous government looked at it some years ago but decided not to proceed. We asked Graham Aaronson to put together a group to look at this, and he pulled together a large number of tax experts from business and academia and the law and they concluded that a general anti-avoidance rule would not be appropriate, but a general anti-abuse rule would be, and we’ve obviously consulted very thoroughly on this and decided to take it forward.
It’s a useful additional tool for HMRC, though it’s not a solution to every issue of tax avoidance. But it is something that will help HMRC deal with some of the very aggressive tax avoidance schemes for example, that HMRC succeed in dealing with in the end, but only after many years of litigation. I think this will help deter some of these schemes right from the start. It is narrowly focused, and I think that is the right approach. There are safeguards there because this is a departure from our previous approach, where the burden was on HMRC. And there’s an advisory panel that’s producing a lot of detailed guidance. Coming back to the answer to the previous question, it is very much focused on the aggressive artificial contrived behavior, and that, I think, will be helpful to HMRC and deter some of that behavior.
Chris Sanger: How do you address the concern from business that the GAAR could morph over time?
David Gauke: Many other jurisdictions already have a GAAR of one description or another. The truth is that no Parliament can bind its successors, and if businesses are concerned about what future governments may do, whether we’ve got in place a GAAR or not, they may have that concern. I hope that this can stand the test of time and that we can build a consensus around this as an appropriate means of responding to aggressive tax avoidance. We have gone into this after very careful study, after an independent group has looked at the various options and decided against a general anti-avoidance rule. Although there’s clearly going to be a debate on this, I think the general anti-abuse rule should be given time to bed in, for us to see the impact that it has. I believe that we’ve got the balance right between dealing with aggressive tax avoidance but also ensuring that taxpayers are not faced with a level of uncertainty that deters investment.
G8, G20 and the base erosion and profit shifting debate
Chris Sanger: The UK has presidency of the G8 at the moment. What’s your messaging been to the G8 on avoidance and where do you think this will go?
David Gauke: In many respects, the international tax architecture hasn’t really moved with the times. Rightly we have an international tax regime that wants to prevent double taxation, so that economic activity is not taxed twice, which would be damaging for international trade and world prosperity. But we don’t want to see those rules exploited so that economic activity is not taxed at all. There is an issue with the way the world has moved, use of new technology, perhaps greater reliance on intellectual property and the way that multinationals structure their businesses. The architecture hasn’t moved with the times and what we want to do is to ensure that it does. The UK has obviously led the way in this, but this is a matter of the world’s major economies working together.
This is an international issue and the answer is an international solution. The G8 is about encouraging a process through the G20 and of course the OECD who are already very heavily engaged in this debate. The G8 and G20 have been very prominent in supporting the OECD in their work in this area.
Rob Thomas: We’ve seen calls from some commentators for a completely new plumbing system rather than a refinement of the existing architecture. What do you hope to see?
David Gauke: Let’s look at some of the ideas that emerge during the course of this process, whether it is at the G8 or the G20 or from the OECD. We want to have something that is workable, something that works in practice and not just in theory, where we can get international agreement The degree to which the system needs to be fundamentally changed — the sort of tear out the plumbing and restarting again – is clearly going to be part of the debate. But we obviously want to make sure that we have a system that does facilitate international trade and investment.
Rob Thomas: Can you comment on the financial transactions tax (FTT)?
David Gauke: We have consistently said that this is a bad idea and that the UK will not participate in it. We have concerns over the wider implications even for those jurisdictions that won’t have the FTT in place. The European Union has huge challenges to address, and I can’t see how a tax that’s going to reduce GDP is going to be helpful for that process. But obviously there are specific legal concerns that we have, as well as the way that this has been pursued.
Chris Sanger: Thinking about the international landscape, do you see a future where we all coalesce on a single system or are we likely to have bunches of countries abiding by particular architectures?
David Gauke: I see the OECD as being the key organization in this process. I think it is for those of us in the G8 and the G20 to give momentum to this process and, although the issue of corporate tax avoidance has perhaps been more prominent in the UK than elsewhere, it is a debate that will apply across the board at one point or another. So I see there being a very strong case for the G8 and the G20 countries cooperating. But the OECD is the driving force in terms of doing the work in this area, and I think that’s how it will continue to be.
Rob Thomas: Finally, do you have any key takeaways for our corporate readers?
David Gauke: In short, as a Government we recognize that businesses have choices as to where they locate, where they invest and we believe that the UK is a great place in which to do business. We’ve got a huge amount going for us, but we can genuinely say — and I don’t think we could have said this as a country three years ago- that we have a tax system that is attractive and demonstrates our commitment to providing an environment that is friendly for businesses to grow and invest.