Category: Speeches

Below is the text of the speech made by David Gauke, the then Exchequer to the Treasury, on 5th October 2012.

Introduction

I was delighted to receive an invitation to make the keynote speech here today, at this – CIPP’s Annual Payroll and Pensions Conference and Exhibition.  Celtic Manor played host to one of the great European Ryder Cup triumphs in 2010. And given Sunday evening’s extraordinary efforts over the USA in Medinah, it seems apt to be here. Excitement, drama, triumph and despair – and unlikely comebacks. We all knew dealing with the tax system can be like that – but now we know that those words can apply to golf too.

It is also apt that I give this speech at CIPP’s annual conference.  I have enjoyed very constructive engagement with CIPP, both during my time in opposition and in government, across both policy and operational matters.

And I am pleased to be able to draw attention to an excellent new CIPP initiative here today. Next week CIPP will announce their new national apprenticeship initiative, in conjunction with the Department for Business, Innovation and Skills. The scheme will create up to 600 skilled jobs helping to address the lack of trained resource in financial administration in small and medium sized enterprises.  I see this as an excellent example of how short-term Government seed-corn investment, alongside business, can lever a sustained increase in employer investment in skills, to ultimately support growth.

Before turning to the key matters I want to address, forgive me if I take you back to when I first started work for a major City law firm, as a trainee solicitor in 1995.  Fee earners did not have their own computers.  Communication was through letter, fax or occasionally telex. If you needed to be contacted when out of the office, you could book out the firm’s mobile telephone.

I raise these points not as a nostalgic look back at a more peaceful age, but to highlight how much the world has changed in the last 18 years. Despite the Treasury’s well documented tight-fistedness, I not only have access to the internet, but I don’t need to dial in for it.

But until fairly recently, the world of tax was behind the times. In 2005, most of us were already paying our utilities online, but three quarters of those filling in self assessment forms did so by post.

While my search engine seems to know to offer me discounted tickets to see Ipswich Town FC play at home – we have until recently failed to make use of the technology available to make life as easy as possible for taxpayers.

Of course paying tax is rarely going to be as popular an exercise as buying football tickets – even for an Ipswich match. But in many ways, that makes it even more important to make the process as painless as possible.

Regardless of our opinion on tax, it affects us all and is intensely personal. But much of our experience is framed by the method and manner in which it is collected.

And I believe the extent to which technology can improve that process is limited only by our imagination and initiative.

So I want to talk to you today about how we are using technology to improve the taxpayer experience.

To reduce burdens on households and businesses; to improve transparency; to allow taxpayers to take responsibility for their tax affairs; to help HMRC exercise a fair and efficient approach to tax administration, and to help the public hold government to account for the way it raises and spends their money.

Modernising PAYE

To modernise the tax system has been our goal since my party was in opposition. In my role as a Shadow Treasury minister, I was struck by how cumbersome the Pay as You Earn system was.  David Freud, advising us on welfare reform, was concerned that in order to move to a universal credit system, we needed earnings information in real time.  So for some time, we worked together to find a way to reform radically how PAYE worked.

Since coming into office, we have already made substantial progress to improve the personal tax system, and in particular PAYE, which for too long had been neglected.

HMRC’s new computer system holds all a customer’s PAYE records in one place, for all their employments and pensions. That new system is now delivering much better accuracy and efficiency.

It allows HMRC, for the first time, to see the full tax position of callers to their contact centres as soon as they get in touch – helping HMRC provide a better service.

Through using the new technology, great progress has been made clearing old backlogs – HMRC are over 97 per cent through the legacy cases (those prior to 2007-08) and will clear these by December this year.  They are aiming to be completely up to date on later tax years (2008-09 to 2011-12) by April – ready to start 2013/14 with PAYE in the best shape for many years.

RTI

And we are making further investment in Real Time Information – a system that will bring PAYE into the 21st century by allowing HMRC to receive information on employees’ earnings, tax, and National Insurance Contributions as they are paid, rather than at the end of the year.

RTI is the single biggest innovation in the administration of the tax system since PAYE was brought in after the Second World War.

It will make it easier for employers to administer PAYE and will make tax more accurate.

RTI integrates PAYE reporting with normal business practices; enables employers to provide information more frequently; in time it will let more issues be resolved in-year; and makes it is easier to adjust when employees leave or join within the tax year. The majority of the pilot employers questioned expect a reduced burden when end of year is taken into account. And they have told HMRC they see clear advantages in increased accuracy and simplicity – especially around starters and leavers.

And I’m pleased to say CIPP have also been hard at work making the lives of employers easier.  Their new Payroll Assurance Scheme should help employers ensure their payroll returns are accurate and complete. I wholeheartedly welcome initiatives of this kind in supporting employers, and by extension HMRC, in the payroll process.

In steady state, we expect our new RTI system to save employers around £300 million net per year in admin costs alone. And we also expect reductions in tax credit error and fraud of £300m.

As a consequence the system is expected to pay for itself within a year.

RTI will also provide a key building block for our reform of the welfare system – which will make sure that work always pays, and is seen to pay.

It will ensure DWP have up-to-date information about employment and pension income, so that Universal Credit awards can be assessed dynamically, without people needing to send information about their pension or employment income.

DWP and HMRC have been working closely to make sure the two projects are appropriately joined up. And that the necessary technology to support RTI for Universal Credit will be in place this month – ready for DWP to use from October 2013.

As you will know, we’ve been piloting the RTI scheme since April, and a couple of months ago I travelled to Solihull to make CIPP’s first RTI submission as they joined.

That provided an excellent photo opportunity of the back of my head as I clicked a mouse button – not quite awarding medals at the Paralympics, but at least I got a small cheer….

From next month, large employers will be able to join the RTI pilot or expand existing involvement, and I would encourage all who have not signed up to investigate the requirements and consider joining as soon as possible – the benefit of doing so cannot be overstated.

From the start of our pilot in April, with just 10 employers, we now have over 1600 PAYE schemes in the pilot – exceeding the target for September by over 15 per cent, and with over 1.9 million individual records sent through the system.

And I am pleased I can say that we have received strikingly positive feedback from the pilot employers. It’s not always the case that the words ‘very easy’ are used to describe an HMRC initiative. And it’s even less often that a tax administration reform is described as ‘pretty cool’ – to quote one Twitter user…

But this reflects the work they have been doing with stakeholders and customers – to ensure that RTI works for them.

The achievement is all the more encouraging given the additional impressive work on data quality taking place, which will ensure HMRC sustains the success as the pilot scales up.

Most employers will begin reporting PAYE in real time in April 2013. All employers will be routinely reporting PAYE in real time by October 2013, in time for the introduction of Universal Credit.

Modernising the personal tax system

But this is only a start of our reforms to bring the Personal Tax system into the 21st Century.

In November last year, HMRC published two discussion documents that took our vision further. They presented our plans for the future, and gave a taste of our ambition.

They spelled out our ambition – to deliver a personal tax system that is more transparent and easier to use for the individual taxpayer.

We want to increase awareness and accountability, making it easier for individuals to know what they have paid, what their overall tax rate is, how it has been calculated and when and why they should interact with HMRC.

While this will not happen overnight, we have started the debate. And we want to engage with individual tax payers to understand whether, what, and how they want to see information on their tax affairs.

Tax transparency

For many, the details of tax are difficult to understand, detached from everyday life, a black box of rates, thresholds and reliefs.

They trust their employers and PAYE to get it right for them, and do not understand the system’s limitations and what can go wrong.

It is little wonder that taxpayers find it difficult to work out exactly how much of every pound they earn they get to keep.

The fact that tax is necessary – to support critical public services – should not give Governments carte blanche to take as much as they can get away with.

Governments need to be accountable for what they raise, how they raise it, and how it is spent. And for that to happen, people need to be in a position to understand what they pay and why.

If I were to summarise Government’s vision for tax it would be transparency, simplicity and efficiency.

And in order to deliver that, I have been clear that I want nothing less than to transform the UK Personal Tax system fundamentally to deliver a better experience, and a more transparent approach for the taxpaying public.

Examples of recent achievements

Other countries are already taking decisive steps to help their citizens engage in their tax affairs. And the evidence shows that allowing customers to view and transact with their own tax leads to greater awareness and understanding.

One idea would be for full online personal tax accounts.

Accounts that would allow those who pay tax via PAYE to access their records online, as is already the case for those who declare liabilities through the self assessment process;

That would allow people easily to check and alter their address details at the click of a button;

That would allow HMRC to correspond with millions of taxpayers at minimal cost through a mailbox system;

That would allow people to manage their tax themselves; see their tax rates; and see how those compare to previous years;

And that would allow employers to do the same.

Ultimately, you could access your online account through your phone – “Putting tax back into your pocket” so to speak…

My gas company has been doing this for years –  and perhaps it’s time for HMRC to be in the same position.

Personal tax accounts could be something for the future.  A lot of thinking would be needed on how they might best work for the taxpayer.  But in the meantime, we have already taken steps to improve transparency.

At Budget this last year we announced that HMRC would introduce a personal tax calculator by April 2012 so that individuals can work out how much tax and NI they may expect to pay, and what their effective tax rate is.

That has been delivered and the mobile app version was downloaded 34,668 times in the first 24 hours, and now has around 220,000 downloads – the Guardian made it ‘app of the week’ and it was the second most downloaded free app in Apple’s online iTunes store.

At the last Budget, we announced we would take this further – with tax statements for 20 million customers every year from 2014/15.

But as well as informing individuals on their tax affairs, it will also make it easier to provide up to date information to HMRC.

Helping increase accuracy, reduce burdens on business, prevent fraud and error, and reduce costs to the Exchequer.

We’re also doing work to help out business.  Our new online ‘Business Tax Dashboard’ for example allows businesses to see how much tax they have already paid and how much they still owe.  Just one of a number of measures that has led to reduced admin burdens for business up and down the UK.

And these are just some of the ideas we’ve had.  I want businesses, individuals, and representative bodies like CIPP to come forward with how we can improve tax transparency further.

Tax/NICs integration

Part of that process involves removing misleading elements of the tax system. While the headline standard rate of tax declined between 1980 and 2010, the level of direct personal tax has remained roughly the same. That is because National Insurance – a tax on income, if not strictly speaking income tax – increased.

Jean Baptiste Colbert, the Minister of Finance under King Louis XIV famously said that ‘The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”

That certainly seems to have been the approach taken in the recent past, with a persistent policy of keeping tax and National Insurance separate, even though for most intents and purposes, they fall on the same base and go to the same place – the Exchequer. That allowed the previous government to keep headline income tax rates low, despite raising taxes on income.

But I believe people should know how many feathers have been plucked. That is my motivation for tax transparency, and underpins our approach to Income Tax and NICs integration.

As many of you are aware, at Budget 2011 we said we would look at  how best to bring together the operation of income tax and National Insurance contributions.

In doing so, our aim is make the tax system more transparent, and also less burdensome.  Over the past 18 months we have had excellent engagement with organisations such as CIPP to work through the detail. Operational integration is not straightforward, we knew that when we started.  But by working in partnership with organisations such as CIPP we can work through those issues to identify what more we can do to simplify the system for employers and employees. This collaborative approach is essential in such a highly complex area where the potential impacts on employers are significant. It is crucial that major reforms are well thought through rather than rushed.

We also need to consider the impact on the individual as well as business. As set out in the Government’s 2011 publication, “integrating the operation of income tax and National Insurance: next steps” any reforms that make NICs match income tax structure could mean that a significant number of individuals would end up with a different NICs liability.  Some could pay more and others less. Therefore before proceeding with any reform, it is our responsibility to ensure we have a clear understanding of the number of individuals likely to be affected and how they will be affected.

I encourage businesses and representative bodies like yours to continue to engage with us on this and other reforms – as I am grateful to you for doing thus far. I hope to be in a position to provide an update on this detailed programme of work shortly.

Conclusion

The ideas of this Government – and the ideas that we are taking on board from taxpayers and their representatives – offer to use technology to transform the way that tax operates.

Ideas that will make it easier for HMRC to keep information up to date and for taxpayers to provide it.

Ideas that will lead to greater individual understanding of and engagement in their tax affairs.

Ideas that could make the administration of the personal tax system easier for employers and fairer for individuals.

Ideas that will increase accuracy, reduce burdens, and cut costs.

Ideas that will benefit the administration of the tax system, but also taxpayers, and – perhaps most importantly – the debate surrounding what we pay and how we pay it.

Thank you.

Below is the text of the speech made by the then Exchequer Secretary to the Treasury, David Gauke, to the Tax Journal Group on 9th November 2011.

Good afternoon, and thank you for inviting me to speak here today. It’s a pleasure to speak to so many of the leading legal and business executives from the tax industry.

The businesses that are represented today from the backbone of our economy, and are the driving force for our recovery.

Your companies and your success are critical to meeting the growth challenge, creating the jobs, driving the investment, and stimulating the innovation that we need.

But the businesses here today, and the businesses represented on the panels throughout this conference haven’t assumed the position of domestic and global leadership through mere luck. They have done so through enterprise and ambition.

And it’s the same endeavour that this Government supports to lead us through tough economic times.

It’s no small challenge. We are still in the midst of an economic crisis that stretches back three years. What was once the worst financial crisis in almost a century, a crisis of private and banking sector debt, has transformed into a crisis of sovereign debt.

The focus today is on Greece and Italy, but it’s easy to forget that when we came into Government there was much concern about the UK’s fiscal credibility.

Because we inherited a dire economic situation. The largest peace time deficit the country had ever seen, borrowing one pound for every four that we spent, with Standard & Poor’s putting our AAA rating on negative watch.

But through the toughest Spending Review in decades, we set out plans to eliminate the structural current budget deficit by 2015.

It was a plan that meant S&P took us off negative watch. It’s the reason the market continues to back our debt, with gilt yields falling record lows in recent months. When we came to Government our rates were tracking the likes of Spain and Italy. But we managed to break rank, and now we’re tracking the likes of Germany.

And those low interest rates make a real difference to businesses refinancing debts, and households paying mortgages. An interest rate increase of just one per cent, would take as much as £10bn out of families’ pockets, and would bring unbearable pressure on businesses across the country.

Fiscal consolidation is not an ideological commitment it is an economic necessity. And as we face continued instability, now is not a time to change tack. We have to stick to the plan and we will.

But fiscal consolidation begs the fundamental question…where should the burden lie? Spending or taxation?

In our Spending Review we were clear…the burden would fall on spending. Restoring spending as a share of the economy to a level closer to its historical average.

All the international evidence and experience suggest that consolidation through spending restraint would be more likely to promote growth.

Hand in hand with that, we have to ensure that we have a tax system that supports our businesses.

In today’s globalised economy, tax competitiveness is arguably more important than ever.

After years of tariff reform, technological advance, and information revolution we are operating in a much more fluid world economy.

Globalisation and the free movement of capital and labour have created vast new opportunities, and indeed the UK has capitalised on these. And in difficult economic times like these, free and open markets are the most powerful tool that we have for a global recovery.

But globalisation also brings challenges…where our competitiveness slips, we can very quickly be left behind. And more often than not, business success in the UK has come in spite of rather than because of our tax system.

In 1997, the UK had the tenth lowest main rate of corporation tax in the EU. But by the time we came to office, we’d slipped to 20th

According to the World Economic Forum, on an overall measure of competitiveness, in the last decade we slipped from 4th to 12th in the global league table.

We are committed to reversing the decline that has marred the last decade or so.

First and foremost that means making our tax system an asset. Making sure that we have a tax system that supports growth and doesn’t stand in its way.

Our ambition is to create the most competitive tax system in the G20.

This is a big challenge. But it’s one that we can meet even as other countries rise to the task.

In fact I was struck by comments by the former Labour Cabinet Minister, James Purnell in an article in the Financial Times only last week. In it he argues that the British state has is ‘good at fixing problems’… Thatcher after the Winter of Discontent, Tony Blair on the health service, and he also lists, the Chancellor George Osborne through the deficit reduction plan.

Compare our resolve in tackling our deficit with the fiscal deadlock in the US this summer, or the monetary hesitancy in the Eurozone. In James Purnell’s words, not mine, “Britain’s state governs. It’s one of Britain’s real competitive advantages.”

We are committed to creating a tax system which is competitive and stable will provide business with the confidence to invest and expand over the long term.

Higher taxes on profits simply make the UK business environment internationally uncompetitive…reducing the returns on, and the incentive to invest…undermining productivity to the detriment of our private sector and our wider society, rich and poor alike.

That’s why we are reducing the main rate of Corporation Tax by 2014 it will reach 23% – the lowest rate in the G7 and one of the lowest rates in the G20.

We are resisting the European Commission’s proposals for an EU financial transaction tax. Whilst we support the idea in principle, it can only work if implemented globally. Even the Commission itself estimates that the current proposal could reduce EU GDP by as much as 3.4% of EU GDP, that’s €422 bn. And, as the Chancellor said in Brussels yesterday, the tax will be paid by pensioners not by banks and bankers.

Furthermore, as a home to many of the world’s biggest Multi-national companies, our approach to tax needs to reflect the realities of dealing with companies stretching around the world and over different jurisdictions.

A competitive tax system should recognise that fact.

Central to doing that is a move towards a more territorial system of taxation.

That is why we have taken steps to reform the taxation of foreign branches, introducing an opt-in exemption from corporate tax for the profits of foreign branches of UK companies.

And it’s why we are also taking action to improve the Controlled Foreign Company (CFC) rules… rules that have been in place since 1984 and have become outdated.

The consultation on new CFC regime closed at the end of September and I would like to thank all those who have contributed to the debate that has taken place over the summer. You have given us much to think about and I am grateful for the level of engagement from the industry, including from many of you here today.

There will be an update on the CFC proposals in the next few weeks, ahead of the publication of draft legislation, and we remain determined to embed a competitive CFC regime.

However any reform to the tax system has to consider the issue of fairness alongside that of competitiveness.

Facing the deficit that we do, we have had to make difficult decisions on tax….decisions that at times necessarily involve a trade off with competitiveness. But decisions that nonetheless ensure that we embed a tax system that is fair.

Firstly, we inherited the 50p rate of tax from the previous Government.

And we have kept the rate as a demonstration of our commitment to share the burden for reducing the deficit. But we nonetheless understand that higher marginal tax rates are not good for the UK.

We believe that making this permanent would do lasting damage to the UK’s economy which is why we have repeated that this is only a temporary measure.

Secondly, the bank levy.

We believe that it’s right that banks make a full and fair contribution to cutting the deficit, and a fair contribution in respect of the risks they pose to the UK economy.

It is also intended to encourage banks to move to less risky funding profiles. Encouraging them to look to more stable sources of funding rather than flighty short term funding. Because as we saw in the crisis, a liquidity shock can all too easily turn into a system wide seizure.

Banks need to be more resilient to those shocks. Look to secure stability for the long term, working with the grain of our wider reform programme, to underpin a sustainable and stable economy.

But the levy balances that imperative, with our commitment to maintaining the UK’s presence as a leading, global financial services centre.

In delivering tax policies, there are times where it is necessary to make trade-offs.  There are times when different objectives take us in different directions.

But I think it was helpful for the Chancellor, in his March Budget, to set out his principles of good taxation for a modern age.  They are that:

Our taxes should be efficient and support growth.

They should be certain and predictable.

They should be simple to understand and easy to comply with.

And our tax system should be fair, reward work, support aspiration and ask the most from those who can most afford it.

I have said something about how we have made our tax system more efficient and growth supporting.  And about the need for fairness.

But let me say a little about certainty and predictability and simplicity.

Because there are always pressures to add to the complexity of the tax system.  Usually, this is as a consequence of the belief that the tax system should be used not just to raise revenue but also to achieve other policy objectives.

And, of course, there are times when tax can do just that.  For example, it is legitimate for the tax system to encourage expenditure in research and development.

We know that there is a market failure that needs to be corrected because firms reinvesting in R&D cannot capture all the benefits that accrue from investment in this area.

And there is a place for using the tax system so that externalities are incorporated into the cost of a good, for example.

But there are those that argue that we can go further, that we distinguish between ‘good’ and ‘bad’ business practices and tax them accordingly.

On examination, this raises many issues.  Some would say that we should favour ‘long term investment’ versus ‘short term speculation’.

But should the tax system encourage people to hold onto an investment for longer than they want to solely to benefit from a tax break?  That would damage economic efficiency.

We could see whole business models facing a changed tax regime because of the activities of one or two businesses that attract negative headlines – thus damaging predictability.

And the history of providing tax breaks to encourage particular types of behaviour has often resulted in avoidance opportunities that have proved to be very expensive.  Which was then followed by complex anti-avoidance provisions.

There is always a risk that attempts to use the tax system to influence behaviour can result in additional complexity and uncertainty for businesses.

So, for the avoidance of doubt, it is not the Government’s attention to assess all businesses and divide them into producers and predators.  And then apply different tax rates to them, perhaps with a ‘predator surcharge’.

Of course, such an approach would place considerable extra demands on HMRC.

HMRC already faces a substantial and difficult task to effectively protect the tax base, ensuring that businesses and people pay what they owe.

We want a tax system that supports business, that demonstrates that the UK is open for business, but doesn’t leave the tax base open to exploitation.

It’s impossible to protect low and competitive rates, if we’re not prepared to protect the tax base.

This isn’t something that can be achieved through sabre rattling however.

How companies experience the UK tax system is as important to tax competitiveness as the headline rates that we set.

It means that our approach to tax collection has to be as intelligent as it is vigilant.

That’s why I support the work of HMRC’s Large Business Service. And it is why I think it is right than an approach of constructive engagement between HMRC and taxpayers is in the best interest of maximising revenue collection, and expanding business activity in the UK.

It’s an approach based on cooperation and trust. Trust from Government in business not to engage in aggressive avoidance. And trust from business in Government and HMRC to treat them fairly and work in complete confidence.

With ever increasing complexity of business affairs, increased cooperation is the only route to efficient and competitive tax systems. It goes hand in hand with the headline reduction in tax rates.

We’ve come a long way in the last year alone to restore UK competitiveness.

Indeed, according to the World Economic Forum, for the first time in a decade the UK has moved back into the top 10 in the global competitiveness index.

But we still have a long way to go, and in difficult economic times it is vital that we work together to understand what more, or indeed what less, our Government can do to boost competitiveness and promote growth.

I look forward to working with you all in the years to come.

Below is the text of David Gauke’s (the Exchequer Secretary to the Treasury) speech to the Hundred Group in London, made on 1st March 2011.

It is a great pleasure to be here today.

I know that the PwC Total Tax Survey is in its sixth year… but I think this year’s event – and the findings that Susan has just set out – are particularly timely.

When public finances are incredibly constrained – where difficult decisions are being made on public expenditure – the interest in business taxation has rarely been greater.

Indeed perhaps the easiest, or the most politically palatable approach to bringing down the deficit would be to concentrate on raising business taxes.

That, however, has not been our approach.

We need a pro-growth strategy to get us out of the mess we’ve inherited.

And this means that the UK must remain an attractive place to do business.

A place where you want to locate, invest, and succeed.

Which is why creating the most competitive corporate tax environment in the G20 is such a priority.

Not only through annual reductions to the mainstream rate – bringing it down to just 24% by the end of this Parliament

But also through the introduction of a patent box – making the UK an attractive location for innovative industries.

Moving to a more territorial system – through reforms to the foreign branches and CFC regimes.

And improving the way in which we make tax law – taking a more deliberative and consultative approach.

This has included innovations such as the corporate tax roadmap… and publishing finance bill clauses in draft… both of which have been warmly received by the business community.

As I believe that a Government who are focussed on supporting economic growth must ensure that we have a corporate tax system that is an asset to our economy, not a liability.

A tax system that encourages businesses to come here in the first place, not the reason they move away.

And that this is in the best interests of everyone.

Yet there are considerable challenges we face when trying to get this message across.

First, there is a perception that the total tax contribution businesses make is restricted to the corporation tax they pay.

Yes, corporation tax is important…

…but as the work carried out by the Hundred Group and PwC demonstrates…

…our largest firms make a vital contribution in terms of business rates, irrecoverable VAT, employers National Insurance Contributions, as well as the income tax and National Insurance Contributions paid for employees.

The second challenge we face is that people believe – or at least give the impression they do – that corporation tax is somehow a victimless tax, not paid by real people.

Of course, as with any tax, the incidence will ultimately fall on someone.

As far as corporation tax is concerned, the question is whether the burden falls on shareholders (largely in the form of pension funds) employees (through lower wages) or consumers (as a result of higher prices).

The consensus, among economists at least, is that it’s predominantly the employee who foots the bill.

And it is testament to the lack of understanding of this fact that – when this point was made to a member of UK Uncut on Newsnight – his response was to say that this demonstrated the unfairness of the tax system.

It is rather like someone complaining about the law of gravity if an apple fell on his head.

And the third misperception is that a competitive corporate tax system somehow involves being weak on avoidance.

This Government is determined to be tough when it comes to reducing avoidance.

As part of the Spending Review, we strengthened HMRC’s capacity in this area.

Under our watch all the major banks have signed up to the code of practice on taxation for banks.

In December, we set out bold policies to tackle longstanding avoidance opportunities, including disguised remuneration.

And we have asked Graham Aaronson QC to explore how a General Anti Avoidance Rule might work in the UK and what it would look like.

Because we all know, at the margin, some people try to be too clever by half in an overly aggressive pursuit of lower tax bills.

The truth is the public will not wear this – especially during times like these.

And as their representative, nor will we.

But it is equally unhelpful to try to exaggerate the scale of the problem.

We have all seen some campaigners choosing to stoke the fires of public opinion.

It is a feature of this debate that legitimate behaviour by taxpayers – consistent with both the letter and spirit of the law – is being classified as ‘avoidance’.

This action artificially inflates both estimates and perceptions of the ‘tax gap’.

It is, I think, to the credit of Richard Murphy, author of the oft-quoted TUC tax gap estimates, that he acknowledges the use of allowances and reliefs within his calculations.

Only last month he wrote that:

‘It is a persistent argument of business that the tax gap on corporate profits (which I have estimated to exceed £10 billion a year in the UK) is not the result of any form of avoidance at all, but simply the use of perfectly acceptable allowances and reliefs.

And some of it may be… of course that has to be true.’

And he then went on to argue:

‘…[that] the use of such reliefs is a valid element in the tax gap.’

That is not my view, nor, I think the view of most people.

But it does demonstrate the difficulty and confusion that can exist in this area.

Where a combination of complexity in the law, fluidity in definition and, quite rightly, a strong desire on the part of the public to see that everyone pays what’s due, can often conflate the problem.

It is not surprising, therefore, that individual businesses – some of our biggest high street names, even the guardian media group, whose publications regularly provide comment on tax, for instance – are finding their individual tax affairs under intense public scrutiny.

And it strikes me that this won’t be the last of it.

It will just run and run.

At present many of the more questionable assumptions that fuel this campaign are taking place without effective rebuttal.

So, having set out the challenges that faces a Government wanting to put in place a competitive tax environment, let me set out a challenge to business.

I know that, for most businesses, the sensible course of action is to keep a low profile here.

To avoid being drawn into a contest that is both complicated and unpredictable.

But although that might make sense for the individual, there is a danger that the collective voice of business is getting lost.

We could have a better-informed debate over the coming years if businesses were willing, perhaps, to be more transparent about the tax they pay… and explain the story behind the figures.

At a time when, across the board, the public expect greater openness…

…I think it could be in your long-term interests to engage more forthrightly in this discussion.

To set out your own position. To be more robust on the essential contribution you are making individually to reduce the deficit.

Yes, that may mean greater scrutiny and, for some, this could be uncomfortable.

But it could also be an opportunity… an opportunity to address some of the myths and confusion that exist.

That’s why I welcome the work undertaken in respect of the Total Tax Contribution.

It is a valuable source in the debate

And a constructive first step towards meeting one of the key communication challenges for UK business over the coming years.

A first step toward, generating and maintaining public consensus in support of an effective and competitive tax system in the UK.

Thank you.

Below is the text of the speech by David Gauke, the Exchequer Secretary to the Treasury, at the Financial Executive Network Group, on 27th January 2011.

Introduction

Thank you.

It’s a pleasure to be here this morning and to talk a little about the Government’s approach to taxation.

As the Minister responsible for tax policy making, I’m well aware of the issues that have detracted from our tax system.

That businesses require more certainty if they’re to make plans for the future.

That there’s a pressing need to ease the burdens placed on the individual taxpayer.

And that taxation in Britain is far too complex.

In short, we need a simpler, more stable tax system, and this is what I’d like to focus on today.

How the tax system is not simple

Because under the previous Government, simplicity took a backseat to other objectives and constant tinkering.

Whatever the motivation, the lack of strategic direction and the willingness to use taxation in an attempt to meet a range of goals led to increased complexity and further instability…

…dare I mention the almost yearly changes to the small companies’ rate?

And one would only need to look at the evolution of the tax code to get a flavour of the problem.

Since the turn of the century it has almost exploded… more than doubling in size in just ten short years.

In fact, almost amusingly, it got to the stage where Tolley’s began using a smaller font in a fraught bid to keep down the number of pages.

We also witnessed the introduction of two fiscal events for every financial year.

A Pre-Budget Report that carried just as much weight as the Budget.

Each one jam-packed with tax amendments.

Amendments that were almost always made under the veneer of consultation.

While in reality, businesses often had little or no say in tax policy, let alone the frequency of these changes.

During my time in Opposition, I remember having a conversation with one company director who said he’d resorted to hiring staff just to monitor HMRC’s website… as this was the only way his firm could keep track of the spiralling myriad of complexity coming out of Whitehall.

And all too often, this desire for constant change led to ill-thought-out proposals.

All this served to show that policymakers needed to think again about the way tax law is made in this country.

Reform was needed.

And it’s reform that this Government has promised.

With stability and certainty being at the heart of our approach.

But as a Ministerial Team, we’re also mindful of the constraints we face as when trying to grapple with these issues.

The challenges we need to address.

And the complex balances we have to strike.

The first set of these are financial, as we deal with Britain’s debts.

I can tell you it is 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 excitement of that first red box, was tempered by the amount of red ink in the first briefing. And the experience inevitably stays with us as we contemplate the tax reform this country needs…

…as we consider how we reform our tax system to assist long term, sustainable economic growth.

The second challenge is that of time.

In our 24/7 news culture, politicians have to deliver progress, and usually the deadline is yesterday.

There’s a constant pressure for immediate announcements and rapid impact.

This is something to which the previous Government too often succumbed.

Yet in tax policy, short-term gains are often in tension with fundamental long-term reform.

So we’re setting ourselves against the patchwork quilt, knitted by constant change in the tax system. But at times this doesn’t sit easily with proclaiming on a regular basis that “something must be done”.

And third, there is the balance to be struck between genuine and open consultation and the desire for certainty.

We believe firmly in the benefits of consultation, especially in tax. There are well-established norms about the length of time we should consult for, and it seems only polite to adhere to them.

But we also hear business demands for certainty in our tax system.

So we find ourselves weighing up how best to consult on tax reform without creating undue uncertainty.

Above all, how can we avoid an overall sense that too much of our tax system is in flux at any one time, even as we contemplate the big reforms that businesses say they want to see.

These are challenges we face.

So the question is: how can we create a simpler, more stable, tax system in the wake of:

Fiscal consolidation.

Short term pressures coupled with calls for reform.

And wanting to be open, without causing undue uncertainty.

And our answer has been to adopt a new approach to tax policy.

One that is more focussed on the longer-term.

More transparent, more inclusive, and far less prone to the vagaries that plagued the previous regime.

Our approach to simplification

It’s about accepting that changes to the tax system are inevitable.

But the way you make these changes is not.

So we will be a Government of fewer, better thought out reforms; one that engages business throughout policy development; and one that places a greater emphasis on simplification.

This strategy has two separate elements.

The first being to look at the current stock of tax legislation, and eliminating any unnecessary complexities.

The second is about the way you introduce new tax law; the manner it’s communicated; and how it evolves from idea, to proposal, to statute.

In short, our plan to promote simplicity is shared equally between what already exists… and what’s yet to come.

So let me address each in turn.

Starting with the current stock of British tax law.

Improving current stock

Looking at where improvements can be made to current legislation is nothing new.

Prominent members of the Conservative party have been calling for this for a number of years.

That’s why, as one of our first acts in Government, we followed the advice of Lord Howe and announced the formation of the independent Office of Tax Simplification….

…drawing together individuals from across the business, tax and legal professions to provide the much needed institutional ballast, and expert advice that Government has previously lacked.

The OTS has, under the leadership of Michael Jack and John Whiting, the unenviable task of unravelling the tangled wool that is our tax system.

And as a starting point, the OTS is taking forward two reviews: one on simplifying small business taxation, and the other on tax reliefs.

Both of which will be reporting in time for the Budget… identifying options for simplification across each area.

Indeed, this work has already begun.

I’m sure you’re all aware that the OTS has already published a comprehensive list of all the reliefs and exemptions that exist within our tax system.

For me it’s striking that when they began this process in the summer, the general view was that we had no more than perhaps 400 reliefs.

Their assessment shows that we actually have more than a thousand.

Now many of these serve a useful role in our tax system, but it’s not unreasonable to ask if at least some of these reliefs are truly justified.

For example, as I’ve said, I’m all for taking a long term view of the tax system, but do we really need a ‘millennium gift aid tax relief’ when the next one’s not for another 989 years?

But we also know that abolishing reliefs is not as simple as it sounds.

That it’s far easier to give tax breaks, than to take them away.

And that behind every relief, and every exemption, is an interested party who’ll be championing its cause.

We understand all of this.

And in many cases, there may well be good evidence to support a specific relief.

But if we’re serious about simplification, we’ll have to make tough choices.

Yes, there’ll be some losers… this is inevitable.

But there will be far more winners.

Because this is no zero sum game.

The work of the OTS is looking to improve the tax system as a whole.

Reducing complexity.

And ensuring that our tax system works in everyone’s interests.

So that as we get rid of reliefs.

And level the playing field.

We will create a tax system with a broader base, and lower rates.

With overall impact that will be beneficial for the both taxpayer and the British economy.

Tax Policy Making

While the OTS is playing a valuable role in improving the stock of UK tax law…

… we also recognise we’ve got to watch the flow of new measures.

Yes, we need a simpler tax system, one with fewer exemptions and fewer reliefs.

And this means change.

But a little paradoxically, I know that businesses need greater certainty.

As a Government, we’ve taken this as a call to create a more transparent framework within which tax policy is developed…

…a framework that will improve the quality of tax law and the way tax policy is made.

It’s our intention to put simplicity and stability first.

This means setting out our long-term ideas for reform.

Allowing ample time for the scrutiny of Government proposals.

And giving businesses the opportunity to help develop major tax changes.

We kicked off this process in November by outlining our plans for Britain’s Corporate Tax regime.

This reiterated our commitment to lower the headline rate in each of the next four years…

…but also, for the first time, put in place a clear timeline for when changes will be considered to the tax treatment of foreign profits controlled foreign companies; and intellectual property.

This is all part of a more deliberate approach to tax policy-making.

One that is simpler, more comprehensive, and ought to mean far fewer surprises.

In support of these objectives, we’re also allowing for greater scrutiny of our proposals through the publication of draft Finance Bills.

This convention will avoid many of the problems we saw under the previous administration… where badly constructed policies – produced in the absence of consultation – were rushed through Parliament with little consideration of their overall impact.

Last July, we released the first ever draft of the Finance Bill.

In response we received over 60 comments.

And this led to changes being made to 9 of the Bill’s clauses.

On the 9th December, we repeated this process for the 2011 Finance Bill.

Because at every stage of the tax policy-making, we want to involve businesses in our decisions.

To help improve the quality of our legislation, and avoid any unforeseen complexities.

So while I’ll freely admit that life as a Government Minister in the Treasury is very different from my time in Opposition.

That there can sometimes be a temptation to conduct less external engagement – and merely rely on the experience that resides within Whitehall.

We’ve deliberately opted against this approach.

As I understand the value that’s to be had from collecting the thoughts of those who are directly employed in the tax profession.

Who, through their own experience, have ideas about where improvements can be made… that Whitehall doesn’t have all the answers.

As a Government, we’re making engagement with external experts a real priority.

And we’ll continue to seek feedback on the way we make tax policy…

…to ensure that our choices have your backing; that you know the direction we’re heading, and feel confident enough to make long-term decisions about the future.

Conclusion

This is my promise.

And the promise of Government:

That stability and simplicity are at the top of our agenda. That they’re not simply words used for dramatic effect. But are, in fact, firmly ingrained in our approach to tax policy. That through the work of the OTS.

External engagement.

And the publication of draft legislation…

…we’re making the fundamental changes needed to create a better British tax system.

One that is simple, stable, and that is an asset to our economy.

Thank you.

Below is the text of the speech made by David Gauke at the Policy Exchange on 22nd March 2010.

It is a great pleasure to speak at today’s event and can I thank Policy Exchange for producing this thought-provoking report.

I want to address most of my remarks to the issue of corporation tax reform and the issues related to that set out in this report.

But before doing so, I would like to say a few words about what is clearly the most eye-catching aspect of this report, the analysis of the impact on jobs and growth of changes in Employers’ National Insurance Contributions.

The report argues that raising this tax appears to be one of the most damaging ways of raising revenue.  The most striking statistic is that the Oxford Economics model predicts that a 2p rise in employers’ National Insurance Contribution means that GDP will, in three years’ time, be 2% lower than it would otherwise be.  And, extraordinarily, that unemployment would be higher by 1m.  The consequence is that, uniquely amongst the tax rises considered, it has a negative impact on the government balance.

These are such striking numbers that the authors of this report urge caution in accepting them.  But what is very striking is that the Treasury model would, apparently, show the same effect.

And this begs the question, what was the advice that the Treasury provided to Ministers in the run up to the announcement in December 2009 that NICs would be increased?

We know that the Treasury was briefing that it was unhappy about the policy and prevailed upon by the Prime Minister.

But did Ministers receive advice that an increase in employers’ NICs would have a significant impact on jobs and growth?

Given what the Treasury model appears to tell us, we can only assume that they did.  And if so, why did the Government proceed with this policy?

This report throws down a significant challenge to the Government.

What is its assessment of the consequences for jobs and growth of raising Employers’ National Insurance Contributions?

Does the Treasury model point to a substantially different impact than is claimed in this report?

Unless the Government comes clean on this issue, there is a strong suspicion that the Government is deliberately pursuing a tax rise which will increase unemployment, slow growth and do nothing to reduce the deficit.  If these numbers are right – and it remains a question – it appears that the Government has once again put politics before economics in a way that is quite scandalous.

Let me turn to the issue of corporation tax.

We have long argued that we should look to broaden the base and lower the rates in the context of corporation tax.

In 1997, our corporation tax rate was lower than the OECD average.  Now it is higher.  In 1997, our corporation tax rate was the 11th lowest, now it is 23rd. We used to have the 3rd lowest in the EU15, now it is the 6th highest.  While the rest of the world has been cutting their corporation tax rates substantially, the UK has been caught up and, in many cases, overtaken.

Although this view is not universally held, we share the view of many commentators and business groups that the corporation tax rate is one of the key measurements in assessing the attractiveness a place to do business.  It is not the only consideration, but if we are to send out a message that the UK is an attractive place to do business and locate profits, a lower corporation tax rate is an important attribute.

And a lower corporation tax rate allows moves towards further simplification.  Rate differentials drive tax avoidance behaviour and this, in turn, drives further tax complexity as the Treasury and HMRC try to prevent this happening.

We are committed reducing the headline rate from 28% to 25% or lower by reducing capital allowances and believe that the UK economy will benefit as a whole from this.  By moving towards a system whereby capital allowances more closely reflect the level of accounting depreciation, we can reduce complexity.  And, given our belief that manufacturing has an important role in future economic growth, we have been engaging constructively with the Engineering Employers Federation and we are keen to consult further on their ideas for a short life asset regime which better reflects the reality of the depreciation rate for certain assets

I have mentioned capital allowances but there are further measures that we can take that would enable us to further lower the corporation tax rate in a broadly fiscally neutral manner.

This brings me to the subject of interest deductibility on borrowings.

For some time, we have argued that there is a need to rebalance our tax system by reducing tax breaks for debt.

First, it will enable us to lower the corporation tax rate which we believe is important in itself.

Second, we believe that our tax system currently favours debt over equity.  As the Policy Exchange paper sets out, the current distortion in favour of debt makes businesses more volatile – prone to exuberant growth in the good times but vulnerable in the bad times.

We do, of course, acknowledge that tax is not the only reason why businesses choose to finance themselves with debt.  Debt can provide a degree of flexibility in financing businesses that equity cannot match and can be cheaper than equity.  For many businesses, the responsible use of debt is clearly a key element in financing.  Our focus is the desire to temper exuberance in leverage whilst not discouraging inward investors in trading businesses that generate employment in the UK.

Nonetheless, we believe that the balance of treatment within the tax system is not right and this can lead to distortions.

To take an extreme and topical case, the current structure of our tax system appears to encourage the situation whereby a successful and profitable business, like Manchester United, becomes loaded down with debt as a consequence of a leveraged buy-out.  Profits and corporation tax payments are reduced as interest payments are increased and the business could find itself in a precarious situation if its success is not continued.

This may be a tax efficient structure but it is difficult to see how this is good for the long term interests of the club, good for football or good for the country.

The Policy Exchange paper highlights the fact that if interest deductibility were to be abolished outright, the corporation tax rate could be reduced to 17%.

Rightly, the paper points out that this would constitute a very major change in the structure of our taxation system and that any such a move would need to be done with great care.  Regard should also be had to pre-existing arrangements and the critical need to avoid deterring vitally needed investment.  We have frequently stated our belief that tax reforms need to be more deliberative and consultative with better pre-legislative scrutiny – as advocated in Lord Howe’s report in 2008 – and this area is no exception.

Of course, it is very easy for this debate to be polarised into either maintaining the status quo in respect of interest deductibility or its complete abolition.

In reality, there are a number of ways in which interest deductibility could be restricted without pursuing a policy complete abolition.  We want to explore these options.  For example, we are looking at the implications of moving to a more territorial system of taxation.  We do not believe, however, that complete abolition of interest deductibility is practical.

Nobody pretends that these matters are simple and we very much welcome a wide, informed public debate about the issues.  It is important that there is proper consultation and that changes are made in a careful and measured way.  Within these constraints, it is vital that we have in the UK a sense of direction for our corporate tax system.

George Osborne has set out our ambition to have the most competitive corporate tax environment in the G20.  He has also said that we will set out our roadmap for the direction of corporate taxation in our first Budget.  This will set out a sense of direction for the next five years.  It will be a coherent strategy for where we want our corporate tax system to be in 2015 and how we will get there.  Having set out the long term changes that our corporate tax system needs, the UK can then look forward to a period of stability in this area.

This is, of course, an ambitious timetable.  However, we have already put in some serious work on this matter.

In the last few months, we have put together a panel of some of the countries’ leading tax experts to help develop options for reforming corporation taxes.  Their role is to set out some options for reform and the consequences of any approach; options which would be for the benefit of the UK as a whole.

The group includes John Whiting, tax policy director of the Chartered Institute of Taxation, Chris Sanger, head of global tax policy at Ernst & Young, tax policy adviser to Labour in opposition in advance of the 1997 General Election, Head of Business Tax Policy for HM Treasury from 1998 to 2001 and chairman of the tax faculty at the Institute of Chartered Accountants of England & Wales, Stephen Machin, special adviser at KPMG and former member of the Tax Reform Commission, Bernard Glass, former tax partner at PricewaterhouseCoopers, and Trevor Evans, former director of business tax at HMRC as well as other senior members of the tax professions.

Many of these people have been putting forward ideas for reforming our corporate tax system for some time.  We have effectively challenged them   to develop some of their thinking for the benefit of us all. This involves issues such as interest deductibility and territoriality, discussed earlier.  It has also been addressing how we can simplify the controlled foreign companies’ regime which we know can be a major disincentive to investment in the UK, and the corporate tax regime more generally, building on the work that has already gone into the discussions with the Treasury and HMRC over CFC reform.

Our objective is to create a tax environment that is good for business.  Good for those businesses already operating in the UK and those who wish to locate their headquarters in the UK.  But also good for those international businesses which want to invest in the UK.

We recognise that the interests of different types of business will not always be identical.  But within the framework of a broader base and lower rates, our objective is to develop a tax system that will be attractive to both outbounds and inbounds.  In short, we want our tax system to be an asset in presenting the UK as a good place in which to do business.

It is evidence of our seriousness in addressing these matters that we have engaged in this process, and are working with such high calibre people, in developing plans in this area.  We hope that this process will mean that, if elected in May, we are in position to move quickly in setting out our thinking in our first Budget.  But I want to stress that we are keen to engage with the wider business community to ensure that we get this right.

There may, unfortunately, be little imminent prospect for reducing the tax burden but there is a prospect of reforming our corporate tax system for the benefit of the UK.

We want to replace complexity and instability with simplicity and certainty.

We want businesses to be able to invest in the UK with the confidence that the UK has an increasingly competitive tax system.

And we want our tax reforms to show that the UK should be the location of choice for business.