Oral evidence: Land Reform in Scotland, HC 274Wednesday 21 January 2015

Oral evidence, 21 January 2015.

Witnesses

Richard Murphy, Tax Research UK, Megan MacInnes, Global Witness, and James Robertson, Chartered Accountant, Institute of Chartered Accountants Scotland, gave evidence.

Chair

Welcome to this meeting of the Scottish Affairs Committee. As you are aware, we are looking at the question of land reform in Scotland. We have been conducting a series of hearings on that subject, and particularly in this and the previous hearing focusing on the financial aspects thereof. We would like to start by asking you to introduce yourselves. Tell us why you are here and what your involvement in this issue is and your specialist expertise.

James Robertson

I am James Robertson. I am an almost fully retired chartered accountant. I am here representing the Institute of Chartered Accountants of Scotland, which is the oldest professional body of accountants in the world and is also a public interest body. We look at the public interest and, only to the extent that it does not conflict with it, we look after the interests of our members. I specialised in tax. In my career, I have advised a full range of landowners, from crofters in sheep stock clubs through tenant farmers, in-hand farmers to the large landed estates with conditionals and property.

Megan MacInnes

I am Megan MacInnes. I work with the international UK-registered organisation Global Witness. We are an organisation that aims to break the links between conflict, corruption, human rights abuses and natural resources. I have been asked to speak today based on two areas of the organisation’s expertise. The first relates to beneficial ownership transparency. Global Witness has been running a campaign for a number of years to try to reveal the problems associated with companies that hide their beneficial ownership—the reason they are doing it and the type of activities, such as tax avoidance and evasion. What is the reason for these companies hiding their beneficial ownership? A lot of that is work on the situation of resource-rich developing countries, where tax havens are used by corrupt national Government officials as a means to launder revenues and corruption payments from, for example, the extraction industries and forestry sectors. More recently, we have been looking in our own backyard. Global Witness has been working with a coalition of organisations in the EU and the UK about the recent introduction of new regulations on beneficial ownership. There are good changes being introduced in the regulations and, as we have already realised from the discussion today, there are still some major loopholes that need to be addressed. I manage the organisation’s work on land issues, which is a separate part of the organisation. We look at land governance issues around the world. Again, our experience is partly looking at the situation of the global land grab and what is happening in Asia, Africa and Latin America. We are also looking at the role of the UK and Europe in terms of the companies that come from these countries and are involved in land grabbing overseas, and how community land rights can be better protected. We are increasingly being asked to lend our expertise in this area to discussions about land reform in Scotland. I spoke at the Community Land Scotland annual conference last summer. We are also providing some commentary on the current consultation by the Scottish Government on the land reform proposals.

Richard Murphy

My name is Richard Murphy. I am also a chartered accountant. I am an English chartered accountant with an Irish name. I was in practice for 20 years before, in 2003, I became one of the founder members of the Tax Justice Network. Since 2005, I have been the director of Tax Research UK, which has done a lot of work with and is funded largely by the Joseph Rowntree charitable trust and trade unions—which I put on record for the sake of any conflicts of interest—and has worked heavily on issues relating to tax evasion, tax avoidance and the UK tax gap offshore. Among other things, I am co-author of the most taught book on offshore in the world.

Chair

Do you want to hold up your book again, just to make sure?

Richard Murphy

“Tax Havens: How Globalization Really Works.”

Chair

Do either of the other two have any publications that you wish to advertise at this event? You were here earlier and heard the witnesses from HMRC. Could I ask you initially to give us any comments you have on the evidence that they provided?

James Robertson

First of all, I have a certain feeling of sympathy with them. One of the joys of tax is its sheer complexity, which I happen to enjoy, but members of the Committee perhaps not so much. Over 30 years, legislation in tax has grown from something that was that high—two volumes—to about this high if you add it all on.

Chair

Unfortunately Hansard cannot record the movements of your hands. Maybe you could tell us. Is that 6 inches?

James Robertson

From about 4 inches to well over a foot. When you ask questions like, “What was the origin of agricultural property relief?” it becomes very difficult for anybody to answer with clarity. If I was to say something right at the beginning on agricultural relief, yes, it applies to agricultural land, but for most working farmers business property relief, as for any other small business owner, is actually more important. Technically you get the agricultural relief first, and only to the extent that it does not relieve that business do you get business property relief. BPR will probably be the most important relief to working farmers. The distinction is that an agricultural landlord is the only form of landlord where you get an inheritance tax relief for letting your property. If you remove agricultural relief, one of the unintended consequences might be yet another incentive for somebody not to let agricultural land. That is not a justification of it; I am simply saying that is the feature of the way the relief probably impacts on how people look at their businesses. I should add that the in-hand farmer will care deeply about the fact that he gets agricultural relief on his farmhouse. As every farmer will tell you, you need a farmhouse on your farm.

Pamela Nash

Why is that the case? Why would business relief be prioritised? Is there an order in which these reliefs are applied in law? I thought agricultural property relief was 100%, whereas business property relief could be variable. Is that not right?

James Robertson

At the moment, the agricultural relief, if you are an in-hand farmer, would be given at 100% of the agricultural value of your land and agricultural buildings. You then get business property relief, so you are correct that there is an order in which those reliefs are given. If you did not have agricultural relief, most farmers would still get business property relief on the farmland that they own. They would not get it on their farmhouse. The agricultural relief is important to the working farmer because he gets that on his farmhouse. Generally speaking, it will be less important to him for his farmland, because if it was not there he would still get business relief. It is given, broadly speaking, to any qualifying trading business.

Pamela Nash

What is the percentage?

James Robertson

It is currently 100% for business property relief.

Pamela Nash

For business property relief also.

James Robertson

If it is their own. If it is land they own that is used by their partnership or by their company, the rate would be 50%.

Chair

Could you just repeat the last sentence? I didn’t quite catch it.

James Robertson

The complication with the relief is that, if I own my farm either directly or farming in partnership, the land is an asset of that partnership and the rate for the business will be 100%. If I hold the land outside a partnership and let my sons run the farming business, my rate of business property relief would only be 50%.

Megan MacInnes

I want to pick up the discussion in the second half of the earlier panel about the issue of beneficial ownership and what the recently introduced EU and UK regulations will mean.

Chair

Can I interrupt for a second? I am being asked by our sound man to ask you to speak up a little so that they can catch your words.

Megan MacInnes

I will start again. I want to touch on the discussion by the previous panel around beneficial ownership and the new regulations being introduced in the EU and the UK, and the extent to which these will help us in the general objective of improving transparency around ownership of land in Scotland, particularly the question of whether there are still loopholes in the new regulations and what the community should consider in terms of further recommendations for addressing those loopholes. The EU regulation includes beneficial ownership of both trusts and companies. The companies will be publicly disclosed, but the information about beneficial ownership of trusts will only be available to Government authorities, as has already been discussed. However, the implementation of the EU regulation at the member state level is up to the decision of the member state. The UK Government could go beyond that, if they wanted to, and require that the beneficial ownership of the trusts also be made public. That is a decision given down to member state level. In terms of the application of this within the EU, the Channel Islands—Guernsey and Jersey—are currently considering the extent to which they want to apply these regulations, and how public they want to be about beneficial ownership of companies and trusts in their jurisdictions. In terms of the UK regulations, it is beneficial ownership disclosure only for companies, not trusts. In our opinion, this creates a significant loophole of the kind, Chair, that you have already indicated; it creates a potential incentive for landowners in Scotland to change their entity registration from a company to a trust in order to be able to further keep the beneficial ownership hidden. The other thing very pertinent to the debate about tax havens is that the Crown dependencies and overseas territories considered whether or not they wanted to apply this new regulation and have decided not to. At the moment, the new regulation in the UK in terms of beneficial ownership disclosure will not apply to any of these tax havens. I am not too familiar with the additional bilateral set of agreements that the HMRC representatives were talking about, but in terms of the Bill currently under discussion by both Houses, the beneficial ownership of companies in the tax havens will not be disclosed under that process. From our perspective, the UK Government really needs to do more, both in terms of pushing the tax havens to push for publicly accessible beneficial ownership registries and also for the issue of trusts to be revisited. It can be revisited as the UK implements the EU directive, because they have the ability in the UK to go above and beyond what is in the EU directive. Finally, I want to touch base on something that Pamela mentioned. From our perspective, the objective of beneficial ownership transparency is not just about tax avoidance and tax evasion. From a land reform perspective, it is much more about enabling local communities to know who owns the land and to be able to engage with the owner of the land. It is important to recognise that beneficial ownership transparency is an incredibly important part of some of the broader reform agendas that are being discussed, both by this Committee and in Scotland: for example, the proposal that the Scottish Government are currently considering around requiring landowners who are charitable trusts to engage with the local communities around changes in land management, land use and land transfers decision making. It is not going to be possible for the local communities to engage with the landowner if they do not know who the landowner is. It is important to tie the element of the extent to which these regulations will improve the actual understanding of who owns land to some of the other broader land reform objectives which have a more public good, common good and community engagement longer-term objective.

Chair

Can I pick up on one point you made? I am not sure I understand this adequately. You mentioned charitable trusts. Are there distinctions in operational terms between charitable trusts and trusts?

Megan MacInnes

Yes, there are a number of distinctions.

Chair

Are there significant differences, not in terms of general finance but in terms of our issues about identification of beneficial ownership and so on?

Megan MacInnes

The difference in terms of how it relates to this specific debate is that the Scottish Government’s proposal is that only charitable trusts will be required to engage with local communities around changes in land management, land use and land transfers which could affect them. There is a very specific type of trust. It is important obviously to have beneficial ownership as a prerequisite for those discussions to happen. I am not too familiar about the extent to which other types of trusts are being considered, or not, within the Scottish Government’s proposal. I do not know whether Richard can say more on that.

Chair

Richard, can you respond to that point, and then generally respond to the things that we heard during HMRC’s evidence?

Richard Murphy

I am happy to deal with the last one first, but there are three points I would really like to pick up more broadly. The charitable trust issue is a real one because a charitable trust of course has no owner. You cannot have a beneficial ownership interest in a charitable trust, because it is up to the trustees to give funds to whoever they think is appropriate within the terms of the trust deed. Of course, in the case of a UK charitable trust it should be registered with the Charity Commission. I have to say that you should not place too much confidence in that registration because about 9% of all UK charitable organisations fail to file accounts each year. Therefore there is a problem of regulation with regard to the Charity Commission, who are very short of resources to undertake their work. There is also no requirement that a charitable trust should actually distribute its income. There are certainly occasions when a charitable trust will simply sit upon a growing pile of cash and say, “We will use it for charitable purposes,” but does not necessarily do so. There is also the problem of the offshore charitable trusts, which certainly exist and are quite common in places like Jersey, which is a trust centre—that is one of its major products in the offshore world. The local regulator should know that the charitable trust exists because, again, there are no beneficiaries. Jersey supposedly knows more about trusts than HM Revenue and Customs does, although nobody knows whether that is true or not because there is no data to prove it. In the case of those trusts, we would not know who the trustees are—who in this case are obviously standing in proxy position for the owner—or how the trust is being managed. There are problems with regulation of charitable trusts here and elsewhere. We should not think that, just because it is called charitable, there is no issue with ownership and that it will be beneficent in its approach. To go back to the three issues I saw coming out of the earlier session, one is with regard to the early questions on reliefs and the availability of data on those. The second one is automatic information exchange, and the third one is beneficial ownership. I have worked on all those areas. I did feel sorry for the three gentlemen who were put up before you. What they were really working under is the constraint of the management of HM Revenue and Customs, I am afraid to say. That constraint is an enormous one, in that it seems to be an organisation set up to not collect tax, if I can put it so kindly. They underestimate the tax gap. I have shown time and again, for example, that they fail to include almost any tax not paid by people who have failed to send in their tax return, which of course is the ultimate goal of the tax evader, yet they seem to presume that all people who do not submit tax returns have no tax liability, which is extraordinary. We have a body which is set up to not think about the tax system we have, which can deny responsibility for it and, as you heard, persistently denied responsibility for it by passing the buck to the Treasury. It has no Minister responsible for it, because it is not a ministerial Department. David Gauke is the Minister accountable to Parliament, but there is no ministerial responsibility as such. It is also massively under-resourced. It has gone from 91,000 staff in 2005 to 55,000 scheduled for this year. That is why I declared my interests earlier on. I am funded by PCS, the union for 80% of the Revenue’s staff, so I have a potential interest to disclose. The fact is that I believe that has had an enormous impact. What I believe we need in this country is an office for tax responsibility, not an Office for Budget Responsibility fully staffed by economists and people from the Institute for Fiscal Studies but who have not actually dedicated their lives to practical taxation in that sense. What we want is a body that is going to sit down and work out the policy implication of recommendations before they are enacted—exactly the sort of thing you were asking for: what happens to a policy initiative after implementation? Supposedly, under the 2010 recommendations for policy, there were going to be post-implementation reviews. I have given evidence in another Committee room for the House of Lords on this. There is almost no evidence that those post-implementation reviews have had any significant consequence. The collection of data is, at best, spasmodic. We appear to have a governance system for a tax authority which is not asking relevant questions. I wonder whether that is because its board is dominated by members of the big four firms of accountants and private sector business; it is a little surprising to find that a former senior partner at KPMG is the chair of HM Revenue and Customs. I feel that a massive reorganisation is required in the Revenue. If the Scottish Government were serious about its new tax policies, it should certainly be looking at an office for tax responsibility as well. There was some extraordinary faith placed in automatic information exchange. I will link that issue with beneficial ownership. I would like also to put this in part, because of where we are, in a Scottish context. The public register of beneficial ownership for the UK is not going to work. I will guarantee you that it is going to be absolutely useless. The reason why is that it is a system of voluntary disclosure. Everybody who is already honest will own up and say who the beneficial owners of their companies are. Those who have something to hide will not say who the beneficial owners of their companies are. I want to put that in the context of the current regulation of Companies House in the UK. There are over 400,000 companies struck off from the register of companies in the UK as a whole each year because the registrar of companies has lost touch with them. They simply have not bothered to file a form; they have not sent an annual return; they have not complied with the law. Companies House do not pursue that. They do not bother to ask, “Why haven’t you done it?” They do not go round and say, “Are you really operating?” They just strike the company off. We have no idea what the true scale of tax loss is, but I have estimated it as £11 billion a year. In Scotland the situation is worse than it is for the UK as a whole. Since 2008, there has not been a single prosecution under company law in Scotland for failure to comply with the requirements to file documents. In practical terms, company law is now not enforced in Scotland. The consequence is very straightforward. Frankly, if somebody wants to form a company and not disclose the ownership of that company, the best thing to do is to form a Scottish company. Nobody will ask a question. Nobody will enforce any action with regard to it. The prospect of any inquiry arising is zero. Why bother to go to the Cayman Islands when you can actually do it in Edinburgh? There is no functioning legal regulation of companies in Scotland. The first thing to do is get the domestic act together before we worry about what happens elsewhere. If we are going to have a failed company registry, just imagine what is going to happen in Cayman, Jersey and so on. It is so easy, and in fact it is normal, to set up a company in these places which is owned by a trust. You might have a company owned by another company owned by a trust, which may in turn be owned by or have interest in another trust and on and on. The fact is that you could also subdivide the ownership to the point where the interest was less than 25%. At that point there is no reason to do automatic information exchange. You can layer trust upon trust and jurisdiction upon jurisdiction. I can well remember when I was at KPMG—it was called Peat Marwick in those days—I was simply told, “Do this.” That was a long time ago and I am sure things have changed at Peat Marwick/KPMG since then. The instruction was simply, “Form your company in Jersey, form your trust in Cayman and put your directors in the British Virgin Islands, and you will never be cracked.” To a very large degree that remains true now. Once you have three jurisdictions involved they can all manage to break the issue up. They can all put forward different information if they wish. As Senator Carl Levin said in the US Senate on an investigation on this issue, everyone turns a blind eye; they look at their particular narrowly focused issue and answer questions on that but don’t look at the rest. Therefore, the chance that true beneficial ownership information is going to come from the Cayman Islands is, I would like to suggest to you, pretty remote. I simply do not believe that we are going to get the data we expect. For the Revenue to think that that is therefore going to provide them with enormous benefit is limited. Trusts are absolutely fundamental to that, contrary to the evidence that you were given by HMRC. Every single offshore arrangement will always involve a trust almost as a matter of course, and there is a very simple reason: the offshore operators—the offshore local financial services industry—do not wish to be seen to be the direct operators of a company. They will always hide their involvement via the trust in the first place. If you do not involve trusts, if you do not investigate trusts, if you do not demand the beneficial ownership of trusts and you do not want that information on public record, frankly we are having some nice wallpaper to make it look as though we are making progress, but whether we will actually get the data we need is open to question.

Chair

We are all doomed then.

Richard Murphy

No, we could do a lot with this. We could start by literally putting our own house in order. We would need a lot more people working in Companies House in Cardiff. We would need a lot more people working in Companies House in Scotland. We need to make sure that people file accounts here. We need to put a simple mechanism in place. It is very simple in this country to solve this problem. If we want to know who the beneficial owners of companies are, we do not rely on an honesty box arrangement. We actually ask the people who should know. I was in Paris yesterday so I still have my passport with me. If I want to open a bank account, whether for myself or for a company as a director, I will be required to put my passport on the table to prove who I am. The banks know who the beneficial owners of companies are in this country. I think by and large that they follow that procedure, so we need to do in this country what we are expecting banks in the Cayman Islands to do, which is to tell us who owns the beneficial interest in the company. It was observed that, from 2016, officially the Cayman Islands should give us the information on who owns a company, if they happen to be British. If that company is going to be in Edinburgh, Inverness or Aberdeen there will be no automatic information exchange requirement from the bank to HM Revenue and Customs or Companies House, so you won’t know. We need a piece of legislation to be put in place that says any bank operating in the UK which opens an account for a UK company must tell HMRC that they are opening an account, where that account is, who they think the beneficial owners of that company are—which they will have proved because they will have required documentation to be put on the table—and where that company is really trading. At that point we will know quite a lot, if we set the gold standard. It is so easy to do because that data exists. It has even got to be compiled for the purposes of informing foreign Governments, yet it is not coming to our Government. That is how daft the situation is going to be. If we used that information, we would crack open the ownership of UK companies and then we would have set the gold standard for everybody else to copy. We could then say that we demand the information from other people.

Chair

I was under the impression from what the Prime Minister said at one point that beneficial ownership of UK companies was going to be publicly available.

Richard Murphy

Yes, but only on the basis of people making voluntary disclosure.

Chair

To be fair, it was not qualified in that way by the PM when that was asked.

Richard Murphy

To explain to you how the system works now for information on ownership, which is legal ownership, it does have to be disclosed now on the annual return form that a company has to file with the registrar of companies; it is up to the company to disclose the information. That I know of, there has never been a prosecution for failing to disclose the right information with regard to legal ownership on an annual return form. There are almost no prosecutions ever, for the reasons I have just explained. The companies are struck off rather than actually asked for the missing return form, so there has, effectively, never been an inquiry on whether the legal ownership is properly disclosed. When we come to deal with beneficial ownership there would simply be an additional question on the annual return form: “Are any of those persons who are the legal owners different from the beneficial owners of the shares?” In other words, are these people acting as nominees? There will, effectively, be a voluntary box arrangement to change this. To put this in context, there is a maximum of about 5,000 prosecutions a year in the UK on company law issues, but none in Scotland—I stress that this is in England and Wales; there are very few in Northern Ireland—and 50% of those are abandoned before they ever actually go through the legal process. They are almost invariably for failing to file accounts, and the accounts are submitted so they do not even pursue the action when they start it. The legal enforcement of these laws is ridiculously weak. Anybody who does not want to disclose beneficial ownership will know that, and simply won’t file it.

Chair

Picking up your point about the circumstances—that legal action is dropped when the accounts are filed—presumably the same thing would apply to beneficial ownership. If the information is not there, and it relates to land and somebody has an interest in pursuing it and they start to pursue it, the information might be provided in those circumstances.

Richard Murphy

But how would we know that there was a difference between legal ownership and beneficial ownership anyway? Only if the legal owner stood up in court and said, “No, it is not me, guv; it’s him.” That is the only way you would ever find out. Finding out that there is not a set of accounts is easy; it is either there or not. Finding legal ownership is another matter altogether.

Chair

In the circumstances we are discussing, is that a distinction without a difference, in a sense? If the point is to identify who is responsible for the land and who you want to compulsorily purchase it from, take action against or something similar, to know who the legal owner is would be sufficient, would it not?

Richard Murphy

No, very definitely not. Barack Obama once said of a building in the Cayman Islands, how could that building be real, because there were 19,000 companies in it and that was not possible. Actually there are some addresses in the UK where there are more than 19,000 companies. There is one in Reading where I think the number is significantly greater. You might have some data on that, Megan; I know Global Witness have worked on this as well. The fact is that there are a very large number of addresses where nominee ownership is recorded. It will take you minutes to discover, if you go and look at it, that it is very easy to buy a package which includes nominee directors, nominee shareholders, a nominee company secretary and a nominee address, all of which will be filed on public record for a UK-based company. You will not at present be able to go behind those. Those nominees will frequently themselves not be UK-resident. You can go and find the nominee, if you can, in Vanuatu—where I know there is one particularly prevalent one—and ask, “Who are you really acting for?” They will say, “I won’t tell you.” They probably won’t know of course; they won’t have a clue. They will just have signed a piece of paper, and they might not even have done that; it might have been rubber-stamped. The point is that it is very easy to put into place arrangements where the legal owner will have absolutely no knowledge at all about the affairs of the company for which they are supposedly responsible. Therefore, to find out who the real beneficial owners are is essential, and the only way to do that is to trace the money—literally go to the bank account.

Chair

James, at one point you looked slightly doubting about that position.

James Robertson

Chair, I am no lawyer and I say that in advance, but my understanding is that under Scots law if you have title to it you could compulsorily purchase. Who has title for that purpose is a very different thing from understanding who has the power to direct. I am told by Scots lawyers that the concept of beneficial ownership is one that does not exist. It is an English concept, not a Scots one.

Chair

You are a lawyer and an accountant.

James Robertson

I said I am not a lawyer; I said very clearly that I am not a lawyer. I am told that what matters is who holds title. There are a lot of issues in Scottish land ownership about not being able to identify who has title. There are areas of land where it is not clear who owns it because there is no recorded title. There is a wide range of issues which this Committee has looked at, and had evidence, on the completeness and the very clear public benefit of having a proper register of ownership. But that is about legal title, and not the beneficial owner. It is about who has a title to the land and therefore who owns it. That ownership is about the title.

Richard Murphy

But ownership carries responsibility. I know there are some aspects of Scottish law which, for example, put a person at risk for prosecution as an officer of the legal owner. Therefore, if we cannot identify who that person is, there are obviously problems in enforcing law elsewhere with regard to land rights in Scotland. I have to admit that I follow hen harriers faithfully on this particular issue and the problems of enforcing the law with regard to wild birds in Scotland.

Chair

I want to come back to the order of questions. We do not think of these questions ourselves; we have staff to write them for us. Let me do my homework and work my way through the things that cover the issues. First of all, what are the advantages and disadvantages to people of having land and property vested in overseas tax havens? How could the advantages of those be undermined?

James Robertson

Assuming we are dealing with a legally compliant person and not somebody who is trying to hide and obscure their liabilities for tax, one feature of the UK tax system is that we do not tax to capital gains, as a first principle, people who are not ordinarily resident in the UK. Legislation is coming forward in the Finance Bill, and recently the Government have decided to tax to capital gains residential property held by non-residents. The previous witnesses referred to that. My institute asked the question in the consultation, “Why is it being restricted to residences? Why not all other property?” It is a fair question to ask. Here we are talking about estates, by and large, or farms. These will have a residential element, but they will have a non-residential element, so it makes sense perhaps for somebody to buy it in an offshore company. It may be operated in the UK by another company in a group, but they will do that and there is no capital gains liability because that is the way our tax system works.

Chair

And that is the main gain of holding it overseas.

James Robertson

That is probably going to be the main gain if you expect to sell it. You may get an inheritance tax benefit because, again, our tax system taxes people who are domiciled in the UK, and after they have been here long enough, which is—Richard will correct me if I have this wrong—17 years out of the last 20, bearing in mind it is Parliament that decides how long that period should be, they then become deemed to domicile. Then they become taxable, like you and me, on their worldwide assets. But if they are not here for 17 years—they may only come here for two or three days a year and they may even be paying tax in their own country under their inheritance tax rules—they buy through an offshore company and then do not have to consider UK inheritance tax. For some owners there is probably, as an individual, no tax saving. There will be for others, but for some in some jurisdictions they might pay more in succession taxes than they would in the UK. If it is a farm they might pay none, because of business property relief, or there may be no equivalent relief in the jurisdiction in which they live. For many people, that is why they do it that way. For others, perhaps a successful entrepreneurial family, it is simply that they have built up quite a lot of wealth, so they buy property around the world as investments. They buy in every country through a particular structure. There is no avoidance in it. For some, as Richard alluded to—however effective or otherwise, I am extremely glad to see that there are now these global agreements—they are seeking to avoid the tax illegally. They are trying to evade tax. They should be caught and they should pay a severe penalty when caught.

Megan MacInnes

I would like to talk a bit about the advantages or disadvantages, not from a tax perspective but just in terms of knowing who owns the land. There has been enough documentation of cases in Scotland of absentee landlords, where the landlords clearly decide that they do not want an active presence on the ground in the local community. They are essentially creating barriers in communication between themselves and their tenants and local communities, operating through factors and other types of intermediary. From that perspective this is clearly an advantage for them. It is hard to determine what the objectives of that are, except for possibly wanting to distance themselves in terms of reducing elements of accountability to the local communities who are dependent on them. It is from that perspective that we also need to think about beneficial ownership and what that kind of transparency could bring in terms of the benefit for local communities. I also want to pick up on something that James said. As I understand it—maybe Richard can speak more about this—the definition of beneficial ownership which is being used in both the UK regulation and in Europe is not something based on English or UK laws. It is based on the Financial Action Task Force’s global definition of beneficial ownership, based on anti-money laundering legislation, so it should be considered potentially applicable in Scotland as much as it is in England in terms of its definition. That obviously depends on the differing legal frameworks in Scotland versus England, but the definition itself is at a global level.

James Robertson

I completely agree with what Megan said; that is absolutely right. My comment about title and compulsory purchase was in relation to your specific question. That is a matter of land law as opposed to the context we are talking about here, of people who can effectively control.

Richard Murphy

It is important to say, and it was said by HMRC earlier, that there are more reasons than tax to hold assets offshore. Let us deal with some that are really quite important to some people. There are husbands who do not want to tell their wives what their wealth is. That is incredibly important to some people, because divorce settlements are very expensive if you are very wealthy.

Chair

Or vice versa.

Richard Murphy

Or vice versa, but at the moment it appears to be wives who are bringing claims for lots of money and husbands who are trying to hide their assets. We have seen that happening in recent divorce cases in London. Likewise protection from creditors, potentially illegally, and non-disclosure of assets in the case of bankruptcy, is something that people try to do. They claim they are now apparently worthless, even though they were in The Sunday Times rich list not long ago. That sort of thing happens, and offshore clearly helps. We should not dismiss that. One which is rarely thought about, but which is quite significant, is breaking enforced succession laws with regard to inheritance. In some countries there are very strict rules on how children will benefit from their parents’ estates, and there is a very significant business in breaking those rules. They happen in odd places. Jersey has very strict rules on the proportion of an estate that must go to the children of a deceased person. Apparently they are quite good at using their own trusts to try to get round this, which I find almost amusing. Clearly in some traditions that is important. It is used in French law, where the same thing happens. That is another use. There is the breaking of responsibility—simply not wishing to be associated with the asset. That is very widespread in terms of offshore. We are not just talking about land, but about actually denying responsibility for the ownership of a company or whatever else, where there might be reputational risk or otherwise from doing it. If we come to tax, the tax that has not been mentioned is stamp duty or its equivalent in Scotland, because it has been replaced in Scotland. That is another tax which can be avoided through the use of ownership of land through a company. There is a much lower rate of charge with regard to the transfer of shares than there is with regard to the transfer of ownership of land. There is a significant saving. With regard to tax, capital gains are undoubtedly significant. There could be an attempt to avoid tax on income arising in the UK. That is possible. I am afraid that the UK is extremely weak at regulating offshore landlords. It was suggested that there is an offshore landlord scheme. I am told by people who have worked in the regulation of that scheme that every single application is automatically rubber-stamped, and there is no after-the-event monitoring to make sure that it is properly appraised. It is quite possible that income is not being subject to tax which should be, because inappropriate exemption from withholding taxes on rental income had been given in the UK. That is very important. Dealing with the issue of beneficial ownership and the FATF, Scotland will have to recognise in its legal system that there is a differentiation for the purposes of this particular piece of regulation. The FATF, which is based in Paris and writes the money-laundering rules for the world, has been quite successful in establishing a legal framework that is at least consistent, and for that they should be applauded. It may not always be applied but there is a consistent legal framework in which there is, very clearly, a differentiation between legal and beneficial ownership. This reflects that fact. Scotland could not ignore that, because it has obligations to other states with regard to provision of information which would recognise the difference. Whether it matters domestically, it certainly matters internationally to Scotland.

Chair

There are a number of minor points. I want to check whether or not we have covered them. Which taxes in particular can be avoided by vesting ownership overseas?

Richard Murphy

You are unlikely to avoid VAT, because it is a domestic tax. If you have to charge VAT on any aspect of an estate’s activities, that is going to arise here. Corporation tax can be avoided if you hold it in a company even if you declare here, because it is quite possible to load your offshore-owned company with debt, which is going to wipe out any profit. The interest paid on the debt, which you can claim was used to acquire the estate, would then be routed to an offshore entity where it would not be taxed. Frankly, the opportunity to avoid all UK tax on any income arising in your UK landholding would be very easy indeed. It is so ridiculously easy as to be absurd. If it is owned in a personal name, or if an entity is used to avoid a personal name, clearly inheritance tax is a possibility. Again attaching inheritance tax could be an issue, but here we are talking about the ownership of the shares, and even then there are various inheritance tax reliefs, such as the business property relief and so on. Inheritance tax is another pretty much voluntary box tax; let’s be totally honest. Let us give you the evidence and the facts as they are. You have a person who is not domiciled and who is going to declare that they own, through a trust in one jurisdiction and through a company in another jurisdiction, an asset in the UK. Well, no, they probably do not own that asset. They will have made sure that that is not the case. Inheritance tax avoidance is significant, but we would never see it turning up in HMRC’s statistics, because there would never be an inheritance tax return. There would never be a transfer to which inheritance tax could apply. In that sense, the inheritance tax is avoided by the structure, not by putting into place any specific inheritance tax measure. You are quite right that capital gains tax would be avoided. I think we have covered most that we are likely to be dealing with. I am sure there are some minor ones we can think about.

James Robertson

Our tax system is structured so as almost to encourage it. We are all offered choices when we buy something. You can buy your house in the company. I would advise you not to, because you will create quite a lot of tax liability. I have seen it done in practice. Where you have that choice and you say, “If I buy something in the company or I buy it personally,” and you can see that you may not pay tax, you are simply taking advantage of a feature of the tax system that this country operates. Whether or not that is something you feel is appropriate in the context of domestic residential property, which we have talked about before, there will be legislation before Parliament saying, “We will tax non-resident owners of residential properties regardless of whether it is a company or an individual,” but it is limited to that. That is a policy decision that Government and then Parliament has taken. Without wanting to say pejoratively that people avoid tax, we do that all the time when we take decisions about how we do things. In a sense, I throw it back to yourselves; if you feel it is not appropriate, the remedy is legislation.

Richard Murphy

Can I qualify how I view that? There is a difference between the choices that are available when you put all your cards face up on the table before HMRC, which would still pass scrutiny, and the choices where you might not wish to put all your cards face up on the table because that might lead to questions that you would not wish to answer. Some of the issues you are looking at are how do we find those who are not putting all their cards face up on the table; and are the resources and mechanisms available to find the owners of land in that situation? Choices are entirely appropriate, and that is one reason why the tax system has indeed grown in size. A modern, complex economy full of modern, complex people requires lots of modern, complex choices to be available to people. We will never end up with a simple tax system for that reason, but it does require transparency and full disclosure. The fact is that we are not going to get transparency and we are not getting full disclosure, and we are not investing in the mechanisms to make sure that, as far as possible, we enforce the procedures to get that transparency and full disclosure.

Chair

But non-disclosure is evasion as distinct from avoidance. It is illegal.

Richard Murphy

Yes.

Chair

That is a different issue. I want to raise the question of the impact of ownership abroad and similar practices that flow from that. What might the impact of that be on land values in Scotland and elsewhere?

James Robertson

I was going to make the comment that, if you are not paying tax on it in the first place, clearly the tax reliefs are irrelevant to you in the price you are likely to pay. A previous witness to this inquiry from the Institute for Fiscal Studies drew your attention to the Mirrlees report. One of the comments that Professor Mirrlees made is that land is quite a nice thing to tax because its supply is not terribly affected by taxation. It works the other way too. Reliefs to some extent do not have a similar impact. There was an article in The Economist last week called “Barbarians at the Farm Gate”, which reflects on the yields that people are actually getting from land over recent years. In the US and the UK, it has outperformed Treasury stock, stocks and shares and gold. I do not think it is tax relief that will be behind that particular surge in price. I suspect that is money looking for safe havens. I have seen before that people have said that tax reliefs are driving land values. I have always been deeply sceptical, simply because there is not a huge churn in land. One of the issues in the land market is that it is not actually that active. When some does come on the market, there are a very few rich people who will pay a lot of money for it. There have been some very substantial purchases of English farmland over the last couple of years, and I very much doubt that they have been driven by tax relief. That is not to say that it does not have an impact. People will invest in land for tax relief but I would question how much, particularly in some of the more remote areas of Scotland.

Chair

We are conscious of that. It is very difficult, if not impossible, to identify the impact of a single factor, because all sorts of other things apply. I am very conscious of that, but all the contributions we have had have asserted that the tax breaks on land ownership serve to drive up price. How you quantify the scale of that compared with everything else is difficult, but is it a proposition with which you would just disagree?

James Robertson

I am absolutely not disagreeing. It clearly must have an effect, but land prices have risen so sharply during the period of the recession that you have to wonder how much of it is driven by UK domestic tax reliefs.

Chair

You heard us speak earlier with the people from HMRC about the extent to which there was a policy clash between the Scottish Government on the one hand wanting to buy land, and the HMRC or Treasury position about tax breaks driving up the price of that land. Are you effectively saying that we should simply ignore that because there are so many other factors involved?

James Robertson

No; it is a factor that you need to take into account. I do not think you would ignore it. The tax reliefs are there for a policy reason, which has been discussed before. People talk about the growth in wealth and the yield; the article in The Economist was looking at yield. That yield would include the capital growth. The average 250-acre small farm is never going to access that. In a sense it is not real to them, other than the amounts that you can get secured on it to borrow from a bank. They will not be selling it and that is one of the features of the land market. You could argue—I think previous witnesses may have done so—that that in itself is a distortion of the market. But that is a policy reason for having it—to enable traders or family companies to continue without having to be sold and broken up. It happens to be farmers in this case. There are some quite difficult decisions that have to be made about policy—these policies.

Chair

Richard, you wanted to come in.

Richard Murphy

I think tax has a significant impact on the valuation of land. I am sure it has had an impact upon the reason why land values have gone up. I live in a different rural community but I am seeing the same consequence. I do not think that agricultural property relief is a major factor in it, if I am honest. I do not think many people would actually buy a farm to avoid UK inheritance tax. I think they would use business property relief—and there are easier assets than land to secure that, if I am completely honest. If I put myself in the position of somebody coming into my office and saying, “I want to avoid tax liability on £5 million because I definitely know I am going to die in a year for medical reasons, or maybe in three years, so I have a life sentence on me,” would I say, “Go and buy land”? No. It would be much easier to go and buy unquoted shares to get the same equivalent relief for inheritance tax. It is unlikely that land is being used for that purpose. The problem is business property relief, not agricultural property relief. The real issue is not the direct tax reliefs, whose merit I would question: whether they really achieve a goal now is a good question. If we go back to 1925, I suspect you will find that it was not well thought through. It certainly does not have a modern policy implication, whatever was thought through at that time. It would need rethinking again. HMRC have interpreted in a modern context something that they have never really thought about from the past. The reality is that we see different groups competing for whatever land is available. Some of those competing groups have been able to accumulate wealth in a relatively low tax environment. Others are not able to accumulate wealth in a low tax environment; that is the working farmer—the person who wishes to make it their career to live and work the land. Whereas if you are working in the City of London or, as likely, working in the financial services industry somewhere else in the world, or you are somebody who has decided to relocate to a tax haven, you are probably suffering quite a low tax rate compared with an ordinary working person in this country who wants to make it their job to own a farm. They would then be in a much better competitive position because of their ability to accumulate tax free than the person who actually wants to work the land. They could therefore always out-compete the working farmer, which is why we end up with tenanted and managed farms. We do not end up with new working owners of land in this country. It is very clearly distorting the land price. It is also distorting the expected return. As I have just suggested, if they can then load the farm with debt in terms of ownership and make sure they never pay tax on that, which is not a direct relief but a general relief for interest, they will then have a very low tax cost of owning an asset which will be accumulating in capital worth, which is where they see their gain arising. That puts them in the position that they are not so worried about the yield as such. The tax system is not giving rise to a yield question but an ownership question. If that has long-term implications for land management, because you are breaking the tenure and ownership and the management of farms and ownership, it has very serious implications for how we end up with farms being managed throughout the UK, not just Scotland. There is a fundamental tax reason for that, which is this differentiation of wealth. It is an accumulation of wealth in a small part of society which can exploit those tax rules to prevent those who are actually going to work the land from getting access to it.

Megan MacInnes

I want to say a bit about this, not from a tax haven perspective but from a secrecy jurisdiction perspective. We also need to think about the impacts on land market dynamics—not necessarily land value dynamics, but the dynamics driving Scotland’s land market in terms of the extent to which the kind of buyers for land are those who see an advantage from being able to register their ownership in a secrecy jurisdiction, and benefit from not having that ownership publicly known. Richard and I have both mentioned the non-tax advantage around the breaking of responsibility and being able to distance yourself from the asset, the land. If you have a system which incentivises and provides a secrecy jurisdiction for the owners of land, it attracts a certain type of buyer and will have an impact on the market; whereas if you put in place regulations which prevent that from happening, such as the proposal from the Scottish Government that you will have to be a Europe-registered legal entity in order to buy land in Scotland, that would immediately disincentivise the kind of buyers who potentially look for a secrecy jurisdiction in which to register. It would incentivise those who want their ownership known and who want direct responsibility and an engagement with the local community and the asset they own. We need to consider not just the tax-based impacts on land values and markets but also the other accountability-based elements.

Chair

We will come to the question of the Scottish Government’s proposal in a moment.

Mike Crockart

I have a specific question relating to the Small Business, Enterprise and Employment Bill, which is currently in Committee stage in the House of Lords. Clause 78 requires companies “to keep a register of people who have significant control over the company”—we touched on that in your general comments up to now. Will this measure be successful in achieving the commitment made by the Prime Minister in response to the EU Council ruling? I think you have already said, no, it won’t, effectively.

Richard Murphy

It won’t.

Mike Crockart

If not, what further measures are required?

Richard Murphy

I would have to go and read that clause and come back to you on that, to be honest. I am quite happy to do that, but I think—

Pamela Nash

I am sorry to interrupt, but the clause referred to is just about the set-up of the register that we discussed earlier.

Richard Murphy

It is just about the register. Then you have to drive behind that and get information. That would be the proposal to secure information to make sure that we really know who the beneficial owners are from third party sources rather than simply relying upon that arrangement. I also question the 25% rule. I think it is too high. It is quite easy to create apparently disconnected ownership at a 25% level. If you made it 10% it would be a lot harder. I was certainly involved in lobbying BIS on that issue. It has been dismissed; 25% is the international standard, but I have a feeling that it is too high.

Mike Crockart

Effectively a small family would be able to—

Richard Murphy

It would be relatively easy to do that. The whole thing ignores the other thing we have put into place. Yes, it is a European company but is it owned by an offshore trust? That is another potential loophole which I am not sure has been adequately dealt with in any of the legislation that I am aware of.

Megan MacInnes

I would echo what Richard has said. The exclusion of trusts from this is a major loophole that needs to be addressed. We also lobbied the Government to reduce it from a 25% threshold down to something closer to 10%, believing that was a much better reflection, and would enable you to capture genuine beneficial ownership much more strongly. I would like to draw the Committee’s attention to schedule 3, which is the accompanying text for clause 78. The 25% threshold is only one of four conditions. The fourth condition is simply that company X or individual X has the right, first, directly or indirectly, to appoint or remove the majority of the board of directors of the company. Secondly, there is a broader clause, which is that X has the right to exercise, or actually exercises, significant influence or control over the company. We should not forget that there is this broader condition that does not depend on 25% voting rights or shareholding, but is about the actual, or in reality, control over the company. That is where there is potential for broadening the extension and the application of this.

Mike Crockart

That is quite a subjective condition though, is it not?

Chair

That’s right. What is the nature of reality? How do you define that?

Megan MacInnes

This is based again on the global definition of beneficial owner under the anti-money laundering regulations. It is deliberately subjective in order to be interpreted as it needs to be in each place. I do not know whether Richard can say more about the legal arguments behind that.

Richard Murphy

It is a quite well-known concept; it is in corporation tax law already. It is in company law already with regard to control. Both of them have a de facto provision as to control which is not exercised through shares. It is behind, in a sense, the concept of the shadow director; the person who manages a company but does not accept responsibility for it. How do you define it? It is not very subjective. It is, “Who is issuing the instruction?” If you wished for a practical interpretation of that, at the end of the day it is the person who is at the end of the phone and who tells the trustees to tell the company to do the transaction. “Who is at the end of the phone?” is the answer to that question. Alternatively, it is mum or dad. Either way, in seriousness, obviously in some family situations you would find a dominant character who might be doing the same job. More likely, in the issues we are worried about, it is the person who actually issues the instruction. It is obviously possible to audit that trail if you can work your way through it. The problem is being able to work your way through the trail; that has always been the difficulty.

Chair

But I could just tell Graeme to phone you. You are the link. I find it difficult to see how that operates in practice. Or I tell Graeme to tell Pamela to phone you.

Richard Murphy

Yes. That is called “layering” in money-laundering terms, by the way. It is a concept which is well known and which you try to break. You have put a layer between you and the telephone, but at some point most people leave a trail of behaviour. Normally you would find it in the e-mails on a computer system somewhere. These days, people are very good at leaving trails of instruction. People are quite paranoid about protecting their wealth, so they are quite good at issuing instructions to make sure that people have done what they said.

Chair

So if I phone you Graeme—

Graeme Morrice

All right, I’ll tell Pamela.

Pamela Nash

I am not answering the phone.

Richard Murphy

You have to put your mobile phone into that “Unknown” category as well. It must not come up.

Megan MacInnes

Chair, the other thing to remember is that this is not a single phone call. The point is that it is regular control over the company’s business and operations. Again, that is much harder to hide when it is a repeated level of phone calls and repeated communication.

Chair

I understand that, but it is possible to have things like blind trusts, or just a standing instruction to maximise profit or run the business. The person is not then involved on a day-to-day basis.

Richard Murphy

But that has to be evidenced. A blind trust has to mean that the person is not seen to be instructing their trustees. It is a concept known mainly to politicians.

Chair

How do you prove a negative?

Richard Murphy

These days by the absence of e-mails and phone calls. You can get those logs, if you want to.

Mike Crockart

You mentioned the difficulties around trusts and those not being included. In terms of transparency, are there any other issues that the Government have not considered fully in this legislation?

Megan MacInnes

One of the things that is being discussed was mentioned by the HMRC panel. In the UK right now, the Government are finally negotiating the text of this UK-based Bill, but there is also the implementation of the EU directive. The EU directive also covers trusts. There is the chance, in terms of the implementation of the EU directive, for the disclosure of trusts to be considered as a separate piece of legislation from that employment-based Bill which does not cover trusts. The other issue is about public access. In the EU directive, trusts are covered but the public do not have access to that. That is another element of transparency which we would like to see. Not only should these registers cover trusts, but they should be publicly accessible.

Richard Murphy

I have two other areas of some considerable concern. One is the Scottish limited partnership, which can be used to disguise ownership. The other is the generally available UK limited liability partnership, which for some perverse reason the Government have decided to allow to continue to be operated by entirely corporate members who can be registered entirely outside the UK but can then appear to be a UK owner even though it is actually wholly non-UK managed and owned. The Scottish limited partnership frequently does not have to file accounts, and does not in many situations. It does not, therefore, file information on who its members are, even though it has certain aspects of limited liability associated with it. Both of those require better disclosure as a consequence. The Government have certainly missed an appropriate issue—demanding that limited liability partnerships should always have at least one real, live warm-bodied human being as a member who can be nailed down to be responsible for it. But that is not the case at present.

Chair

James, do you have any comments on that?

James Robertson

In terms of partnerships, which have not been talked about generally, there is no register of who are partners of a general partnership. Again this falls to disclosure and openness. Scottish general partnerships, in contrast to England, are legal entities. They are able to own property but they cannot take title in it in the name of the partnership. It will usually be taken in the name of one of the partners. It might be a corporate, just for convenience, that is owned by the partners. Although it is a partnership asset and it belongs to all the partners, its title will be held in the name of an individual. That is a peculiar feature of Scots law. A partnership in Scotland is a legal person and it can own property. That is very different from England, and is another factor in terms of how transparency should be considered.

Graeme Morrice

If we take that issue of legal entities in Scotland, you will probably be aware that the Scottish Government are looking at proposals to restrict legal entities that are eligible to register a title to land and property only to those in the EU. Do you agree with that? Do you think that is helpful in ensuring transparency? Do you see any loopholes in that?

Richard Murphy

They have no choice about that in the EU. That is simply a matter of fact. Within the European Union under the Treaty of Rome and all following treaties there is a right of freedom to incorporate. Therefore you can incorporate if you are in the EU in any country you wish. But let us also be quite clear: there are some member states in the EU who are blatant tax havens and secrecy jurisdictions, where a secrecy jurisdiction is deliberately used to disguise ownership or other forms of activity from the regulator of another state. Luxembourg is a classic example. It is quite difficult to get information from Malta and Cyprus. For these purposes, rather curiously, I am not quite sure where we will find the legal test falling with regard to places like Jersey, Guernsey and the Isle of Man, because the EU extends its own regulation on some occasions to those places, deeming them to be part of the UK. It would be an interesting idea. In practice, I think there are real problems with this. Unless you go behind the company and say, “We’ve got to know who still owns the company,” and you look through the trust and so on, this is not going to be very useful.

Graeme Morrice

I suppose ultimately it could be owned by corporate entities that are registered in tax havens.

Richard Murphy

Yes, of course.

Graeme Morrice

Having said that, would that not still encourage the disclosure of beneficial ownership?

Richard Murphy

In theory it should, but, in practice, if somebody is determined to hide the beneficial ownership of a piece of land they will put behind that company whatever structure is necessary to make sure it is not identifiable, including arrangements where, for example, it is quite common to find that a company in another European country may be owned by two nominee companies which in turn own each other. I have frequently come across that arrangement, and discussed it on television in the past with regard to ownership of some situations. There is then going to be a trust behind those, but we do not know who. Dead ends are normal in this. I do not see that saying that the next layer has to be a European country is a great problem. It just adds another layer in the whole arrangement, but that is all, unfortunately.

Megan MacInnes

From our perspective and from the Government’s perspective and other groups working on the more community-focused elements of Scottish land reform, this is a really important provision. Again it links with helping us to understand who owns land, and is an important step towards some of the other elements of the proposals being discussed by the Scottish Government at the moment, such as the community engagement proposal and also the proposal to remove certain exemptions on business rates for certain activities. In general, it is very much to be encouraged. There are definitely some loopholes and things which need to be considered. I would agree with Richard in terms of what this means for tax havens within the European jurisdiction and how that can be addressed. The other question is that the extent is not clear in the current proposals, whether they cover companies and trusts, and what kinds of trusts and charitable trusts. These kinds of things need more consideration as well. Another question is whether or not it is applied going forward or retroactively, given the fact that there is relatively low turnover, especially of larger land and estates in Scotland. In addition to the provisions that will apply going forward, there is a question of whether or not there can be some encouragement to the current owners of land to undergo some process of registering legal entities in Europe—a schedule process. That is something which should be given more consideration.

Chair

Let me clarify that last point. Presumably if you have a situation where it becomes the law that the owner has to be registered in Europe, it is almost bound to be retrospective in a sense. If you are saying, “As from now it has to be,” those who own will have to register in Europe.

Megan MacInnes

As I understand what is in the current Scottish Government’s proposal, it would apply only to those who buy land in the future. It will not apply to those who currently own land.

Chair

But it could, am I not correct?

Megan MacInnes

My understanding is that it was only going to apply to future transactions, but that may not be correct.

Chair

There is a distinction in what they are proposing. What I am trying to clarify is whether or not they would have the power to say that it could apply to all land in Scotland: “All land in Scotland as of such-and-such a date will have to be owned by an EU entity, otherwise we will take it,” or something. There would have to be some sort of sanction, presumably.

Megan MacInnes

Our understanding is that there are no legal barriers preventing them from doing that. Obviously there are bureaucratic and administrative barriers in terms of how it is actually applied, given the slow progress that has been made in terms of the ownership being registered on a land registry. It would be about how it is applied in practice, rather than the yes or the no.

Richard Murphy

Could I make a suggestion that would make that proposal much more effective? There is at the moment a real problem that the foreign owner of UK land is not deemed to be trading in the UK because renting land is not considered to be a UK trade for the purposes of defining a foreign company resident in the UK, and therefore required to put information on public record on a UK registry of companies, even though it is a foreign company. If you were a foreign company operating a factory in Scotland, you would have to file accounts in Scotland as if you were a Scottish company. But if you simply rent out land, you do not have to file accounts because that is deemed not to be a trade. That makes no sense at all to me. As far as I can see, if you are actually renting land in a place, you have to be trading in a place and you have an income arising in a place. Therefore, you should be subject to the law with regard to the operation of limited liability entities in that place. One of the things to do is change the law on that particular issue, and say that for company law compliance purposes any company that owns land in Scotland is deemed to be a Scottish resident for the purposes of disclosure of accounting and beneficial ownership information under Scottish law. You are not then relying upon Maltese law, Cypriot law or Luxembourg law. You can do what you like but you also have to comply with English—sorry, Scottish law with regard to this issue; the two are the same at the moment, but they could be different in the future. You will therefore file here as well. That would also then mean that if they operated a bank account in Scotland, and you followed through my recommendation that the banks be required to put on record the beneficial ownership information that they had secured from those companies, you would get the information that way as well. In my opinion, that information would not only be supplied to HMRC but also to the relevant Companies House so that beneficial ownership records could be checked. What the company discloses and what the bank discloses should be checked to marry up with each other. That will require the engagement of staff. That is a cost, but if we are really interested in ensuring that we have a fair and level playing field in our economy, it is an essential cost to incur to protect from the abuse of limited liability which otherwise takes place.

Chair

I want to clarify whether or not the decision to say that firms would have to file accounts in Scotland, while I recognise it could be a decision for the UK Government to apply across the whole of the UK, could be a decision that the Scottish Government take and put into law to apply only to Scotland.

Richard Murphy

To be honest, I have not read the Smith Commission on that so I am not quite sure yet.

Chair

Would that not be a matter relating to land ownership?

Richard Murphy

I cannot see why there would not be something, because there is a separate companies registry for Scotland already. Why Scotland could not possibly pass law with regard to the application of Scottish company law because there is a separate registry in place seems to me to be a bit odd.

Chair

I am conscious of Smith, and I cannot remember where company law comes into it. I think company law remains reserved. However, many of the matters relating to land ownership are devolved. It could be made a condition, could it not, under devolved powers, that registration with an agency which is reserved could be a condition?

Richard Murphy

Yes.

Chair

That gets round that. The Scottish Government would be able to make that a condition, should they so wish.

Richard Murphy

I would have thought so. I am sure a clever lawyer could find a way to achieve that goal, if the political will existed.

Chair

That is the issue. To be fair to the Scottish Government, these are complexities with which they might not have grappled.

Richard Murphy

No. They’re new.

Chair

Indeed.

Pamela Nash

In evidence from Community Land Scotland to the Committee, concern was raised that registered charities could be used as a front for ownership of land to benefit from tax advantages. Is this potential abuse of the regulatory system something you have heard of before? If so, what would you suggest as a good way of dealing with it?

James Robertson

I have to say honestly that I have no experience of it being used in an abusive way. I have advised a number of charities. There are a number of very well-respected organisations that are charities and that own land in Scotland. There are a number of land trusts—

Pamela Nash

They would be legitimate charities. The phraseology used was “there are charities and charities”.

James Robertson

I am saying that I have no experience of it. I would have been interested to hear specifics of what the concern was. In Scotland, if you are setting up a Scottish charity, it will have to be registered with the Office of the Scottish Charity Regulator.

Pamela Nash

I can read the evidence to you because it is quite specific. I quote Peter Peacock, who says that “it sometimes looks like some of the charities that were probably approved as charities quite some time ago before the new regulation of charities in Scotland came into effect, look like a front for the existing old family just to continue the old ownership and continue the old ownership practices, but now with charitable status which gives them tax advantages which allow them to keep the ownership of that land.” I can’t provide any more clarity than that.

James Robertson

I am trying to speculate in my head as to who Mr Peacock had in mind. I had a couple of thoughts. Those that I am aware of have been set up to preserve a particular piece of land or a particular bit of heritage property. The regulations as to how they should be regulated by OSCR, and for tax purposes by HMRC, ought to prevent abuse, providing that they are being properly regulated. One of my fellow witnesses has made comments before about the effectiveness of regulation. It should not be capable of being abused. The kind of comments that have been made about engagement with the community are a part of addressing that, it would seem to me.

Megan MacInnes

I have heard that this is a vehicle being used for tax avoidance but I cannot speak about the actual details, not knowing the facts myself. The question of regulation is critical and whether or not OSCR is in fact—

Pamela Nash

When you say you have heard of it, have you heard of any specific instances of it, or is it just hearsay—that it might be something that is used?

Megan MacInnes

I have heard it said that this is one of the reasons why some estates are owned by charitable trusts, but I cannot speak to the detail.

Pamela Nash

You have not seen any evidence of that.

Megan MacInnes

No. I have heard rumours. That is all I can say. Again, I would say that this is really something that OSCR needs to look into in more detail. The extent to which the current regulations are being implemented in terms of whether charitable trusts are fulfilling their genuine charitable objectives should be looked at, both in terms of current implementation of the regulations and whether or not those regulations should be strengthened to make sure that trusts which claim to have charitable objectives really do, and are meeting them.

James Robertson

If I may come back, where I have seen them operated they have been operated extremely hands-on, with separation between the owners and the charitable trustees almost to the extent of creating difficulties. The tax legislation provides a particularly draconian measure if you breach your charitable rules. If you lose your charitable status, you are immediately treated as having disposed of all your chargeable assets at open market value with tax payable, and they can go back 20 years. Losing your charitable status, if you are a charitable trustee, is something that really concerns you. I cannot say that people do not abuse something; I am just not aware of it.

Chair

How many times has that sanction ever been applied, to your knowledge?

James Robertson

I advised a charity that was looking at doing something which would have lost it its charitable status. They were not aware of that. They did not do what they were thinking of doing. It was not bad behaviour; it was simply something that a charity is not allowed to do and retain its charitable status. It would have breached it.

Chair

I think you are saying to me that the answer to the question is never.

James Robertson

The only people who could answer that question are HMRC. In my experience, I have never seen it.

Pamela Nash

You have never seen it because you have always given advice to prevent that from happening, or because it is not enforced.

James Robertson

On enforcement, if I was acting for that particular entity, I would have to file a return and declare the tax.

Chair

That is pretty much the nuclear option. Without applying the nuclear option there is still a fair amount of scope for a considerable amount of bad behaviour.

James Robertson

I do not think it is bad behaviour, Chair. The engagement of almost any entity I can think of—I do not just include private charities but other entities, including well-known ones, common good funds and so forth—could be better with their local communities.

Richard Murphy

There have certainly been examples of abuse of charitable status in the press. I have never seen the forced break-up of a charity in that way. The Revenue are remarkably reluctant, in some quite blatant cases, to challenge charitable status, which always surprises me. I do not know why they won’t do it. I think charity regulation is relatively weak. I admit I have less experience of the Scottish system than I have of the English and Welsh system. Generally, it suffers from all the same problems of too few resources being provided to achieve the goals that are set by legislation. There is opportunity for abuse. There is non-filing of accounts. There are issues about that, although, if you have gone to the point of setting up a charity to own land, it is unlikely you are going to do that sort of abuse. My belief is that this is an area where a general anti-avoidance principle in tax law is the weapon needed to anticipate an abuse which nobody has yet seen. There is a general anti-abuse rule now passed by the Scottish Parliament with regard to Scottish taxes, which may be appropriate in this case, because it would be about land taxation. They have not yet drafted the detailed regulation on how that will work. I was involved in the drafting of the UK-wide rules on the general anti-abuse rule. That is certainly inadequate to deal with this, but I have higher hopes of the Scottish rule than I have of that for the UK as a whole. I think it would be the way to deal with it.

Chair

We may get Peter Peacock to contact you. You can discuss informally what you had in mind. I seem to recall a particular situation where, effectively, the family that had previously owned it passed it to a charity, but they still continued to run it in their own interests. That was my understanding of what was happening.

Richard Murphy

It is hard to see the motive, because they would already have got inheritance tax relief and so on, which the charity would enjoy as well. There must be a motive but I am not quite sure what it would have been in many cases.

James Robertson

Generally speaking, letting it tax free.

Richard Murphy

It seems unlikely.

James Robertson

It becomes difficult to talk about these things, because there are not many of them around. The one I suspect Mr Peacock is thinking about is one I have never acted for. I can speculate as to why one might. You might set something up because you genuinely want to preserve that house in a particular way with a view to its being preserved for ever. If the family want to use it, they have to pay to use it. That is something that has to be policed. You cannot use the charity’s property as if it is your own. You will have to pay whatever it is valued at. On the fact that the family might be trustees, I would be surprised if they were the only ones and there were not professional trustees involved. I would also be surprised if there was not great care taken to ensure that there was not abuse. Whether or not there are issues with the local community seems to me to be a different question. Sometimes, Chair, one has to be aware that people take a particular action or relief and say, “This is the bad thing,” when actually they are talking about something else; it is a kind of weapon. I will happily talk to Mr Peacock about it.

Chair

All of us have dealt with the public, and therefore we are aware that they are not always correct, though that diminishes as we get closer to an election. Could I pick up the question—

Richard Murphy

Chair, I need to go soon.

Chair

We had three final points, all related to the question of valuation and what your view is on the argument that the tax arrangements drive up price. We pretty well covered that earlier on. Are there any answers you had prepared to questions that we have not asked? Are there any points that you want to leave us with? Richard, do you want to come in first since you have to go?

Richard Murphy

Everything that I hoped to say I put into the opening bit rather than the closing bit. I wished to raise the issue about Scottish regulation and its failure. That was the particular issue which I think you have to take into account. If you do not get Scottish company law regulation right, all the rest of this is going to fall flat on its face. To me, that is the starting point of any recommendation. I have nothing else to add to that.

Megan MacInnes

I want to go back to what I said at the start. From our perspective, the challenge of reforming Scotland’s land and land ownership is not just one of lack of transparency; therefore beneficial ownership and increasing the disclosure of who owns land in Scotland is only part of the solution. It is good to recall that improved transparency of who owns land, whether it is through beneficial ownership or some of the other mechanisms we have discussed, is essential to some of the broader and longer-term challenges in reforming Scotland’s land and how it is used and managed, especially in terms of how we address the challenge of greater community ownership of land and greater community involvement in decision making on how land is used—as crofters, as tenants, as owners of land, or other ways in which they are dependent on the land—especially around the question of accountability. How are the owners of land accountable for the way in which they own the land? How are the Government in Scotland and the UK Government accountable to the public in relation to how those decisions are made? We should not get too focused on the disclosure element. Over the last few years, the international community has focused on transparency being a really important tool, whether talking about greater public transparency through, for example, the Open Government partnership or in corporate operations in oil, gas and mining companies, or in revenue payments. There has been a big focus on transparency which is extremely important, but this focus has made us realise that getting access to the information is really just the first step. We need to think about what we do with that information and how we use it. Many elements in the proposals for reforming land and the management of land in Scotland look at how we use that information and what we do with it afterwards, to make sure that the people of Scotland can benefit from the land of Scotland. It is good to track the conversations we have had today back to that broader objective.

Chair

To be fair to ourselves, we recognise that many of the issues that you have raised are devolved, and therefore it is not appropriate for us to try to determine policy. That is why we were particularly focusing on issues like the question of taxation, and issues relating to disclosure, beneficial ownership and so on which remain reserved. Megan MacInnes:: Absolutely, Chair. I very much agree, and we commend the Committee’s choice to focus on this specific area, but it is good to recall the broader objectives. For example, there are choices around using secrecy jurisdictions, which are deliberately used to distance yourself from the assets at hand rather than just simply tax-based reasons.

Chair

James, do you have any final words?

James Robertson

I feel I ought to say something about tax. I would say to the Committee that, if we are looking at the tax system in little bits and saying, “I want to change that because it might have that effect,” I would draw you back to the question that you asked HMRC earlier on, which is about assessing whether the tax relief and the tax that is operating is achieving the policy goals that you have. In that context—thinking about how you design tax systems that produce the policy answers you want to achieve—the endless tinkering at the edges in the short term merely adds to complexity, and frequently adds to the ability of people to exploit them in ways that were not anticipated. A previous witness, Stuart Adam, raised the Institute for Fiscal Studies report on how you might have tax by design. My own institute has statements of principle about how one should look at designing tax, particularly taking account of global ownership and a global economy. You need to assess whether anything on tax fits into a wider policy objective, rather than simply tinkers at the edge, with unexpected consequences. Think it through and make sure that HMRC or Treasury, whoever is responsible for it, is actually assessing the effectiveness of tax policy.

Chair

Given that point and given that nobody seems to have been assessing the impact of agricultural relief, would the world be a sadder place if it was abolished?

James Robertson

You would have some very disappointed farmers because of the effect on the farmhouse. That is a micro point. If you are asking me on a broad principle if the world would be a better place, I think it is neither one nor t’other. It has less effect than people think. There is a much wider question, which is reviewing the whole method of taxing land—inheritance tax and capital gains. There is a much wider project there.

Chair

Is it reasonable that farmers seem to be the only people who manage to avoid inheritance tax on property on death?

James Robertson

Any trading entity is in the same position. There are many urban businesses such as factories and other properties which may have very considerable value because of their site value. It has nothing to do with their productive capacity, particularly in London. They are in the same position; they get business property relief if they meet all the qualifying tests. It is there to enable family businesses, as I understand it, to continue without having to be broken up and sold. That is the policy reason for doing it. Is it an effective one? That, I would say, is another project. In terms of why one should look at that, you may consider the fact that I get 100% relief on death and my heirs get a step up to market value for capital gains tax on my death. If they sell the next day there is no tax bill. You may find that one of the reasons why people hold things until they die is precisely that. That is a much wider thing than land. In fact, the inflated values may have much more value in terms of what is taxable outside of land. It is just less visible.

Chair

Unless there are any other questions from my colleagues, I thank you very much for staying much longer than you may have anticipated. We expected, or the staff—ever-optimistic—had expected, each session to be an hour but I think it was two hours and then an hour and a half. Thank you very much for staying to the end.