Oral evidence: Tax avoidance and evasion: HSBC, HC 1095
Oral evidence, 23 March 2015.
Witnesses
Edward Troup, Second Permanent Secretary and Tax Assurance Commissioner, HMRC, and Megan Ormson, Assistant Private Secretary to Edward Troup, gave evidence.
Chair
Can I start by apologising for keeping you waiting a week ago, or whenever it was? Had you appeared at our original hearing, this hearing might not have been necessary, so my apologies for wasting your afternoon that day. It is difficult to know where to start, but I want to start with the issue of what this episode with HSBC teaches us about other banks, and what action you’re taking. When we had evidence from Mr Gulliver he said that, looking at the UK-Swiss bank agreement, HSBC was responsible for $27 million of the moneys that were revealed in that, or which came back into HMRC. Is that right?
Edward Troup
Sorry?
Chair
Out of the Swiss bank agreement. When Stuart Gulliver gave us evidence, he said that “HSBC paid $27 million out of the $1.1 billion” which HMRC received on the back of the UK-Swiss bank agreement. Is that correct?
Edward Troup
I think he said that that was their contribution to the up-front payment which was made by the Swiss banks under the terms of the agreement.
Chair
What I am really getting at is that they are only one player, and a pretty small one, in what might be a very much bigger problem. What I really want to hear about from you is this. As we learn more about this, we learn that this isn’t just an issue of aggressive tax avoidance. There is tax evasion involved here on quite a large scale, and one assumes that it’s not contained to just one bank. I want to know what you and HMRC are doing in relation to the probability that this is occurring in other banks in Switzerland with UK citizens as holders.
Edward Troup
I understand the question. The interesting thing about this whole business is how it covers a period of time in which things changed absolutely dramatically. The period at the beginning of that—the early 2000s, the period to which the Falciani data relate—was one when banking secrecy seemed to be impregnable in Switzerland and elsewhere. As I think you have heard from Mr Hartnett, although I didn’t catch all of it, the negotiation of the Swiss agreement was made against that backdrop. At that point, as recently as less than five years ago, the idea that Swiss banking secrecy might be breached seemed unthinkable although, as I think Mr Hartnett said, there is also provision under the Swiss agreement to get up to 500 disclosures a year from Switzerland on request. What has happened since then, led very much by the UK and others, is that the common reporting standard has effectively breached the principle of Swiss banking secrecy. From 2018 we will get information automatically and not just on demand about account holders in Swiss banks. It is difficult to overstate what a change that is in the climate and how much it eliminates the ability of citizens of any country—although you are obviously interested in the UK—to hide their money in Swiss bank accounts. The action that has been taken and continues to be in relation to the past, whether against the individuals or the banks, is necessarily different from the action we will take in future.
Chair
That is 2018, Mr Troup.
Edward Troup
2018.
Chair
Okay, if we’re lucky.
Edward Troup
No. That is an agreement the Swiss have signed up to.
Chair
Okay. We’re in 2015. What action are you taking now, given what we have all uncovered? Various members of the bank who gave evidence said they were shocked. I was pretty taken aback to see that what we were talking about was not aggressive tax avoidance, which I am getting used to seeing—much as I hate it—but actual tax evasion.
Edward Troup
This was tax evasion. I am not going to go into operational details.
Chair
I want policy; I want information. Hiding behind this stuff drives us completely mad in this Committee.
Edward Troup
I was going to give a plug for the Chief Secretary’s document that he put out on the day after the Budget on reducing tax evasion and avoidance. The Budget announcements make it clear that in relation to the disclosure facilities, which you have heard about and discussed in this Committee, we will bring them to an end early. From 2018 we will be using the information under the common reporting standard. There is a significant amount of money scored in the Budget for what we expect to get under the common reporting standard. Between the early closure of the disclosure facilities and 2018, there will be a new, tougher penaltied disclosure facility, very much making it clear, “This is your last chance, on payment of a higher penalty than you get under the existing disclosure facilities, to come forward and pay up, pay the tax and the interest and penalties.” That is the policy and the strategy to exploit what we have achieved through the common reporting standard.
Chair
One of the slight frustrations about these hearings has been the muddling between individuals and institutions. I want to talk about the institutions; we may come back to the individuals. We are talking about the banks. What was clear from my reading of the leaks, as much as I have seen, is that it was systemic in the bank. It was institutional; it was not about one bad apple or one bad employee, and it was not about one wicked person holding one account. It was absolutely systemic and institutional. Given that HSBC themselves said, “We are a tiny player in this field,” let me take another player, Coutts. Coutts, a bank owned by RBS—owned by us, as the taxpayer—is under investigation for tax evasion in Germany and the USA. I have read reports in the papers that money has been set aside to cover the potential hit from the USA. Until as late as 2009-10, they were offering in their brochures the hold mail accounts that some of our Members talked about at the previous hearing. That was certainly after 2008, so it was when they were already in public ownership. I can hear and understand all these movements and steps being taken in future. How can it be right now that Coutts, which is essentially owned by us, the taxpayer, is allowed to get away with selling tax-evasion schemes?
Edward Troup
I am sorry, Madam Chair, I am not going to be able to help you on operational matters, referring to an individual bank.
Chair
I take it as an example. The only comfort you have given me, the reason that it is particularly awful, is that we own it.
Edward Troup
Somebody owns all of the banks and it is pretty awful for them, too.
Chair
No, but we own it; the taxpayer owns this at great expense.
Edward Troup
I understand that but I cannot comment on an individual bank. I don’t have details, obviously, and I wouldn’t share them even if I did have them, which I would not. I go back to the policies for the future.
Chair
It is always the future. I am interested in the now. This has been happening for a long time. The reason I used the Coutts example is that it’s owned by us, and I think that makes it particularly awful. You can’t just wait for future action to give us comfort that you’re ensuring that banks owned by the taxpayer aren’t involved in tax evasion.
Edward Troup
You challenged Lin Homer and Jennie Granger last month on this and they gave you some explanations as to what powers we have, where we can apply criminal sanctions and what we are doing to follow up on individual cases.
Chair
That was only in relation to HSBC and suddenly, miraculously, after our hearing you got the commission.
Edward Troup
I think that was before your hearing.
Chair
No, it wasn’t, it was after. That was only in relation to HSBC. I am not talking about HSBC. I started this by saying these are other banks. HSBC told us they were a small player. I use the example of Coutts because it is owned by us.
Edward Troup
I’m not clear what the question is.
Chair
Action should be taken in relation to banks that are specifically selling tax evasion schemes to their clients in Switzerland.
Edward Troup
In terms of the policy I again refer you to the Chief Secretary’s announcement.
Chair
No, that is the future, Mr Troup. This is evasion now.
Edward Troup
If any person or body conspires to evade tax, that is a criminal offence. Obviously, we have to prove it to the standards of criminal liability, but the tax liability, first and foremost, remains on the taxpayer. Offences of secondary liability are few and far between for tax evasion, until the announcements this week by the Chief Secretary, and would have to be proved to a criminal standard for conspiring to evade tax. If those offences can be shown to exist, I have no doubt that my operational colleagues will pursue them. As you know, we have quintupled the number of prosecutions for tax evasion over the past five years.
Chair
For tax evasion?
Edward Troup
We have quintupled, multiplied by five, the number.
Chair
Tax evasion, or are these people on tax credit? Are they big companies or small companies?
Edward Troup
They are the whole range. This is about tax, not tax credits.
Chair
Do we know how many of them are actually tax credit cases?
Edward Troup
No, that is tax prosecutions, not tax credit.
Chair
Do we know how many of them are small businesses?
Edward Troup
I don’t have those figures in front of me.
Chair
Do you have them?
Edward Troup
There have been some very significant prosecutions.
Chair
Do you have them?
Edward Troup
There was a penalty endorsed last week, a criminal penalty of £1.2 million.
Chair
Do you have them, Mr Troup?
Edward Troup
I don’t have them in front of me.
Chair
I was told that you don’t analyse the data in that way.
Edward Troup
Well, I am sorry, in that case we don’t, but obviously we have individual figures.
Chair
We are interested in equality of treatment in front of the law and that SMEs are treated in the same way.
Edward Troup
We have had, over the past five years, 11 prosecutions for offshore evasion. I think Jennie has told you that we have another 50 offshore evasion prosecutions pending.
Chair
Is this individuals or institutions?
Edward Troup
I assume that’s individuals rather than institutions.
Austin Mitchell
You are investigating clients, not banks?
Edward Troup
Yes, because that’s who the taxes—
Austin Mitchell
Do you investigate banks?
Edward Troup
As I’ve said, we can only investigate where there is an offence.
Austin Mitchell
Do you investigate banks?
Edward Troup
If a bank, or any other person, has committed an offence, or is perceived to have committed an offence, we will, in accordance with our guidelines, investigate, and, if appropriate—
Chair
How many banks or bankers are currently under investigation?
Edward Troup
I can’t answer that question.
Chair
Why?
Edward Troup
It is an operational matter; I don’t have the details in front of me.
Chair
No, no—I’m not asking for any identity, just how many banks or bankers are currently under investigation.
Mr Bacon
I don’t understand why you can’t answer that. I remember asking the chairman of Customs and Excise, I think it was, back in the early 2000s, before the merger, how many members of Customs and Excise staff were facing criminal investigation. He answered straight out: 13, he said. So what’s changed between then and now, that you can’t talk about numbers?
Edward Troup
I can’t speculate, but if members of our staff are subject to criminal investigation, that would be an extremely serious matter which I would expect Lin Homer, as chief executive, to know quite a lot more details about than she would about an individual prosecution.
Chair
Just explain to me in a very common sense way what is the danger of our knowing the number of banks? How does that in any way damage taxpayer confidentiality? David Burrowes is a lawyer and may be able to help me on this. I am not a lawyer but I can’t understand how it can in any way damage taxpayer confidentiality. I just don’t get it.
Mr Burrowes
It is an issue of severity. Mr Troup was saying it would be very serious if it was an internal prosecution, but—
Edward Troup
I wasn’t saying it wouldn’t be serious. I would not be surprised if the chairman of Customs and Excise in 2000, or whenever it was, knew the number of individuals.
Mr Bacon
What is the problem with talking about the fact that investigations are going on? I don’t think anybody would expect you to point the finger and say, “It is Fred Jones at Bloggs plc who is under investigation.” Of course not, but that is not the question. What I am trying to understand is what prevents you from saying, “In total, across our domain, we have 26 criminal investigations and 3,412 civil investigations.” What stops you saying that? I was making up the numbers.
Edward Troup
We can and have made statements like that. Can I pick up what the Chair said?
Mr Bacon
What is the answer to the question?
Austin Mitchell
Can you tell us?
Edward Troup
No. I don’t have the figures in front of me. Can I just say why—
Chair
Can somebody behind you get them before the end of this session?
Edward Troup
I very much doubt it, but I will see if they can.
Chair
Why not?
Edward Troup
Can I just make a point? The Chair said that the reason we couldn’t share information was taxpayer confidentiality. That is true in part, but it is not the whole story. Very often there is operational information within figures and information for which you might ask us that would either prejudice our operations or prejudice potential criminal trials.
Chair
Mr Troup, just give us a little bit. All we are asking for is numbers. All we are asking for is some feeling. It is nothing to do with undermining any action that you want to take. All we want is a very simple answer, and I cannot for the life of me see anything out of the—
Edward Troup
I understand the question. I will see whether colleagues can answer it, but I very much doubt it.
Chair
Okay. How many banks and how many bankers are currently under investigation for conspiracy to cheat the Revenue?
Mr Bacon
And the reason why that is a particularly pertinent question—I would have hoped that the Revenue or HMRC could find some sort of answer—is that we have just listened to the former permanent secretary for tax, the former acting chairman and the former everything, because Mr Hartnett has been around for so long, say that he was surprised, in relation to the Falciani case, that there have been so few prosecutions. That is the background to this question. It would be helpful to know to what extent bankers and others are under criminal investigation. We are asking not who they are, not which banks and not what names, but whether there is any activity going on.
Edward Troup
Let me take it away, but I am not—
Chair
No, we’d like an answer this afternoon. If the person sitting behind you could go out and use the telephone, it would be really helpful.
Edward Troup
I cannot promise to give that. Can I just make a comment? Mr Hartnett himself pointed out on a number of occasions that he left the Department more than three years ago. I was quite surprised to hear him make that statement about his views on the number of prosecutions, because both Jennie Granger and Lin Homer were asked about it, and I gave you quite a clear explanation of what had happened and how diligent we had been in pursuing individuals on the Falciani list. That is all on the record. I don’t think there is anything there that suggests that we have not been diligent. As Lin Homer told you, we have collected £135 million, and we believe that we have collected all the tax, all the interest and a significant amount of penalties due from those individuals. I don’t think that I quite see where Mr Hartnett’s statement came from.
Mr Burrowes
We heard previously that, alongside Ireland, we have carried out the only prosecutions to come forward. How would you describe the number of prosecutions? Would you say it is satisfactory? Is it not good enough?
Edward Troup
I am not going to get drawn into commenting on the performance of operational colleagues. They have made it very clear that they think that they have done the best job within the law, within the constraints and within the burdens of evidence at the time, and I believe they have. I believe that my colleagues are extraordinarily diligent. As Mr Hartnett said, and I agree with this statement, criminal investigators want to be successful. They want criminal prosecutions, and since 2010, as I have said, we have multiplied by five the number of prosecutions we have brought.
Chair
Can we ask about the Swiss bank accounts? You talk tough a lot of the time. A lot of literature and a lot of statements come out that talk tough, and then it seems to us that you act soft or weak. Let’s test you on the Swiss bank accounts. You have collected £135 million.
Edward Troup
Are we talking about Solace and the HSBC Swiss accounts?
Chair
Yes. You are absolutely right. How much of that £135 million is penalties?
Edward Troup
I think you asked Ms Homer exactly the same question, or was it the Treasury Select Committee? I think she said around £10 million or 10%.
Chair
Only 10%?
Edward Troup
It would be better to check.
Chair
On the 200% penalty that Mr Hartnett talked about, the press statement that I read to him said, “If they do not come forward, HMRC will begin an investigation into their affairs, which could include a criminal investigation or result in penalties, in certain circumstances, of up to 200 per cent.” Have you ever, in any case, given a 200% penalty?
Edward Troup
As you know, the Falciani data relate to periods up to 2007, or even earlier, when the data were stolen. The 200% penalty was introduced, I think, by this Government, or it might have been just at the end of the last Government, so in around 2009-10. We can obviously only apply penalties as set out by the law at the time the offence was committed. So the 200% penalty was not, as I recall, enforced for any of the periods to which this data relate. But yes, we have used that penalty regime in cases since it was introduced.
Nick Smith
How many times?
Edward Troup
I don’t know, I’m afraid.
Nick Smith
Can you tell us?
Edward Troup
I can find that data.
Chair
Are you now investigating the bank, since you got permission from the French?
Edward Troup
I cannot give information on operations.
Chair
Lin Homer told us that she could not take any action on money laundering in relation to the bank, because she was not permitted to use the data for that purpose. That is my understanding of what she said at the hearing and what she then said in subsequent correspondence with us. You have since had permission from the French, surprisingly, to use the data for other purposes to aid investigations of money laundering and evasion. Are you using the data for that purpose? Are you investigating HSBC?
Edward Troup
We have had permission, as you have reminded me, since February.
Chair
28 February.
Edward Troup
Yes. We have had permission to share the data with other agencies for the purposes of criminal prosecutions. Obviously, as soon as we had that permission, we started to take steps to speak to the other agencies, but I am not going to—I am not able to, and I do not have access to operational information—say what action has or will be taken.
Chair
There was a big multi-agency meeting with FCA, CPS, National Crime Agency, Serious Fraud Office, City of London Police, and Eurojust. Are you able to tell us anything that occurred in that meeting?
Edward Troup
No, I am not, because, just as Mr Hartnett explained how operational matters were left to the Director General for Enforcement and Compliance, I would say exactly the same thing. Jennie Granger is responsible for that. I suspect that if she was sitting here she would also say that that is operational information that it would be inappropriate to share.
Chair
What criminal offences are you looking at?
Edward Troup
Sorry, I get confused between these hearings, but I think I explained to the Treasury Select Committee that the criminal offences that relate to tax—
Chair
No, in relation to after 28 February, what criminal offences are you now able to investigate, which I assume you are investigating operationally?
Edward Troup
HMRC is responsible for tax, so those are the criminal prosecutions that we would pursue. Indeed, we were always free to pursue prosecutions and investigations in relation to tax. It is for other agencies to determine what criminal offences they could investigate on the basis of the data, once they have had it.
Chair
And we are waiting to see what you are doing on institutions, because you are not prepared to tell us that. Are we expecting to see more prosecutions off the Lagarde list?
Edward Troup
As I think has been explained to you, there are a small number of individuals for whom we have not concluded the investigations—around 100 of the 1,100. I cannot say anything about what is happening with those until they are taken forward or resolved.
Nick Smith
Can I ask about that? You said “a small number” and then you said “100 of the 1,100”. So are you still looking into 100 or a subset?
Edward Troup
There are 130 left from the original Lagarde list, who we have not yet finalised our investigations into.
Nick Smith
So there may yet be prosecutions from that list of 130?
Edward Troup
There may be prosecutions, and I am sure there will be tax collected.
Chair
If we go back to the £1.1 billion that you have received from the Anglo-Swiss agreement—I am on to the HSBC bit—from which bank did most of that come?
Edward Troup
Can I just remind the Committee about the Swiss agreement? First, the agreement postdates the Solace data. Anybody whose name was on the Solace data cannot take advantage of the Swiss agreement. They are effectively, expressly excluded, because anyone in respect of whom we had opened inquiries could not take advantage of the Swiss agreement. As I said at the beginning of this hearing, the terms of the Swiss agreement were entered into at a time when there was banking secrecy and they gave UK residents with bank accounts two choices. They could either seek to maintain that secrecy, which with the benefit of five years’ hindsight was probably rather foolish, and in respect of their accounts a lump sum payment would then be made by the banks to us, or they could choose to have their names disclosed to us, as 25,000 have chosen to do. The 25,000 have produced a significant amount of money, and that is not from banks; it is from individuals. The lump sum payments were pooled by the Swiss Government—the Swiss revenue—and passed to us as a single lump sum, so we do not know which banks they come from.
Chair
You do not know?
Edward Troup
We do not know under existing provisions of the Swiss agreement. But as I have said repeatedly, come 2018 we are going to have, and we are already getting from the disclosures we have requested under the 500 a year, considerably more information about where money is held in Switzerland and by whom.
Nick Smith
Have you asked if you could have that information?
Edward Troup
Yes, we have asked. We have made several—well, not several requests. We have asked the banks—the Swiss—for more information and we have not obtained it.
Nick Smith
You have not obtained it?
Edward Troup
Sorry, let me correct that. I visited my counterparts in Switzerland last year, or it may have been the year before, to talk about the working of the agreement. That was primarily to get their agreement to the 500 disclosures a year. I am not sure whether there has been any operational contact since then for further information.
Nick Smith
What reason did they give you for not providing more information?
Edward Troup
That the agreement was the agreement and they were abiding by its terms.
Nick Smith
And they were not prepared to open it up at all?
Edward Troup
Yes, but as I say, that was a little while ago. We continue in dialogue with the Swiss. The most productive part of that dialogue has been that they have signed up to the common reporting standards.
Nick Smith
When was the last time you asked them for that information?
Edward Troup
I am sorry, I cannot recall. But I know we discussed it at the meeting I had with them, which was about 15 months ago.
Nick Smith
About 15 months ago—could you confirm that later?
Edward Troup
Yes.
Chair
One of the issues that came out in the hearings with us was the non-dom status, which enables people to take advantage. Correct me if I am wrong on this one. Once you have your non-dom status, you can then take advantage of the Liechtenstein agreement. Is that about right?
Edward Troup
No. That is not quite right. The non-dom status has existed since 1799, when the Bourbons came across here and did not want to be taxed on all their income.
Chair
To get people not to contribute to English wars.
Edward Troup
The arrangements effectively said that if you can show you have a domicile overseas, you only pay tax on income you earn in the UK or income and gains that you bring to the UK. That is the advantage—the so-called remittance basis. That has been watered down by successive Governments. If you have been here for more than a certain period of time and have more than a certain income, you now have to effectively pay an annual charge in order to continue to benefit from that. A lot of non-doms do not actually claim the remittance basis. They effectively just accept that they are going to pay tax on their worldwide income, like I or any other UK-domiciled person would do. There is no specific relevance for the Liechtenstein disclosure facility, other than that a non-dom is less likely to have undisclosed offshore income because he or she would not have had to pay tax on it if they did not remit it to the UK.
Chair
So what limits are there on non-dom status? When can you challenge? When do you ever challenge if someone chooses to call themselves a non-dom although they are born here, educated here, have their children educated here, own a house here, have worked here for 12 or 15 years, speak English, have a British passport—I am trying to think what else they do.
Mr Bacon
Go to the opera, like you.
Chair
Go to the opera, like me. And they still call themselves a non-dom. Interestingly, I probably do qualify for non-dom status because I was not born here, but I have never thought about that.
Dame Anne McGuire
Don’t complicate matters.
Chair
What are the limits? Where do you limit it?
Edward Troup
I am not sure whether the question is about when we ask the questions or what the legal limits are.
Chair
When do you challenge it? It seems to me that anybody can call themselves a non-dom by buying a property elsewhere.
Edward Troup
Anybody could put in their tax return that they have £1,000 of deductible expenses from going to the opera. We would challenge that because it would look unlikely and non-deductible. Self-assessment returns—a non-dom would almost certainly be filling in a self-assessment return if they wanted to claim it—contain a whole lot of information and facts, and effectively, have a whole lot of claims. Like all of our other business, these will be risk-assessed according to a number of judgments about what is on there, what the facts are, and whether they look as though they merit some investigation. A very significant number of the non-doms will be handled by the high net worth unit, or the affluent unit, and they get a much higher level of scrutiny than you or me—certainly me, though I am not sure about you—about their tax affairs, and they will be scrutinised in the normal way. A non-dom who has been here for a number of years is probably more likely to be asked questions about their status than someone who has arrived and is in their fifth or sixth year in the UK.
Austin Mitchell
I feel sorry for them. How many are there?
Edward Troup
In total, there are around 114,000 non-doms in the UK, roughly, but only 47,000 of those claim the remittance basis. The rest—and Madam Chair, I was not aware that you are a non-dom, but if you are a non-dom, then don’t claim the remittance basis.
Austin Mitchell
The question was how many you have challenged about that status.
Edward Troup
I don’t know the answer to that question, and I am not sure that we hold it centrally, any more than I can say exactly how many individual self-assessment returners we have challenged on the amount of their opera ticket expenses, or their agricultural property relief, or whatever. But we do have a risk-based method of investigation and assessment, which is vindicated by the yield we have. As you know, we were on target to get £26 million of yield this year, and that is based on a good, risk-based assessment investigation process.
Chair
So how long should they have lived in the country, for example, for you to think, “Oh my goodness, that doesn’t sound like a non-dom to me.”?
Edward Troup
You lose your domicile of origin and become domiciled in the UK once you have given up any evidence of wanting to return to your original home, to your domicile of origin. You could do that the day after you arrived. It is possible that somebody arrives in the UK, non-dommed, and it becomes perfectly clear from the moment that he or she arrives that they have no intention of returning home, and that they have given up their domicile of origin. We would challenge somebody like that more or less straight away.
Chair
Would it be your view, Mr Troup, that the definition is being used for a purpose that Parliament did not really intend, even way back in 17-whatever?
Edward Troup
1799. The question of what Parliament intended is probably more for you and your fellow parliamentarians than it is for me.
Chair
I am asking you for the evidence. It is a bit like all the tax reliefs, isn’t it? When the film tax relief was used for purpose that wasn’t intended, you set about advising how to tighten up the legislation.
Edward Troup
It is more that this is so lost in the mists of time. The question for Parliament is more: given that this is what the non-dom status allows, do you think this is still the right policy for the 21st century? There are obviously views that there should be a different policy, but it is quite difficult to pose that in relation to the question of what Parliament intended, simply because it was so long ago.
Chair
It was so long ago. It seems to me that it is being used by people with extreme wealth to avoid being treated equally under the tax law, as Parliament intended.
Edward Troup
If you are making the case for wealthy people not benefiting so much from the non-dom rules, in a sense, that has partly been responded to by the policy changes, which increase from April this year the annual remittance charge to £90,000, if you have been here more than 17 years—
Chair
It still may not be what you would pay.
Edward Troup
No, it may not be.
Chair
For the extremely wealthy, it may just be worth their while paying it, because they still get away with having a lot of money that is not taxed at the UK rate, although they live here, work here, have British passports and their children go to school here.
Edward Troup
And there are some policy choices for the next Administration.
Austin Mitchell
How many of the other countries have this exalted status for non-doms?
Edward Troup
Most countries have some basis of allowing temporary residents to have a treatment that recognises that the mere fact you set foot in the country—
Austin Mitchell
Not many have a recognised status like this.
Edward Troup
Not many have something based on the English principle of domicile, no. One of the disadvantages of having one of the oldest tax systems in the world is that we have some of the oldest bits of rules, and this is clearly quite a venerable one.
Nick Smith
So you said about 50,000 of them take advantage of that status. How many of these types of people were there, say, 10 years ago?
Edward Troup
I do not have historical information. I suspect that it has grown, but I would not have thought it has grown dramatically.
Nick Smith
Could you let us have some information, how these numbers have gone up in the last year—or 30 years, or every five years?
Edward Troup
I can do—
Mr Bacon
Every year I think.
Edward Troup
I do not have so much confidence in our historical data to promise you everything, but there may be some published records.
Dame Anne McGuire
Don’t you have to keep it for seven years though, like everybody else?
Edward Troup
We do but it’s whether we actually extract it—
Dame Anne McGuire
It was only a cheap point, sorry. We are at the end of five years and I think that it’s fair to say that the tax system over the past five years has been pretty well exposed for its inadequacies, whether it be major companies either avoiding or evading tax—and I choose my words carefully—or major, established accountancy firms apparently encouraging some ways in which people can avoid tax on an industrial scale—or, in the Chancellor’s words, aggressive tax avoidance. Yet the ordinary person out there watching this must be pretty demoralised when they are subject to rules and regulations that allow them little wriggle room. Is it the tax system that is the problem or is it that HMRC can no longer cope?
Edward Troup
It sounds like that is a question with no very easy answer. I accept the perception that the tax system is not always even-handed and my appointment as Tax Assurance Commissioner, was motivated, as the Chair knows, in very large part by the importance of overcoming that and establishing a sense of confidence in both Parliament and among the public in the even-handedness with which we work. But I think that this is more perception than reality. The Solace data that we have been talking about—no one has been let off anything, everybody has paid tax and interest and some penalties. I can absolutely see that the individual, who we quite rightly pursue because they haven’t paid their tax, is concerned that we are not pursuing with equal vigour those who manage to hide their tax off-shore. As I said at the beginning of this hearing, the record of this Government and of HMRC over the last few years has shown that we have put a lot of resources in, we have multiplied the number of prosecutions by five, and we have with the Treasury had success in getting information out of foreign banks, so I hope that what you describe is a diminishing perception. In answer to your question, I do not think that it is the fault of Parliament and I certainly do not recognise that we are not seeking to do the best we can for taxpayers large and small. We are putting proportionately more resources into chasing the big evaders than we are having to chase small businesses.
Dame Anne McGuire
I don’t think that it is just about prosecutions, I think it is also about relationships. As constituency MPs, all of us would have examples where HMRC’s relationship with the small and medium enterprise—who we are always told is the foundation stone of our economic growth—is not as good as it appears to be and certainly, from the revelations that we have seen over the past five years, as it is with the big boys. By that I mean the big boys in terms of the companies supported by the big boys in terms of accountancy, talking to the big boys in HMRC, when the smaller companies do not get that level of service. Indeed, Jim Harra admitted a few weeks ago that the relationship with small and medium companies was not as good as it was with the larger organisations. So how can people feel that it is even-handed out there?
Edward Troup
First, I absolutely recognise that there is more that we can do to improve relations at a taxpayer to HMRC level with small and medium-sized businesses. I would defend it against the suggestion that the relationship that we have with large businesses is in any way a comfortable one. We get a huge amount of yield from large businesses, because they pay the largest amount of tax. The attention they get is the attention to make sure that they are paying the right amount of tax and that is demonstrated by the amount of yield that we get. It would be nice, in a sense, to give as much attention to small businesses, if we had the resources, and they might feel more comfortable—or they might feel less comfortable—if we did that, but it is a conscious decision. It is reflected in our performance and the amount of money that we recover, but I acknowledge the point that Jim acknowledged: there is work to do to improve our relationships with small business at a business to taxpayer level so that they can get something that—if not actually personalised—feels like a personalised service and like we are actually helping them.
Dame Anne McGuire
But how do you deal with how it sometimes looks from the outside? You might be amazed, but people actually watch this Committee and they can tell you what has been discussed. It feels as though there is a network of people supporting one another. I take your point that big companies pay lots of tax and all the rest of it, but it appears sometimes that a small group of people at the top—in Government or HMRC, companies and the big accountancy firms—are doing the deals when companies in my constituency are being pushed to the wall by HMRC, sometimes quite unreasonably.
Edward Troup
If that is a perception, we must find more ways of dispelling it. As Tax Assurance Commissioner, I sit with two other commissioners and sign off settlement of our large disputes. I publish a report each year. I recommend it to you. It is not brilliantly readable but it has some good facts about what we do. If there are more ways that we can communicate what we are doing and the even-handedness, which really is my job to deliver to your constituents, I would be happy to discuss them.
Mr Bacon
I am surprised by your earlier answer, Mr Troup because I share Dame Anne’s concern. What impresses me is not so much what I read in the newspapers or what I see by way of demonstrations. What impresses me is when I get a tax accountant whose job is to audit the books of lots of small and medium-sized businesses coming to my constituency surgery to say—he is a tax expert and an accountant—that he has noticed that for his clients, which include retailers, small manufacturing firms, a fish and chip shop, the heat has been dialled up by HMRC over the past few years in an environment in which we see a lot of what Dame Anne called deals being cut with large corporates. It is not merely a perception issue. There is an asymmetry between the way that HMRC treats one group and the way it treats another. I am sure that you will say that the reason there is an asymmetry is because large corporates have more activities in more jurisdictions and more opportunities to engage in things that will result in them saving tax in a way that a small manufacturing company in my constituency, employing 25 or 30 people, does not. I am sure that you will say that you would treat all large corporates in the same way, and that if this manufacturing company of mine employing 25 or 30 people only had the wit to have an enormous balance sheet and borrowings in lots of different jurisdictions, it would be treated in exactly the same way as these large corporates are treated. The fact is that the system creates opportunities for large players, which are out of all proportion to the opportunities that it creates for small players. In fact, the reverse is true. If you are a small manufacturing business, a fish and chip shop or a retailer, your main concern is to ensure that you are not on the bank’s radar for a negative reason. You might very well want to ensure that you keep your balance sheet as strong as you reasonably can and that you do not have any debt, if you can possibly avoid it. If you can show that you are making a profit to reassure your banks, you will. Then you come along and thwack them with the corporation tax rate of whatever it is—we know it has been going down slightly. Whereas, if you are an enormous enterprise, you have opportunities to structure things as debt, rather than equity, and then you get tax relief. These things are simply not available to smaller enterprises. It is not merely a perception. It is a fact that the way that small enterprises are treated is very different in practice from the way that large ones are. That is the reason that, over the past four years, the activities of this Committee have had so much traction and generated so much public anguish. For you to say that it is mainly a matter of perception rather than reality, I fear makes you look rather out of touch, to be honest.
Edward Troup
Can I respond to a couple of points? I am not sure whether that was a question but let me answer what I think the question is. You said that the system allows them to do that and I completely accept that. The system in terms of the UK tax rules and the interaction with the tax rules of other jurisdictions does give companies operating in a number of jurisdictions opportunities that are not available to businesses here, which is precisely why, both operationally and through policy change, through the OECD, the BEPS initiative and everything else, the UK and HMRC—
Mr Bacon
Can you say what that is?
Edward Troup
It is base erosion and profit shifting.
Mr Bacon
That is BEPS.
Edward Troup
That is BEPS, and the initiative is seeking to address some of those issues and differences in the system. But those differences in the system are both a function of rules and a function of different sides to the business. You also talked about the asymmetry of treatment. I would put it another way; I’d say that it is an appropriate treatment. Of course we are not going to put transfer pricing specialists and debt equity specialists on to your small manufacturing business, because they should be addressed to those large businesses who are playing games with them. So there is, in your words, an asymmetry. But I’d also say that we cannot neglect the small businesses. I turn to the figures on the tax gap, and while the large businesses account for £9.3 billion—27% of the tax gap—SMEs account for £15.1 billion, or 44% of the tax gap. It is right that we use our resources, which we must do carefully, and we definitely should assume that small businesses are trying to do the right thing and not the wrong thing; but we must put some resources into tackling SMEs and the tax gap, precisely because they represent £15.1 billion of uncollected tax. I am sure that this Committee would be down on me, Jennie Grainger and Jim Harra, were we not doing a proportionate and appropriate amount in the space of tackling small businesses. What we have got to get right is making sure that the way we interact with small businesses helps those who want to comply—that is the whole of our digital transformation strategy—and making sure that we put our resources into those who, despite help, despite the nudge, despite the best systems, are not prepared to comply and are still contributing to that tax gap. But that is not an easy challenge.
Mr Bacon
To return briefly to the subject of non-doms, can you now be a non-dom without regard to the number of days you spend in this country? Or is there a limit on the number of days that you can spend in this country, and if you exceed that limit would you lose your non-dom status?
Edward Troup
I am sorry to go back on a bit more history. Tax treatment is determined by residence and domicile, which are separate concepts. Residence is determined by the number of days you spend in a year and the first question you ask is, is an individual resident? I am afraid I am not familiar with exactly where the rules have got to now, but in some cases that does involve counting days.
Dame Anne McGuire
Is it 90 days?
Edward Troup
It used to be 90, but we now have a statutory residence test and it is a bit more complicated—well, it’s not complicated; it is supposed to be simpler. When you have established that you are resident, then you can look at the question, “Am I non-domiciled?”, which is a question determined by your origins, by where you have come from.
Mr Bacon
So it would be perfectly possible for somebody to be resident here and a non-dom for tax purposes?
Edward Troup
Normally when we talk about non-doms—
Mr Bacon
Is that correct?
Edward Troup
That is shorthand for UK resident—
Mr Bacon
I am just defining it.
Edward Troup
You are defining the term.
Mr Bacon
So you could easily spend 75% or 85% of your time in the UK because you are resident here—
Edward Troup
Or 100%.
Mr Bacon
Or 100%, but be a non-dom. No wonder people are pissed off, frankly. Under both Governments—the last one and this one. It is extraordinary, frankly. You wonder why people—
Edward Troup
It is a policy issue.
Mr Bacon
I know it’s a policy issue. It is nothing to do with you—you are just the bloke in charge. I realise that. In all honesty, you are surprised that people think there is one set of rules for rich people, and one set of rules for someone else, when you’ve just told us that that’s exactly what there is. No wonder people are pissed off.
Chair
Is there somebody behind you who can get the person back, so they can answer the question? I don’t know how many advisers you have got behind you.
Edward Troup
We will find out whether we’ve got the answer to the question, but I am not holding out—
Mr Bacon
It wasn’t a question, by the way.
Austin Mitchell
I am just surprised that, when the parties were dredging round for arguments against Scottish home rule, they didn’t bring up the fact that Scottish home rule would lead to thousands of non-dom Scots coming down to count the bawbees in London. However, that is just a passing remark—and has not produced a reaction.
Dame Anne McGuire
We wouldn’t use “bawbees” anymore.
Austin Mitchell
They will use euros. The code of conduct for the banks has been in place since 2009. Mr Harra told us, “We expect a standard of behaviour of the banks that is higher than simply not breaking the criminal law.” That is since 2009—I don’t know what they expected before that, but they expect a higher standard of behaviour and clearly, the banks must have a naughty step. What are the sanctions if they break the rules?
Edward Troup
Can I step back a bit, because it is slightly related to the earlier questions? The point about something stronger, above not breaking the law, was a reflection of the fact that banks could promote avoidance—not evasion—quite legally, and if we found that avoidance and successfully challenged it, they could say, “We are not breaking the law.” That was not felt to be a good position. The code of practice was introduced in 2009 and 95% of banks have now signed up to it. Effectively, the banks said, “We will not promote avoidance, we will not undertake avoidance ourselves,” and we have seen a real shift in behaviour. When it was introduced, it did not have an actual sanction. It was quite difficult to impose a sanction on behaviour simply because there is no definition of behaviour: it is different in the eye of one beholder from another. But we do now have a measure which comes in from this year which effectively allows naming—I do not like to use the phrase “naming and shaming”—of those banks who do not comply with the code of governance.
Austin Mitchell
For all banks? That must terrify them.
Edward Troup
Actually, the reputational risk of being named effectively as not complying with a code of practice on good tax governance has alarmed the banks and—
Chair
Have you got that power, or are you getting it?
Edward Troup
We have got it.
Chair
Have you used it?
Edward Troup
We have not used it, because—
Chair
When did you get it?
Edward Troup
The first year it applies is the year that is about to end on 31 March, and then there will be a report written, effectively giving—
Austin Mitchell
But there is no other sanction.
Edward Troup
There is no other sanction, but again it is open to Parliament to impose a further sanction if it wishes to.
Austin Mitchell
So they won’t get a nasty letter from the Bank of England. You are going to start reporting on the code of practice, so in those reports will you include an analysis of what has gone on at HSBC?
Edward Troup
It is a report for the year ending 31 March 2015, which we are just about to end, because that is the first year for which the reports apply. It will report, for that year, the behaviour of any banks who have not complied with the code of practice. It is published, so you can see what—
Austin Mitchell
In the last year.
Edward Troup
Yes. It is not retrospective.
Chair
So they avoid it.
Mr Bacon
Can you clarify what the behaviour is that you had trouble defining?
Edward Troup
That they have complied with the spirit of the law as well as the letter, that they have not promoted avoidance and that they have a good relationship and are trying to promote a good relationship with us. In particular, I am not saying that complying with the spirit of the law and not promoting avoidance is not capable of definition; indeed, the code of practice does describe them. But—
Mr Bacon
I don’t see what the problem is. We have plenty of statute defining what kind of behaviour is allowed in relation to, for example, race relations or hate crimes. If you wanted to define not promoting in statute law, that would not be that difficult to do.
Edward Troup
I think it would be possible and the public mood has moved on. Under the next Parliament, it may well be that Parliament will wish to have a go at doing that.
Chair
I will ask you two questions. One is on prosecutions, which you said that you have increased. In written evidence in answer to a question that Mr Bacon asked at the previous session on the effectiveness of advertising in deterring non-compliance, your research demonstrated that the chances of prosecution do have an impact on behaviour. It says, “Approximately three quarters of SMEs and just over a third of individuals said that the chances of prosecution were sufficient to deter businesses and individuals from regularly evading tax. For individuals the figure marks a significant increase from 2012.” It continued, “Among those who were aware of prosecutions for tax evasion, deterrent effects were assumed to be strongest among people who were considering evading what were only small amounts as they were liable to fear humiliation of detection and to hold broadly compliant views.” Your own evidence demonstrates the potency of prosecution as a deterrent. In her evidence to us when we looked at the HSBC issue, Lin Homer said—and I think this is where you are, really—“prosecution is one end of the toolkit, and it is an expensive end.” I wonder whether you are deterred from prosecution, particularly of high net-worth individuals or big multinational corporations, because of the expense—whether that influences your approach—and you don’t have sufficient regard to the deterrence effect that your own research tells you works.
Edward Troup
There are a number of things on that. First of all—I’m sorry I keep repeating this statement—we have multiplied the number of prosecutions by five. We are doing more advertising. We are doing research to see whether it has a deterrent effect. If you met colleagues in HMRC who deal with criminal prosecution, I don’t think you would think that they were being deterred from pursuing cases. If the suggestion is that there are cases where we say, “Oh well—we could prosecute that but it is all too expensive,” I don’t believe for one moment that that is correct.
Chair
We are looking at the evidence of the Falciani leaks, for example, where you have ended up with one prosecution. That is just an example, actually.
Edward Troup
But I don’t think—and again, I refer you back to Lin Homer’s evidence—that there is any suggestion that that was anything to do with resource. It was to do with our published criminal investigation policy and the desire to recover as much money as possible for the Exchequer, consistent with the criminal investigation policy and with the standards that are needed by the Crown Prosecution Service to bring prosecutions.
Chair
But to be clear, you have just said to us that the desire to maximise income for HMRC was more important to you than the success of prosecution and the impact that would have as a deterrent. Isn’t that what you’ve just said to me?
Edward Troup
I was attempting to paraphrase the published criminal investigation policy, which has been endorsed by Governments for many years and says: “Criminal Investigation will be reserved for cases where HMRC needs to send a strong deterrent message or where the conduct involved is such that only a criminal sanction is appropriate.” That statement makes it very clear that the criminal investigation policy, as Lin described, is just one of the tools in our toolkit for our task of collecting and managing taxes.
Mr Burrowes
On the other tool, penalties, you inherited the statement from Mr Hartnett, on the Swiss bank accounts, that those involved could face penalties of up to 200%. Have any faced such a penalty?
Edward Troup
I think I was asked a question by Mr Smith about how many penalties we had applied under the new regime. I will undertake to provide an answer to that.
Chair
Can I just ask, finally, have you had contact with Mr Falciani to see whether he can be of any further assistance to you?
Edward Troup
I think that question was asked of Lin Homer.
Chair
You hadn’t, at that point. I am asking you.
Edward Troup
Not as far as I know, but that is an operational question for Jennie Granger. I wouldn’t know even if there had been contact, so I cannot answer that question.
Chair
Do you know whether the Swiss bank has helped you in providing corroborative data so that you can take prosecutions? Has HSBC co-operated with you in providing the data you require to take some of the cases through to prosecution?
Edward Troup
I feel I keep pleading the first amendment, or whatever it is—the fifth amendment. That is an operational matter and I wouldn’t have that information.
Chair
Would they be able, if they so wished, to co-operate with you and provide you with corroborative information?
Edward Troup
I simply do not know. These matters are complex issues of banking law, international law—
Chair
And as your official has arrived behind you and is not in the corridor, do you have information now to tell us how many banks and bankers are currently under investigation?
Megan Ormson
I am afraid that we don’t have the time to get that before the end of the hearing.
Chair
The information or the—
Edward Troup
We will answer the question. We will write to you. I cannot say that we will provide exact numbers. If there is only one bank, for instance—I don’t know—we might find it very difficult to say that because it would send commentators on a hunt for who that bank was. I don’t know whether we will be able to say but we will write to you.
Chair
And you will do that before Parliament prorogues?
Edward Troup
We will write to you before Parliament prorogues.
Chair
So we can publish the information.
Edward Troup
We will write to you as soon as we can.
Chair
Thank you very much.
Edward Troup
Thank you. It has been a pleasure being your last witness of the Parliament. I hope you have a good election campaign. Oral evidence: Tax avoidance and evasion: HSBC, HC 1095 50