Examination of Witnesses (Questions 1-19)
INLAND REVENUE
15 DECEMBER 2004
Q1 Mr Williams: Mr Gray, welcome to our
hearing this afternoon which, as you well know, is on Inheritance
Tax. Mr Paul Gray, the Deputy Chairman of the Inland Revenue,
is our principal witness. Would you introduce your two colleagues
to the Committee.
Mr Gray: On my left is Gabriel
Makhlouf who is the Director, Capital & Savings in the Inland
Revenue, and on my right is Jonathan Leigh-Pemberton, who is the
Business Director Capital Taxes, also in the Inland Revenue.
Q2 Mr Williams: This is really a follow-up
to a hearing we did in 1999 and I am glad to see that quite a
few of the recommendations that were made by that Committee, which
was quite contentious if I remember correctly, have been implemented.
Can you tell us why we cannot follow the American good practice
in terms of assessing the performance of your department by having
a concept of a tax gap? They estimate the gap between theoretical
Inheritance Tax, or whatever they call it in their country, and
actual receipts is a gap of 13%. It at least gives one a measure
of efficiency of delivery insofar as it is a reliable statistic.
Why have we not been able to do the same?
Mr Gray: Can I thank you first,
Mr Williams, for your welcome for the progress we have made since
the last Report. We would very much like to be able to make progress
in measuring the tax gap across the whole range of our direct
taxes, including Inheritance Tax, and we welcome the recommendations
and some of the suggestions from the National Audit Office in
their Report. There is no lack of will or desire on our part here.
This is technically, though, very difficult territory. As I think
our American colleagues would acknowledge, I do not think they
feel desperately confident about the precise accuracy of the figure
they came up with which you mentioned. That was based on a survey
that was done as far back as 1992 and I do not think they have
been able to repeat the exercise since. All that said, we do want
to build on their experience. We are committed and indeed have
already started to do a broadly similar random selection exercise
of around 100 cases which will build on and draw from the experience
of our American colleagues. However, I would not want to lead
the Committee to think that we are at all easily going to come
up with a precise and reliable estimate. There is a general problem
right across the direct taxes as distinct from the indirect taxes
collected by Customs and Excise where there is much more matching
data you can draw on, for indirect taxes you can use data about
consumption, then see how much you are gathering from tax, and
then do calculations to see what the difference is between the
two. With direct taxes and wealth taxes in particular we are rather
short of data. Indeed, whereas in the United States our counterparts
have been able to draw on wealth data from elsewhere in their
governmental system, we are in rather the reverse position in
that our own Office of National Statistics uses such information
as we have got on wealth as the most reliable estimate available,
so there are data problems. All that said, we are committed to
doing our best to estimate the tax gap and we have got work in
hand to do that.
Q3 Mr Williams: I am inclined to say
that your multiple caveats are a good investment for your reception
here next time because you have not given us anything we can hold
you to, to say "why did you not do what you were going to
do?"
Mr Gray: We are promising to do
the random sample.
Q4 Mr Williams: You can see from our
point of view that if it is practical, we feel it could be helpful
in directing your targeting and your compliance work. We accept
the general principle and we will give you another try and ask
you again the next time you are here.
Mr Gray: Thank you.
Q5 Mr Williams: Something that has emerged
relatively recently, which is different from how taxpayers in
other areas have been advised and helped, is a series of schemes
peddled and advertised in newspaper articles which seem to be
legitimate avoidance schemes, and people pay a lot money to solicitors
to sign up to these things and then you come along and pass an
Act that invalidates them. I am not questioning the appropriateness
of doing that but is there not a way of giving some warning very
early on, knowing the temptation there may be for people to rush
into heavy commitments with solicitors? You do it in other areas
of taxation. Could you not have issued earlier warnings that you
really were going to be looking very closely at these schemes
and advise them to be very, very cautious about them?
Mr Gray: In relation to Inheritance
Tax we seek to adopt exactly the same approach as we adopt right
across the direct tax spectrum. Frankly, it is an asymmetric approach
which we adopt. Where people come to us and seek clear guidance
in relation to schemes which we are entirely clear fall well within
the existing tax law, we are content to confirm that our interpretation
is that those schemes represent perfectly reasonable tax planning.
When we are at the other end of the spectrum and we have people
coming to us who are seeking to, how shall I put it, press us
to the point of defining precisely what the limits are of legitimate
tax planning and what represents artificial schemes then, frankly,
we have taken the view in Inheritance Tax and in the other direct
taxes that the Inland Revenue is not really here to help people
plan to the very limits of what we will accept. So it is an asymmetric
approach. Where we think people come to us with something which
is well within normal tax arrangements we are content to confirm
that. If people are pushing us on how far the limits are pushable,
then we really do not think it is either sensible or wise for
us to be seeking to give precise interpretations, not least because
there is always a possibility, as Ministers have made clear on
a number of occasions, of legal changes of the sort you referred
to in your question, if the view is taken that particular schemes
are clearly pushing into the area of artificiality.
Q6 Mr Williams: You can understand the
frustration of people who are wanting to do the legal thing and
at the same time wanting to get what they see as the best thing
for their families and wanting as firm advice as is practicable.
Okay. To move on to the other end of the process now, the penalty
system. You seem to be singularly compassionate to the people
whom you find guilty of misdemeanours in the way they deal with
Inheritance Tax. Penalties that average just 7% of the maximum
seem hardly to verge on the edge of deterrence. How does it come
about that the penalty level is so low?
Mr Gray: Again in the Inheritance
Tax area we are operating the same sanctions and penalties regime
that we operate across the board on direct taxes, so our approach
on this particular tax does not fundamentally differ from other
areas and we have a recognised tariff, if I can put it that way,
of deductions from penalties that are made to reflect various
considerations that come to light in particular cases.
Q7 Mr Williams: So has anyone been unfortunate
enough to pay the full 100%?
Mr Gray: I will refer to my colleagues
in a minute. I think there are relatively few penalties at the
100% level but of course what has happened very recently is that
at the far end of our sanctions regime we have secured the first
fraud prosecution in this area—
Q8 Mr Williams: —I was going to
come on to that.
Mr Gray: —which has now
incurred a very heavy penalty. I hope that underlines that we
are seeking to operate a spectrum here and the underlying purpose
is how can we best develop deterrence and compliance over time.
Q9 Mr Williams: There is a big jump between
7% and being done for fraud. Rather than answering now you might
be able to give us a figure or a graph showing what proportion
of people pay what proportion of the maximum penalty.
Mr Gray: We could certainly do
that.[1]
I do not know whether either of my colleagues want to offer some
broad figures.
Q10 Mr Williams: A ballpark figure would
be quite helpful in case we want to follow up on it. Do many go
beyond 50%, for example?
Mr Leigh-Pemberton: The short
answer to that is no and the reason for that is because of the
underlying behaviour here because we are not talking about people
dealing with their own affairs, it is personal representatives
trying to make sense of a deceased person's affairs and there
are usually several beneficiaries. The vast majority of people
administering estates are just trying to do the best possible
job they can and most infractions are consequently minor. We take
comfort from the fact that as part of this review the National
Audit Office themselves asked us to look at cases where we had
not pursued a penalty but thought about it. As you will see in
the Report, they were content that the mitigation that we were
applying was correct and in line with general policy in the Department
on penalties.
Q11 Mr Williams: Before I go on to Mr
Trickett, on the point you have raised of the one case of fraud,
is it not rather remarkable that there has only been one case?
Mr Gray: I think it reflects the
fact that in complex cases the process of investigation can be
extremely extended. That particular case was under investigation
for a good number of years. What I would say is—and obviously
I am not able to refer to specifics—there are a number of
other cases currently under investigation. Depending on the course
of those investigations they may or may not lead to prosecution.
We are certainly not viewing the Lamberton case as a sole example
of using that far end of the compliance spectrum.
Mr Williams: Can I just say before I
call Mr Trickett I know that you are trying to be helpful and
you are giving full and very helpful answers, but I do not time
limit myself in the chair, it is a luxury I indulge in, but my
colleagues are time limited so if you can give succinct answers
that would be helpful to them. Jon?
Q12 Jon Trickett: I have just had the
experience of bereavement with my mother's death in April this
year when I helped my dad to fill in the forms. As the Report
describes, the forms are not straightforward at all. IHT205 is
meant to be the short form (which is applicable to the vast bulk
of all estates) and although my mother did not leave enough money
to pay tax we found that we were able fairly easily, within just
over an hour, to complete IHT205, only to find a circularity about
the form because almost the last point on the form was "now
go to IHT200 (which is the longer form) because your mother's
estate now requires you to go and do that". That was an intensely
irritating thing given the fact we had just been bereaved and
were going through the complex financial situation that any person
leaves. IHT200 was beyond our capacity, frankly, and myself and
my father are not illiterate or innumerate people. In the end
we had to employ someone to fill the form in and, frankly, that
was a professional accountant working in a large practice in the
centre of Leeds which does have some top-class accountants. They
themselves prepared the form, filled it in, and it was returned
twice because it had been filled in incorrectly. The form itself
is not as clear as it ought to be. Finally, we ran into trouble,
after all that had been done, with the probate where there were
further problems. It is not good enough, is it? It is not satisfactory
that people are having to employ specialists to fill forms in
when really this should be a family matter particularly at a time
of bereavement? Why is it that the form is so complicated?
Mr Gray: I am naturally very sorry
to hear about the case that you had to go through. We have sought
to make quite strenuous efforts over recent years both to improve
and simplify form design and reduce the number of people who do
have to fill in the longer form. I obviously cannot comment on
your particular case—
Q13 Jon Trickett: I am not asking you
to but I think 70% of all people who have to fill in IHT200 are
employing specialist help, so there is money going out of the
family in the vast majority of cases. Is it not right that that
is the case? They are having to employ specialists to fill in
forms which really should be a fairly simple and straightforward
matter?
Mr Gray: 70% of those who need
to fill in the form are indeed using professional advisers but
the proportion of total bereavements where it is necessary for
people to fill in the full form is now significantly reduced as
a result of the action taken.
Q14 Jon Trickett: How many of those people
who are not filling in the 200 form are also having to employ
people to do it for them?
Mr Gray: We would hope that very
few are.
Q15 Jon Trickett: You do not know then?
Mr Gray: Because they are in the
position of finding through the probate process that that is automatically
resolving the matter for them and they do not need to fill in
the form.
Q16 Jon Trickett: First of all, I am
not sure that what you are saying is correct. Do you find that
there are problems frequently between yourselves and probate even
when the forms have been completed for yourselves and there are
further complications with filling the forms in and satisfying
the demands of probate?
Mr Gray: I think I can honestly
say the experience you referred to is not something that we find
all that typical. Usually the degree of complementarity and successful
co-operation with the Probate Service is very high but obviously
I am very sorry to hear about this particular case having been
so difficult.
Q17 Jon Trickett: All I know is that
when you have specialists in large accountancy firms failing to
fill in the form correctly it tells you that it is not the human
beings involved it is the complexity of the form itself. Can I
just go on to another matter which is this business of having
to pay tax before probate is issued. It did not affect me in my
particular case but it was obvious that had I inherited a property
from my mother which had been above the tax threshold and had
she not left any money in the bank, the family would have had
to find the liquidity to pay the tax before probate would have
been issued. We would not have the authority to sell the house
in order to raise the money to pay the tax but you yourselves
would have wanted the tax prior to probate. Is that correct?
Mr Gray: It depends on the type
of case. We have sought to increase the number of cases where
it is possible to avoid that, for example with the introduction
of the direct payment scheme for banks.
Q18 Jon Trickett: Paragraph 3.6 on page
29 says: "Once any tax assessment is agreed with the Revenue,
representatives"—I presume that is of the bereaved—"need
to pay any tax due before probate can be granted and assets in
the estate distributed". There must be many people whose
largest single asset is a house which they bought for probably
not a large amount of money and over the years they have lived
there it has gone beyond the tax threshold. This is affecting
many older people and middle class people and so on, it not just
the very, very wealthy. In those cases one can imagine there is
frequently not a large amount of money left in the bank at the
end of a life. If you cannot sell the house and there is not enough
money in the bank, and in any event you cannot get access to the
money because probate has not been issued, then literally the
family is thrown back onto its own resources to go to a bank or
elsewhere to pay the tax because probate has not been granted.
Is that not grossly unfair?
Mr Gray: There are a number of
points. Firstly, we are only talking about 5% of bereavements
where any Inheritance Tax is being paid. You refer to paragraph
3.6. The bullet points later in paragraph 3.6 do spell out a number
of measures we have taken over the last few years to seek to mitigate
that problem in cases where it arises, for example through the
direct payments scheme in the first bullet of 3.6, and there is
a point in the bullet at the bottom of that page around the provision
where a payment does need to be made but can be settled in annual
instalments, so we are seeking to mitigate that.
Q19 Jon Trickett: That third bullet point
does not make it clear whether that is before or after probate.
Mr Leigh-Pemberton: The instalments
are paid over ten years after probate is granted, as long as you
have met the requirements and agreed the instalments with us.
1 Ev 11-12. Back
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