Examination of Witnesses (Questions 60-79)
INLAND REVENUE
15 DECEMBER 2004
Q60 Mr Jenkins: Mr Williams asked you
a question about the first prosecution for Inheritance Tax fraud.
Surely that is not the first case you have prosecuted?
Mr Gray: It is the first prosecution
in relation to Inheritance Tax since the conversion from Capital
Transfer Tax.
Q61 Mr Jenkins: Are there any more in
the pipeline?
Mr Gray: I sought to indicate
to Mr Williams that we certainly have other investigations underway
and if they are not satisfactorily resolved in another way we
will pursue prosecution.
Q62 Mr Jenkins: Because it seems looking
at the penalties you have issued that the average value of the
penalties imposed has actually decreased since 1999, when the
penalties available to you have increased and the caseloads have
gone up as well. Why has that number of penalties fallen? Is that
because of the more efficient service providing a faster, closer
turn round or because, once again, it is easier and it is maybe
a laxer regime?
Mr Gray: We are certainly not
operating a laxer regime. We pursue penalties not for the sake
of pursuing penalties but as part of the deterrence/compliance
regime. The feedback that we have been getting from our increasingly
regular contact with the professionals who operate in this area
is that they feel we are operating a tougher regime. I think the
National Audit Office in the course of their study point to this
and external stakeholders in this gave the same feedback, so we
feel that we are actually operating a tougher, more deterring,
more compliant regime now, and once you get into a more virtuous
circle of that sort it gets into prevention rather than cure.
If you resort to penalties then it is initially a cure.
Q63 Mr Jenkins: I can almost understand
that.
Mr Gray: Only almost?
Q64 Mr Jenkins: I can understand the
virtuous circle because the offences are smaller and going down
the scale, and therefore the penalties are going down the scale,
but I am not quite convinced why the amount of penalties you are
imposing, not the number but the amount, should be falling. Of
course the professionals would say you are imposing a draconian
scheme charging them anything at all, but do you feel that your
deterrent effect is heightened by a falling amount of penalty?
Mr Gray: You are talking about
the profile of the average penalty which has gone a bit up and
down but taking the two years that you did it is now slightly
lower. We do feel that as a result of all the things I have talked
about and given that our strongest interest is in encouraging
people to co-operate with us that it is sensible to take account
of the inherent difficulties a lot of people have in dealing with
us in mitigating penalties.
Q65 Mr Jenkins: How much tax is lost
from undeclared gifts?
Mr Gray: We cannot give you a
precise estimate of that. It is part of the general difficulty
of understanding the tax gap which Mr Williams started the discussion
with us, but we are through our compliance activity looking to
crack down on that.
Q66 Mr Jenkins: So we have no estimate
at all? We have got no profile, we have done nothing with regard
to how much money is transferred between individuals? You have
not worked with the Revenue and decided if wealth suddenly moves
from A to B there is a suspicion of transferring gifts across?
There is no way to track that?
Mr Leigh-Pemberton: We do do that.
As a result of the recommendations you made before we did a specific
exercise to look at lifetime transfers to see how much of a risk
there was, and the figures are reflected in the Report. That gave
us a feel for the level of risk. Gifts are likely to be a feature
in the larger cases because that is where the liquid wealth is
and we are much more joined-up with other parts of the Department
so we receive information from them and we use the databases on
SA tax returns and we look at changes in income in life that may
suggest there have been transfers, so the sort of approach you
are suggesting is very much at the core of our compliance work
in that area.
Mr Gray: Just to add to that if
I may briefly, one area of enhanced co-operation we have is with
a relatively new dedicated service we have set up in the Revenue
for dealing with high-value individuals and in the case of bereavement
of any of those individuals we now have a much more automatic
link with that part of the organisation.
Q67 Mr Jenkins: That was what I was going
to talk about next. How much extra tax are you getting in now
that you are referring all cases of unquoted shares to be checked
by the Shares Valuation Division? The second question is how much
extra Inheritance Tax has the Special Compliance Office secured
from its work on offshore trusts, and what more is to come in
these areas?
Mr Gray: In relation to offshore
trusts we have had a special spend-to-save scheme in operation
since April of 2003, and our latest figures there are that we
think we have already secured £11.3 million and there is
something like another £7.5 million.
Q68 Mr Jenkins: Is that million or billion?
Mr Gray: Million but that is in
return for an additional staff effort of something of the order
of £100,000 so this has been a very good investment.
Q69 Mr Jenkins: Yes, spend more money
please, let's get more money in! And the shares issue.
Mr Leigh-Pemberton: As the Report
says, we make an adjustment of £54 million. We do not actually
calculate that through precisely into the tax bill because it
depends on where the threshold is on each specific case, but that
is a substantial addition in tax.
Q70 Mr Jenkins: Is the pay back for the
amount of work involved good?
Mr Leigh-Pemberton: Yes, very
good.
Mr Jenkins: Thank you.
Q71 Mr Curry: Do you recall Adam Smith's
definition of a good tax?
Mr Gray: I cannot remember the
precise quotation.
Q72 Mr Curry: The gist was that it is
easy to collect, difficult to avoid, and a high proportion of
what is due is collected. On that definition, Inheritance Tax
is a lousy tax, is it not? It is a very, very, very bad tax. There
is a very high proportion of avoidance, relatively little of what
could be paid is paid—very sensibly I have to add, I am
entirely on the side of those who do not want to pay—I am
absolutely on the side of those who do not want to pay it, I have
to say. It is very, very complicated. Mr Trickett has illustrated
that it is massively complicated.
Mr Gray: I am not sure I would
accept it is massively complicated. We have sought to streamline
the regime over the years.
Q73 Mr Curry: Is it not also a bad tax
because the poorer you are above the threshold the more likely
you are to pay the tax whereas the wealthier you are above the
threshold the less likely you are to pay it?
Mr Gray: I am not sure that I
follow that point.
Q74 Mr Curry: The tax threshold for the
sake of argument is £265,000. So if my assets when I die
are £350,000 or whatever it is, then I am not going to pay
Clifford Chance a king's ransom to devise an avoidance scheme
for me. If my assets are £3.5 million it is jolly worthwhile
employing Clifford Chance or somebody else, is it not? Let's start
again. Roy Jenkins said that Inheritance Tax was a voluntary tax
and that you had to hate your relatives more than you hated the
Inland Revenue to pay it. Would you agree with that?
Mr Gray: I do not really think
I wish to comment on that. I think you are raising questions about
the policy basis of tax rather than about the administration of
it, of which I am in charge.
Q75 Mr Curry: That may be true but I
am also raising questions about the efficiency of the tax. Let's
look at it in terms of return on capital. It raises about £2.5
billion, or probably a bit more—£2.7 billion or £2.8
billion that sort of thing.
Mr Gray: About £2.8.
Q76 Mr Curry: How much capital is invested
in raising that amount of money for the Government. How much does
it cost you?
Mr Gray: In terms of our cost
of administration, our administrative cost is of the order of
1.2% to collect this tax, which is very broadly in line with the
average across most of our other direct taxes, so in terms of
administrative cost of collection it is not way out of line.
Q77 Mr Curry: Not out of line with Income
Tax or VAT?
Mr Leigh-Pemberton: It is cheaper
than Income Tax and the largest estates still pay the largest
proportion of the tax.
Q78 Mr Curry: If the threshold were £1
million—and correct me if I am wrong—the tax yield
would be down to £400 million, that sort of order?
Mr Gray: Yes, I think there was
a Parliamentary answer a month or two ago that suggested that
if it was £1 million, the loss of yield would be about £2.5
billion, so we take it down to a few hundred millions.
Q79 Mr Curry: So does the higher the
threshold make your return on capital better or worse, as it were?
Mr Gray: I think it is a rather
complicated calculation because we are already only looking at
a relatively small proportion of the cases. That explains why
we have high compliance with relatively low administrative cost.
If you were to raise the threshold, I think that calculation would
carry through and we would actually need to employ significantly
fewer people because a much larger proportion of the cases would
be sorted out automatically.
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