House of Commons portcullis
House of Commons
Session 2006 - 07
Publications on the internet
Public Bill Committee Debates

Draft Tax Avoidance Schemes (Penalty) Regulations 2007

The Committee consisted of the following Members:

Chairman: Mr. David Wilshire
Ainger, Nick (Carmarthen, West and South Pembrokeshire) (Lab)
Dowd, Jim (Lewisham, West) (Lab)
Etherington, Bill (Sunderland, North) (Lab)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Gibson, Dr. Ian (Norwich, North) (Lab)
Goldsworthy, Julia (Falmouth and Camborne) (LD)
Kennedy, Jane (Financial Secretary to the Treasury)
Ladyman, Dr. Stephen (South Thanet) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Prosser, Gwyn (Dover) (Lab)
Simon, Mr. Siôn (Birmingham, Erdington) (Lab)
Streeter, Mr. Gary (South-West Devon) (Con)
Taylor, Mr. Ian (Esher and Walton) (Con)
Thurso, John (Caithness, Sutherland and Easter Ross) (LD)
Walker, Mr. Charles (Broxbourne) (Con)
Ward, Claire (Lord Commissioner of Her Majesty's Treasury)
Wright, David (Telford) (Lab)
Glenn McKee, Committee Clerk
† attended the Committee

Eighth Delegated Legislation Committee

Thursday 25 October 2007

[Mr. David Wilshire in the Chair]

Draft Tax Avoidance Schemes (Penalty) Regulations 2007

8.55 am
The Chairman: It might be to the advantage of the Committee if I remind everybody that this is a narrow debate. It is about the need to increase penalties and the amount of the increase, not an opportunity for a general kick-about on a Thursday morning.
The Financial Secretary to the Treasury (Jane Kennedy): I beg to move,
That the Committee has considered the draft Tax Avoidance Schemes (Penalty) Regulations 2007.
After that comment, Mr. Wilshire, can I say what a sincere pleasure it is to serve under your chairmanship this morning? As you have said, this is a straightforward measure. The draft regulations propose an increase in the daily penalty imposed under section 98C of the Taxes Management Act 1970 in cases of continued failure to disclose a tax avoidance scheme after an order has been made by the special commissioners under sections 306A or 314A of the Finance Act 2004.
The tax avoidance disclosure regime applies to schemes that concern income tax, capital gains tax, corporation tax and stamp duty land tax on commercial property. Part 7 of the Finance Act 2004 requires certain persons to disclose information to Her Majesty’s Revenue and Customs about avoidance schemes that fall within certain descriptions. That person is normally the promoter of the scheme, the person who designs it or who makes it available for implementation. In practice, promoters are accountancy and law firms, banks and other institutions. In most cases, the promoter must explain how the scheme works within five days of its being made available for implementation. There are penalties for failure to disclose. The initial penalty is up to £5,000 with daily penalties for continued failure of up to £600. The regulations will amend those figures to £5,000 and £5,000.
I am happy to respond to any questions as necessary, but to sum up, the regulations will provide for the proportionate increased penalties that are necessary to ensure compliance with the disclosure regime and to provide a level playing field for all promoters of tax schemes.
8.57 am
Mr. David Gauke (South-West Hertfordshire) (Con): It is a great pleasure to serve under your chairmanship, Mr. Wilshire, and I shall certainly bear in mind your comments about avoiding a general kick-about on a Thursday morning. However, I have a few brief questions for the Financial Secretary about the disclosure regime in the context of the increased penalties proposed in the regulations.
I have not had a chance to notify the Financial Secretary of my questions in advance, and I appreciate that she may well not have all the answers at her fingertips. However, I am sure that in her usual courteous manner she will be able to respond in due course. Given that the disclosure regime has been in place for a couple of years, since the Finance Act 2004, are there any up-to-date figures on how many schemes have been disclosed in that time and how many promoters have made such disclosures?
Is any evidence or detail available about how many times the fines at the lower rates have been levied under section 98C of the Taxes Management Act? Given that some tax returns have been made from both 2006 and 2007, has HMRC made any estimate about the number of schemes that should have been disclosed but have not been? Obviously, provisions in the Finance Act 2007 and the increased penalties proposed today might have an impact on that.
Considering the disclosure regime as a whole, can the Financial Secretary tell us anything about the number of anti-avoidance measures introduced by the Government under various Finance Acts as a consequence of disclosures made to HMRC? Given that the regulations increase penalties, particularly the daily penalty, do the Government have any concern that the regime may cause difficulties under the Human Rights Act 1998? I ask because the Finance Act 2004 stated that a doubt about notifiability was no longer a reasonable excuse for failure to disclose. Given the increased penalties in the order, there might be increased difficulty, or perhaps a greater chance of somebody attempting to dispute the regime. I am not arguing that there is a strong case for that, but does the Financial Secretary have any concerns about it?
Finally, does the Financial Secretary agree that one of the problems with the current disclosure regime is that promoters can go to counsel and get aggressive advice that a particular arrangement does not require notification and is not a scheme for the purposes of part 7 of the 2004 Act? That is perhaps the biggest difficulty in obtaining disclosures, as HMRC and the Government seek to do.
As I said, I do not necessarily expect the Financial Secretary to be able to answer all those questions, but if she is able to deal with any of them now I shall be extremely grateful. I have no intention of opposing the regulations.
9.2 am
Julia Goldsworthy (Falmouth and Camborne) (LD): I have a couple of questions additional to those asked by the hon. Member for South-West Hertfordshire.
First, on the increased penalties in the regulations, I know that new information powers were introduced in the Finance Act 2007. The regulatory impact assessment on the Act stated that options considered included doing nothing, introducing new powers and increasing the penalty for non-disclosure. It stated that when the Government considered the risk of the latter option, they found:
It went on to say that calculating a suitable penalty would be difficult. As a result, that option was not recommended, and instead new powers were brought in. Why, in addition to those powers, does the Financial Secretary now feel it necessary to reconsider penalties? Having done so, on what basis has her Department judged that £5,000 is a suitable amount, given the difficulties mentioned in the regulatory impact assessment?
Secondly, does the Financial Secretary have an estimated breakdown of the impact of the regulations on the Treasury in terms of revenue from additional disclosures? Also, does she expect any additional revenue from increased numbers of penalties being issued and their increased amount? Like the hon. Member for South-West Hertfordshire, we have no intention of opposing the regulations.
9.3 am
Jane Kennedy: I am grateful for the indication of a fair wind for the regulations. I fear that the hon. Member for South-West Hertfordshire is prescient, as I probably cannot answer some of the detailed questions that he asked.
It is worth the Committee bearing in mind that billions of pounds are lost through avoidance schemes and that, although most promoters of tax avoidance schemes comply with their obligations, a minority do not. In response to the hon. Member for Falmouth and Camborne, we took the view that the activities of that minority, if left unchecked, would undermine the regime and create a competitive disadvantage for the compliant majority.
HMRC consulted on the wider package, as well as specifically on what the higher penalty amount should be. Respondents to the consultation agreed that increased powers were needed to deal with non-compliance in order to ensure a level playing field for promoters, and there was a consensus that higher penalties were needed to deter non-compliant promoters. The higher amount needs to reflect the seriousness of the non-compliant behaviour. Before an order is made there may be some uncertainty about whether disclosure is required. However, the order by the special commissioners removes any uncertainty and, therefore, continued non-compliance is a serious matter.
The higher amount is also needed to deter those promoters who would otherwise choose not to comply and to offset the penalty against the substantial fees earned from these schemes. I believe that the increase is proportionate and will prove to be an effective deterrent. The amount was discussed by HMRC with mainstream promoters who have indicated that they believe that it is at broadly the right level. HMRC will monitor compliance and the effectiveness of the increased penalty, and if it becomes apparent that the amount is not sufficient to deter certain promoters, the Government will not hesitate to come back to the House for approval for a further increase. However, I do not anticipate that that will be the case.
The hon. Member for South-West Hertfordshire asked how many penalties we have charged already. I can tell him that three have been imposed. The special commissioners have a degree of discretion over how much they levy. I do not have those figures, but I shall see how much of that information I can disclose to the Committee.
By 31 March 2007, HMRC had received 852 income tax, corporation tax and capital gains tax disclosures, 670 stamp duty land tax disclosures and 836 VAT disclosures. The increased yield from the regime will be approximately £15 million per year, which is not a huge amount compared with the global tax take. The purpose is to encourage compliance, to prevent non-compliance and to protect revenue. We have no doubt about the reasonable excuse issue of an order by the commissioners. It removes doubt about notifiability as a reasonable excuse, although there are other reasonable excuses, such as illness, which would be accepted by the special commissioners. I have already revealed how many penalties have been charged.
I believe that this proposal is a very reasonable response to a serious threat to the Exchequer. I hope that the Committee will give it a fair wind, and I am grateful to the hon. Members for Falmouth and Camborne and for South-West Hertfordshire for the spirit in which the probing has been conducted. I shall check Hansard to see if I have missed any points, and write to hon. Members if that is the case.
Question put and agreed to.
That the Committee has considered the draft Tax Avoidance Schemes (Penalty) Regulations 2007.
Committee rose at eight minutes past Nine o’clock.

House of Commons home page Parliament home page House of Lords home page search page enquiries ordering index

©Parliamentary copyright 2007
Prepared 26 October 2007