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None the less, the Government seek to extend the regime set out last year. We question the timing of that. Two logical positions could be taken on the matter. The first is that it is confusing to have two different penalty regimes for errors in tax returns and therefore right to move to one common structure as quickly as possible. That could be described as the big bang approach to penalties, if that is not overdoing it. The alternative is to take a more gradualist approach, by seeing how the new system works, extending the approach in stages by a process of trial and error, learning as we go along, identifying strengths and weaknesses, and imposing a new system of penalties for tax returns over a number of years.
Both are acceptable positions and there are arguments for adopting either. However, in attempting to take two different approaches, the Government appear to be in an inconsistent position. In the 2007 Act, the Government did not seek to apply the new penalty regime comprehensively; instead, they just picked out the main taxes and left the rest. That would indicate the gradualist approach. However, long before the existing provisions come into force and it is possible to assess the effectiveness of schedule 24 of the 2007 Act, the Government are seeking to expand the regime to a new set of taxes, as we see in schedule 40 of the Bill. The taxes include inheritance tax, stamp duty, stamp duty land tax, petroleum revenue tax, insurance premium tax and a wide range of duties.
Over the course of a year, the Treasury and HMRC have gone from a gradualist approach to one of trying to impose a single regime as soon as possible. However, clause 117(3) allows different days to be appointed for different provisions, so things might not work out like that and some taxes might be treated differently over time. If the Government had wanted to introduce all the measures as quickly as possible so that different regimes were not running simultaneously—I acknowledge that there is an argument for doing so—we must ask why they did not do that in 2007 by applying the new penalty regime more broadly. I hope that the Financial Secretary will address that point. It appears that the Government changed their mind during the past few months and I should be grateful for an explanation of why that happened.
The Government also seemed to change their mind in a rush. “Modernising Powers, Deterrents and Safeguards: Penalties Reform—The Next Stage”, HMRC’s consultation paper, was published only on 10 January. It is rumoured that it would have been published earlier, but that it was delayed because of HMRC’s difficulties owing to the missing data discs. Perhaps it would have been too embarrassing for HMRC to consult on the penalties that it would impose on taxpayers for errors when HMRC itself had been guilty of the most horrendous errors.
It is worth noting that annexe A of the document contains the consultation criteria in the Department for Business, Enterprise and Regulatory Reform code of practice. The first criterion states that a consultation should
“Consult widely throughout the process, allowing a minimum of 12 weeks for written consultation at least once during the development of the policy.”
The consultation closed on 6 March, just eight weeks after the document’s publication on 10 January. Why was that the case? If it had closed any later, it would have finished after the date of the Budget—12 March—and, clearly, announcing the policy of extending the penalties regime while the consultation was still under way would have been too obvious. The credibility of the consultation was undermined because the consultation period ended on 6 March and, just six days later, HMRC published board notice 96, in which it announced the Government’s plans to legislate.
The consultation document stated:
“HMRC would welcome views on...extending the penalty regime...to incorrect returns for other taxes”.
Six days after the date for submitting those views, it announced that legislation would be introduced in the Finance Bill 2008
“to create a single penalty regime for incorrect returns”
across all taxes, levies and duties administered by HMRC. HMRC might well have welcomed views on the subject, but it is difficult to believe that as much consideration was ever going to be given to views that conflicted with what the Government seemed determined to do in the first place. There are plenty of stories that Treasury officials were burning the midnight oil in the run-up to the Budget and that there were all sorts of last-minute changes, but I suspect it is unlikely that the intense review of submissions to the consultation on penalties was the reason.
It has not been a good winter for HMRC consultations. Draft legislation on non-doms had to be corrected mid-review because it was already damaging the UK’s reputation. The consultation on income shifting was so widely castigated that plans to introduce measures were withdrawn. The consultation on penalties might not have been in the same league for controversy, but its timing—eight weeks, not 12—and its completion six days before the Government announced their policy, gave every impression that HMRC was simply going through the motions. That concern is shared among various professional groups. That is not to say that there is no support for the proposals; indeed, the principle of a single system for penalties has many supporters. However, serious points of substance were raised during the consultation.
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I do not intend to get into a detailed debate about schedule 40—we will return to that in much greater detail upstairs—but it is worth briefly highlighting the concerns raised through the consultation process to show that there are issues to address, as I think that the Minister accepts. In such circumstances, a hurried consultation was far from ideal.
I shall outline several of the concerns. The proposals involve penalties that are based on underlying behaviour. That is widely supported, but the Institute of Chartered Accountants, for example, believes that there is a problem with distinguishing between prompted and unprompted disclosure for one-off taxes, such as inheritance tax and stamp duty, compared with the situation for taxes that are paid repeatedly, such as income tax or corporation tax.
A third-party penalty for incorrect inheritance tax returns was raised during the consultation process by the ICA, which said that it was not convinced by the
Government’s proposals, and the Chartered Institute of Taxation, which had strong reservations about penalties on third parties generally. The Government have moved on that point, but worries still exist. The ICA raises an important concern that proposals on penalties for failure to notify might discourage persons operating in the shadow economy from regularising their position. Both the CIT and the ICA raised the issue of suspended penalties. There are substantial issues for us to debate, but I think I have demonstrated that important points were raised in the consultation process, so it is not good enough to steamroller through the measures. Given the limited time allowed for consultation, our assessment and evaluation upstairs will be all the more important.
I welcome you to the Chair, Sir Nicholas. It is a pleasure to serve under your chairmanship.
Mr. Peter Bone (Wellingborough) (Con): I declare an interest as a member of the Institute of Chartered Accountants.
I do not understand why the institute and other organisations were put to the trouble and cost of becoming involved in a consultation that lasted for only eight weeks when I understand that the Government recommend minimum consultation periods of three months.
Mr. Gauke: Yes, as I said earlier, the Government’s code of conduct states that consultations should last 12 weeks. However, it simply was not possible to do that and to get everything done before the Budget, when the policy was announced. That raises the question whether we are rushing into this somewhat. My hon. Friend makes a helpful point.
There is further evidence that the matter has been rushed. The Financial Secretary wrote a letter dated 24 April to my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond), the shadow Chief Secretary to the Treasury, about the powers under clause 117(4). Her letter makes the point that HMRC is still working through old legislation to work out what consequential amendments need to be made to that legislation in what is, admittedly, a complicated area. That prompts us to ask, again, why legislation is not ready at this point. The fact that it is not suggests that there is a rush.
Having highlighted several issues of substance that we need to debate, let me point out that the consultation timetable has made it difficult for the Government to respond regarding the latter two substantial points—on penalties for failure to notify and suspended penalties. We would be in a much better position to assess the validity of those arguments if we knew how the regime for main taxes that was introduced in the Finance Act 2007 had bedded down. If we were able to see how that had worked over a given period, we would be able to see whether there is a strong argument on these points. But we do not have that opportunity, because the Government wish to proceed much more quickly with extending the penalty regime.
Amendment No. 1A would give us the chance to pause and reflect, thus enabling us to see how schedule 24 works out in practice. It would also give the Government more time to consult properly—as my hon. Friend the Member for Wellingborough (Mr. Bone) has pointed out, they consulted for only eight weeks—and give a genuine response that does not look as though it had
been ready to print, regardless of the submissions that have been made. Amendment No. 2A would require the use of the positive resolution procedure to implement schedule 40, which would give the House a proper opportunity to debate this matter again.
We do not criticise the Government for seeking to introduce a single penalty regime. However, given last year’s decision to do that in one go, the Government should pursue this matter carefully, by listening to the concerns of professional bodies, assessing the measures that they have introduced and examining the effectiveness of those measures before acting. Amendment No. 1A would enable them to do precisely that.
Amendments Nos. 4A and 3A—particularly 3A —address another concern that several bodies have raised: that subsection (4) seems to be what is sometimes described as a Henry VIII clause. I learned the definition of such a clause only today, from the first report of Session 1992-93 of the House of Lords Select Committee on the Scrutiny of Delegated Powers, which I had not read before. It states that a Henry VIII clause is
“a provision in a Bill which enables primary legislation to be amended or repealed by subordinate legislation, with or without further Parliamentary scrutiny.”
I do not pretend that it is the first time that such a clause has been used, but its use is a matter of concern. Subsection (4) states:
“The Treasury may by order make any incidental, supplemental, consequential, transitional, transitory or saving provision which may appear appropriate in consequence of, or otherwise in connection with, Schedule 24 to FA 2007 or Schedule 40.”
Subsection (4) is extraordinarily broad. We must put that in the context of the Prime Minister’s statement last year that he was looking for a
“new British constitutional settlement that entrusts more power to Parliament”.—[ Official Report, 3 July 2007; Vol. 462, c. 815.]
The measure seems to take power away from Parliament, because it gives the Executive enormous flexibility to amend the provisions that we will consider in schedule 40 to the Bill, and those that we considered in schedule 24 to the 2007 Act.
Not only do Henry VIII clauses seem to be more prevalent, but they are more widely drafted. Section 97 of the 2007 Act, which implemented schedule 24, gave the Government the power to make an order that may include “incidental, consequential or transitional” provision. This year, in addition to those words, an order may contain a supplemental, transitory or saving provision. The word “supplemental” is particularly vague, and I hope that the Minister will indicate what she means by that. I note also that subsection (6) states:
“An order under subsection (4) may make different provision for different purposes.”
I confess that I am not sure what that means, and I should be grateful for some elaboration on that point. However, it appears to be extremely broad.
Mr. Bone: Is not the Henry VIII clause typical of what the Government do these days? They rush through legislation and do not have proper consultation, taking the view that if they get things wrong they can alter them without coming back to Parliament. It is a way of rushing things through without giving them proper consideration.
Mr. Gauke: My hon. Friend, who is a doughty defender of the rights of Parliament, makes another good point. His comment brings together the first and second parts of my argument, the first being that there seems to have been a rush to get the legislation in place this year, and the second that the Government have had to protect themselves as a consequence. To be fair to the Financial Secretary, she acknowledges that this is a technical area that is likely to require a great deal of consequential amendment. However, rather than try to get the Bill right first time and take a more methodical approach to it, they provide themselves with powers to go back to it and address these issues again.
Mike Penning: A “get out of jail free” clause.
Jane Kennedy: I might have misheard the hon. Gentleman—I have learned that he is very thorough in his approach to such matters—but he quoted a definition of the so-called Henry VIII clause from 1992. He will know that a different party was in government in 1992, and that this issue has long been a complaint of parties in opposition.
Mr. Gauke: Sometimes parties in opposition are right. I thought that the Financial Secretary would pick me up on that point, but I did say that the use of such clauses seemed to be more prevalent. That is our concern. They are also more comprehensive. A comparison with last year’s Henry VIII clause shows that we seem to be getting bigger Henry VIII clauses by the year. That is a concern.
Mr. Gauke: I shall not make any ill-judged remarks comparing my hon. Friend with Henry VIII.
Mike Penning: I shall take my hon. Friend’s comment in the manner in which I am sure it was intended.
The Financial Secretary talks about 1992, but it was only last year when the Prime Minister said that he wanted the House to be consulted more. She waves that comment away—perhaps the Prime Minister’s comments should be waved away more often—but such comments are important. If we are to believe what the Prime Minister says, then why have the Government used another, even larger Henry VIII clause?
Mr. Gauke: I am grateful to my hon. Friend, who makes a very good point. To be fair to the Financial Secretary, I must stop trying to put her into embarrassing positions in respect of the Prime Minister’s comments, as she had to cope with denials over the losers in the 10p tax rate issue last night. On this occasion, however, I think that the Prime Minister was right to say that Parliament should be in the centre of things to a much greater extent, and we would like to see that happen in practice rather than just hear the rhetoric, but we see no evidence of it in the Bill. In fact, we see Parliament being marginalised because it will not have the ability to scrutinise or control legislation as it should.
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Let me draw a couple of comparisons with provisions elsewhere in the Bill. Clause 118, for example, deals with penalties for failure to notify and covers equivalent provisions, while clause 119 relates to HMRC decisions, reviews and appeals. That, too, employs similar wording, but unlike clause 117 it requires the affirmative resolution process. Amendments Nos. 3A and 4A would remove the powers. If the Government wish to amend the law in this area, we believe that they should do so through primary legislation and amend schedule 40 accordingly. If HMRC is not ready to do so and is still working its way through existing legislation, that is a further argument for delay, as I said.
I referred earlier to the Financial Secretary’s letter of 24 April 2008 to the shadow Chief Secretary, in which she states that the
“order-making power contained in clause 117(4) is a reserve power to provide for the smooth transition from the old penalties legislation to the new, allowing for interim rules to apply if necessary when the new legislation comes into force”.
In arguing that it is purely about a smooth transition, the Government’s difficulty is that the provisions are much wider than that. For example, there is no sunset clause that would satisfy the concerns identified by the Financial Secretary, but it would at least provide some comfort to Opposition Members who are concerned about these provisions.
If the Financial Secretary says that she will not use the powers more widely than is set out in her letter, I would not for a moment doubt her integrity on the matter; I fully accept that, but she will not necessarily hold her position for ever. I mean that in a positive way, as I am sure that promotion beckons. I, for one, think she would make an outstanding member of a Labour shadow Cabinet, but Parliament should require greater protection of its rights than the assurances of one particular Minister, however popular.
There is already an issue about parliamentary scrutiny because these measures are contained in a Finance Bill and it is worth making the point that the other place does not have an opportunity properly to scrutinise these measures for that reason. Given that the provisions greatly affect the balance between the liberties of the individual and the sanctions that the state requires to enforce the law, there is a strong argument for saying that any fundamental review of HMRC’s powers, as we saw in last year’s Finance Act and this year’s Finance Bill, should be contained in separate legislation that is not part of a money Bill. Any such separate Bill could then be examined in the other place. I would be grateful if the Government gave consideration to that point, which has been raised by a number of bodies.
As well as the constitutional argument, there is a practical point about the way in which the Government seek to amend legislation through statutory instruments. The design principles followed in the review of HMRC’s powers are referred to in the consultation document I mentioned earlier, which states that penalties should be
“visible and set in statute”.
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