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inspect a document, or to make or take copies of or extracts from or remove a document.
We were talking about computer records, so I gave the example of an e-mail, attachment or web page on a server hosted outwith the country. I also made the point that clause 112 allowed an authorised person to have access to
any person having charge of, or otherwise concerned with the operation of, the computer.
That could be a third party, a maintenance company, someone with a management contract, or a computer that was not under any circumstances in the control of the taxpayer whose documents the Revenue was trying to see.
The Financial Secretary gave us some comfort at that time, particularly in relation to the extraterritoriality potential in clause 112. However, it is in part 7, as is the introduction of schedule 36 penalties, including paragraphs 43 to 47 and 50, which include the concealment or destruction of documents, failure to comply with time limits, and the tax penalty if a failure or breach continues after an initial penalty has been levied. I am sure that it is not the intention of the Bill or the Revenue, but given the debate on clause 112 in Committee, it strikes me that a penalty under schedule 36 could be levied for concealment, breach of time limits or a tax penalty thereafter, for non-compliance with an order to allow a document to be copied, extracted or removed from a computer wholly under the control of a third party, and not under the control in any way, shape or form of the taxpayer. What attracts me to new clause 5 is the reference to safeguards applying to taxpayers who might find themselves in the hideous position of wanting to comply but being technically unable to do so.
I look forward to what the Minister has to say about clause 112, computer records, how breaches could be penalised under schedule 36, and what safeguards might exist in the absence of new clause 5 to prevent or insure taxpayers from being penalised if they had no control over a document that the Revenue was trying to get at or to copy.
As the House was told by the hon. Member for South-West Hertfordshire (Mr. Gauke) and as the explanatory note makes clear, new clause 16 is required as a result of a recent judgment by the Court of Appeal to protect the Exchequer from potential avoidance opportunities, and to ensure that tax is collected as Parliament intended. The hon. Gentleman asked me about the cost to the Exchequer. I approach the answer with some caution. It is extremely difficult to say how much would be lost if the Exchequer were to lose its powers and duties to set off outstanding liabilities against claims for overpaid tax, but it is clear from the value of claims currently lodged with HMRC that the revenue potentially at risk runs into hundreds of millions of poundsless than £500 million, but nevertheless representing a considerable range. I do not wish to be drawn into too much detail, but there is a significant risk.
Until the Court of Appeal judgment, HMRC had taken the view that only the person who overpaid the tax was entitled to make a claim for repayment. When a person makes a claim for over-declared VAT, HMRC is required to set off against it any outstanding liabilities of the claimant. For example, when a taxpayer submits a claim for £10,000 but has a VAT debt on file of £3,000, his eventual refund will be £7,000.
The judgment of the Court of Appeal in the case mentioned by the hon. Gentleman, Commissioners for Revenue and Customs v. Midlands Co-operative Society, makes it clear that the right to make a claim can be transferred by the person who overpaid the tax, namelythis is where it becomes horribly legally complicatedthe original creditor, to another person, the current creditor, who then becomes entitled to make the claim to HMRC for repayment of the tax. The potential loss of tax arises because there is no provision under current law for HMRC to offset the liabilities of the original creditor when the claim for the overpaid tax is made by someone else. As a consequence, taxpayers can, through assignment of the right to make a claim, avoid the set-off procedure.
New clause 16 seeks to address that avoidance opportunity by putting the current creditor in the shoes of the original creditor for the purposes of the setting off of liabilities. That is about as far as I, a non-legal person, can follow the details, but it is important to ensure that when a person who has overpaid his tax liabilitythe original creditortransfers the right to claim that overpaid tax to another personthe current creditorthe current creditor will not receive from HMRC any more than the original creditor would have received had he made the claim himself.
Although the Midlands judgment was a VAT case, its application is not limited to VAT. As the current procedure for claiming overpaid VAT is replicated for all the indirect taxes administered by HMRC, the potential for avoidance and loss to the Exchequer exists for them all. HMRC believes that it may also exist in relation to claims for error or mistake relief in direct tax. I stress that the new clause does not empower HMRC to make the current creditor liable for the debts of the original
creditor. It simply ensures that the current creditor cannot receive any more tax from HMRC than the original creditor would have been entitled to.
It is not my intention that HMRC should rely solely on the new clause to recover the original creditors liabilities. When the right to claim a repayment from HMRC is transferred, the set-off mechanisms in the new clause will not be applied to a payment to the current creditor until HMRC has taken all reasonable steps to recover any outstanding liabilities from the original creditor.
Amendments Nos. 24 to 28 make consequential changes to clauses 128 and 129. I am grateful to officials for their advice. This is one of those moments that occurred relatively seldom in Committee. I send my best wishes to the leader of an exemplary team of officials, and wish him many happy returns of the day on his 31st birthday. I am sure that he is enjoying spending it in our company this evening.
The hon. Member for South-West Hertfordshire asked whether a motive test had been considered. The simple answer is no. The purpose of the new clause is not to prevent assignments that are genuinely commercial arrangements, or to make them impractical. It simply ensures that the Exchequer does not pay out any more than it would have had the claim been made by the original creditor.
The hon. Gentleman spoke of what he perceived as the danger of erring too far on one side of the balance between powers and safeguards. The package provides greater consistency across taxes: although there are some extensions of powers, they are matched by tightening in other areas and a strengthening of safeguards. Inevitably there will be tensions as we seek to ensure that HMRC has appropriate powers to work effectively, and that taxpayers have strong safeguards. The balance has changed, but in my opinion it has changed in favour of the taxpayer. The schedule contains 37 statutory safeguards to protect the taxpayer, at the heart of which is the need for all actions carried out by HMRC to be reasonable. We debated that at length in Committee.
The hon. Gentleman made a valid point about the protections for ordinary, decent taxpayers who might otherwise be badly affected. As I have said repeatedly, if there is any evidence that the changes work detrimentally in the way that he described, I shall wish to act to address that. At the heart of all our proposed changes is the need for HMRCs actions to be reasonable. Guidance will support the safeguards, and will seek to ensure that taxpayers are fully aware of their rights.
The hon. Member for Taunton (Mr. Browne) said that he would press new clause 19 to a vote. In my opening remarks, I explained at length the interest in the taxpayers charter, and I want to present proposals in due course. As the hon. Gentleman knows, we are in the early stages of consultation, and I prefer that approach to the one suggested in his new clause. The review of powers aims to include more safeguards in legislation where appropriate, and, as I have said, additional safeguards are set out in codes of practice and operational guidance.
The hon. Member for South-West Hertfordshire asked how we could be sure that we would have a chance to scrutinise the guidance. HMRC set out the guidance in a timetable in the consultation response document that was issued at the end of March. The codes of practice and the examples were also published in both consultation
documents, providing much of the detail needed, and full draft guidance on record-keeping has been published. All those documents are public and can be scrutinised in Parliament in the normal way, although obviously not by means of a legislative process.
The hon. Gentleman suggested that taxpayers were not clear about what records to keep. Taxpayers have said that they do not want HMRC to be too prescriptive. Its largely generic approach requires records to be kept of income, sales and expenses, but it also allows taxpayers to decide exactly what they need to keep. They are best placed to decide, bearing in mind their own circumstances. What is important is for taxpayers to keep enough records to be able to make accurate tax returns or claims.
The hon. Gentleman asked what would happen in the event of a dispute. When there is a dispute, the taxpayer can tell HMRC, and when there is genuine doubt, HMRC will use the written information power that we discussed in Committee. That power would carry a right of appeal in most cases, or it would have to be pre-authorised by an independent tribunal.
The hon. Gentleman asked why there is no right of appeal against the power to inspect premises. The law says an inspection must be reasonable, and guidance will set out examples of specific cases where an inspection would, or would not, be reasonable. If HMRC breaches that guidance, the taxpayer could either make a formal complaint or refuse to allow the inspection to take place, knowing that for a penalty to be charged HMRC must demonstrate to the tribunal that the inspection was reasonable.
The IT enhancements planned by HMRC will improve the handling of individuals tax details and will allow HMRC to identify incorrect payments earlier. That will mean that many overpayments will be repaid automatically without the need for a formal claim. In many such cases, a refund is due whether or not the taxpayer makes a claim, so the time limits to which the amendment refers do not apply.
I did not address amendment No. 39 in detail as we debated it in Committee. It might be helpful, however, if I make the following comments. The seven days in the proposed legislation is a minimum period of notice, and usually a longer period would be allowed if necessary. We were asked what would happen in the event of a holiday, perhaps of a fortnight. That would not be a problem, as the taxpayers would have a reasonable excuse for delaying a visit until the conclusion of their holiday. Therefore, based on the requirement for HMRC to behave reasonably, the problems described would not arise.
The new aligned time limits have been warmly welcomed by external stakeholders. The application of the same time limits across taxes will be a useful simplification for taxpayers. They will also allow HMRC to work in a joined-up way across taxes when carrying out checks, which will reduce costs for taxpayers. Most welcome of all has been the earlier certainty for taxpayers that will be provided by reduced time limits as they relate to direct taxesHMRC will only be able to go back for six years when the taxpayer has not taken reasonable care to get their tax right. Six years is a substantial reduction
from the 20 years that currently applies. HMRC will continue to accept later claims when the taxpayer has a reasonable excuse.
I will keep the effectiveness of HMRCs publicity and the planned pay-as-you-earn system improvements under review to ensure that people are prepared for the new time limits from 1 April 2010. A considerable period will pass before the new powers take effect, which is sufficient for not only Parliament, but the representative groups of taxpayers who are also closely scrutinising this work to be satisfied that the powers are appropriate.
The hon. Member for Dundee, East asked about computer records. As I said in Committee, computer records are no different from paper records. If HMRC wishes to inspect any such documents, they must be relevant to the taxpayers tax position, and must be in either the taxpayers or the third partys power or possession, and if they are stored abroad, they must be made available in the UK. All those requirements would be necessary. I know the hon. Gentleman is particularly concerned about where the computer or website, for example, is outside the control of the individual. It would be possible to demonstrate that to HMRC. As I have said to him, HMRC would have to liaise with foreign authorities, perhaps in the jurisdiction where the records are sited, in order to obtain the information through a formal exchange of information. To that extent, the individual taxpayer would step back in order to allow a process of dialogue with the tax authorities in the other jurisdiction to take place. The application of penalties is also no different.
The hon. Member for Taunton asked about what HMRC is doing to protect taxpayer data. I refer him to the Independent Police Complaints Commission and Poynter reports. There is a long list of steps that HMRC is taking, and I encourage him to look at the reports in detail because they give the scope and nature of those improvements.
(a) the Treasury has prepared and laid before the House of Commons a report setting out the safeguards available to taxpayers and third parties in respect of HMRCs powers contained in Part 7 of this Act; and
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