Finance Bill

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The Financial Secretary to the Treasury (Jane Kennedy): It is a pleasure, Sir Nicholas, to see you back before us this afternoon in better health and looking so well with your new haircut. As you encouraged hon. Members to speak widely it would be appropriate for me to respond in a similar way. It may mean that there will be less need for longer discussion on some of the detail. I entirely accept the concerns that are being expressed. I know that those concerns are sincerely held outside Parliament. I accept how important it is that adequate safeguards are built into not just the legislation but the guidance, the training given to HMRC staff and the whole ethos within which HMRC carries out its responsibilities.
I can confirm that the review grew out of the merger of two quite distinct institutions. Bringing the two together was a sensible step and a step that was being mirrored around the world. A separate consultation was held on safeguards last year. Recognition of the importance of adequate and clear safeguards also lies behind a number of Government amendments that we will consider shortly. The legislation being debated today is in line with other OECD countries. It has more safeguards than most of those countries and more safeguards than the provisions it will replace.
Indeed, on a light-hearted note, I asked officials to check international comparisons so that I could be reassured that the work that we were doing was not providing HMRC with powers far in excess of other tax authorities in developed countries around the world. They were surprised to find how limited their powers were in many cases by comparison. The only example was of the guidance issued to tax inspectors in one eastern European member state on the circumstances in which guns should be deployed when tax officers went about their business. I hasten to reassure the Committee that I quickly doused any enthusiasm for such guidance here in the UK.
More seriously, VAT and pay-as-you-earn officers could previously call on anyone unannounced without the requirement for authorisation. In future, all unannounced visits must have the approval of a senior HMRC officer and visits cannot take place to purely private premises. There are also further safeguards in the interrelationship with other parts of the Finance Bill. I will say a little in a moment about the fishing expeditions about which there is genuine concern.
In other parts of the Bill the new limitations on assessing time limits that we will come to shortly in schedule 39 will limit the period for which it is reasonable to request documents to check a tax position. It would not be reasonable to check a tax position if no additional tax can be assessed. If there is no possibility of assessing now or in the future, then there is no tax position. So where a taxpayer is thought to have made a mistake, HMRC will be able to ask only for information that is four years old. In addition to those safeguards included in the primary legislation, further protections will be provided by regulations and by guidance upon which HMRC will consult. That was done on the penalties clauses in last year's Finance Bill, and I understand that it has proved very successful and popular.
The focus of the amendments that we shall discuss in a moment is that further safeguards have to be in primary legislation. I shall respond directly to the points about whether it should be in this Bill or in a separate Bill that could be scrutinised in greater depth—no, at greater length—in another place. Our scrutiny is quite deep. Legislation cannot cover every conceivable scenario. It is important that HMRC can react quickly where necessary to adapt safeguards to protect taxpayers.
For example, the definition of what constitutes business premises may need to change as the way in which people’s work pattern changes. It is for this reason that, where appropriate, safeguards are included in published guidance and codes of practice. That does not mean that they are paper tigers. In deciding whether HMRC is acting reasonably in any particular case, the courts already take account of what HMRC’s published guidance says, although it would be much better if disputes could be resolved before resorting to the law.
There needs to be a balance between those things that provide real and effective safeguards for taxpayers and those that create bureaucracy and delay. There is no point legislating measures that merely give an illusion of additional protection while making it unnecessarily complex and expensive for HMRC to ensure that taxpayers have paid the right amount of tax. It would be sensible to put this important package of measures in context to help understand some of the amendments that are proposed.
Schedule 36, which we will come to later in detail, is a vital part of HMRC’s modernisation programme. It would be impossible to deliver the full benefits of merger without it. HMRC has a responsibility to check that taxpayers are complying with their obligations. To do that there needs to be a statutory framework so that officers can check that people and companies are doing what they need to do. These checks reassure the compliant taxpayer that they are doing the right thing, but they also deter those who are minded not to comply.
The idea of aligning and modernising the powers and safeguards in this area has generally been applauded and described as sensible by those who responded to the two detailed consultations issued in May of last year and January this year. There are a whole range of quotes from organisations applauding the work that was undertaken. I have chosen one from the Low Incomes Tax Reform Group. Commenting on compliance checks, it said:
“We welcome the extended formulation to allow HMRC to correct ‘obvious’ errors, with its safeguard against inappropriate use, and see this as an important part of HMRC’s stated aims of offering support, in a non-threatening way, to taxpayers, particularly those who are unrepresented.”
There about 1.7 million VAT registered businesses which also pay income or corporation tax. Different rules for different taxes are confusing for taxpayers and their advisers. They also hamper checks that cover more than one tax.
It is clearer for everyone to have a single set of aligned rules in one place. The alignment means that some powers, such as the inspection power, are being extended. I understand the concern that if individuals or businesses have dealt mostly with corporation tax, capital gains tax or income tax issues, they will feel that some of the powers are being extended into their area. However, VAT officials within HMRC are seeing many of their powers reined back. That is seen as a welcome balancing of the powers.
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As I have said, different rules hamper checks that cover more than one tax. The VAT and PAYE powers to visit homes are being curtailed. As is currently the case, many compliance checks can be carried out without invoking the powers formally. Formal powers are none the less needed to ensure that those who would otherwise not pay or would be unco-operative—believe it or not, there are some in that category—do not gain an advantage.
Let me respond to some of the specific points raised by hon. Members. I would agree with the opening remarks of the hon. Member for Taunton in which he expressed concern if we were not building in the safeguards that I have referred to. I have heard the concerns expressed, so I know that there are those who would like the safeguards to be in primary legislation rather than in guidance.
Mr. Browne: Will the Financial Secretary respond specifically to the point made by the hon. Member for Cities of London and Westminster that it would be more appropriate to have these powers in a Home Office Bill so that they could be scrutinised by both Houses of Parliament rather than just by this Committee?
Jane Kennedy: I will come to that point in a moment.
First, a number of hon. Members raised a question about consultation. This is the last stage of an extensive consultation process over two years involving 12-week consultations, workshops and dozens of meetings with interested parties. I know that the time between the closure of the most recent consultation and the publication of the measures was very short. However, I hope to reassure the Committee that, knowing that time would be tight in March, HMRC raised key issues in meetings with stakeholders and sought suggestions for improvements. Changes to the draft law were identified and action was taken before the consultation period closed. All written responses were considered in detail and several changes to the draft legislation were made before the Finance Bill was published on 27 March. As the hon. Gentleman and others have rightly noticed, there are a number of Government amendments that we will consider later that address some of the responses to the consultation.
The hon. Member for South-West Hertfordshire asked whether the Bill was the right legislative vehicle for us to consider these changes. This is the normal route. I simply say to members of the Committee that the changes that I hope we will make today and in the days ahead are sensible and proportionate. However, there is one incomplete review because one or two areas of work are still under way.
The hon. Gentleman rightly says that HMRC has had a traumatic year and as its Minister, I have shared every traumatic moment. He will know that it is anticipated that a new chair of HMRC will soon be appointed, followed shortly afterwards by a new chief executive. It would seem appropriate for a new leader, in these circumstances, to want to take stock not only of the work in response to the capability review and the work on the merger of two big organisations—a process which began only three or four years ago. So I would anticipate that a new chair and a new chief executive might want to look also at how powers are developed. There was a suggestion that there be a road map—that a more strategic view be taken. The chair would sensibly want to comment on that and might even wish to influence it.
I accept that using a Finance Bill has the drawback that it cannot be scrutinised in another place, but the use of Finance Bills has enabled us to break down a wide-ranging review into manageable chunks. The criticism of that may be—as the hon. Member for Gosport said—that there is no human rights scrutiny. I believe that Members of this House, whether lawyers or specialists or not, will have an acute awareness of human rights, because human rights legislation is often founded in sensible infringements, and in what any reasonable person could assume to be an infringement of their human rights. The Committee is well qualified to raise such concerns, and the hon. Gentleman has himself flagged them up.
The Finance Bill also allows for a staged approach to consultation, which is particularly important for those who have given much time to responding to the consultations. Having said all of that about the vehicle, I hear what has been said. I believe that the Finance Bill, as we have structured it today, is an appropriate vehicle for the powers that we are reforming in these clauses and this schedule. However, I will take on board what has been said, and will consider it in the event that future changes are necessary, although from a Government perspective the Finance Bill is a useful way of making those changes.
The hon. Member for Taunton made an important point, and I am grateful to have the opportunity to respond. He believes that it is important that HMRC should not be able to use the new powers to go on fishing expeditions. He is right. All the new powers must be used reasonably for the express purpose of checking someone’s tax position, and for that alone. HMRC has a duty to ensure that people understand and operate the requirements of the various tax regimes correctly. The Department also needs to validate its understanding of risk. To do that, there is a need to check by way of an audit, and there is a need for random programmes. HMRC has for many years targeted its checking where there is the greatest risk of underpaid tax. Effective risk targeting minimises the extent to which taxpayers who have already paid what is due are checked. For risk targeting to work, a small sample of taxpayers has to be checked at random, to see what risks are out there in any given year. If HMRC could not make random checks, it would not find out about new risks as they arose.
The hon. Member for South-West Hertfordshire asked me about the average time for such checks, and the fact that they vary from tax to tax. He is right, but he would accept, I am sure, that new powers will enable checks to happen more quickly. The average elapsed time for a full corporation tax check is 23.8 months, for a shorter corporation tax check it is 16.5 months, and for a full check on income tax it is 18.3 months. A shorter check on income tax can take 14.5 months, an employer compliance check takes 11 months on average and a VAT check can take 2.7 months.
In 2006-07, HMRC successfully targeted 35,000 of what it describes as “ghosts and moonlighters”, securing more than 4,000 new VAT registrations—about £37 million of additional VAT and £53 million in income tax. It does some very good work, and any Government would want to support the work that it is doing in that respect because it ensures that those who owe tax pay it properly. That is fair on the rest of the taxpayers, who pay in an appropriate and co-operative way.
Mr. Browne: On the point that the Minister has now moved on from, she said that she did not wish to see HMRC engaging in so-called fishing activities, but she went on to say that it should be given the power and authorisation to make checks on certain individuals without grounds for suspecting that that individual is offending or failing to comply in any way, just so that it knows the scope of any offending or non-compliance going on in the economy as a whole. If I were that particular individual and being subjected to the checks that she describes, with no grounds at all for suspecting that my affairs were out of order, I would regard that as entirely a fishing expedition.
Jane Kennedy: Surely it is reasonable for an HMRC officer to ask a taxpayer to show on what they base their claim for tax relief or on what they base their tax return. I do not think that that is unreasonable. The hon. Gentleman may become satisfied that the checks are done in a reasonable and appropriate manner. I quoted the low pay tax unit because I want to see a culture in which HMRC does the checks, in many respects, in partnership with taxpayers. Where the risks are greatest, HMRC will have to adopt different approaches, but it will be risk-based. PricewaterhouseCoopers strongly supports HMRC’s risk-based approach and it was happy to have a quote used in that context:
“We fully support a risk-based approach to compliance checks but we accept the need for random checks.”
I acknowledge the concern, but I believe that HMRC will apply the powers, which we are giving a statutory framework to here today, in an appropriate way.
The hon. Member for Gosport rightly raised concerns about whether this was an appropriate place to consider the matter in detail because the powers might infringe on individual businesses’ and people’s human rights. I have touched on that point before but I wanted to reinforce it. I hope that it will reassure him to know that the review of HMRC’s powers has a consultative committee, which has been working closely with HMRC as the detail of what we were going to discuss has been brought forward. That committee contains experts on the Human Rights Act 1998, and proposals have been changed and developed using their expertise. Notwithstanding the forum that we have here, which can give that scrutiny, HMRC has opened up the detail of the measure to consideration on human rights grounds.
I would like to deal specifically with the amendment. I appreciate that I have spoken very widely and I am grateful to you, Sir Nicholas, for allowing that. Amendment No. 189 would require any transitional provision to be by primary legislation introduced by my right hon. Friend the Chancellor and for that to happen before the schedule came into force. The amendments taken together would mean that there was no facility to make changes by order at all. In Committee, we regularly debate whether it is appropriate to use an order-making power or to restrict that power of Government.
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For example, in a long-running transfer pricing inquiry, on 1 April 2009, HMRC might be able—this is a fear that the hon. Member for Taunton has—to visit a business to inspect records and documents that up until that date were required to be provided only by post. I make it clear to the Committee and reassure the hon. Gentleman that no new information can be sought under the new powers; it is just the mechanism that is changing. I know that our having guidance to back up the legislation is often dismissed, but reassurance on that point will be given in HMRC’s guidance. In a long-running inquiry, any access that is necessary to business records will usually have already taken place under the old powers, but in the event that it has not, I hope that the hon. Gentleman accepts my reassurances.
The reformed information and inspection powers do not alter the obligations for taxpayers to maintain adequate records, prepare accurate returns and provide information to HMRC to check that the right tax has been paid. Every time we receive our P45 or P60, it says, “Retain this in your records as it may be required in future.” The new framework modernises and aligns across taxes the way in which HMRC can undertake those checks and the safeguards for taxpayers. The simplest and clearest way to introduce the new framework is from an appointed day, so that taxpayers, their advisers and HMRC officers know that from that point onwards, the new rules apply. There is no need for complex transitional rules that would serve only to confuse.
A Treasury order is the most appropriate method of announcing such an appointed day. Schedule 36 already contains a substantial number of repeals as the variety of old powers are swept away and replaced with a single set of rules across the main taxes. If further changes are required, they will be minor in effect and are likely to remove separate information powers because the new framework makes them redundant. Any Treasury order under clause 108 will be published in draft form at least four weeks before it is laid, giving a further opportunity to address concerns about the detail.
Moving the commencement and transitional provisions from a Treasury order to primary legislation would delay the introduction of that central plank in HMRC’s modernisation programme. I discussed whether we should have a road map or more clarity about the direction in which HMRC is going, and I am conscious that we are having this debate amid concern among the business community that HMRC’s approach is becoming too onerous. I am very alert to the anxieties that have been expressed today.
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