Mr.
Gauke: I will speak primarily to the amendments in my name
and the names of my hon. Friends. I will also be interested in the
Government’s response to amendment No. 173 and their explanation
of Government amendment No. 224, although I think that we are
sympathetic to that one—I will leave it at that at this
point. Amendment
No. 291 relates to an issue raised by the Law Society. It would amend
paragraph 19, which sets out part of the protections for the taxpayer
against the powers in schedule 36. The premise of the paragraph is that
a notice cannot be issued in relation to a taxpayer if that taxpayer
has already filed a tax return, but that is subject to exceptions.
Concerns have been raised that one of the four exceptions, condition B,
is so broad that essentially it waters down the protections contained
within paragraph 19. Condition B provides that the information powers
can be used if an
officer “has
reason to suspect that...an amount that ought to have been
assessed...may not have
been” or
that “an
assessment...may be or has become
insufficient. That
appears to mean—at least in the Law Society’s
view—that if HMRC has not assessed an amount of tax that it
should have, it can simply start to issue information notices under
schedule 36. I would be grateful for the Minister’s view on
whether that concern is
reasonable. The
solution produced by the Law Society is that condition B should be
subject to the qualification that if the relevant facts have been known
to HMRC for one year, it cannot use the powers in the schedule 36. In
other words, HMRC should not be able to use the powers in the schedule
if the information is already available to it but it has simply failed
to act upon it. That is the reason behind amendment No.
291. Amendment
No. 255 relates to the period of time available for assessing a
deceased person’s tax position and has to be looked at in
conjunction with paragraph 11 of schedule 39, which will alter the
existing period from six years to four years after the end of the
assessment year in which death occurred. Both the Law Society and the
low incomes tax reform group have made the point that it seems
illogical that paragraph 20, as currently drafted, will give HMRC
powers to seek information for up to six years after a person’s
death, whereas the period of assessment in schedule 39 is only four
years, or four years plus the relevant year. There appears to be an
inconsistency; will the Minister explain whether that is the case and
the purpose of allowing information notices to extend six years after a
person’s
death? Amendment
No. 256 seeks to impose a parallel provision to the present
arrangements through paragraph 20 for companies, although we see no
reason for not having the six-year norm in these circumstances. It
would amend schedule 36 so that an information notice could not be
given
“more than 6
years after the company ceased to
exist.” There
is obviously a practical issue about record keeping for companies that
have not been in existence for a long time.
Amendment
No. 258 relates to the rather thorny issue of legal professional
privilege. I should declare an interest, or perhaps the reverse of an
interest, because I am a non-practising solicitor and remain on the Law
Society’s roll of names. More specifically, I should declare that
my wife is a tax lawyer. The fact that the provisions appear to favour
tax lawyers over tax accountants has excited considerable interest in
the representations that we, and no doubt the Minister, have received
from the Institute of Chartered Accountants and other accountancy
bodies. However, no other representations on that point have been
received from the Law Society, because it represents a continuation of
the existing position, whereby the protection provided for documents
produced for the purposes of providing legal advice is somewhat wider
than that given for documents provided by tax advisors and
auditors. Paragraph 21
relates to legal professional privilege, and paragraph 22 relates to
tax advisors. What causing considerable concern within the accountancy
profession is not so much advice documents, for example, being produced
by a tax advisor, because when that advice is held by the tax advisor,
he will benefit from the provisions in paragraph 23. The difficulty
arises when that advice is provided to the taxpayer, as it would appear
that paragraph 23 will no longer provide any protection. Therefore,
HMRC can seek to obtain that advice from the taxpayer and no privilege
is provided. However, as far as paragraph 21 is concerned, when dealing
with a lawyer, the privilege protection applies when the advice is in
the hands of both the lawyer and the client. There appears to be an
inconsistency, and I would be grateful if the Financial Secretary
explained the reason for
it.
12.45
pm This
issue goes back to the historical development of legal professional
privilege under our common law system. It goes back to a time when a
defendant was not able to make representations to a court and had to
rely on his lawyer to make them for him. I do not want to bring into
question the whole basis of legal professional privilege; my former
colleagues would never forgive me. However, there is a purpose behind
that
privilege. It
is presumably right that people should be encouraged to seek
professional advice to guide them in difficult circumstances. Tax
matters can be difficult. The taxpayer does not want to find himself in
a worse position as a consequence of seeking advice to ensure that he
does what is in his interests and in compliance with the law. As I have
said, I think that the proposals are a continuation of what we have had
until now. The Financial Secretary may differ from that view. If we
continue with the existing position, this is a missed opportunity
because this is a fundamental review of
powers.
Mr.
Bone: As my hon. Friend said, this is not a new situation.
It has consistently rankled with members of the accountancy profession
that in effect they cannot talk freely to a taxpayer and a taxpayer
cannot talk freely to them for fear that what they say might be exposed
to the
Revenue.
Mr.
Gauke: I am grateful to my hon. Friend who comes from a
different profession to me. That is a long-standing complaint and this
is an opportunity to do something about it. There does not appear to be
anything within the provisions that addresses that complaint, which
creates difficulties in the relationship between an accountant and his
or her client. It also creates a market
distortion because there are circumstances in which the legal profession
has an advantage over the accountancy
profession. Particularly
in the context of tax advice, the line between the two professions is
relatively narrow. What is legal advice, what is accountancy advice and
what is simple tax advice is not always clear. There is some crossover
between what the two professions do and there appears to be an
advantage to the legal profession. That raises a concern because, by
and large, it is big businesses and wealthier private clients who go to
the legal profession for tax advice; they may also go to the
accountancy profession, but the clients of tax lawyers tend to be
bigger businesses and wealthier families. Some of the protections
contained in paragraph 21 will therefore essentially be available only
to those bigger businesses and wealthier families and not to smaller
businesses and less wealthy private individuals or families because
they will not be extended to auditors and tax advisers. There is
therefore a distortion that could be seen to be
unfair. This
seems to be an opportunity to address those concerns. If there are
reasons why the Government are not able to address them in this Bill or
schedule, I should be grateful if the Financial Secretary would explain
why that is and whether there is any prospect of this long-standing
complaint of the accountancy profession being addressed at any point.
Were we to start afresh in this field it would be very
difficult—and I speak as a lawyer—to justify the way that
privilege works at the moment. Therefore, some indication as to whether
the Government will look at this more widely would be welcome on these
benches.
Jane
Kennedy: The information powers may require documents to
be produced if they are reasonably required to check a tax position. Of
course, HMRC will not seek documents if, because of the operation of
time limits, it would be unable to assess liability disclosed by the
documents.
Where there
is deliberate error by a taxpayer, the general rule is that HMRC may go
back and recover tax for the previous 20 years. Any evidence about tax
liability for those earlier years may be contained in documents that
are themselves several years old. The effect of amendment No. 173 would
be that HMRC could never require production of a document that
originated more than six years before the date of the information
notice. It would mean that no old document could ever be sought in an
information notice despite its being essential for the accurate
determination of liability. Documents more than six years old can only
be accessed with approval from an authorised officer who will be a
suitably experienced senior official. Together with the protection
provided by the assessing time limits, these are an effective group of
safeguards. I will explain a slight doubt in my voice in a moment when
I come to some of the detail.
HMRC needs
to be able to look at old information in a range of routine checks.
Where, for example, capital gains, capital allowances or stock are
being sold, the original purchase may well have taken place more than
six years ago. It is right, therefore, that HMRC can
access old documents in appropriate circumstances and acceptance of this
amendment would prevent that from
happening. Government
amendment No. 224 reinstates some words that were omitted when the Bill
was printed. The words were inadvertently omitted and reinstating them
would give clarity to the legislation. It does not work properly
without them. I am grateful to the hon. Member for South-West
Hertfordshire for saying that he agrees with it. The Institute of
Chartered Accountants in England and Wales notified us of the omission,
although, of course, we had already spotted it.
If the
enquiry window has passed, sub-paragraph (6) provides that the officer
must have reason to suspect some further tax is due. That is
essentially the same as the existing direct tax rule but providing
further taxpayer safeguard in that the “reason to
suspect” test is a higher one than the existing “may
contain information relevant to a tax liability” test. The
amendment seeks to import an additional test; that is “the
evidence of facts rule” from the VAT legislation.
Direct tax
checks are in their nature different from VAT checks and there is good
reason for the present different tests that these proposals retain.
Having an evidence of facts rule in direct tax could lead to numerous
assessments for the same year as more information came to light, which
would not be a taxpayer-friendly outcome. In workshops held by HMRC in
2007 there was no enthusiasm either within HMRC or the representative
bodies to change the respective direct tax and indirect tax tests with
which everyone is
familiar. Turning
to the treatment of deceased taxpayers’ affairs, amendment No.
255, tabled by the hon. Member for South-West Hertfordshire, seeks to
align the period for which information can be sought with the assessing
time limit. Six years was retained to ensure that HMRC can obtain
information about the affairs of the deceased where there has been
failure to take care or deliberate error during the person’s
lifetime. Where the deceased was also involved with a company, it may
be that tax can be assessed on the company even though HMRC is out of
time for assessing the deceased. That may require information in the
extra two years. The four-year time limit only applies to assessments
to charge tax not attributable to careless or deliberate
error.
If the
information is needed within six years of death in connection with an
assessment for failure to take reasonable care, it is right that HMRC
has the power to obtain it. In considering this, I have been thinking
hard about the amendment proposed by the hon. Member for South-West
Hertfordshire and I may wish to revisit the issue later in our
consideration on the Floor of the House. On the six-year restriction, I
hear the point that people should not have to keep records for a long
time. People have to keep records only for as long as the
record-keeping requirements tell them to. [Laughter.]
Information can be requested only if it is in the person’s
possession or power. I must admit that I smiled when I read the advice.
There is some attraction to the idea that the assessment time and the
powers to require documents to be produced should be aligned. I would
like to consider that further, particularly as when I asked for advice
on how often we use the powers, I was told that we do so very rarely.
It is mostly in cases of fraud or when old capital gains tax cases are
being pursued. I hope to return to that issue.
I come now to
amendment No. 256. In practice, HMRC is very unlikely to pursue the
affairs of a ceased company—we move from a deceased person to a
ceased company—as it will be unable to assess any discrepancies
found in relation to the company unless there has been fraud by the
directors, in which case the assessment can be made on those directors.
The protection provided by the assessing time limits provides a
sufficient safeguard without the
amendment. I
shall now deal with amendment No. 258. Paragraph 21 of the
schedule enshrines the common law principle of protection given to
communications between lawyers and their clients. That protection
existed in section 20 of the Taxes Management Act 1970, and the new
legislation clarifies that that applies across all relevant taxes. I
recognise that there is a problem in this regard. I can see that a
large firm that might be providing financial and tax advice using
accountants in the firm can use the cover of the fact that there are
solicitors in the firm and that gives it a professional advantage over
smaller firms. I have discussed that with the organisations concerned
about it and I want to give it further thought. I cannot give an
undertaking at this point. I am more attracted to amendment No. 255,
but this is in the legislation on the insistence of the Ministry of
Justice and, being part of a joined-up Government, I of course support
that entirely. It could be argued that the common law principle was
protection enough, but representative bodies were keen to preserve the
protection in tax law. Therefore, paragraph 21 achieves
that. If
amendment No. 258 is designed—it is now clear that it
is—to clarify that privileged information in the hands of third
parties is protected on the basis that the common law principle will
prevail, it seems unnecessary. Information giving tax advice is
protected in law for auditors, tax advisers or lawyers while it is in
the hands of those professionals. Information in the hands of the
taxpayer is protected in law only if it is advice given by a lawyer.
The Committee may find that distinction helpful.
The hon.
Member for South-West Hertfordshire will know from the tone that I have
taken in replying to him on the question of legal privilege that my
heart is not entirely in the position, but the protection for legal
privilege is very important. If we extended it as widely as suggested
in the conversations that I have had with those making representations,
I would be concerned that we would extend it too widely, but perhaps
the hon. Gentleman will allow me to give the issue further thought. If
the Committee will agree Government amendment No. 224 and the hon.
Member for South-East Cornwall will withdraw amendment No. 173, I hope
that we can make
progress.
Mr.
Breed: Although I believe that clarity and certainty are
to be preferred and would not undermine the process, I am prepared to
seek leave to withdraw the
amendment.
The
Chairman: I should have called Mr. Gauke first,
because the amendment is in the name of the hon. Member for South-East
Cornwall and I suspect that half a minute might suit Mr.
Gauke. I will call Mr. Gauke and then the hon. Gentleman who
speaks for the Liberal Democrats can say what he wishes to
do.
Mr.
Gauke: I shall see what I can do, Sir Nicholas. I am
grateful for the clarification that taxpayers are required to keep
records only for as long as the record-keeping requirements
require.
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