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 Governments response to amendment No. 173 and their explanation of Government amendment No. 224, although I think that we are sympathetic to that oneI 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
an assessment...may be or has become insufficient.
That appears to meanat least in the Law Societys viewthat 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 Ministers 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 persons 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 persons 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 persons 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
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.
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
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 difficultand I speak as a lawyerto 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
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 persons 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 persons 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 companywe move from a deceased person to a ceased companyas 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 designedit is now clear that it isto 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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