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Jane Kennedy: To prevent penalties from becoming a barrier to people coming forward when things have gone wrong, there are substantial reductions in penalties for disclosure by taxpayers. Paragraph 13(5) of schedule 41 says that if a person comes forward unprompted within 12 months of tax becoming unpaid as a result of a failure to notify, the penalty may be reduced to nil. That involves a date that is identifiable to the taxpayer, their advisers and HMRC, and it provides clarity on how long the additional reduction will apply. That is important to encourage people to come forward to HMRC early, and was amended in line with suggestions that were made during consultation. It means that someone who starts a business in one year and delays going to an accountant to sort out their tax until just before the following 31 January deadline—I can imagine that all the work of setting up in business could, on occasion, lead to that happening—would still be able to escape a penalty.
The hon. Gentleman says that he has heard representations that it is a “hopeless task”—that phrase was used—trying to persuade HMRC of a reasonable excuse. HMRC has made it clear that a person who had reasonable grounds for believing that an obligation to notify did not arise will have a reasonable excuse. That and other matters of interpretation will be published in HMRC guidance. If there are clear examples of HMRC not applying that, I will be happy to consider the examples. Let me give a few examples of what might constitute a reasonable excuse, but this is not an exclusive list: compassionate circumstances, such as serious illness, at the time when notification was required; doubt about whether an activity is taxable; and uncertainty about employment status when there is genuine doubt as to whether a person is self-employed.
A fundamental problem with the alternative proposed in amendment No. 303 is that it will be difficult to ascertain, in any verifiable way, when the taxpayer became aware of the failure. Where a taxpayer has a reasonable belief that an obligation to notify did not arise, they will not be charged a penalty. That will be so even if HMRC, or a tribunal, subsequently determines that the activity is taxable—an important safeguard for taxpayers.
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An example is a case in which where there is genuine uncertainty about whether there is an obligation to provide notification. Someone may consider all the facts, take advice and conclude that their activity is not taxable. I think of my dad, who is an avid collector of small die-cast models of diesel trucks. He goes to events called swap meets, which other avid collectors of diesel trucks attend, and they swap trucks. The value of those items depends on the condition of the box as much as the model being swapped. Small amounts of money are exchanged, and we would not want to catch people engaged in that kind of hobby, which may, or may not, be a trade. That is not quite an interest to declare, but my dad came to mind when I was thinking about the details of the measure.
The concept of reasonable excuse will address that type of situation, and HMRC will publish guidance to make that clear. That mirrors the principle that is applied to incorrect returns: if a mistake is made, despite reasonable care being taken, it should not be penalised. If the amendment were accepted it might be perceived as unfair to the compliant majority who come forward to register and pay tax that is due on time. With no clear downside for those who fail to do so, compliant taxpayers may lose confidence in the fairness of the system.
Mr. Mark Field (Cities of London and Westminster) (Con): I listened with interest to what the Minister said, particularly the example that she gave. The Opposition are concerned that that the bar is set too high. The reality, as far as I can see, is that for anybody with any previous business experience—through incorporation, or trading as a sole trader and thus having dealings with tax officers—and for anybody who has ever taken professional advice from an accountant and so on, will almost certainly be unable to claim under these provisions. We are trying to capture, as it were, such individuals, who have made a genuine mistake, in our amendment.
Jane Kennedy: I accept the point that the hon. Gentleman has made, and I undertake to keep that particular provision under close review to make sure that it works as intended, in the event that we resist the amendment.
Amendment No. 304 seeks to provide the facility to suspend penalties for failures to notify that are “neither deliberate nor concealed”. Conditions for suspension would be that a further failure to notify did not occur, and that a carelessly incorrect return should not be made for a period of up to two years. The suspension of penalties is an innovative aspect of the new penalties introduced for incorrect returns in the Finance Act 2007, which did a lot of good work. That is appropriate in the case of errors due to poor accounting or record-keeping systems. Conditions are set so that someone spends money to improve systems to prevent further inaccuracies, but the amendment seeks to apply similar provisions to the failure to notify penalties. However, there is an important difference, as HMRC believes that it would be unworkable. The obligation to notify a new taxable activity is a one-off, unlike submitting accurate returns, which is an ongoing requirement for most taxes.
It is hard to see what conditions could be set to help the taxpayer avoid a further penalty for failing to notify. The provision would be applicable only if they started another taxable activity requiring notification and, again, it is difficult to see how specific conditions could be set to help prevent them making an error in subsequent returns. It was suggested in the consultation that suspension of a failure to notify penalty should be made on the condition that routine tax obligations, such as filing returns and paying tax on time, are complied with for a period. That makes more sense, but there are still difficulties with that approach, not least because it could weaken and confuse the message that people must tell HMRC when they start a new taxable activity. Both amendments are unnecessary, particularly amendment No. 303. Amendment No. 304 is unworkable, so I suggest that neither amendment should be pressed further.
Mr. Gauke: I welcome the Financial Secretary’s remarks about the concept of reasonable excuse. The term “hopeless task” was not mine, but was used by the low incomes tax reform group, which has a great deal of experience in this area. She made an interesting practical point about how HMRC would ascertain when somebody became aware, but again, I highlight the fact that the tax credit system permits that. She may have her own views about how that aspect of the tax credit system operates, but it does allow for that.
On suspension, I am not persuaded by the Financial Secretary’s comment that it is difficult to see how one could have a suspended penalty in such circumstances. One could do it on future notifications, ensuring that tax returns are filed on time and accurately. Therefore, I will withdraw amendment No. 303, but I will press amendment No. 304 to a Division. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendment proposed: No. 304, in schedule 41, page 406, line 11, at end insert—
16A (1) HMRC may suspend all or part of a penalty under paragraph 1 for an act or failure that is neither deliberate nor concealed by notice in writing to P.
Question put, That the amendment be made:—
The Committee divided: Ayes 9, Noes 16.
Division No. 13]
Bone, Mr. Peter
Breed, Mr. Colin
Browne, Mr. Jeremy
Field, Mr. Mark
Gauke, Mr. David
Greening, Justine
Hands, Mr. Greg
Hoban, Mr. Mark
Penrose, John
Blizzard, Mr. Bob
Chapman, Ben
Efford, Clive
Hall, Patrick
Hesford, Stephen
Joyce, Mr. Eric
Kennedy, rh Jane
Morden, Jessica
Palmer, Dr. Nick
Pound, Stephen
Sharma, Mr. Virendra
Simon, Mr. Siôn
Thornberry, Emily
Todd, Mr. Mark
Ussher, Kitty
Wright, David
Question accordingly negatived.
It being twenty-five minutes past Ten o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.
Adjourned till this day at One o’clock.
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Prepared 13 June 2008