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Clause 92 concerns senior accounting officers. I can understand the Government’s approach, which would identify someone who would be responsible for ensuring that the accounting systems are adequate and accurate for tax reporting. It refers to the preparation and submission of returns to HMRC, not tax figures in financial statements. The SAO must ensure that tax returns are timely and procedures are adequate for accurate tax reporting. The adequacy of the systems must be certified annually, because the tax code changes with alarming regularity. Systems have to be changed almost annually to ensure that the data in returns are accurate. The SAO will be personally liable for a penalty of up to £5,000 for
careless or deliberate failure to comply with the rules. According to the impact assessment, some 2,000 individuals will need to comply with this new regime.
The regime is supposed to target large companies, but the definition of large is not exact. Indeed, the Government have tabled some technical amendments to try to address that issue and ensure that we are targeting the right sort of large companies. That lack of definition is slightly disappointing in provisions that will charge individuals with some heavy responsibilities, for which the penalties can be significant—not only in financial terms, but in professional terms, because a person’s ability to retain their job or get another one might be limited if they were found liable in this respect. It is important that the Government have tight definitions and an understanding so that those individuals—it has been assessed that there are about 2,000 of them—have clear and accurate information about what their responsibilities are and what they have to do, and do not find themselves falling foul of inaccurate definitions or definitions that can be construed or introduced in different ways that could disadvantage them in their work.
Finally, on the issue of cost, although I can understand why the Government are formulating this proposal, there are serious concerns that businesses will face quite a considerable increase in costs, bearing in mind the potential of the expected yield. Do we have real proportionality? Will the costs incurred by businesses up and down the country be proportionate to what the expected yield might ultimately be? I would be grateful if the Minister could comment on that.
The Financial Secretary to the Treasury (Mr. Stephen Timms): This group of amendments relate to the tax administration elements of the Bill. The formation of HMRC and the merger of the previous separate bodies provided a lot of opportunities to deliver more consistency and clarity for taxpayers and businesses. We are taking advantage of those opportunities in this part of the Bill.
The package has been the subject of extensive consultation. The key elements replace myriad complex penalties and surcharges with a more effective and proportionate penalty structure with improved safeguards; replace the confusing old range of interest rates and formulae with a new regime based on recompense, fairness and simplicity; make it easier for taxpayers to pay what they owe on time, so supporting HMRC and tackling effectively those who pay late; extend the compliance checking introduced in the Finance Act 2008 to other taxes, clarifying where visits can be made and what time limits reply; and pave the way for the launch of the new HMRC charter by the autumn. The hon. Member for South-East Cornwall (Mr. Breed) just commented on that, and the charter will play an important role in the relationship between HMRC, taxpayers and agents, setting out taxpayers’ rights and responsibilities.
The hon. Member for South-East Cornwall quoted criticisms from the Institute of Chartered Accountants of England and Wales. I think that since those criticisms have been made they have been overtaken a bit by developments and I can reassure him by quoting what the ICAEW’s briefing said to the Finance Bill Committee on 17 June:
“We support the current version of the Charter which we believe is a well balanced document which sets out the rights and obligations of the taxpayer.”
That tax administration package runs in parallel with measures to protect tax revenues. There has been a lot of discussion with interested parties on these measures and I want to place on record my thanks for the help that we have received.
Amendment 3, which was moved by the hon. Member for Somerton and Frome (Mr. Heath), is not really about the charter, as I think that he would accept. He has taken the opportunity to raise perfectly fair points about the HMRC approach to carousel fraud. This is probably not the place for an extensive discussion on that subject. However, he acknowledged that the scale of such fraud was vast. We were threatened with a loss of more than £5 billion in 2007-08, and that level of fraud obviously requires HMRC to take every reasonable and proportionate step to prevent it. I would suggest to the hon. Gentleman that the response has been proportionate.
HMRC will withhold repayment where there are reasonable grounds to suspect knowledge of fraud. That approach is being supported by the courts when it is challenged. Such fraud is perpetrated by criminals seeking to steal vast sums of public money. It is complex and orchestrated by criminal gangs using what often look like legitimate trading companies, but the fraud only works if there is complicity in the supply chains, which often are very long. I suggest that it is not unreasonable for HMRC to expect companies to take steps to satisfy themselves that their transactions are not part of a fraudulent supply chain.
If HMRC could use only criminal proceedings to prevent fraudulent repayments, I am afraid that the criminal justice system would rapidly grind to a halt. It is right that HMRC has civil powers to tackle fraud where the risk to the Exchequer is as significant as it is in this case. The powers that HMRC is using to protect taxpayers from organised crime exist already and are not new.
Safeguards are in place, and I should be very happy to discuss our approach with the hon. Member for South-East Cornwall separately, but I do not think that the HMRC charter is the vehicle to address this problem. None of the representative bodies that we consulted suggested that this specific point about fraud should be in the charter.
Amendment 6 would delay the charter coming into effect until it had been approved by a resolution of the House. I do not think that that would be the right thing to do: the charter is intended to be a document that can be easily updated, and an advisory panel with a majority of external members will monitor performance. It would not be appropriate for approval by the House to be necessary whenever the wording of the charter was updated.
Amendment 32 would impose a four-year time limit on the application of clause 92. That would imply that, in four years’ time, large companies no longer needed to maintain tax accounting arrangements. That would be a mistake. As the House will be aware, we have significantly amended clause 92 to include the reference to materiality that the hon. Member for Fareham (Mr. Hoban) first suggested. I do not think that we should have a sunset clause to constrain it further.
Amendment 33 would require an annual report on the impact of the measure, but it strikes me that reviewing the benefits of one measure in isolation would be of
limited value. HMRC looks at the tax compliance position of large businesses, and its relationship with them means that it takes a wide range of factors into account. I do not think that it would be helpful to divert HMRC resources into an annual assessment of one measure in isolation.
Government amendment 43 is a consequential amendment to align the terminology in clause 92 and changes the reference to “large” companies in schedule 46 to “qualifying” companies. I am grateful to the hon. Member for South-West Hertfordshire (Mr. Gauke) for welcoming that.
Amendment 7 would remove stamp duty reserve tax from the narrow list of taxes to which the new aligned power to inspect property for the purposes of valuation applies. HMRC has to undertake valuations for stamp duty reserve tax, because the consideration for shares on which the tax arises may be in the form of property. The value of the property affects the value of the transaction, and the new power replaces existing individual powers for each tax, including stamp duty reserve tax. The powers being replaced took different forms and had different safeguards, and the new power has been welcomed because it has stronger safeguards. It is proportionate and necessary and includes improved taxpayer safeguards, so I hope that amendment 7 will not be pressed.
Amendment 8 relates to the valuation inspection power more generally. In Committee, I was pleased that Opposition Members appreciated that the clause providing for property valuations contained considerable improvements in the safeguards for taxpayers. The importance of that provision is recognised across the House, because the strongest possible safeguards should apply. The amendment would strengthen those safeguards, so I am content to accept it.
Sadly, I cannot be as helpful with amendments 9 and 10, both of which relate to stamp duty land tax. They would restrict to four years the time limit for HMRC to make assessments where the taxpayer has failed to notify it of a land transaction, unless that failure was deliberate. The provisions that we have reassure the majority who pay their taxes that those who try not to pay them will have to do so in the end. It would not be fair on the compliant majority if, after a period, people who failed to notify did not have to pay the tax because the limit had elapsed. I hope that those amendments will be withdrawn.
Amendments 11 and 12 seek to widen the scope for HMRC to accept a claim for repayment by removing some of the exceptions, but the capital allowances system is designed to give taxpayers very wide flexibilities and choices. Businesses have made it clear that they value those flexibilities and choices and would not want them to be curtailed. If a claim is out of time and it is not appropriate to extend time limits under the existing rules, there would be no reason to allow a claim under this provision to achieve the same end. I hope those amendments will not be pressed.
Amendment 13 seeks to remove an exclusion which applies where HMRC started court proceedings to recover a sum and either obtained court judgment or the taxpayer agreed to settle the matter. By the end of the process, the taxpayer will have had every opportunity to contest
the amount due. HMRC will have had to satisfy the court that the debt is due or the taxpayer will have had to agree to settle HMRC’s claim in order for the exclusion to apply. To allow taxpayers the possibility of further disputing the amount would seriously weaken HMRC’s ability to recover tax liabilities from defaulters.
On amendment 14, as each tax is brought into the new interest regime, consequential changes to existing legislation will be made by regulations, using the powers in clause 103. These changes will ensure that the result that the hon. Member for South-West Hertfordshire is seeking will be achieved. On amendment 19, the hon. Gentleman explained the effect of the proposal. The position is provided for in schedule 54 and is in line with the general rules that apply when repayment interest starts to run. Amendment 19 would be inconsistent with those rules and I must therefore resist it.
Amendment 20 relates to schedule 55, which creates an aligned and modern penalty regime to deter failures to submit tax returns. It is right that where an obligation to submit a return exists, failure to do so should result in a penalty. However, we consider every proposal on its merits. I agree that amendment 21 corrects a minor drafting error. I am grateful to the hon. Member for South-West Hertfordshire for drawing the attention of the House to it, and I am happy to accept amendment 21.
Government amendments 44 to 46 in clause 107 and Government amendments 51 to 53 in schedule 56 correct technical deficiencies that could lead to taxpayers not being able to benefit from the suspension of late payment penalties in the way that was intended. I believe they will find favour across the House.
Mr. Heath: I congratulate the hon. Member for South-West Hertfordshire (Mr. Gauke) on having won two amendments in a Finance Bill—quite a proud record. I am grateful to him for his support for some of my contentions, as I am to my hon. Friend the Member for South-East Cornwall (Mr. Breed).
With reference to the Minister’s comments on my amendment, we agree about the seriousness of the fraud, the potential loss to this and other jurisdictions, and the need for effective interdiction and penalty. I make it plain, however, that I still have concerns. The Minister says that the response of HMRC is reasonable and proportionate. Clearly, it is reasonable and proportionate to take those confiscatory measures in the case of somebody who is perpetrating a fraud, but by its actions HMRC seems to be extending that to anyone who is associated with a trade in which fraud has taken place, and I am not sure that it is reasonable and proportionate to take confiscatory action against a person or company who is trading in that environment if they, in turn, have taken measures which are reasonable and proportionate to make sure that they are trading lawfully and not encouraging or permitting fraudulent behaviour by others.
The “reasonable suspicion”, which the Minister says is the test, is of course put to the test only when the case is before a tribunal or the High Court. The way in which matters have been—I was going to say “prosecuted”, but that is exactly the wrong term to use—carried out hitherto suggests that that finding of fact happens at a very late stage in the process. According to information that I have received, a large number of those cases are not found to be based on reasonable suspicion when a
tribunal or, more particularly, the Court, has had a chance to adjudicate. That is what worries me. Having heard what the Minister said, I still feel that there is an extra-judicial process going on; it is perhaps necessary in some cases, but in others it is excessive.
The Minister has found me out, in the sense that he has realised that amendment 3 was a probing amendment to enable me to raise essential matters on behalf of my constituents and others. I would be most grateful if, having looked again at my remarks, he would write to me to explain the Government’s position, perhaps in slightly more detail than is possible in a speech. I may well then take him up on the suggestion that we discuss the matter privately. It is certainly not my intention to divide the House this evening, and I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendment made: 43, page 46, line 23, leave out ‘large’ and insert ‘qualifying’.— (Mr. Timms.)
Amendments made: 44, page 55, line 1, leave out from beginning to ‘P’ in line 2.
Amendment 45, page 55, line 4, leave out
‘whether before or after that date,’.Amendment 46, page 55, line 10, leave out ‘during’ and insert
‘between the date on which P makes the request and the end of’.— (Mr. Timms.)Mr. Gauke: I beg to move amendment 17, in page 289, line 23, at end insert—
‘Stock dividends3A (1) Section 107 (conditions for tax-exempt business) is amended as follows.
(2) In subsection (8) omit “(a) by way of dividend, and (b)”.
(3) After subsection (8) insert—
“(8A) In this Part and for the purposes of section 973 of ITA 2007, a distribution of the profits of the property rental business shall include—
(a) an amount distributed by way of dividend, and
(b) an issue of shares to which section 249 (1)(a) of ICTA applies and in case a falling within (b). the amount of the distribution shall be the cash equivalent of share capital determined in accordance with section 412 of ITTOIA 2005, but otherwise Chapter 5 of Part 4 of ITTOIA 2005 shall not apply.”.
3B (1) Paragraph 6 of Schedule 17 is amended as follows.
(2) In paragraph 6 (4), delete “by way of dividend and (c)”.
(3) After paragraph 6 (4) insert—
“(4A) In the application of section 107 (8A) for ‘profits’ substitute ‘UK profits’ as defined in paragraph 6 (4).”.
(4) Section 142 (1) of TCGA 1992 is amended by inserting “or section 107(8A) (b) 2006” after the reference to “ITTOIA 2005”.’.
Mr. Deputy Speaker: With this it will be convenient to discuss the following: Amendment 18, in page 289, line 23, at end insert—
‘Conditions for tax-exempt business3A (1) Section 107 (conditions for tax-exempt business) is amended as follows—
(2) In subsection (8)(b) after “before”, insert “the third anniversary of ”.
(3) The amendment made by sub-paragraph (2) has effect for distributions in respect of accounting periods beginning on or after 1 January 2008 and ending on or before 31 March 2010.
3B (1) Schedule 17 is amended as follows.
(2) In paragraph 6 (4) after “before”, insert “the third anniversary of”.
(3) The amendment made by sub-paragraph (2) has effect for distributions in respect of accounting periods beginning on or after 1 January 2008 and ending on or before 31 March 2010.’.
Amendment 15, in page 290, line 24, at end insert—
‘Profit: financing-cost ratio5A (3) Section 115 (4) is amended as follows.
(4) In subsection 115 (4) (a) after “costs giving rise to”, insert “credits or”.
(5) In subsection 115 (4) at end insert “but exclude—
(f) financing costs falling within (a) to (e) above which are exceptional due to their size or incidence.”.’.
Amendment 16, in page 290, line 29, at end insert—
‘Termination by notice: Commissioners6A (1) Section 129 is amended as follows.
(2) In section 129 (2) (c) at end insert “but a breach of the condition in section 107 (8) where the company is in financial difficulties shall not be treated as serious”.
(3) The amendment made by sub-paragraph (2) is to be treated as always having had effect.’.
Mr. Gauke: This group of amendments relates to real estate investment trusts, or REITs, which were introduced with effect from 1 January 2007. Their introduction was, in part, a response to Kate Barker’s review of housing supply and the need to promote greater efficiency and flexibility in the UK property investment market. Two and a half years after their introduction, it is possible to make some evaluation of the effectiveness of the new REIT regime. It is clear that large property groups have obtained REIT status, but there have been no new REITs, and in particular none covering residential property. It would be fair to say that the economic climate has not been ideal for the creation of new REITs, but there is clearly a debate to be had on whether the fact that REITs covering residential property have not come into effect is down to the economic problems or defects in the tax system.
Since we debated the matter in Committee, the House of Lords Select Committee on Economic Affairs has commented, in its report on the Finance Bill, that REITs
“have failed to live up to expectations” .
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