The
Committee consisted of the following
Members:
Chair:
Mr
David Crausby
†
Bradley,
Karen (Staffordshire Moorlands)
(Con)
†
Duddridge,
James (Lord Commissioner of Her Majesty's
Treasury)
†
Gauke,
Mr David (Exchequer Secretary to the
Treasury)
†
Greenwood,
Lilian (Nottingham South)
(Lab)
†
Hendrick,
Mark (Preston)
(Lab/Co-op)
Hepburn,
Mr Stephen (Jarrow)
(Lab)
†
Heyes,
David (Ashton-under-Lyne)
(Lab)
†
Lammy,
Mr David (Tottenham)
(Lab)
†
Leslie,
Chris (Nottingham East)
(Lab/Co-op)
†
Morris,
David (Morecambe and Lunesdale)
(Con)
†
Munt,
Tessa (Wells) (LD)
†
Osborne,
Sandra (Ayr, Carrick and Cumnock)
(Lab)
†
Pugh,
Dr John (Southport)
(LD)
†
Reevell,
Simon (Dewsbury)
(Con)
†
Rudd,
Amber (Hastings and Rye)
(Con)
Ruffley,
Mr David (Bury St Edmunds)
(Con)
†
Rutley,
David (Macclesfield)
(Con)
Wilson,
Sammy (East Antrim)
(DUP)
Mark Etherton, Committee
Clerk
† attended the
Committee
Third
Delegated Legislation
Committee
Tuesday 2
November
2010
[Mr
David Crausby
in the
Chair]
Draft
Tax Avoidance Schemes (Penalty) (Amendment) Regulations
2010
10.30
am
The
Exchequer Secretary to the Treasury (Mr David Gauke):
I
beg to move,
That the
Committee has considered the Draft Tax Avoidance Schemes (Penalty)
(Amendment) Regulations
2010.
It
is a great pleasure to serve under your chairmanship, Mr Crausby. The
Finance Act 2010 makes changes to the penalties for failure to comply
with the disclosure of tax avoidance schemes regime. Those changes will
from 1 January 2011 ensure that penalties are proportionate and
sufficient to deter non-compliant behaviour by scheme promoters. A
primary purpose of the disclosure regime is to require promoters of tax
avoidance schemes to disclose information to Her Majesty’s
Revenue and Customs about schemes that they are promoting. In most
cases, the promoter must disclose the scheme to HMRC within five days
of making it available for implementation or, once provisions in the
2010 Act come into force, beginning to market
it.
There
are penalties for failure to disclose a scheme by the due date.
Currently, a tribunal may impose an initial penalty—a one-off
amount of up to £5,000—for failure to disclose a scheme.
If a promoter still fails to disclose after the initial penalty has
been awarded, HMRC may impose a continuing daily penalty of up to
£600 a day until he does disclose. If there is a dispute about
whether a scheme is disclosable, HMRC may apply to the tribunal for a
disclosure order. If the promoter fails to disclose the scheme after a
disclosure order has been issued, the legislation provides for Treasury
regulations to increase the maximum continuing daily penalty amount.
Regulations currently increase the continuing daily penalty from
£600 to a maximum of £5,000 a day in those
circumstances.
Provisions
in the 2010 Act, which will be brought into force by an appointed day
order, replace the initial penalty—the one-off amount of up to
£5,000—with an initial daily penalty of up to £600
a day, so that the penalty can be in proportion to the extent of the
delay in disclosing the scheme. If a tribunal considers that the
maximum penalty arrived at using that formula would be an insufficient
deterrent, it may impose a higher amount, up to £1
million.
The
2010 Act also provides for Treasury regulations to increase the maximum
initial daily penalty amount if a promoter fails to disclose a scheme
after a tribunal has issued a disclosure order. That mirrors the
existing rule for continuing daily penalties. The 2010 Act makes no
changes to continuing daily
penalties.
The
regulations before the Committee will apply if a promoter fails to
disclose a scheme following the issue of a disclosure order by a
tribunal. The regulations will in those circumstances increase the
amount of the new initial daily penalty from a maximum of £600 a
day to a
maximum of £5,000. That will bring the initial daily penalty into
line with the continuing daily penalty, which is already set at
£5,000 in those
circumstances.
Given
that background, I commend the regulations to the
Committee.
10.33
am
Chris
Leslie (Nottingham East) (Lab/Co-op):
Good morning, Mr
Crausby. As ever, it is a pleasure to serve under your chairmanship.
This set of regulations appears pretty helpful, creating a stronger set
of incentives for accountants and taxpayers alike to stay on the right
side of the tracks. I say that because I suspect that the regulations
were initiated while my party was in government, so obviously there is
great sense behind the fundamental principles of them. However, I have
a number of questions that I would like the Minister to
answer.
The
Minister has helped to outline the parameters of the regulations, but I
would like to examine the details. As we are living in times when
revenues need to be protected and issues of tax avoidance are very much
to the fore, these types of change require a little more scrutiny than
usual.
My
first question is on part 7 of the Finance Act 2004, section 98C of the
Taxes Management Act 1970 and how this set of regulations apply only to
income tax, corporation tax, capital gains tax and stamp duty tax. To
take another indirect tax not covered by the penalties, why is there no
cover in respect of tax avoidance arrangements on VAT, for instance? Is
it covered by a provision elsewhere? If so, where?
I am
interested in the concept of promoters of tax avoidance schemes. I
assume that they are highly paid and intelligent accountants who make
it their business to squirrel around foraging for loopholes and vacuums
in the legislation. Can the Minister give a sense us of whether there
are many such promoters out there? Those of us who were not born with
great trust fund support and are used to paying tax through PAYE do not
necessarily encounter promoters of tax avoidance schemes. Some of us
might, in other circumstances, like to know where they are. Can he give
examples of industries? Are they large accountancy firms or a specific
niche set? How does HMRC identify who promoters of tax avoidance
schemes are?
As the
Minister said, paragraph 7.8 to the explanatory notes mentions the
requirement for the promoter to notify HMRC of how a scheme works
within five days of it being marketed. Why did that five-day period
arise? It seems pretty strict, and I am glad of that. Is it five
working days or is it, essentially, a week from the start of marketing
the scheme? I am not familiar with how promoters of tax avoidance
schemes operate, but I am interested in that area.
The
explanatory notes
say:
“Most
promoters comply with their obligations to
disclose,”
which
is good
news,
“but
a minority do
not.”
Can
the Minister give us a sense of scale? How many problems have arisen,
historically? Can he tell us about occasions in the past two or three
years when promoters of tax avoidance schemes did not disclose
adequately? Perhaps that was a reason why we moved from £600 to
£5,000. That prompts the question, how many penalties has it
been necessary to impose recently? Is this a
theoretical threat that hangs over the heads of promoters of tax
avoidance schemes or is this an era in which frequent penalties are
being imposed or threatened? For a sense of scale, could the Minister
say how
many?
I
am conscious that the law provides for compliance with the regulations
such that HMRC needs to apply to a tribunal—I think
that is a tribunal of the commissioners—to get non-disclosure
acknowledged and a penalty imposed. Is that a circuitous process? Is
the requirement for HMRC officials to go to a tribunal to get that
established and then have the penalty imposed a long and convoluted
process? It is not open to other taxpayers when HMRC imposes a penalty
on them directly, and it allows a level of legal right of appeal and so
on, which seems generous. Is that tribunal link necessary or could the
process be made simpler to ensure that an even tougher stance is taken
on tax avoidance? I am sure that there are historical reasons why that
tribunal arrangement exists, but we could think about whether it could
be short-cut
somehow.
The
only other specific question on this section is why the sum of
£5,000 a day was chosen. It is clearly quite a leap from
£600. Again, was there a particular logic behind that figure? I
am glad that the penalty regime has had a ratcheting-up effect for
“egregious non-compliance”, but what does egregious
non-compliance look like? Are we talking about people who are
persistently given a lower-level penalty and after three strikes, they
move up to the higher rate? Do we have many egregious non-compliers?
Some sense of scale and definition around that term would be
useful.
For context,
can the Minister give the Committee a sense of what the level of tax
avoidance is assumed to be within the UK at present? As I have said,
the regulation relates particularly to direct taxation, and we can
stick to that if it is helpful. However, rather than looking only at
whipping public services back into their box, as the Government
spending review did, the Opposition would like to maximise revenues
that are due legally and legitimately, but are perhaps not being paid.
What exactly is the HMRC’s estimate of the great unknown that is
out there and has not been recovered? There must be a sense of what
that amount is. I know that the Public and Commercial Services Union
has put out its figures of several billions of pounds, but I wonder if
the HMRC has its own estimate.
I would like
to ask the Minister where the Government stand generally on the
question of tax avoidance versus tax evasion. I do not want to be a
bore and go through the usual debate about the definitions of tax
avoidance and tax evasion, because I think we can probably all take
that as read. However, I am interested in the comments that the Chief
Secretary to the Treasury has made in a number of speeches
recently—for instance, on 19 September:
“There
are some people who seem to believe that not paying their fair share of
tax is a lifestyle choice that is socially acceptable… Just like
the benefit cheat, they take resources from those who need them
most…Tax avoidance and evasion are unacceptable in the best of
times but in today's circumstances it is morally indefensible…We
will be ruthless with those often wealthy people and businesses who
think they can treat paying tax as an optional
extra.”
Those
points are perfectly agreeable but contrast with the
Chancellor’s statements, specifically in his party conference
speech and elsewhere. He seems—and I am
only reporting what has been written in the press—to have stepped
back from the form of words used by the Chief Secretary. The Chancellor
merely refers to “tax evasion”; he does not seem quite as
willing to talk about avoidance in the same terms, and he has been
described as stepping back from Lib Dem promises on avoidance and so
on. Can the Minister give us a clear line, once and for all, on whether
the Chancellor has the same views as the Chief Secretary when it comes
to tax
avoidance?
Finally,
I wonder if the Minister has any observations about Sir Philip Green,
the Government’s adviser on public sector efficiency. I
understand that, allegedly, he is one of the most significant tax
avoiders, ensuring that paying dividends does not necessarily fall on
his own tax account. There have been reports of up to
£500 million of tax avoidance. Is this one of those
schemes that is being promoted—perhaps unwittingly—to Sir
Philip Green? It may be an accident that he has avoided that amount of
tax. Although I am almost tempted to give him the benefit of the doubt,
has he been the beneficiary of one of the tax avoidance schemes that
has been promoted? If so, would that be the sort of change that would
fall under the regulations?
10.44
am
Dr
John Pugh (Southport) (LD):
I want to make a brief
contribution. I congratulate the Minister on the vigour with which he
has approached the issue of tax avoidance. In fact, he has responded to
an Adjournment debate on this precise topic, laying out the
Government’s strategy. Since then, I have identified a clear
commitment of time and resources, albeit that some of those resources
have been transferred from somewhere else. Only this week, I noticed a
whole series of double taxation treaties going through the House of
Commons, which shows that the Government are serious in carrying
forward the impetus that was given to them on this topic of tax
avoidance by, to be fair, the previous Government and the right hon.
Member for East Ham (Stephen Timms) in
particular.
The
hon. Member for Nottingham East should realise that this actually is a
big problem. In a “Dispatches” programme this week, there
was some criticism of HMRC, not so much because of the time it spent on
the matter, but because of the skill it has at its disposal compared
with the skill that is available in the branches of Barclays
international and so on. It compared the whole scenario to a fat
policeman chasing a Ferrari, which is a colourful metaphor that has
stuck in my mind. We need either swifter policemen or to slow the
Ferraris
down.
Can
I ask two broad questions on this? First, one way of avoiding the
endless production of SIs and closing of loopholes is, as has been
suggested in the coalition agreement, a general anti-avoidance rule. I
know that the Treasury is considering that and may go on considering
that for some time, but there must be time limit as to when it decides
that it is a good or bad idea. If the Minister can give us some
indication of when that might be, that would be extremely helpful,
because we would then know whether there are lots more SIs coming our
way.
Secondly,
in this area, it is difficult to get clear evidence of success, because
if a lot of people are picked up for avoiding taxation, one could argue
that
there is a lot of tax avoidance going on. On the other hand, if there
are not many people picked up for such avoidance, it could be suggested
that they are getting away with it and that we are simply being
incompetent. I would find it helpful if the Minister enlightened us on
how the Treasury is measuring its success in that
area.
10.47
am
Mr
Gauke:
I thank hon. Members for raising several questions
that I shall attempt to answer in the course of my remarks. The first
question, from the hon. Member for Nottingham East, was about why VAT
was not included within the order. VAT has a separate disclosure
regime, which is set out in schedule 11 to the Value Added Tax Act
1994, and is consequently treated differently from the various taxes
that he
mentioned.
Chris
Leslie:
If the Minister can write a short note about
whether there is a consistent set of penalties for those who promote
avoidance of VAT arrangements, when compared with those who promote
avoidance of direct taxation, I would be interested to know. I presume
that there must be some kind of consistency, but I do not
know.
Mr
Gauke:
I can certainly write to the hon. Gentleman to
elaborate on how the VAT regime works. It would be fair to say that
vulnerability to these types of schemes tends to be greater within
direct taxes as opposed to VAT. That is not to say that there are no
issues with VAT—there are significant issues—but it is a
slightly different issue as far as schemes are concerned, and I will be
happy to write to the hon. Member with further
details.
The
hon. Gentleman asked about promoters and how many schemes are affected
and for further details and context. HMRC have identified 487 different
promoters to date, and there have been some 150 disclosures over the
past two years. The definition of promoter catches those involved in
the design of the scheme as well as its marketing. In practice,
promoters are accountancy and law firms, banks and other financial
institutions. It is right to say that the vast majority of those
promoters are compliant and have abided by the regulations as they have
already been brought in, but there are some
exceptions.
The
hon. Gentleman also asked about evidence of non-compliant behaviour. To
date, there have been six instances of when a promoter has paid the
maximum £5,000 initial penalty under the tribunal rules, but
without a formal hearing. That is a small absolute number, but that is
a high proportion of the non-compliant promoters in total. The schemes
involved are typically marketed schemes with multiple users, mainly
high net-worth individuals, and the tax at risk is many millions of
pounds.
Chris
Leslie:
Are those six cases available for disclosure in
the public domain, and would it be possible to find out—as one
could, as it were, in a court of law—which firms had been found
to be in breach of those arrangements?
Mr
Gauke:
As far as disclosure of names is concerned, the
hon. Gentleman may be aware that the Government continue to consider
naming and shaming those who
are not fulfilling their tax obligations. Up to now, no disclosures have
been made in the public domain of those who are in breach. That is
something that we continue to look at in order to decide what is
appropriate.
The hon.
Gentleman asked about the five-day notification period, which is a
long-standing position since the disclosure of tax avoidance schemes
regulations came in. It ensures that HMRC is aware of the scheme at an
early stage, and allows HMRC to make a risk assessment and to provide
counter action before the scheme can be properly implemented. We are
currently happy with that five-day
period.
The
hon. Gentleman asked about appeals to the tribunal and whether that was
necessary, and whether it was a convoluted process. The tribunal makes
an independent judgment as to the level of the penalty and whether the
requirements have been breached. The tribunal takes full account of all
relevant factors. Consultation in that area raised the fact that the
penalty must be proportionate to the response, and the tribunal ensures
that that happens. The hon. Gentleman is aware of some of the
difficulties that authorities have if there is no appropriate appeal
regime and no opportunity to consider whether the penalty is
proportionate. It is necessary to have penalties that are sufficient to
deter promoters who might be tempted not to comply on the basis that
any continuing income from the scheme will outweigh the penalty. That
danger exists if a promoter takes the view that they will pay the fine
because it is a small price to pay for being able to promote a scheme
that could raise millions of pounds in fees. That is why we are looking
at that, and that is why that the penalty is set at a level
proportionate to the fees with a high maximum figure. It is also worth
pointing out that we are aware of one repeat offender, who essentially
appears to be doing that. The problem is not widespread in the sense of
there being many promoters who are acting in such a way, but the sums
involved can be considerable. It is right that we crack down on that as
effectively as we can.
The hon.
Gentleman asked about the total tax loss as a consequence of various
behaviours. In particular, he highlighted tax avoidance. The HMRC
estimate of the tax gap, for the most recent year available, is
£42 billion. That incorporates tax avoidance, tax evasion and
unpaid tax debt; it covers across the board. A breakdown is provided,
and if my memory serves me, about 17.5% of that tax gap is a
consequence of avoidance. The Government are absolutely determined to
tackle the level of avoidance and evasion, and as my hon. Friend the
Member for Southport has pointed out, as part of the spending review we
announced an additional £900 million to be spent over the
spending review period on tackling evasion and avoidance. We will be
announcing further details on exactly how that money is spent, much of
which will counter avoidance by high net-worth individuals and
corporates. It will also be used to tackle evasion and criminal gangs,
which costs the Exchequer considerable sums of money—things such
as cigarette smuggling, missing trader intra-community fraud, alcohol
smuggling and attacks on the self-assessment system.
It is hugely
important that the Government and HMRC take measures to tackle and
reduce such things. At a time when we are making very difficult
decisions as far as the public finances are concerned, it is right to
ensure that HMRC is able to raise as much revenue as
possible. By the time we get to the end of the spending review period,
we believe that the additional expenditure and investment will result
in HMRC collecting £7 billion a year more than it would
otherwise. That is a considerable sum of money and we will work hard
with HMRC to ensure that it can deliver on
that.
One
of the points raised about tax avoidance is how we get to the
fundamentals of the issue. We must ensure that we have greater
simplicity and clarity in our tax law. That is a challenge for us all
collectively when considering how we make tax law and how we ensure
greater clarity in what we are trying to do. We must not allow there to
be opportunities for avoidance within the tax regime. That is something
we must all work very hard
at.
My
hon. Friend the Member for Southport raised the issue of having a
general anti-avoidance rule. He is right to mention that point, and it
is something that we are actively studying at the moment. The matter is
complex and there are perfectly legitimate arguments on both sides. The
previous Government considered the issue—in 1997 and
1998—and concluded that it was not the right thing to do. It is
right that we consider the matter again because some of the arguments
have moved on, in part as a consequence of the disclosure of tax
avoidance scheme rules and a slight change in attitudes across the
board in that area. As I said, we continue to look actively at the
matter. I will not give an end date at which we will make an
announcement, but I assure my hon. Friend that we are very much
actively looking at that particular
issue.
The
hon. Member for Nottingham East will not be surprised to know that I
will not be drawn into the individual tax affairs of certain people. He
will also be aware that, as a Minister, I do not have access to the
individual tax records—and quite right, too. That is a tradition
we will maintain. I will certainly not be drawn into those
issues.
Chris
Leslie:
Is the Minister therefore implicitly criticising
the Business Secretary who did get drawn into the issue
of Sir Philip Green’s tax avoidance at the last business
questions on the Floor of the
House?
Mr
Gauke:
I will certainly not implicitly or explicitly
criticise one of my esteemed colleagues, but the hon. Gentleman asked
me whether particular arrangements had been entered into by one
individual and I am not in a position—nor should I be—to
know the answer. I will not be drawn further into
that.
I
hope those remarks are helpful to the Committee in providing a bit more
context to what we are trying to do as a Government. The measure is but
one part of that. I assure the Committee that we are determined to
tackle tax avoidance. It is right that we try to address those
artificial and aggressive activities that are clearly not consistent
with what Parliament intended and the spirit of the law. This measure
is one of the tools available to the Government and, as a consequence
of the regulations, it will be a more effective and useful tool. We
hope to continue the progress that we have already made in reducing
avoidance.
10.59
am
Chris
Leslie:
With the leave of the Committee, I would like to
say that I find the Minister’s comments, by and large, pretty
helpful. We will want to work on the matter further across the
parties—I could use the word “bipartisan” because
essentially the Conservatives and Liberal Democrats are one grouping
these days. This is an important statutory instrument and it is one of
a series of changes that will help tighten up on what I did not realise
were 487 promoters of tax avoidance schemes. It might be worth
considering some of the details a bit further. I am still not convinced
that the shrouds of obfuscation have been lifted by the Minister in
respect of disagreements between the Chancellor and the Chief
Secretary, but we will pick those up another day. For now, I am happy
to support the statutory
instrument.
Question
put and agreed
to.
11
am
Committee
rose.