Draft Tax Avoidance Schemes (Penalty) (Amendment) Regulations 2010

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.