Draft Penalties, Offshore Income etc. (Designation of territories) Order 2011

The Committee consisted of the following Members:

Chair: Mr Mike Weir 

† Barclay, Stephen (North East Cambridgeshire) (Con) 

† Birtwistle, Gordon (Burnley) (LD) 

† Burt, Lorely (Solihull) (LD) 

† Clarke, Mr Tom (Coatbridge, Chryston and Bellshill) (Lab) 

† Cunningham, Mr Jim (Coventry South) (Lab) 

† Dinenage, Caroline (Gosport) (Con) 

† Donohoe, Mr Brian H. (Central Ayrshire) (Lab) 

† Doyle-Price, Jackie (Thurrock) (Con) 

† Gauke, Mr David (Exchequer Secretary to the Treasury)  

† Goodwill, Mr Robert (Scarborough and Whitby) (Con) 

† Hanson, Mr David (Delyn) (Lab) 

† Hollingbery, George (Meon Valley) (Con) 

† Metcalfe, Stephen (South Basildon and East Thurrock) (Con) 

Pearce, Teresa (Erith and Thamesmead) (Lab) 

† Reynolds, Jonathan (Stalybridge and Hyde) (Lab/Co-op) 

Ritchie, Ms Margaret (South Down) (SDLP) 

† Smith, Mr Andrew (Oxford East) (Lab) 

† Stephenson, Andrew (Pendle) (Con) 

Alison Groves, Committee Clerk

† attended the Committee

Third Delegated Legislation Committee 

Wednesday 2 March 2011  

[Mr Mike Weir in the Chair] 

Draft Penalties, Offshore Income etc. (Designation of Territories) Order 2011 

2.30 pm 

The Exchequer Secretary to the Treasury (Mr David Gauke):  I beg to move, 

That the Committee has considered the draft Penalties, Offshore Income etc. (Designation of Territories) Order 2011. 

It is a great pleasure to serve under your chairmanship, Mr Weir. 

The order is an important step in implementing new penalties for offshore non-compliance with income tax and capital gains tax. Right hon. and hon. Members will be aware of the risk to tax revenues that is posed by those who do not declare offshore income. Her Majesty’s Revenue and Customs’ review of powers, deterrents and safeguards has in recent years modernised and aligned HMRC’s powers to obtain information and to penalise those who do not comply with their tax obligations, yet those powers are effective only when they can be enforced. When income and gains arising abroad give rise to a tax liability here, HMRC uses the exchange of information and other mutual assistance arrangements with foreign tax authorities to help to detect and remedy non-compliance. 

New penalties that will come into effect for the 2011-12 tax year will raise the stakes for those who do not declare their offshore liabilities and, at the same time, signal the UK’s endorsement of the work of the G20 and the OECD to encourage all jurisdictions to implement international standards of tax transparency and exchange of information. The penalties will play an important role in our drive against tax evasion. Recent disclosure opportunities have helped to address past non-compliance, and HMRC has used its information powers to obtain information on offshore accounts from banks operating in the UK. There was also an announcement of £900 million over the spending review period to tackle evasion, including funding for new teams to tackle offshore evasion. The penalties underpin those measures by increasing the deterrent against offshore non-compliance and giving taxpayers more incentive to get their affairs in order. 

For tax years from 2011-12 onwards, penalties will be linked to the tax transparency of the country in which income or gains arise. If income or gains arising in a so-called category 1 territory are not declared to HMRC, penalties will be due at the existing rate of up to 100% of the tax lost. Where a category 2 territory is concerned, penalties will be due at 1.5 times the existing rate—up to 150% of tax. For a category 3 territory, penalties will be doubled, so the most serious evasion of tax on income from such countries will attract penalties of up to 200% of the tax evaded. The draft order designates which territories will be placed in categories 1 and 3. All other territories, with the exception of the UK, will be considered to be in category 2. 

I shall say a little about how that classification was arrived at. The process has mostly been mechanical and objective to consider the information exchange agreements that are in force between the UK and its international partners. The classification is not a judgment on the integrity of a jurisdiction, and nor should it be interpreted as a list of “tax havens” or any other such term. The primary legislation sets out several factors that must be considered when devising the instrument: first, the existence of information exchange agreements must be taken into account; and, secondly, the quality of such agreements must be considered, particularly with regard to whether they provide for the automatic exchange of information on savings income. 

Territories that have agreed to share such information automatically with the UK are designated as being in category 1. That includes territories that share such information under the European savings directive or related bilateral agreements with the UK. Those territories that are not listed in the instrument are largely those that have agreed to exchange information with the UK on request, which fall into category 2. Those that have no agreement to share information with us are mostly designated in category 3. In a few cases, such as with Barbados, and Antigua and Barbuda, although there is an old agreement in force, the deficiencies in the information-sharing arrangements provided for by the agreement mean that it falls well short of international standards for exchange of information on request. As a consequence, the agreement cannot be said to provide for the effective exchange of information, so those territories are also placed in category 3. 

The UK is working with its partners to tackle deficiencies in treaties with a view to allowing for the exchange of information to a sufficient standard and moving the territory to category 2. For example, we will be starting negotiations with Barbados on a new treaty in a matter of weeks, and a new agreement with Antigua and Barbuda has already been signed. When no information exchange agreement exists, the primary legislation also allows the Treasury to consider whether the UK would derive benefit from an agreement were one to come into force. That consideration may then be taken into account in the classification. We have used that provision to place some of the least developed countries into category 2, even if they have no information-sharing arrangements with the UK. That addresses several concerns raised when the proposal was first introduced about the disproportionate impact on such countries. 

The order is the first version of the classification, and it is not envisaged that that will be set in stone. The world is becoming a smaller place for those who do not pay the tax due on their offshore affairs. Countries are increasingly recognising the benefits of signing up to international standards for the exchange of tax information. The work of the Global Forum on Transparency and Exchange of Information for Tax Purposes, which now has a membership of more than 90 jurisdictions, will help to measure progress towards applying those standards in practice. As countries move to sign and put in place new agreements, we expect the number of territories in category 3 to fall. We will keep the classification under review and update it as necessary. 

I want to bring a typographical error in the draft order to the attention of the Committee. The reference at the top of the schedule to “Articles 3 and 4” should,

of course, read “Articles 2 and 3”. I reassure the Committee that that will be corrected in the final version of the instrument. I commend the order to the Committee and I am happy to answer any questions that hon. Members might have. 

2.36 pm 

Mr David Hanson (Delyn) (Lab):  I welcome you to the Chair, Mr Weir. 

The official Opposition broadly welcome the thrust of the order, which will be made under powers in schedule 24 to the Finance Act 2007, which was passed under the previous Government as part of the approach to try to tackle tax avoidance and tighten up agreements with other nations. We certainly want proper and effective mechanisms to ensure that the right amount of tax is paid in the right jurisdiction by individuals so that we do not have tax avoidance and such tax revenue is used for the benefit of the British public as a whole. 

Penalties that may be levied under schedule 10 to the Finance Act 2010 will come into effect shortly. The severity of the penalties will depend on the category of nation under the order. As the Minister explained, a territory is in category 1 if agreements are in place to provide for the exchange of tax information. A territory is in category 2 if information will be shared on request, while for countries in category 3, there is no information-sharing agreement or the arrangements are of insufficient quality. 

We accept the broad principle of the order, which helps to clarify which territories fall into which category. However, I have some questions for the Minister about the categorisation of some relevant nations. Let us focus on the territories in category 3 under the schedule to the order. I refer the Minister to a response that he gave on 17 January to a parliamentary question tabled by the hon. Member for Banff and Buchan (Dr Whiteford) in which he set out several countries with which tax information exchange agreements were “in force”. Included in those countries were several that are listed under category 3, which I remind him and the Committee is the category for territories with which no information-sharing arrangements exist or for which the arrangements are of insufficient quality. Why have some those territories been placed in category 3, given that he said on 17 January, in response to the question asked by the hon. Member for Banff and Buchan, that tax information exchange agreements are in force with places such as Antigua and Barbuda, which he mentioned in his opening comments, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines, Aruba and, interestingly, Belize. 

Hon. Members, and especially Labour Members, will remember that Belize attracted controversy in the run-up to the election, when the noble Lord Ashcroft was subject to some discussion about his tax status. It is not for me to discuss that today, although I could elucidate on that if Members wished. Interestingly, I happened to find, while researching the order, a copy of the Daily Mail—that wonderful organ—from 25 March 2010 that included an article about the Labour Government’s final Budget, which it termed the “Belize Budget”, with reference to Lord Ashcroft. The article stated that my right hon. Friend the Member for Edinburgh South West (Mr Darling) had said that the 

“Treasury was close to signing tax information exchange agreements with the Caribbean state” 

of Belize. I would welcome the Minister’s comments about the progress of that. If an agreement has been signed and has been in place since around the time of last year’s Budget—my right hon. Friend indicated that it was forthcoming—why is it of insufficient quality, or why has it not been signed? Belize is included in category 3 in the schedule before us, indicating that the agreement was either not of sufficient quality or not in existence to ensure that we could place Belize in the list of designated territories for tax purposes. 

For some of those territories—there are probably more—the Minister has explained that either the tax agreements in place were not of sufficient quality or that agreements have not yet been completed. Some were ones that the Labour Government tried to progress, such as the one that impacted on the noble Lord Ashcroft, which now appears to be of insufficient quality for the current Government to put that territory into categories 2 or 1. 

Let me give the Committee the current status. There are a number of territories that—let us be generous—have tax-friendly authorities: Andorra, where there is no personal income tax; Barbados, which is a low-tax regime; the Cook Islands; Nauru, where no taxes are paid; Panama; and several others that I could go through. Individuals may place resources in those tax-friendly regimes and legally avoid taxation. I accept that there is a heavy penalty for tax avoidance, but those countries are in category 3. Why is there a lack of sufficient quality in the countries that I have mentioned so that they could not be moved from category 3 to categories 2 or 1? What steps has the Minister taken to ensure that, particularly with those low-tax, tax-friendly regimes, we have clarity on sharing tax information so that people who invest in, put their resources in, or work or travel in those areas are clear about their tax liabilities in this country and the nations that I have mentioned? 

Will the Minister indicate whether the Treasury has made any assessment of the likely number of individuals from the UK or other countries who will be forwarded to category 3 in relation to the overall business that is undertaken with those nations? Categories 1 and 2 are simple and straightforward. With category 1 there are clear information-sharing arrangements and, with category 2, we have on-request sharing arrangements. For all the countries in category 3, we either are not confident of the quality of the tax agreement with them, or there is no agreement. How many UK residents does the Minister believe are currently working in, generating income in or undertaking business with Andorra, Barbados, the Cook Islands, Dominica or any of the other nations in category 3? If we had that answer, we would know the possible loss of income to the British taxpayer as a result of not having a tax agreement with such authorities. That is an important point. If individuals are paying little or no tax in Andorra, Barbados, Nauru, the Cook Islands or other territories, and avoiding UK tax by doing so, that tax is ultimately lost to the Treasury, lost to the deficit and lost to public spending. The Minister needs to be clear about the extent of such practice. 

I would also welcome some information about the review process. The Minister says that the list is not fixed, which I accept, but will he tell us when and how the Treasury intends to review the categories, and particularly category 3? How will that review be undertaken

and how often will it happen? When and how will the categories be updated? If the categories do change, will the update take place through secondary legislation that will be considered in Committee? 

Will the Minister also indicate the likely time scale for the negotiation of tax agreements, particularly with countries in category 3? I recognise that several such agreements are coming up—we seem to spend a lot of time in such Committees dealing with them—and proceedings on them started under the previous Government. However, there are some significant nations in category 3, so I shall be grateful if the Minister indicates which nations he is prioritising and the anticipated time scale for trying to open negotiations with, say, the top five. Are any countries in the list refusing to negotiate? Are there any particularly difficult issues with any of those countries? At what stage will that schedule be updated, and how will it be updated? 

I raise those important points because this approach is about maximising the UK’s tax take, and ensuring that people pay fair taxes and that taxation is transparent. I accept the designations that have been set out—the official Opposition will not oppose the order—but I would welcome some clarification on the points that I have raised. 

2.47 pm 

Lorely Burt (Solihull) (LD):  I would like to ask my hon. Friend the Minister for some clarification because I am not knowledgeable about tax matters, as will soon become apparent. I am pleased that we are tightening up on all forms of tax evasion, and obviously the order is a valuable part of that. 

The Minister said that tax evaders under category 1 would pay a penalty of up to 100%. Is that 100% of the outstanding sum, or is it the outstanding sum plus an additional 100%? If we will require people to pay only the 100% penalty, what is the incentive for people to pay tax, because in such circumstances, the most that people would ever have to pay is the amount that they should have paid in the first place? 

2.48 pm 

Mr Gauke:  I thank the right hon. Member for Delyn and my hon. Friend the Member for Solihull for their questions and support for the order. I shall attempt to address the various points that they raised. 

There is a shared view on both sides of the Committee that it is important to address offshore tax evasion. The right hon. Member for Delyn asked about the scale of the problem and how many individuals have evaded taxes by holding offshore accounts. Of course, given the very nature of the process, it is difficult to give a precise figure. We do not have information about such accounts and we cannot know how many there are. All Governments have faced that problem. HMRC will focus on tackling offshore evasion over the next few years, and we anticipate an additional yield of some £5 billion through the action it will take up to 2015. 

I shall deal with the point about why some countries are in category 3 even though agreements have been signed. The right hon. Gentleman referred to my answer of 17 January, in which I stated that we had concluded

agreements with a number of those countries. That means that those have been signed, but they are not necessarily in force. We may recognise only agreements that are in force for the purposes of the categorisation. Once those agreements are in force, we will recognise them in a future version of the instrument, moving the territory into category 2. That will be done through a new order, which will be subject to the negative procedure. Essentially, once a country has agreed to share information to international standards it can move into category 2. It is absolutely the case that we want to move as many countries as possible into that category. 

Mr Hanson:  Let us take one example. By chance, let us pick on Belize. When will its agreement come into force—at what stage is it? Will the Minister tell us the progress that has been made? 

Mr Gauke:  I am happy to respond specifically on Belize. A previous agreement was in force that was not up to international standards. We have now signed another agreement. As the right hon. Gentleman will be aware, we must now go through the process of giving it parliamentary approval. I believe that we will do so as part of our consideration of a block of other territories—I am not sure whether that will be before or after Easter. I hope that he will be pleased to learn that we are making rapid progress on that particular agreement, along with others. 

Mr Hanson:  Twelve months. 

Mr Gauke:  The right hon. Gentleman chunters about the timetable, but he will be aware that the time lags in the previous Parliament for progressing some of these information exchange agreements were sometimes considerable. None the less, we are proceeding quickly on that. 

We have approved a large number of tax information exchange agreements already in this Parliament, and we hope to proceed with many more over the forthcoming months. We are making progress on Belize, as we are on Antigua and Barbuda, to which much the same timetable will apply. 

Mr Hanson:  On 17 January, the hon. Member for Banff and Buchan asked the Minister which agreements had been established for countries and whether he had any plans to review such agreements. He answered that agreements had been signed; he did not say that they were not in force. Will he tell us the dates on which the agreements to which his answer referred will be in effect rather than an aspiration? 

Mr Gauke:  Of course, that is subject to our ratification procedures in this country—in Westminster—and to those of our international partners. We aim to move as quickly as possible, and a number of those agreements will be dealt with. The timetable is well established and is operating somewhat more quickly than has been the case on many occasions in recent years. 

Mr Hanson:  I cannot speak for the former Treasury Ministers, because I was in the Home Office at the time. I am asking this Minister, however, to give a final

backstop date by which the agreements that he mentioned in his 17 January reply will be in force, as opposed to signed. If he cannot, we shall have to table questions on a regular basis to follow through on each of them—St Kitts; Belize; Aruba; and Antigua—to find out when they are in force rather than simply being negotiated and signed. 

Mr Gauke:  This matter is subject to the parliamentary timetable for agreement through the usual channels, and I suspect that the right hon. Gentleman is more familiar with those procedures than I am. We need to find an opportunity to debate these matters in Committee and progress them, and we continue to move as quickly as possible. When I was in opposition, I remember making the point to Treasury Ministers that it was important to progress this as quickly as possible. We were prepared to be flexible to ensure that a number of orders could be debated on one day so that we could expedite the process, and I am sure that he wants to share that approach. On the point that he raised, I am happy to write to him to provide whatever details we have. I am sure that he understands that timetabling constraints in the House determine when we can move these matters through, but we are keen to do so as quickly as possible. 

Mr Hanson:  I am sorry to be persistent, but what causes me concern is not so much the timetabling arrangements in the House as those of the other party, because we are talking about an agreement. The agreements have been signed, and whatever our time scale in the House, they need to be ratified by other nations as well. We can complete our proceedings by Easter. I will happily agree to ratify the provisions; we have not objected so far to any orders. I am interested in when the nations with which we are agreeing will ratify so that the order comes into effect and is not just an aspiration on our part—a signed agreement that is worthless until it takes effect. 

Mr Gauke:  Of course, it is in the interests of countries that have signed the agreements to progress the matter, not least so that they can move from category 3 to category 2. I am quite happy to write to the right hon. Gentleman with the information that we have on this area. We are keen to progress the matter as quickly as possible, and we are keen for our international partners do so sooner rather than later. He appears to be particularly concerned about Belize. Let me put his mind at rest: it has already ratified, as have Antigua and St Kitts. They have notified us of that fact, so there is no feet-dragging there. I am sure that he will be pleased, as we all will, when we can ratify, which will be as soon as we possibly can. 

We will review the classification regularly, and we will need to update it to reflect changed circumstances such as the coming into force of some of the agreements. Given the speed with which new information-sharing arrangements are being agreed and are coming into force, we have no precise timetable of exactly when we will update the list, but I anticipate at least one revision during the next 12 months. 

I turn to the question raised by my hon. Friend the Member for Solihull on penalties. I assure her that the penalties are in addition to having to repay the tax that is due. Clearly, in the case of a category 3 territory in particular, that is a significant penalty and an increase on what we had before. I am pleased that the approach has cross-party support. 

I hope that I have been able to assure right hon. and hon. Members with further clarity on some of the points that have been raised. I am grateful for the constructive way in which questions were asked, and I hope that the Committee will accept the order. 

Question put and agreed to.  

2.59 pm 

Committee rose.