Finance Bill

The Committee consisted of the following Members:

Chairs: Martin Caton  , † Mr Gary Streeter 

Burt, Lorely (Solihull) (LD) 

† Dakin, Nic (Scunthorpe) (Lab) 

† Dinenage, Caroline (Gosport) (Con) 

† Duddridge, James (Rochford and Southend East) (Con) 

† Elphicke, Charlie (Dover) (Con) 

† Evans, Chris (Islwyn) (Lab/Co-op) 

† Fuller, Richard (Bedford) (Con) 

† Garnier, Mark (Wyre Forest) (Con) 

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

† Gilmore, Sheila (Edinburgh East) (Lab) 

† Glindon, Mrs Mary (North Tyneside) (Lab) 

† Hames, Duncan (Chippenham) (LD) 

† Heaton-Harris, Chris (Daventry) (Con) 

† Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op) 

† Kane, Mike (Wythenshawe and Sale East) (Lab) 

† Kwarteng, Kwasi (Spelthorne) (Con) 

† Leadsom, Andrea (Economic Secretary to the Treasury)  

† Leslie, Chris (Nottingham East) (Lab/Co-op) 

† Mahmood, Shabana (Birmingham, Ladywood) (Lab) 

† McKenzie, Mr Iain (Inverclyde) (Lab) 

McKinnell, Catherine (Newcastle upon Tyne North) (Lab) 

† Mearns, Ian (Gateshead) (Lab) 

† Menzies, Mark (Fylde) (Con) 

Morgan, Nicky (Financial Secretary to the Treasury)  

† Pearce, Teresa (Erith and Thamesmead) (Lab) 

† Pincher, Christopher (Tamworth) (Con) 

† Rudd, Amber (Hastings and Rye) (Con) 

† Rutley, David (Macclesfield) (Con) 

† Shelbrooke, Alec (Elmet and Rothwell) (Con) 

† Smith, Henry (Crawley) (Con) 

† Swales, Ian (Redcar) (LD) 

† Vaz, Valerie (Walsall South) (Lab) 

† Wheeler, Heather (South Derbyshire) (Con) 

† Williamson, Chris (Derby North) (Lab) 

Wilson, Sammy (East Antrim) (DUP) 

Matthew Hamlyn, Kate Emms, Committee Clerks

† attended the Committee

Public Bill Committee 

Tuesday 17 June 2014  

(Morning)  

[Mr Gary Streeter in the Chair] 

Finance Bill

(Except clauses 1, 5 to 7, 11, 72 to 74 and 112, schedule 1, and certain new clauses and new schedules) 

9.10 am 

The Chair:  It is a matter of great sadness for all of us that this is our last day of consideration of the Bill in Committee. I will miss you all. 

We now come to clause 192 and the start of part 4 of the Bill, which covers follower notices and accelerated payments. 

Clause 192 

Overview of Part 4 

Question proposed, That the clause stand part of the Bill. 

The Chair:  With this it will be convenient to discuss the following: 

Clauses 193 to 202 stand part. 

That schedule 26 be the Twenty-sixth schedule to the Bill. 

Clauses 203 to 208 stand part. 

That schedule 27 be the Twenty-seventh schedule to the Bill. 

Clauses 209 to 211 stand part. 

That schedule 29 be the Twenty-ninth schedule to the Bill. 

Shabana Mahmood (Birmingham, Ladywood) (Lab):  Thank you, Mr Streeter. It is a pleasure to serve under your chairmanship. You are right in saying that we are coming to the end of our consideration of the Bill in Committee. 

Part 4 of the Bill is made up of four chapters, all of which cover various tax avoidance measures. Chapter 1 provides an overview of part 4 and outlines some of the main definitions. Chapter 2 introduces a new obligation on users of an avoidance scheme that Her Majesty’s Revenue and Customs has defeated at a tribunal or court hearing in another party’s litigation to concede their position to reflect that decision. That obligation will take the form of a follower notice and is the subject matter of this first group of proposals. 

Chapter 3 makes provision for issuing accelerated payment notices on the same grounds as follower notices, but in addition to the cases disclosed under the disclosure of tax avoidance schemes—DOTAS—or those cases in which HMRC is taking counteraction under the general anti-abuse rule, which is known as the GAAR. 

Finally, as we will discuss later, chapter 4 makes special provision covering the application of part 4 to stamp duty land tax and annual tax for unfit dwellings, in addition to conferring a power to extend the provisions of this part to other taxes and making consequential arrangements. As the Minister and the Committee will be aware, the measures have been subject to much comment and I look forward to exploring them in more detail during our final day in Committee. 

On clauses 197 to 211, the Opposition support measures to tackle tax avoidance. It is important that everyone plays their part and pays their fair share of tax. These measures are the result of backlogs in the current system and the feeling that it is easy at the moment to game the system and to extend the time for resolution of a case, which is in the interests of the party that has sought to engage in tax avoidance, but less in the interests of ordinary taxpayers who end up paying more overall as HMRC takes longer to resolve cases. 

This chapter in the Bill falls under the Government’s broader consultation, “Raising the stakes on tax avoidance”. Follower notices were subject to consultation from 12 August to 4 October 2013. They focus on encouraging users of avoidance schemes to settle their tax affairs after similar cases have been lost in court. As the consultation document outlines, buyers of tax avoidance schemes will submit their returns to HMRC on the assumption that the schemes will reduce their tax liability. When a tax avoidance scheme is mass marketed, as they often are, HMRC is presented with a large number of returns based on the same assumption that the scheme will have reduced the person’s tax liability in a particular way. When HMRC holds that the scheme does not work, it follows that it will argue that any returns based on that scheme are incorrect. 

When faced with a large number of similar cases, it is sometimes more efficient for HMRC to investigate representative cases, taking them to litigation if necessary. However, when HMRC wins a representative case in the courts, other taxpayers who have used the same or similar schemes sometimes see little incentive in settling their cases with HMRC. When HMRC pursues litigation in similar cases, tribunal rules allow for them to be heard together in certain circumstances but, unfortunately, that applies only to cases that have been notified to the tribunal. To get to that stage, HMRC has to investigate those cases to litigation standard and then close the tax inquiry. That uses up the tribunal’s resources, places a strain on HMRC’s compliance resources and often delays the collection of the correct tax. 

9.15 am 

In his autumn statement last year, the Chancellor of the Exchequer announced: 

“We are introducing a new, limited power that requires people to pay their taxes up front where the scheme they used has already been struck down by the courts.”—[Official Report, 5 December 2013; Vol. 571, c. 1107.] 

That measure will introduce a new obligation for users of an avoidance scheme that HMRC has defeated in a tribunal or court hearing in another party’s litigation to concede their position to reflect that decision. 

Earlier this year, on 24 January, the Government published a further consultation document, “Tackling marketed tax avoidance”. The consultation closed exactly

a month later on 24 February 2014. The consultation received more than 100 responses, more than half of which came from one website. 

However, concerns were expressed by several stakeholders and members of the public who will be affected by the measures that the consultation period was insufficient. For many of them, particularly the accounting organisations, the consultation took place at their busiest time of the year and therefore contained their ability, they say, to take part fully in the consultation process and to respond as they would have liked. In its response to the consultation, the Institute of Chartered Accountants in England and Wales said that there was 

“so little time for comment that one month is not long enough, given their length, complexity and contentious nature”. 

I am sure the Minister will tell us that a total of 800 responses received suggests that the length of time given for the consultation was sufficient, but I am a little concerned that so many key stakeholders were upset about the length of time for consultation and said that it did not give them enough time to discuss with their members in detail the measures before us today. They fear that they may have missed opportunities to improve the legislation—not necessarily the principles behind what the Government are trying to achieve, but some of the more technical aspects of how those ends will be achieved. When the Minister responds, I would be grateful if he explained to the Committee the thinking behind the length of consultation period adopted by the Government. Is he concerned that the short consultation period might mean that there was insufficient opportunity for HMRC and the stakeholders it regularly works with to build confidence about the impact of the measures and how they will be implemented when the Bill is passed? 

The consultation document outlined follower notices and the expansion of the accelerated payment notice scheme, which the Committee will discuss later today. The main concerns discussed in the summary of responses document focus on the absence of a right of appeal, the implications for the HMRC’s resources, and the processes that will be adopted internally as it takes important decisions on whether to apply a follower notice to a tax inquiry. 

We must recognise the challenge facing HMRC because of the number of cases. It is estimated that there are around 65,000 open cases involving marketed tax avoidance schemes, representing potentially billions of pounds of uncollected taxes. We all want to ensure that tax due is collected as quickly as possible. However, the process of collection and litigation that is currently undertaken by HMRC can take several years to complete. There is a sense that it is quite easy to game the system and for individuals challenging the decisions of HMRC at the tribunal stage to cause delay. Opposition Members therefore support the principle of follower notices as a practical measure that should—hopefully—decrease the amount of time it takes to settle those matters and ensure that the currently uncollected tax is collected quickly. 

The responses to the consultation from many of the membership bodies show support in principle for the idea of follower notices when cases are the same or very similar, in recognition of the need to deal with the many tens of thousands of outstanding mass-marketed avoidance schemes. The stakeholders accept that the position is untenable and is causing great strain on HMRC and the

tribunal system. However, those same stakeholders have serious concerns that dealing with this backlog with follower notices risks taking away a taxpayer’s normal safeguards and rights of appeal. They are also concerned that the measure risks shifting a considerable amount of power from the legislature and the judiciary straight back to the Executive, meaning, in this case, HMRC officials. 

One of the biggest concerns about the balance of power relates to the removal of a right of appeal. Much more will depend on officials at HMRC making decisions about whether a follower notice should be applied. Some stakeholders have described that as putting the taxpayer at the mercy of the bureaucrat. Given that there is no right of appeal, stakeholders fear that far too much of power is concentrated in HMRC and they are not confident that HMRC can be relied on always to get it right. Many members of the public have commented that, because the new powers sit within HMRC, HMRC is becoming judge, jury and executioner. There is therefore a fair amount of concern about how the balance of power will sit in relation to such decisions. The Minister will be aware of the reaction of members of the public who may now get follower notices and it will be interesting to know how much confidence he has in the system overall and its robustness to deal with the lack of confidence that has been expressed so far. 

Another issue concerns the fact that tribunal group rulings from the first-tier tribunal can act as the basis for follower notices. Therefore, the clauses within the chapter make the provision for HMRC to issue a follower notice on the basis of a judicial ruling that HMRC deems to be relevant to the taxpayer’s chosen arrangements. The definition of judicial ruling appears to include first-tier tribunals. First-tier tribunal members are judges and deputy judges drawn from the former special commissioners, the former VAT and duties tribunal chairmen, assignees from other tribunals and non-legal recruits who are selected by open competition, possibly including ex-general commissioners. In most cases the decisions of the first-tier tribunal are made by a judge and two other members, although this can vary between chambers and sections, and sometimes depends on the nature of the case. 

There is no issue about the robustness of the FTT in and of itself, but the use of FTT rulings as the basis for follower notices has been met with considerable opposition throughout the consultation process. As the Law Society observes, it is rare in our legal system for decisions of the lower tribunals to be used in that way because they have no precedential value. In the normal run of things, FTT decisions are not capable of setting a legal precedent that then has to be followed in all other cases that flow. Is the Minister satisfied that the use of FTT decisions is satisfactory from a legal point of view? What conversations has he had with the Law Officers and his colleagues in the Ministry of Justice about that slight change to the way in which lower tribunal decisions are treated within our legal system? It can be difficult enough, when a tax-related or a non-tax-related case gets to the upper tribunals, to work out the exact basis for the decision that the lower tribunal judges made. Often, lawyers—I confess I was one in my pre-political life—will spend many hours and earn a lot of money trying to work out the whether the comments of a judge are the rationale for the decision, and whether the comments go to the heart of a decision or are obiter dicta. 

James Duddridge (Rochford and Southend East) (Con):  I apologise for interrupting the hon. Lady. Is she suggesting that, when looking at the first-tier tribunals and generalising from a decision made, there should be a difference between the merit of cases that are similar compared with those that are identical where, effectively, the same scheme is sold to multiple individuals, which I suspect is the bulk of the 65,000 to which she refers? 

Shabana Mahmood:  I am grateful to the hon. Gentleman for his comments. He is right. The thrust of the measures that we support deals with the latter example that he gave—cases in which the same scheme has been marketed and used in exactly the same way in each case, but there will be some differences. The question is, looking at FTT decisions, whether there will be enough in that ruling to be able to work out what the similarities are. Often, legal argument does not necessarily turn just on the features of one marketed tax avoidance scheme. There may be other elements to a case, which might be lost. That is why I am putting that point to the Minister. 

There is a principle of law and of the way our legal system works, which relates to what type of decisions have the ability to set a precedent that has to be followed in all cases thereafter. A good feature of the measures is that there is a small number of boutique practices that put together marketed tax avoidance schemes, which are almost exactly the same in nature all the time. That is what we are trying to tackle. 

Charlie Elphicke (Dover) (Con):  Is the hon. Lady’s position that the provisions should not apply unless there has been a ruling in the court of appeal or higher? 

Shabana Mahmood:  No, I am merely testing the Government’s case to ensure that the rules that end up on the statute book are as robust as possible. In principle, I have no objection to an FTT decision being capable of setting a precedent for all cases thereafter but I would not be doing my job if I did not press the Minister as hard as possible, given the concerns expressed, particularly by the Law Society. 

If we are going to change fundamental principles of the English legal system and the way it functions—whether taking away rights of appeal, potentially introducing retrospection, which I am sure we will discuss in greater detail in the next group, or changing the basis on which precedents are set—as legislators, it is our duty to ask as many questions as possible to ensure that we know the scope of what we are trying to achieve so that the people who watch the debate understand exactly what they are dealing with and know that we do not make the decisions lightly or easily. 

Charlie Elphicke:  Does the hon. Lady agree that the expertise of the judges in the first-tier tribunal is often extremely high and specialised, and that they know what they are doing and understand the principles of the cases to such a level that we can have trust and confidence in them and their decisions? 

Shabana Mahmood:  That is exactly why I explained the level of seniority and the long experience that those making decisions at FTT level have. I am making no comment about the value of their judgments. I am

merely saying that, as a long-standing principle of our legal system, lower courts are often not capable. In a personal injury claim, the average county court does not set a precedent that is followed. That is normally set by higher courts. That is just how our legal system works and a similar principle is applied in this case. I have no objection to departing from that because I recognise that a backlog of 65,000 cases with potentially billions of pounds of uncollected tax is no good for anybody. We need to think of practical ways to deal with that problem but, before departing from fundamental principles of our legal system, we should test them to ensure that we know what we are doing and that we are doing the right thing. 

9.30 am 

James Duddridge:  The hon. Lady mentioned marketed tax avoidance schemes and the 65,000 cases. Does she have a feel, in her investigations, for how many individual marketed schemes there are? Her case would be more powerful if there were a very limited number, but I suspect there are quite a few and that there would be significant cost in going beyond the tribunal stage, which may or may not be necessary but is a factor to consider. 

Shabana Mahmood:  I am grateful for that intervention because I was going to put that question to the Minister. It would be good to know how many of the 65,000 marketed schemes HMRC expects to fall within the number of known marketed schemes causing the real mischief behind the backlog, so that we know how many we can hopefully strike out quickly and start collecting tax that ought to have already been collected. 

HMRC, I think in relation to the objections raised by the Law Society, argued that FTT decisions ought to be used when it comes to deciding whether a follower notice can be applied, because if they were unavailable—if a follower notice could be applied only to a higher court decision—taxpayers might not appeal unfavourable decisions in order to avoid setting a precedent that would give rise to follower notices. The Law Society said that it was not convinced by that argument and felt that 

“it would require an unusual degree of altruism toward other taxpayers on behalf of the litigant choosing not to appeal”— 

something it believes is “rarely seen in practice.” 

I am sure that many stakeholders have been speaking to the Minister and his officials at length about this aspect of the measures. I would be grateful if he explained how the Government arrived at the position of allowing FTT decisions to be included and if there might be some scope for looking at whether the system needs additional safeguards. For example, the Chartered Institute of Taxation suggests that, at the end of a lead case, it might be appropriate to ask a judge to make a declaration that the case is apt for follower notices to be issued. That might provide an opportunity for the judge briefly to state the points of law and fact that helped them arrive at that decision, so as to remove uncertainty when that case is used as the basis for follower notices in other cases. 

It would be helpful to know if the Minister considered alternative methods of bringing greater clarity to the regime as envisaged by the legislation and why the

Government seem to be coming down in favour of HMRC assessment of a judgment. Do the Government think it is worth considering, perhaps once we have seen how the measures work out in practice, whether there is scope for such a declaration to be made by a judge so that there is less debate about the facts and features of a scheme that led a judge to make that decision? That might also assist with the change we envisage in our system to allow the lower tribunal to set a precedent. 

Charlie Elphicke:  The issue is that many of these schemes are mass-marketed. One example is the Eclipse 35 scheme, of which Sir Alex Ferguson was a member. Let us say the case was taken against him. There are 289 investors; I would say that the other 288 cases are exactly the same and that there would be an appropriate case for saying, “These cases are all the same. This is what is called a cookie-cutter transaction in the legal profession; they should all fall over at the same time.” Would the hon. Lady agree that is the right principle? 

Shabana Mahmood:  Yes. I have no different analysis of or principled objection to that. It will be helpful if the Minister can give us a feel for how many of the 65,000 will fall into this cookie-cutter type case. We would assume, for example, that the 289 cases within the Eclipse 35 scheme would all be exactly the same. We all know that there are always cases in the legal system where there are some differential elements and we need to ensure that our rules are robust enough to deal with the many and varied facts that are adjudicated upon by our tribunals day in, day out. In the normal run of things, we would think there would not be any issues, but, if we are going to change the law, we need to ensure that we allow for the odd cases that sit outside the cookie-cutter type or those where the cutter has gone wrong and the cookie has come out a slightly different shape. Those are the cases that we need to worry about and ensure that the rules are robust enough to deal with. 

Another main concern is the lack of a right of appeal when a follower notice is issued. Many of the concerns expressed by stakeholders, as well as by members of the public, relate to the fact that they feel it represents an erosion of a taxpayer’s access to justice. Getting the balance right between ensuring that we are able to clear backlogs, thereby saving taxpayers lots of money, and collect tax that is due, and ensuring that the justice system is fair, is tricky. It is important and necessary that if we are going to make these changes—I have no objection in principle to the rules of appeals and follower notices—and take away rights of appeal, we must ensure that we have really stress-tested the case for doing so and ensured that the new arrangements are well understood and people know exactly what they are dealing with. 

The Association of Taxation Technicians has raised deep concerns about the lack of any right of appeal against the follower notices. It says that the result is 

“that a taxpayer who wishes to pursue negotiation or litigation with HMRC must accept the likelihood of the imposition of a substantial penalty even if they are prepared to pay on account the full amount of the disputed tax.” 

It feels that that 

“involves a unique and disturbing tipping of the scales in favour of the executive beyond the extent required to address the targeted mischief.” 

Even if a person is prepared to pay up front the amount of tax that is in dispute, they are still liable for penalty and their rights of appeal are still affected. The legislation means that if a taxpayer is not prepared to abandon their entitlement, or negotiate or litigate with HMRC in respect of the effectiveness or otherwise of the adoptive arrangements, they are at risk of the penalty. All that the taxpayer can do is notify HMRC that they dispute its conclusion and wait for HMRC to either withdraw or confirm the notice. 

While it may be possible in theory to pursue judicial review, which is fast becoming the first and last resort for many people under the changes to our justice system over the last few years and is, of course, an expensive procedure, there is no direct appeal to an independent court of tribunal in relation to either the follower notice or the accelerated payment notices scheme, which we will discuss later. The Law Society says 

“this equates to the imposition of a substantial contingent cost for access to justice” 

and that it 

“should only be created if there is absolutely no credible alternative.” 

Will the Minister establish that there was no credible alternative and the rules that we have ended up with in the Bill are the only formulation that could be adopted in order to relieve us of the severe problem of the backlog of the cases? Will he tell us what advice he took on the lack of a right of appeal and how the penalties will operate? What discussions did he have with colleagues? Was some of the thinking around bureaucracy and further delays to the system if appeal rights were put back into the legislation? Was any assessment made of what further delays might be caused if the follower notices legislation went forward but included some limited right of appeal? Were different types of appeal processes considered and rejected? It would be helpful to have more detail. 

The last concern is around HMRC resourcing. It is clear that the new arrangements will place a significant burden on HMRC at a time when existing resources are being spread ever thinner. The Association of Revenue and Customs believes that HMRC is facing a demographic time bomb. More than half its work force is aged over 45, with 18% over 55. That proportion is higher at senior level where around 30% of grade 6 employees are over 55. 

Will the Minister inform us at which grade the decisions about issuing follower notices will be taken, so that we can establish that they will taken by appropriately senior individuals with the requisite amount of experience, and get an idea of whether they are all people who are likely to retire soon? 

The Minister and I have often discussed HMRC resourcing and retirement figures. I have often tabled parliamentary questions that the Minister has not been able to answer because there is no set retirement age in HMRC. I understand that, but in terms of how these measures are implemented, it would be helpful to know the numbers of staff who will make the decisions about the imposition of a follower notice and are also coming up to retirement. If it is likely that many of those staff will soon retire, it would be helpful to know the contingency planning in HMRC to ensure that they are replaced by people with appropriate experience, so that there is no gap in how the scheme is enacted. 

Is the Minister confident that ensuring seniority of decision makers on follower notices will not mean that other aspects of HMRC work face a detrimental transfer of expertise? Are we in danger of seeing exceptional performance of the team that deals with follower notices but a decrease in performance in another team because people have been transferred? It would be helpful to have some detail about how that will work at HMRC in practice. 

The operational detail on how HMRC will handle the new regime was highlighted by the Chartered Institute of Taxation in its response to the consultation. It said that the key point that needs to be addressed is that if there is a transfer of power from the legislature to the Executive, the efficient and fair function of the Executive becomes critical. Its concern, and that of the vast majority of respondents to the consultation, relates to the practical operation, including an understanding of seniority of staff. HMRC will effectively be operating a Chinese wall where the decision about issuing a follower notice will be taken by a senior official wholly removed from the team that was dealing with the case up to the point at which a decision had to be made about a follower notice. 

Many barristers’ chambers and solicitors’ firms often have people in them acting for both sides; it is not unusual to see a Chinese wall in our legal system. However, if so much power is to be vested at Executive level, it is important that the arrangements have the confidence of the public who will be issued with the notices and of the stakeholders who will act for those parties. It would be good to get an understanding of how robust the procedures within HMRC will be. 

9.45 am 

Many stakeholders have asked for a clear official explanation of the internal governance processes. Will the Minister address that suggestion in his comments to the Committee and his work with stakeholder groups after the Bill passes? Will HMRC issue comprehensive guidance to outline which situations will be tackled by the new legislation? Has consideration been given to what might be included in such guidance? If guidance will be issued, will the Minister give us an idea of the time scale he has in mind for publishing it? 

Finally, many people have asked for a formal review of the measures and how they will operate not only in HMRC but in the courts and the tribunal service. The Government response to the consultation used the usual formulation, and said that they keep taxation measures under regular review. However, I felt that it held out the possibility that HMRC recognises that the new rules are radical and remove substantial rights from taxpayers to deal with a real problem. I wonder whether that is a hint that the review will say something more than that they will keep everything under review, and that HMRC is looking at how the measures will be implemented. I want to get an idea from the Minister about whether that is wishful thinking on the part of those who want a review, or whether something is going on. 

The Exchequer Secretary to the Treasury (Mr David Gauke):  It is a great pleasure to serve under your chairmanship this morning, Mr Streeter. I thank the

hon. Member for Birmingham, Ladywood for her questions. She is right that it is incumbent on her to ask testing questions about this significant policy. I welcome the tone in which she set out her questions. She said she is supportive in principle, but she wants to understand the detail. I shall endeavour to respond to her concerns. 

Clauses 192 to 211 speed up the settlement of avoidance disputes by encouraging taxpayers whose avoidance scheme has been shown to fail in another party’s litigation to promptly settle their dispute with HMRC. Before I respond to the points that have been raised, I will set out the background. The Government have taken a firm line on tackling tax avoidance. It is not acceptable that a small but persistent minority try to find ways around our tax laws to avoid paying their fair share, especially at a time when the public finances are under considerable pressure. It is not right that would-be avoiders can frustrate efforts to resolve their cases, often spinning things out only to settle their case on the steps of the tribunal. These clauses introduce a follower notice that is designed to highlight the choice for taxpayers. 

Many avoidance schemes are marketed widely, often with minor variations. When HMRC wins a case, the tribunal or court’s decision and reasoning will in all likelihood decide the related cases as well. However, some taxpayers and their advisers do not see it that way, and argue that tiny differences in the arrangements mean that the judgment does not apply to them. They will now have to make a choice. If they decide to proceed with their case in the face of the evidence and the court’s decision, they run the risk of a penalty when the case is closed. If they can show that the grounds of their case were different, there will be no penalty. The penalty will be a percentage of the tax advantage wrongly claimed by the scheme user, but it will be substantially reduced if those involved decide to co-operate with HMRC to settle their case. 

I will now set out in more detail the changes made by the clauses and schedules. The first substantive clause—clause 197—sets out the circumstances in which a follower notice may be issued. Four criteria must apply, two of which I would like to emphasise. First, there has to be an open inquiry into a return or claim, or an appeal in progress. That is important, as the taxpayer involved will know that HMRC is challenging their tax return, so the process should not come to as a surprise to them. Secondly, the return, claim or appeal has to be made on the basis that a tax advantage is gained from a set of tax arrangements—in other words, that the taxpayer has used a scheme with the intention of avoiding tax. The policy is therefore about not routine inquiries, but taxpayers who have knowingly used schemes that they hope will reduce their tax bills, often by large amounts. 

Clause 198 sets out when a legal ruling can trigger follower notices. If a taxpayer’s scheme failed merely because he did not apply it carefully, that cannot trigger follower notices for other users. The ruling needs to be relevant, finding that the scheme was defective regardless of how it was applied and explaining why. If the appeal process has been exhausted, that ruling may be used as a basis for follower notices to be issued. 

Clause 199 sets out that a follower notice has to identify the judicial ruling on which it is based and to explain why HMRC believes that it is relevant. The notice must also set out the person’s right to object to the notice and the consequences of ignoring it. 

Clause 200 deals with a taxpayer’s right to ask HMRC to reconsider a notice. The purpose of follower notices is to discourage certain taxpayers from spinning out their disputes unreasonably with HMRC. One professional body recently said that HMRC 

“should be able to root out hopeless cases that clog up the system at the expense of the courts”. 

It also called for a formal appeal right, but allowing taxpayers to appeal against follower notices would simply exchange one dispute for another, which would not speed up the process at all. 

It is right, however, to provide a safeguard for taxpayers so that they can raise objections if they believe that a notice has been wrongly issued, so clause 200 allows a taxpayer to make representations about a notice within 90 days and requires HMRC to consider them. Having done so, if HMRC confirms the follower notice, the taxpayer is given a further 30 days to take corrective action. I reassure the Committee that HMRC will apply firm governance to such notices, which will be approved by senior officials in the organisation. 

Clause 201 applies a penalty if a taxpayer is served with a follower notice, but does not take corrective action within the specified period. The penalty is charged on the amount of tax advantage denied: the extra tax that becomes due, or the reduction in tax repayable, when the scheme is counteracted. That is defined in schedule 26, and there are special rules to deal with denied loss relief and with tax arrangements that purport to delay a payment or bring forward a repayment of tax. 

Clause 201 also sets out the steps that a taxpayer should take in response to a follower notice by making suitable amendments and contacting HMRC. 

Ian Swales (Redcar) (LD):  Some members of the Committee have received representations regarding retrospection. The Minister said earlier that none of the notices should come as a surprise to a taxpayer. Will he say more about retrospection and whether anyone who is about to be subject to a notice will not be expecting it? 

Mr Gauke:  As I said earlier, none of the notices should come as a surprise to taxpayers. We will no doubt turn to the issue of retrospection in greater detail when we discuss accelerated payments. We are presently debating situations in which there is a dispute between HMRC and a taxpayer when there has been a court or tribunal hearing against another taxpayer related to a similar scheme, and about HMRC being able to take action in respect of that so that the system is not clogged up. 

Nic Dakin (Scunthorpe) (Lab):  The Minister is explaining things well and comprehensively. Representations have also been made about appeals. He has spelled out clearly the actions that individuals can take on appeals, but will he pick up on whether independent appeal is appropriate? 

Mr Gauke:  I am grateful for that intervention. As the hon. Gentleman was kind enough to say, I am working through this in good order so, if I may, I will complete my run through of the various clauses before turning to various points, including rights to appeals, which he was right to raise because they are important. 

Ian Swales:  Perhaps I may clarify my question. Is anyone likely to get a follower notice unexpectedly? Will they already know that they are part of a scheme that may be subject to a follower notice? 

Mr Gauke:  As I said a moment ago, we are talking about cases in which there is an open inquiry into a return or claim, or an appeal in progress. The taxpayer will be aware of that open inquiry and that HMRC is challenging their tax return, so a follower notice really should not come as a surprise. I hope that my hon. Friend finds that reassuring. 

Charlie Elphicke:  Just to be clear, is it not the case that generally those people who receive follower notices have engaged in tax avoidance schemes? They knew what they were doing—they were playing with fire—they have been caught out and they are having the book thrown at them, so they are not really in a position to complain. 

Mr Gauke:  My hon. Friend puts it in characteristically punchy terms. I would say to him that taxpayers will be aware of a dispute. The purpose of these measures is to bring those disputes to a head and not permit those who have very similar arrangements to those found to have failed by a court or tribunal—we must remember that such schemes fail in the vast majority of cases when a court or tribunal looks at them—to drag proceedings out over a long period. 

Let me turn to clause 202, which provides that the penalty under clause 201 is set at 50% of the denied tax advantage. That is in line with the scale of penalties for inaccurate returns, which range from 30% to 100%, depending on behaviour. To encourage taxpayers to co-operate with HMRC to resolve their case, clause 203 allows the penalty due to be reduced to as little as 10% to reflect any co-operation. 

Clauses 204 to 206 are administrative provisions that detail the information that must be included in a penalty notice and the deadline for charging a penalty. They contain protections in relation to the amount of the penalty, including repayment by HMRC if the value of the tax advantage underpinning the penalty is changed. Clause 207 sets out the taxpayer’s right to appeal against a follower penalty. If a tribunal thinks that the basis of a follower notice is wrong, any penalty will be cancelled or reduced. 

Richard Fuller (Bedford) (Con):  I want to delve into the Minister’s mind on this issue. Are the Government proposing this complex range of measures because they are concerned about the backlog of cases and HMRC’s ability to deal with that, or because the Treasury believes that this is, in principle, a better way of managing such tax arrangements? 

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Mr Gauke:  We think it is not fair to the general taxpayer that those who have entered into tax avoidance arrangements that are very similar to others that have been shown to fail can drag on proceedings over a long period while a matter is being disputed when, ultimately, it is very likely indeed that they will lose. 

On the point about backlogs—I may return to this later—I would not want the Committee to be under the impression that this is simply a matter of HMRC not having the resources to deal with cases, meaning that a backlog is created. Such legal proceedings can be complex matters and the wheels of justice sometimes turn slowly. If a taxpayer is determined not to settle and looks for every opportunity to delay, the process can take a very long time. That enables the taxpayer to benefit, as they may hold the money for a considerable period. We will come to another aspect of that when we turn to accelerated payments, but it is right and proper that we deal with the specific problem of when people who have entered into arrangements similar to those that have failed even so continue to dispute the sum. At the end of the process, when we get to the tribunal, the taxpayer or the adviser often concedes at the very last minute. That involves a huge cost, including opportunity costs for HMRC, and gives that taxpayer an unfair advantage. I hope that I have been helpful in explaining the Government’s thinking. 

Richard Fuller:  That is very helpful, so I hope that the Minister will forgive my coming back another time. For those of us of a conservative disposition, any extension of the Executive’s authority in areas of the judiciary warrants a little more inspection. As I understand it, after a ruling has been made, the executive branch of HMRC will be able to apply it to other cases. There may be other aspects of jurisprudence in this country where that takes place, but what are they? I know that in environmental law there is deeming—because something has been followed, other cases should therefore follow—but it would be helpful if the Treasury commented on the fact that this is an extension of an executive branch into what the judiciary would otherwise determine. 

Mr Gauke:  It is difficult to come up with precise parallels because of the nature of the tax system. My hon. Friend mentions environmental law, but it is difficult to find an area other than tax in which there is such complex behaviour and where structures of great complexity can be created to give an individual a particular advantage. Rather than attempting to persuade him on the basis of parallels elsewhere in the legal system, I come back to the first principle: is it right that somebody who has arrangements that are designed to reduce their tax bill should be able to continue their dispute with HMRC even when the precedent has been set that they will lose? In such circumstances, I do not think it is right to permit that situation to continue, and I hope the Committee agrees. It is right that HMRC’s powers are extended so that it is able to address such circumstances, because that is fair for the general taxpayer. 

Clause 207 sets out the taxpayer’s right to appeal against a follower penalty. If a tribunal thinks that the basis of a follower notice is wrong, any penalty will be cancelled or reduced. Clause 208 introduces schedule 27, which provides rules to deal with the special nature of partnership returns. It specifies the penalty on partnerships and details how any penalty is divided between the partners. Clause 209 suspends the operation of follower notices if the taxpayer in the litigation on which the

notice relies is given late leave to appeal, meaning that the case cannot, for the moment, be regarded as final. 

Clause 210 and schedule 29 deal with transitional and consequential provisions. There have been comments about the measure being retrospective, but let me be clear that this is not retrospective legislation. It does not create any new tax liability; it simply creates an incentive to settle for those who are disputing their liability with HMRC, despite all the evidence showing that their case is unlikely to succeed. 

Ian Mearns:  In my role as a member of the Committee, I have been contacted an awful lot about this matter, but I do not think that I have been contacted by a single one of my constituents. I suppose that all hon. Members would want HMRC to ensure that, in pursuing such claims, we are not in any way creating more problems than we are solving. If an individual’s assets are tied up with a business that employs people, we would not want the pursuit of the assets to make life worse for those employees. I have received correspondence citing the potential for bankruptcy. Can we ensure that we do not create more problems than we solve in pursuit of the aim? 

Mr Gauke:  The hon. Gentleman raises an important point. Committee members have been lobbied hard about a number of the measures that we will debate this morning, especially regarding accelerated payments and, to some extent, follower notices. 

As someone who believes in lower taxes and—when the public finances permit—allowing people to keep more of their own money, thus putting in place an environment that is likely to lead to greater wealth creation, more business investment and so on, I hear the arguments that are made, but there is also an obligation on people to pay the tax due under the law. People may well say, “I’d be able to invest more in my business if I didn’t have to pay as much tax,” and that might be true, but they still have to pay the tax. That is a matter for the House and the Government, and people should pay the tax due under the law. Some people say, “I avoided tax some years ago and pay very little tax now, but now you are asking me to pay a tax bill and that will have an impact.” That may be the case, but the fact is that people still have to pay the tax, and all Committee members would probably agree about that. 

Ian Mearns:  To clarify the point, let me describe a scenario. If someone who avoided tax used the proceeds of that avoidance to invest in a business, meaning that the asset was entirely tied up in that investment—in capital equipment or the enlargement of a business premises—and the pursuit of that tax bill were harsh, the attempt to retrieve the debt in a short time could have a detrimental impact on the running of the business, and perhaps on the livelihoods of people who had no part in that avoidance. 

Mr Gauke:  The hon. Gentleman makes a perfectly reasonable and practical point. I should not be surprised if we returned to this issue on the debate on accelerated payments, but let me make two points in response, about practical enforcement of the new powers. 

First, in certain circumstances HMRC enters into and operates a time-to-pay arrangement with taxpayers, to allow them additional time in which to pay off a debt. That is a sensible, practical response to particular circumstances. There is no reason why the time-to-pay arrangements could not also apply in the circumstances that we are talking about. 

People sometimes ask for a guarantee that HMRC will not bankrupt any taxpayer as a consequence of such powers. I simply cannot give that assurance; to do so would be dangerous and would undermine the effectiveness of the policy. I have no doubt that people would then make arrangements so that the only measure available to HMRC in pursuit of the debt would be to issue a bankruptcy order. If I said, “HMRC will not issue a bankruptcy order,” we can quickly guess that that will have a behavioural impact. We may return to this issue in the debate about accelerated payments, but I am happy to put that point on the record now. I hope that hon. Members can understand precisely why HMRC should not have its hands tied in these circumstances. 

Ian Swales:  I thank the Minister for giving way again—this might be the wrong time to raise this point, but I think it follows on from what the hon. Member for Gateshead said. We are all getting representations, and the largest number concern one of the sins of our fathers: the Finance Act 2008. It effectively went retrospectively into arrangements that many contractors and others were using in the period up to 2008. The nub of many of the criticisms of what we are doing this morning concerns that retrospection. The 2008 Act effectively caught out a load of people from before then. Does the Minister agree with that analysis and does he believe that special arrangements should be made for those who were doing something in good faith that, at the time, did not appear to be against the law, even by HMRC’s own analysis? 

Mr Gauke:  The hon. Gentleman leads me into another area, but it is perfectly reasonable for him to raise that point. There is no doubt that those who campaigned against section 58 of the 2008 Act have also taken the opportunity to highlight this issue. It has been a long-standing campaign in the context of the further powers contained in the Bill. The point I would make with regard to the 2008 Act is on the record. I raised significant concerns about the action taken by the previous Government at that time. We must also remember that, since then, those who used what was undoubtedly an aggressive tax avoidance scheme and clearly a contrived and artificial arrangement took their case for judicial review. They argued that HMRC and the previous Government had acted unreasonably. The courts took the view that that was not the case and that exceptional circumstances applied. 

In the light of that decision, the Government have not abolished section 58. We believe it is reasonable for it to remain, in the light of where we currently are. Notwithstanding the sometimes impassioned lobbying we have received, it is right for us to put in place legislation that fundamentally ends the use of some of these aggressive and contrived tax avoidance schemes. The measures before us, along with those we will debate later this morning, clearly represent a comprehensive set of policies that will result in a lot fewer contrived

and artificial avoidance schemes of the kind that so irritate, annoy and anger the vast majority of our constituents. We are already seeing a significant decline in the use of tax avoidance schemes compared with where we were six years ago, but these measures will continue to assist us. 

Ian Mearns:  I am grateful to the Minister for giving way; he is showing his usual generosity. On the issue of bankruptcy, there will be cases where there is a fine balance. I am quite happy for HMRC to go down that route when there is no alternative; however, there can be a risk of forgoing other tax revenue. For instance, declaring an individual bankrupt means closing a business and losing income tax revenue from perhaps two or three employees, as well as the VAT generated by the business. There are some fine balances to be considered. One would hope that such circumstances would be closely looked at, to ensure that we are not robbing Peter to pay Paul. 

10.15 am 

Mr Gauke:  I understand precisely where the hon. Gentleman is coming from. The points he raises are not unique to these powers—[ Interruption. ] He nods in assent. HMRC’s record over recent years in the judgment it has shown in granting taxpayers additional time to pay has, by and large, been extremely good. Large numbers of businesses have benefited from those arrangements. I suspect that many members of the Committee can think of examples in their constituencies where businesses have been granted time to pay. 

However, there comes a point when if a business is viable only if it consistently pays tax late, it could be described as “not viable”. A fine judgment has to be made. The hon. Gentleman’s points are reasonable. There is no reason why time-to-pay arrangements in respect of this matter would not be available. I stress that I do not desire and I do not believe it would be sensible—in respect of these or other powers we will debate this morning—to tie HMRC’s hands, so that it does not have access to the full insolvency powers that it would in a normal case. 

David Rutley (Macclesfield) (Con):  I welcome the Minister’s important points. We have corresponded about a case in my constituency. Does he recognise that some companies have perhaps not been given the best advice on tax arrangements and are now in a difficult position? The hon. Member for Gateshead made the point that bankruptcy is not the optimum outcome in many of these situations. Will the Minister assure the Committee that he and HMRC will make every effort, if not to be sympathetic, then at least to ensure that appropriate arrangements are put in place for such payments? 

Mr Gauke:  My hon. Friend makes an important point. I know he has been assiduous on behalf of his constituents who may be affected by some of these measures. He makes an interesting and valid point that in some circumstances the taxpayers have perhaps been guilt of naivety. However, a lot of the culpability for their difficulties may well lie with their advisers and promoters of these schemes, who consistently say, for example, “This has all been signed off by HMRC;

there’s nothing to worry about,” “It’s all absolutely fine; there’ll be no problems with the scheme,” or, “You don’t need to worry about paying tax; HMRC won’t cause you any difficulties whatsoever,” when they know, or should know, that this will be a disputed and controversial matter that is likely to drag out for many years. I have had representations from people who deeply regret becoming involved in such schemes. In some cases they are angry with the Government for taking steps to address the matter, but they are also very angry with the promoters who led them into this area without giving them full information or explaining exactly what the risks were. That is why we are determined to deal with those promoters. 

Chris Heaton-Harris (Daventry) (Con):  Following on from that point, two of my constituents came to see me who were wary about a product they had been told about that was too good to be true, although the scheme was supposedly registered with HMRC. They therefore took out an insurance product in case it turned out to be too good to be true, which is common across a swathe of this industry. On thing they were concerned about is HMRC’s efficiency at notifying people if, at the end of the day, the scheme is not right and a certain amount of tax is liable, which would trigger their insurance policy. Does the Minister have any words for the Committee to reassure my constituents that, should that happen, HMRC will be effective in issuing notice? 

Mr Gauke:  I am grateful to my hon. Friend, who used an important phrase when he said that the schemes appear to be “too good to be true”. Often, that is exactly right. It might be more appropriate to discuss his important point about the administration of these matters in our debate on accelerated payments, but it is right that HMRC administers these powers effectively. I will say a little more about that in a moment. 

As we have heard, this measure was subject to two consultations. The first was the policy consultation entitled “Raising the stakes on tax avoidance”, which ran for eight weeks in August to October last year and generated 31 responses. It was shorter than the standard length, to ensure time to digest the responses before the autumn statement. The second was the consultation on the draft legislation, which ran for four weeks in January and February this year, to which there were 22 responses. The response periods were shorter than normal because we were keen to ensure that we could progress this matter on a Budget timetable and make it part of the Finance Bill. HMRC made every effort to ensure that anyone who wanted to make a comment was able to, and it continued to accept responses and meet with concerned parties after the consultation formally closed. 

The majority of those who responded agreed that delaying the settlement of cases involving failed schemes is a problem that needs to be solved. Some commentators felt the first draft of the Bill was not sufficiently focused on schemes shown to fail and would allow HMRC to issue follower notices after winning any litigation about avoidance. The Bill was amended to make it clear that that will not be possible and that notices can be issued only when a scheme has been shown by the courts not

to work. However, avoidance disputes that get to the tribunals or courts are largely decided in HMRC’s favour, and taxpayers in that position must be encouraged to settle their cases and not drag them out in hope of a more lenient offer. 

The hon. Member for Birmingham, Ladywood made a number of important points, which I will address. She probed the idea of using first-tier tribunals for creating a precedent. HMRC wins an overwhelming majority of avoidance cases at tribunal, and most taxpayers who lose accept the tribunal’s decision and do not take their case further. Therefore, in most cases the first-tier tribunal settles the matter. However, if a case is appealed further, follower notices cannot be issued until the litigation is finally settled in HMRC’s favour. Excluding first-tier cases would remove an important source of judicial decisions and might lead to taxpayers deliberately avoiding an appeal against and adverse judgment, so it could not be used to generate follower notices. 

The hon. Lady asked why there is no right of appeal against a notice. The purpose of the measure is to release the logjam and speed up the resolution of slow cases. Creating a right of appeal against a notice would simply clog up the process and not deliver a saving. Taxpayers will be able to require HMRC to reconsider any notice that they receive. There will be a full right of appeal against any penalty issued and against any amendment made to the taxpayer’s return if the taxpayer does not amend it himself. HMRC will be ensuring strict governance over the issue of notices, which will have to be authorised by senior leaders. 

That takes me to HMRC’s internal process. Taxpayers will still be able to continue their appeal against their tax liability if they disagree with a follower notice. Taxpayers who disagree with a notice can request HMRC to carry out a formal review, which will be carried out by an independent person within HMRC who did not take part in the decision to issue a notice. They will review the facts of the case and decide whether it was reasonable to issue the notice in those circumstances. 

If the taxpayer does not ask for a review, or if HMRC upholds the notice, they can choose not to make the amendments to their return. They can then appeal in the normal way against any assessment or amendment to their return by HMRC to recover the tax. Taxpayers will be able to appeal against any penalty that they are charged. 

Shabana Mahmood:  Will those independent individuals reviewing the decision about the follower notice be from within the same team of HMRC officials that look at these cases, or will they be from a different team? 

Mr Gauke:  HMRC recognises that powers must be applied consistently and fairly for all taxpayers, and clear governance will be established. A clear separation will be established so that reviews of follower notices will be carried out independently of the original issuing team. Clear internal guidance and training will be provided to HMRC senior officials to ensure complete understanding of how to apply the rules. I hope that provides the hon. Lady with a degree of reassurance. 

I will return to first tier tribunal decisions and whether they are always clear, because a point was raised about the CIOT’s suggestion that it would be better if tribunal

judges declared relevant points of law. HMRC will have to consider a wide range of factors, including the nature and clarity of the tribunal’s decision, before deciding whether the case should be treated as a relevant judicial ruling. HMRC will not do so if the follower notices issued were not soundly grounded in a good case. The purpose of the measure is to push cases through the system quickly and speed up their resolutions. Extra requirements at tribunal could blunt the measure and slow things down and, as I said, HMRC will issue notices only if a decision is clear. 

A couple of hon. Members raised the scale of the issue. The published tax information and impact note sets out that 43,000 payment notices will be issued. It also provides detail about how much money relates to followers and how much to the general anti-abuse rule and disclosure of tax avoidance schemes measures. The number of taxpayers involved is 65,000; the vast majority of schemes are used by more than one person or business. 

HMRC’s resources were also raised as an issue. In November 2013, HMRC created a new counter-avoidance directorate to bring together all marketed avoidance work in one place. The directorate is mainly made up of departmental resources that were already working in the marketed avoidance area rather than additional resource, but about 100 of its 850 people will be funded from new money announced by the Chancellor at the Budget to deliver accelerated payments. We do not believe there will be a detrimental impact on HMRC’s other operations. HMRC expects to issue guidance for comment shortly, and it will be finalised in time for Royal Assent. 

10.30 am 

I have already touched on whether the measure is retrospective. It is not; it does not create new liability to tax. HMRC will be able to issue follower notices to cases on hand only once the courts have shown the avoidance scheme to fail. In other words, the tax is already due and it is not right that a minority can delay payment even longer. 

The clauses and schedules we are debating constitute a major new development in the Government’s continued fight against tax avoidance. If someone wants to string out a dispute with HMRC, even though a court has shown their scheme to fail, they are still at liberty to do so. However, if they cannot satisfy a tribunal or court that their case is really different, they will face a penalty for not settling promptly when given the chance. I believe that that approach is right and fair—fair to the millions of taxpayers who pay their tax on time and expect others to do so. The Committee has scrutinised the measure closely this morning, but I hope it will support these clauses and schedules and that they stand part of the Bill. 

Question put and agreed to.  

Clause 192 accordingly ordered to stand part of the Bill.  

Clause s 193 to 202 ordered to stand part of the Bill.  

Schedule 26 agreed to.  

Clause s 203 to 208 ordered to stand part of the Bill.  

Schedule 27 agreed to.  

Clause s 209 to 211 ordered to stand part of the Bill.  

Clause 212 

Circumstances in which an accelerated payment notice may be given 

Mr Gauke:  I beg to move amendment 32, in clause 212, page 141, line 3, leave out “tax”. 

The Chair:  With this it will be convenient to discuss the following: 

Government amendments 33 and 34. 

Amendment 56, in clause 212, page 141, line 35, at end insert— 

‘(8) The Chancellor of the Exchequer shall, within six months of this Act receiving Royal Assent, publish a post implementation review.

(9) The Review referred to in subsection (8) above must in particular examine—

(a) the total number of accelerated payment notices issued;

(b) the number of accelerated payment notices issued to cases involving a disclosure made under DOTAS prior to the Act receiving Royal Assent,

(c) the total revenue collected through accelerated payment notices;

(d) the total revenue collected through penalties arising as a result of accelerated payment notices;

(e) the number of representations made to Her Majesty’s Revenue and Customs following the issuing of an accelerated payment notice;

(f) the number of accelerated payment notices that have been subsequently withdrawn;

(g) the financial consequences resulting from the issuance of accelerated payment notices for the businesses and taxpayers involved.

(10) The Chancellor of the Exchequer must publish the report of the review and lay the report before the House.”

Clause stand part. 

Clauses 213 to 221 stand part. 

Government amendments 36 to 38. 

That schedule 28 be the Twenty-eighth schedule to the Bill. 

Government amendment 35. 

Clause 222 to 226 stand part. 

Mr Gauke:  Before I address the amendments in detail, I think it would help the Committee if I set out what the legislation is about and why we are introducing it. Some of that is, of course, common to the debate we just had on follower notices. I suspect that a number of points that we have debated apply even more to this debate, and I may well make similar points during it. 

Clauses 212 to 226 introduce the accelerated payment rules. They set out circumstances in which an accelerated payment notice may be issued, including where a follower notice, which we have just debated, has been issued, together with the consequences of a notice being issued. 

As I have already said, this Government have taken a robust line on dealing with tax avoidance. It is not right that would-be avoiders can hold on to the disputed tax while their—often highly contrived—attempts to avoid tax are concluded. 

The majority of taxpayers have all their tax taken at source under PAYE, and they do not see any reason why suspected avoiders should benefit from holding on

to their money. There is no principle in our tax system that disputed sums should necessarily be held by the taxpayer rather than the Exchequer, and there are a number of examples to demonstrate that this is not always the case. Perhaps unsurprisingly, some of those affected by the measure—the taxpayers involved and those who advise them—have been vociferous in their opposition. I know that Committee members will have received many representations, not necessarily from their constituents but from those who might be affected by the measure. I will attempt to address their concerns, although I must say that some of the points that have been made are as contrived and artificial as the tax avoidance schemes that have been used. Let me be clear where the Government stand: the Government have closed many tax loopholes but have also made the tax system more competitive. They expect people to pay the tax due rather than search for increasingly obscure ways of avoiding their obligations.

I have certainly had a lively postbag and there has been some active commentary on social media. Indeed, I am struck by the number of people willing to admit openly that they are or have been involved in tax avoidance, and who then object—albeit anonymously on some occasions—to something being done about it. I have also had letters from businesses claiming that making these payments will harm their ability to maintain and invest in their business, a point made by the hon. Member for Gateshead. Let me repeat what I said earlier: as a Government, we have put in place a very attractive environment for business investment. We also expect people to pay their taxes. Of course, lower tax bills can increase business investment but that is a matter for this House, taking into account the state of the public finances. That does not in any way excuse aggressive tax avoidance. 

Chris Williamson (Derby North) (Lab):  Will the Minister reassure the individuals who have been lobbying me and, I am sure, other members of the Committee, and who have said—not all of them, but a number—that the retrospective nature of the APNs will result in them going bankrupt? Is that correct? 

Mr Gauke:  I am not sure whether the hon. Gentleman was here earlier for my exchange with the hon. Member for Gateshead, but it is a perfectly relevant point. HMRC operates a time to pay arrangement, allowing people who will ultimately be in a position to pay any tax debt additional time to pay it. There is no reason why time to pay arrangements should not apply to circumstances covered by the measures in front of us. However, it would be a grave mistake to tie HMRC’s hands and say that it will in no circumstance bankrupt someone as a consequence of the powers we are debating. What would happen quite quickly, I suspect, is that people would make arrangements so that the only enforcement action available to HMRC in respect of these measures would be bankruptcy. I will certainly not tie HMRC’s hands. It needs to have access to all the usual insolvency powers for these powers to be effective. However, I put on record the fact that HMRC has time to pay arrangements for those who are constructively engaged with it and who are looking to pay off their tax debts in a constructive way but are constrained by cash flow matters. That is a perfectly reasonable approach. 

Ian Swales:  The Minister talked about the fairness of people who pay through PAYE as opposed to having these arrangements and the principle of there being no reason why HMRC should not have disputed money while it is being disputed. I am sure that you will not permit a long answer, Mr Streeter, but can the Minister say whether he intends to extend that principle into the world of corporate tax, because the same point could be made in that regard? 

Mr Gauke:  My hon. Friend raises an interesting point. Although I am not privy to any confidential information, as I am sure he would expect, I understand that, as a matter of practice, often in a dispute HMRC does hold that money and that when such a matter is resolved, the large corporate does not necessarily have to make a payment. That does not happen in every case, by any means—I do not want to give the impression that it does—but sometimes that is so. My hon. Friend raises an interesting policy point. 

There is clearly vociferous opposition to the measure. However, it is worth noting responses from professional bodies and larger firms, which I am encouraged by, which agree that this problem must be tackled. I am sure that the vast majority of the tax-paying public also agree, especially when they see reports of court decisions, setting out the elaborate contrivances that some people employ to avoid paying their fair share or to delay the inevitable for as long as possible. 

Understandably, the public are shocked to see those who can afford to pay trying to dodge their tax, passing the burden on to the majority, and they expect us to put a stop to it. We have consulted on the measure and I acknowledge that some respondents have raised important concerns. As I said in an earlier debate, I want to make it clear that this is about tackling tax avoidance. We do not intend the measures to be any wider. We have carefully considered the comments received and I have asked HMRC to ensure that there is active consultation on the published guidance, to ensure that the important issues raised are dealt with in that process. Dialogue is important on such a measure and I want it to continue as the measures start to take effect. As I said before, we share the agenda with the business and professional bodies, which want to eradicate such behaviour, and I want that to continue. 

The essence of our message is that the Exchequer has waited long enough for this money. The overwhelming evidence of the last few years is that disputes reaching the tribunals and courts decide against the taxpayer and many more taxpayers see the writing on the wall and concede the position before going to the expense of formal hearings. That sends a clear signal to those who may have thought they would never have to pay this money: they are likely to be wrong and should start making provision to pay their tax right now if they have not done so already. I make no apology for these tough measures; they are justified to tackle the behaviour of a persistent minority and I believe that the vast majority of taxpayers will support us for taking these steps. 

Duncan Hames (Chippenham) (LD):  No one likes to wait for money that is due to them. How long will the taxpayer expect to wait for their money to be returned to them, in the event that it has been collected through advance payment, but HMRC is unsuccessful in a tax tribunal? 

Mr Gauke:  My hon. Friend asks a good question. That will depend upon the progress of the tribunal case. The taxpayer will, of course, be in the driving seat and will be able to progress his or her case to the tribunal. It is right that HMRC properly engages and it is certainly right that it does not engage in any delaying processes. HMRC needs to see full documentation before a case is ready to go to court. However, where the taxpayer has paid as a consequence of the measures, but continues to dispute, as they are more than entitled to do, it is clearly in the interests of the taxpayer to progress the case to tribunal and right that HMRC also takes the steps necessary to get to a tribunal. I would hope and expect that, once a decision has been made at the tribunal that is adverse to HMRC, there would be a very short period from that decision being made to HMRC paying over the disputed sum to the taxpayer. I think that that is only right and proper and I hope that that reassures my hon. Friend. 

10.45 am 

Let me set out in more detail the changes made by these clauses and the schedule. The clauses require taxpayers involved in certain types of avoidance dispute to pay over the tax that is being disputed while the dispute continues. They will have held the money for long enough by that point. Clause 212 sets out the circumstances in which an accelerated payment notice can be issued. There has to be an open inquiry or appeal, and it has to concern a dispute involving one or more of: a follower notice, a scheme disclosed under the disclosure of tax avoidance schemes—DOTAS—rules or a scheme being challenged under the general anti-abuse rule, the GAAR. 

We have already talked at length about the rationale behind the follower notices. Let me take the GAAR next. We introduced the GAAR last year and have recently expanded it to cover national insurance contributions. From what I hear, it is having the effect that we want, dampening the enthusiasm for abusive tax avoidance schemes. It seems entirely appropriate that where we are looking at the most abusive schemes, we should require the taxpayer to pay up front. Very few people disagreed with us on that point in the consultation, and I was happy to take on board the suggestion that taking account of the advisory panel’s opinion should be written into the legislation. I am grateful to those who made that very helpful suggestion. 

The final criterion is DOTAS, and in this case there was a wider range of views. Let me set out our thinking. First, DOTAS is clear and objective: the scheme has been disclosed and allocated a reference number and the taxpayer has been told about the disclosure and number. That is clear and easy to apply. Secondly, DOTAS is about tax avoidance schemes. I know that there are concerns that some people disclose arrangements just in case they might fall into DOTAS. I am pleased that they do so, and they should carry on doing so. Where there is no extra tax to pay, HMRC will be able to agree that fairly quickly and there will be no accelerated payment. It will, of course, be in the interests of advisers and taxpayers to provide complete information to HMRC as soon as possible. 

I have been very disappointed by the assertions made in a number of letters in my postbag. They claim that HMRC will have almost unfettered power to demand

what they describe as arbitrary sums of tax. That objection is misconceived. Taxpayers and their advisers need to work with HMRC to get to the right figure of disputed tax, but where that co-operation is not forthcoming, HMRC will have to take the decision. I know that robust governance is being put in place by HMRC requiring scrutiny at senior levels. HMRC takes its responsibility very seriously in this regard. I am also aware that this measure may be seen as penalising those who disclose against those who do not. Let me be clear: we will take robust action against those who choose not to disclose when they should. Our new measures against high-risk promoters, which we will come to shortly, will be part of tackling that behaviour, and in the summer we will consult on further improvements to DOTAS. 

Nic Dakin:  One of the representations that came across my desk argued that the changes to DOTAS will have the unintended effect of pushing people away from openly declared and transparent tax planning mechanisms towards the more secretive area that the Minister is about to speak about. I would be interested to hear his direct response to that point. 

Mr Gauke:  I take on board what the hon. Gentleman says. We have toughened up the DOTAS regime, and we are also looking to consult over the summer on a strengthened DOTAS and on what may be needed further to strengthen the regime’s effectiveness and compliance with it. The best response to the concern that the hon. Gentleman raises is to ensure that the consequences of failing to comply with DOTAS become ever more significant. I hear his argument, but I am not persuaded by it. 

Christopher Pincher (Tamworth) (Con):  Does the Minister recognise that since fines for non-disclosure were significantly increased from £5,000 to £1 million, a lot of people have over-disclosed on the advice of their tax advisers and erred on the side of caution? Is there not a danger that these arrangements will penalise people who try to be honest and drive them and others to be less than honest in future, as the arrangements are seen to be unfair? 

Mr Gauke:  I shall make two points in response to my hon. Friend. The first is one that I made a moment ago: disclosure under DOTAS does not necessarily mean that someone will be affected by the accelerated payments regime. HMRC will look at the particular scheme and assess whether it is effective. There may well be circumstances in which HMRC will look at a particular scheme and say, “A DOTAS disclosure has been made, but as far as we can see this scheme is entirely consistent with the law. It is effective and there is no tax under dispute, so no accelerated payment will need to be made.” If there is no tax under dispute, there is no accelerated payment. 

The other point that is worth bearing in mind is that the trend for DOTAS disclosures is a significant fall, and all the evidence suggests that that trend has been driven not by concerns about accelerated payments, because it was in place before that policy was announced, but due to the fact that not as much aggressive tax avoidance is being undertaken as a few years ago. The measures that the Government have taken are successfully

changing behaviour, and there are instances of the promoters of tax avoidance schemes declaring that they are ceasing their business because the environment is no longer favourable for them. Taxpayers are changing their attitudes as well, as there is much less appetite for aggressive tax avoidance, and I think that the whole Committee would welcome all that. I hear my hon. Friend’s concerns, but all the evidence suggests that we should not be over-concerned about precautionary disclosures under DOTAS. In truth, they are unlikely to result in any tax dispute. 

Charlie Elphicke:  Does the apparent reduction in tax avoidance indicate not only that the Government have changed the law to take the battle to the tax avoiders, but that they have already sent important behavioural and social messages about what is acceptable and unacceptable in the post-2008 world? 

Mr Gauke:  That is an important point. It has been clear since the Government’s first year in office that there was great focus on this area and a great determination to deal with the situation. There has also been a change to the general public mood, and my hon. Friend is right to highlight 2008 as a time when the public finances faced great challenges. Aggressive, contrived tax avoidance schemes are seen as much less socially acceptable than was once the case. 

I return to how the measure will work and the criticisms that have been made of it. Many of those who wrote in claimed that it was retrospective, because it will apply in cases when there has already been disclosure under DOTAS. We are clear that the legislation is not retrospective. It does not change anybody’s tax liability, but it changes who holds the tax during an avoidance dispute. As I said earlier, the taxpaying public is entitled to ask why tax avoiders should hold on to their money for far longer than the majority who pay their tax through PAYE. 

Chris Williamson:  I appreciate that clarification, but will the Minister give us a little more information? If the dispute is found in favour of the person who was previously perceived to be avoiding tax, will they receive any compensatory additional payment from HMRC? 

Mr Gauke:  They will receive the original tax back, with interest, which is fair. It is absolutely right that interest is paid. The hon. Gentleman’s body language suggests that he assents to that approach. I have learned during our proceedings that it is always worth watching his body language. 

Clause 213 explains how a notice is given during an open inquiry, while clause 214 does the same when there is an open appeal. Clause 215 sets out how the taxpayer can make representations. During our consideration of follower notices, we debated why there is no formal appeal to a tribunal. Such a process would involve simply contesting the substantive point at issue, which is not what the measures are about. The same is true for accelerated payments. As I have said, the key is for taxpayers and advisers to provide full and early information so that we can get to the right amount. 

Clause 216 sets out what happens when a notice is given during an open inquiry. The accelerated payment is a new form of payment. It will be treated as a payment on account of the final liability, which means that interest will stop running on the amount paid from the date that the taxpayer pays it over. This is emphatically not any form of determination of the final tax liability, which will still be subject to all existing appeal rights. If the taxpayer is ultimately successful, they will get a repayment, with interest, just like the vast majority who have to reclaim any tax they think they are owed. Clause 217 does the same for an open appeal. In an appeal, the change we are making means that it will no longer be possible to postpone the tax in dispute in these types of case. 

Clause 218 is a precautionary power in circumstances when HMRC has concerns that the tax in dispute might be lost following a tribunal or court decision in the taxpayer’s favour, but if it is appealing to a higher court. HMRC can therefore apply to the court to retain the tax in dispute. 

Clause 219 introduces a late payment penalty in connection with an accelerated payment. The structure and rates are based on existing late payment penalties under tax legislation. If the tax is under appeal and no longer postponed, the position follows existing rules for the tax concerned. Clause 220 sets out what happens if circumstances change and HMRC reduces or withdraws a payment notice. Any amount overpaid will be repaid with interest, along with any penalty that was paid in respect of the repaid amount. There are special adaptations of the rules under clauses 223 and 224 to cover stamp duty land tax and the annual tax on enveloped dwellings, and in schedule 28 to deal with partnerships. 

I know that the hon. Member for Erith and Thamesmead will speak to amendment 56, which she tabled, but I hope that she will forgive me if I make a few pre-emptive remarks about it. She is right to highlight the importance of the implementation of this measure to its success, and I can assure her that HMRC has been working extremely hard to ensure the policy is implemented as planned, and that the first payment notices are on track to be issued shortly after Royal Assent. 

I do not agree that the hon. Lady’s amendment is necessary or would add anything to the success of accelerated payments, however. To begin with, six months would be a very short time in which to review the policy. Taxpayers will have 90 days to respond to the notices and it would be hard to produce a meaningful analysis of the impact on a taxpayer of receiving a notice in such a short time frame. It is unlikely that we would see any real impacts that quickly and I do not believe that we would gain any real insights from producing such a report. 

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Secondly, the assessment of the impacts has already been made public in the Budget documents, and the tax information and impact note and policy costings documents that were published alongside them, in March. Those documents set out that payment notices will be issued to 33,000 individuals and 10,000 corporates, which will cover about £7.1 billion of tax under dispute. They also set out that the mean gross income of those individuals who will receive notices is £262,000—more than nine times the average for the wider income tax paying

population. The average gross profits of businesses that are set to receive notices is £545,000. We have also set out that the vast majority of notices are expected to be issued over the 18 months following Royal Assent. That information and much more is already in the public domain, so I do not think that reporting again so soon after the event would add any real value to the debate. 

Thirdly, as for other areas of delivery, HMRC will publish information on the implementation of the policy. It is still determining exactly what figures will be published and at what intervals, but I assure the Committee that it will be transparent about how the measure has been implemented. 

For all the reasons I have set out, I do not believe that producing a report that will distract HMRC from the key job of delivering the policy would be beneficial. I pre-emptively thank the hon. Member for Erith and Thamesmead for her contribution, but I hope that she will not press amendment 56 to a Division. 

Government amendments 32 to 38 correct the unintended effect of using a definition contained in the follower notice provisions. That definition of “tax arrangements” requires that the main or a main purpose of the arrangements is to gain a tax advantage. That requirement has been taken through into the accelerated payments legislation and, in particular, the DOTAS criterion. However, the intention is that DOTAS should be an objective criterion. In order to be disclosed under DOTAS, arrangements will already have been through a number of tests and filters, including one to the effect that the main or a main benefit is to secure a tax advantage. Therefore, adding a further test is unnecessary and takes away from this being an objective test that is simple to apply and understand. The amendments deal with that and tidy up how the definitions sit together. 

The Government recognise that the changes are significant. As I said earlier, we have consulted on the detail, receiving more than 800 responses. In our debate on the previous group, I explained the changes we were making through those provisions, and this aspect of the Bill makes a change so that the rules can apply only when the GAAR advisory panel has given its opinion that the arrangements are not reasonable. 

Several further concerns have been raised, chief among which is the lack of a formal appeal right. As I explained earlier, that would simply involve arguing the substance of the case at a different stage and would significantly weaken the impact of what we are trying to do. 

We estimate that accelerated payment notices relating to existing avoidance cases currently under dispute will be issued to approximately 33,000 individual taxpayers, concerning £5.1 billion of tax under dispute, and to around 10,000 corporates for £2.1 billion of tax under dispute. The vast majority of notices are expected to be issued over the course of 2014-15 and 2015-16 and, of course, notices relating to new avoidance schemes will be issued in future years as the need arises, although a key part of our drive to tackle avoidance is to stop such schemes from being promoted and used in the first place. 

As I said, this is a major new development. If someone tries to avoid tax, the likelihood is that they will fail, but if they want to try, the Exchequer will hold the money while the matter is sorted out. That is the right and fair approach, and it is fair to the millions of taxpayers who pay their tax on time and expect others to do the same. 

Teresa Pearce (Erith and Thamesmead) (Lab):  It is a pleasure to serve under your chairmanship, Mr Streeter. I had six pages of questions to ask, but in the light of the Minister’s comments and responses to hon. Members’ interventions, I will pick through them to find those things on which I still need to press him. 

In my previous life before my election to the House—sometimes it seems a long time ago—I worked for HMRC and then for the tax investigations department of one of the big four, so I have been poacher and gamekeeper and have seen this problem through 360°. I do not by any means defend aggressive tax avoidance, but certain aspects of this legislation concern me. I am worried that it might not work or be necessary, so I would like some reassurance from the Minister. 

My first concern is about retrospection. Businesses need a level playing field and certainty, but retrospection is something that makes people in business very nervous. The Minister says—I understand him—that no one’s underlying tax liability is being changed, but the legislation changes the code of practice under which businesses thought they operated with HMRC. The definition of retrospection is to change the legal consequences of actions that were committed, or relationships that existed, before the enactment of a law, and that is exactly what this legislation does. I agree that it might not change an underlying tax liability, but it changes the consequences of actions. 

I am especially worried about those who have submitted applications to postpone tax. Such postponement will have been agreed by HMRC some years ago, but now it will be withdrawn, which is clearly retrospective. The changes will apply to all tax arrangements registered under DOTAS since 2004. I worked for one of the big four when DOTAS came in, and I thought it was a marvellous idea. It has helped HMRC tremendously to investigate tax avoidance schemes. Previously HMRC would have to wait until a return was in before looking at a scheme and trying to work out what it meant, meaning that it would be years before it could be unravelled, but now it has advanced notice and can do things in a timely manner. 

It is not only my interpretation that the legislation is retrospective, but that of the Treasury Committee. The Chartered Institute of Taxation, the Law Society and several well-respected chambers have said that they find the legislation’s retrospective element unacceptable. I agree with the legal profession that there is a retrospective element. If the Minister and the Government are trying to change behaviour, surely they cannot change behaviour in the past. They need to change it going forward, but the retrospective element will not do anything about that. People cannot change what they have already done, but they can change what they will do in the future. 

I was interested in what the Minister said about the reduction in aggressive tax avoidance. One of the reasons for that might be adverse publicity and changes in public opinion. At one time, people thought, “Well, we would all pay less tax if we could,” but now people do not think that—I am glad they do not. People think that they should pay the right amount of tax at the right time. I agree with that, but dealing with that retrospectively is a dangerous path. I would like more reassurance from the Minister about why he feels that it is necessary, for particular cases, retrospectively to change an agreement

that was reached with HMRC. HMRC already has powers to link a taxpayer’s arrangements to a lead case, so I am not sure why some elements of the legislation are needed. 

I hope the proposal works—I want it to work—but I am not convinced that it is the right way forward. Has any research been carried out into behavioural changes that might push companies away from disclosed schemes towards much more risky undisclosed schemes? Has any view been taken of how many inspectors will be needed to issue accelerated payments and go after them, rather than looking into the wider tax gap and the black economy? 

Time to pay arrangements can be restrictive. Normally, only a matter of months are allowed, not years. When a retrospective payment has to be made, will any guidance be given to the collector and HMRC about whether there will be more time to pay than is currently the case in most cases? Finally, has HMRC budgeted any money to contend with the number of judicial reviews that are expected to arise from this legislation? I hope that the Minister will be able to respond to my points and reassure me that, if the legislation proceeds, it will do what it is meant to do and close the tax gap. 

Charlie Elphicke:  I rise to oppose amendment 56, and start with a quote from the obituary of Lord Templeman, who passed away recently: 

“He was promoted to the Court of Appeal in 1978, where he gained a reputation, among other things, for his implacable opposition to artificial tax avoidance schemes—although as a QC in the 1960s his practice had involved helping some of his clients to avoid estate duty. ‘Every tax avoidance scheme involves a trick and a pretence,’ he said later. ‘It is the task of the Revenue to unravel the trick and the duty of the court to ignore the pretence.’” 

As a former tax lawyer, I humbly follow in the steps of Lord Templeman. 

The hon. Member for Erith and Thamesmead talked about the important point of retrospection which, traditionally, we go back to seeing in the light of Adam Smith. The Treasury Committee has also raised criticisms on the grounds of retrospection. Adam Smith said that the principle is that every tax that 

“each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought…to be clear and plain to the contributor and to every other person.” 

That goes to the heart of whether money should be handed over to the Revenue pending determination. 

The history of retrospection before this House was well elucidated by my predecessor, Lord Rees, who, as Peter Rees, was Member of Parliament for Dover and Deal. He said that there needed to be a precise warning to the House regarding retrospection because a mere suggestion was not enough. He said that provision needed to be clearly directed, legislatively appropriate and, in essence, to involve a level of certainty. My concern is that whenever we talk about retrospection, we talk about the avoidance of taxation, Parliament’s intention being undermined, and retrospection being needed to reaffirm Parliament’s intention. 

Chris Williamson:  Will the hon. Gentleman help me by explaining those aspects of amendment 56 to which he objects? He has not spoken to the amendment so far. 

Charlie Elphicke:  The hon. Gentleman knows that the debate is about the wider provisions that govern this entire subject, as well as the amendments. You will correct me if I am wrong, Mr Streeter, but I think I am in order by raising these particular points, although of course I stand to be corrected. 

Chris Williamson:  I apologise to the hon. Gentleman if he thought I was suggesting that he was being disorderly. I was not doing that, but when he rose to his feet, he said, “I rise to oppose amendment 56,” so I was merely asking which parts of it he objects to? 

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Charlie Elphicke:  The hon. Gentleman, who has long entertained the Committee, understands that I was talking particularly about the comments on retrospection made by the hon. Member for Erith and Thamesmead. It is legitimate that I talk about retrospection, since it has been raised with so many of us on social media. Many of us have a timeline filled with great anger, angst and fury about the issue. It is right that the Committee honours those heartfelt opinions that have been expressed to us by debating them. I hope I am not alone in thinking that that is a right, proper, legitimate and—dare I say—orderly manner of approaching the matter. 

When my predecessor for Dover and Deal discussed this issue and raised these rules, they seemed a touchstone. Retrospection was built on by the previous Labour Government with the help of the Second Deputy Chairman of Ways and Means, when she was a Treasury Minister, and indeed Jane Kennedy, no longer of this parish, through the Finance Act 2008. The issue has been much discussed down the years, but let me just pick up on what the Chair of the Treasury Committee, my hon. Friend the Member for Chichester (Mr Tyrie), says: 

“We have deep reservations about any extension of retrospection in the tax system. Retrospection runs counter to the Committee’s principles of tax policy. In particular, it undermines certainty. Retrospection should be considered only in wholly exceptional circumstances. The latest measure would have to be justified on those grounds. Retrospection puts policy on a slippery path to arbitrary taxation, discouraging investment and innovation and creating the scope for great unfairness.” 

In other words, the attack is made on the principle that retrospection creates uncertainty. That is not the case with these provisions, as they apply only in a DOTAS case when a filing has been made to the Revenue. If an adviser has been making a filing, they will say, “I have had to file this with the Revenue.” If they were a competent advisor, they would say, “Keep the money to one side; don’t go out and spend it.” 

The argument that we hear being made is that if a person puts £100 on red or black in a roulette tournament, it is okay for them, while the ball is still spinning, to take 50 quid of that stake and buy a round of drinks on the grounds that they might win, but that is a poorly founded argument. If someone is going to put a bet down—that is what people are doing when they are gaming the tax system; it is no different from roulette, except that it is more disreputable—the stake should stay on the table. The principle that the Government are setting out is that the stake should remain on the table and in the hands of the house. In this particular case, the money should be held with the Revenue if it is making a challenge and has issued a follower notice. 

Richard Fuller:  I want to validate my hon. Friend’s Conservative credentials because I think his position is calling some of them into question. Will he accept a couple of points: first, that the taxpayer’s money belongs to the taxpayer first, not to the state; and, secondly, that at the time that the quotes of Adam Smith were made, the complexity and breadth of the tax system were narrower, meaning that those conditions do not now pertain? We have an arcane, complex tax system that makes it difficult for the taxpayer to be sure where he or she should be paying tax. I want to see if my hon. Friend’s assumptions hold to Conservative principles or whether, when he talks about the house holding the money, he is rather referring to views that might come from the Opposition. 

Charlie Elphicke:  My hon. Friend is right to challenge me—I welcome it—but let us consider how this process works. If a person is advised to reduce their tax liability, they are often introduced to a promoter who explains the scheme to them. The person then signs documents to enter into the scheme and pays a fee. The promoter tells the taxpayer that the scheme is a disclosed tax avoidance scheme and gives them a reference number that needs to be included on their return in the tax avoidance section. They know what they are doing. They know that they are playing with fire and spinning the roulette wheel. They are not an innocent who has suddenly come to an impost—a big shovel in their stores—as has been said in legal cases regarding the philosophy behind the taxation system. They enter into the arrangement with their eyes open. 

When the taxpayer submits their tax return with the scheme reference number, or their adviser submits it for them, HMRC considers the tax return and whether more tax is due than has been paid as a result of the avoidance scheme. If an inquiry notice is issued, the taxpayer can choose to co-operate or not, but even when taxpayers co-operate in full, the investigation and litigation process inevitably takes a considerable time, and some people take advantage of that by holding on to the tax. The principle is that, from now on, the tax in dispute in suspected avoidance cases will be held until the matter is resolved. The question is who should hold that money, given that the person has engaged in a disclosed tax avoidance scheme. The Government would argue that the measure ensures a consistency of approach. 

Chris Leslie (Nottingham East) (Lab/Co-op):  Will the hon. Gentleman give way? 

Charlie Elphicke:  Let me make some progress first. 

HMRC will be able to issue a notice only when it has sent the taxpayer an inquiry notice or issued a notice of assessment for the disputed tax. As a minimum, therefore, everyone who receives a notice will have been notified by HMRC that their tax affairs are under consideration. They will have filed a DOTAS notice and been notified that their tax affairs are under consideration. I would argue that they should have kept the money to one side and not gone off to the races, spent it on a round of drinks or whatever; they should have responsibly, prudentially and conservatively set the money aside against that risk. 

Once an accelerated payment notice is issued, the taxpayer will have 90 days to pay. If they cannot pay, they can contact HMRC to agree arrangements for payment. The Government are demonstrating their understanding by engaging in discussions about hardship cases. If the taxpayer thinks that the tax due is incorrect, they can raise that with HMRC which, as I understand it, will review the facts. People can therefore ask it to look at the matter again. The taxpayer will then get a decision notice confirming the amount of tax due to be paid up front, at which point they will have 30 days to pay. It is fair to say that due warning will be given and that there is due understanding that the person concerned is playing with fire, as it were. 

Chris Leslie:  I am interested in how the hon. Gentleman’s logic might extend to other tax-paying scenarios. If, for example, the Chancellor of the Exchequer said that the banks should be paying a £2.5 billion bank levy, is the hon. Gentleman arguing that the banks should vest that money with the Treasury, and that if, as seems to be the case, they then claim that for some reason they need to pay only £1.6 billion, that is their lookout? Is that the logic that he is describing, and why would it not apply in other circumstances? 

Charlie Elphicke:  I always enjoy the hon. Gentleman’s interventions, but he makes a facile point—[ Laughter. ] As is in line with his character. What I am describing is more in line with what happened under the Finance Act 2008, about which Jane Kennedy, then of this House, said: 

“the avoidance scheme that the clause closes down was designed to frustrate legislation passed by Parliament in 1987 to prevent this type of avoidance, also with retrospective effect”.––[Official Report, Finance Public Bill Committee, 22 May 2008; c. 372.] 

This is about when due warning has been given. In this case, I would say that the taxpayer has been given due warning. They know that they ought to keep the money to one side. HMRC wins 80% of these cases, and I think that the case is well made. 

Shabana Mahmood:  We have had an interesting debate. As we have been hearing, the legislation underpins the Government’s belief that during litigation and investigations into avoidance, disputed tax should sit with the Exchequer rather than, as is currently the case, with the taxpayer. Under existing rules, taxpayers are able to include the tax advantage in their initial self-assessment and thereby reduce their liability. 

The measures have given rise to a lot of comment from stakeholders—members of the public—outside the House. We have heard references to the vigorous campaign being waged on social media. We have all been getting messages in our timelines even as the debate has continued, so many people are listening to what is being said today. I hope that they feel that the issues are being thoroughly ventilated. 

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The Chair adjourned the Committee without Question put (Standing Order No. 88).  

Adjourned till this day at Two o’clock.