Session 2014-15
Publications on the internet
Finance Bill
Finance Bill
The Committee consisted of the following Members:
Chairs: † Martin Caton , Mr Gary Streeter
† 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)
† 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)
† 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
(Afternoon)
[Martin Caton 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)
2 pm
The Chair: Before we resume proceedings, I draw the Committee’s attention to a minor error in the selection list. Clause 284 appears in the list, but that clause was agreed by the Committee on 13 May.
Clause 212
Circumstances in which an accelerated payment notice may be given
Amendment proposed (this day): 32, in clause 212, page 141, line 3, leave out “tax”.—(Mr Gauke.)
Question again proposed, That the amendment be made.
The Chair: I remind the Committee that with this we are discussing 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.”.
Clauses 213 to 221 stand part.
Government amendments 35 to 38.
That schedule 28 be the Twenty-eighth schedule to the Bill.
Clauses 222 to 226 stand part.
Shabana Mahmood (Birmingham, Ladywood) (Lab): Thank you very much, Mr Caton. In our previous session I introduced my remarks to this set of proposals, so I will not do so again. However, before I comment on the points raised during the debate this morning, I want to look at the financial impact of the changes.
The impact notes for the provisions estimate that accelerated payment notices relating to existing avoidance cases currently in dispute will be issued to 33,000 taxpayers. The revenue associated with the provisions is substantial. Her Majesty’s Revenue and Customs estimates the notices will result in receipts of £340 million this year, £1.3 billion in 2015-16, £1.3 billion in 2016-17, £750 million in 2017-18 and £385 million in 2018-19. It is important to stress that this is not a new revenue stream—the measures bring forward money HMRC expects to collect by several years.
The revenue expected to be raised by the extension of accelerated payments to cases covered by disclosure of tax avoidance schemes and by the general anti-abuse rule is significant, particularly as no cases have been deemed to have breached the GAAR yet. Will the Minister explain how he has calculated those figures, especially in terms of the interplay with the GAAR? It would be helpful if he could explain the methodology that was used. We briefly discussed that point on Second Reading. Will he explain the details when he responds?
We know that HMRC has an 80% win rate for the cases it pursues to litigation, which is an excellent rate to achieve, and we all hope it remains intact. However, the win rate is different from the value of the claims that are won—they are two different things. Will the Minister tell the Committee the average value of an HMRC win? That would help the Committee to interrogate the figures that were used in the costings. How confident is the Minister that the same success rate will apply to cases heard on the GAAR since no cases have been heard under the rule yet?
Our debate this morning was about retrospection and the concerns of members of the public who fear they will be caught by accelerated payment notices, and of professional bodies. The debate turned on whether the measures were retrospective. The Minister stated that, because there is no change to underlying tax liability, retrospection does not come into play. However, against that, the Committee heard the argument put forward by my hon. Friend the Member for Erith and Thamesmead, who pointed out that the measures impact on behaviour that cannot change because it has already occurred, and therefore that retrospection and all associated issues were engaged.
I found the Minister’s explanation on retrospection and the argument he and HMRC put forward to be persuasive. There is no indication of a new and unexpected tax liability—if that was the case, there would be no doubt that the measures are retrospective. However, I do not believe that is the case. This feels much more like a situation where, to borrow a concept from another aspect of our legal system, the legitimate expectations of a taxpayer have been changed. When that happens, as it does in other aspects of our law, particularly when
we discuss concepts of reasonableness in judicial reviews and other matters, if legitimate expectations of taxpayers or others are changed, that mischief—the changing of legitimate expectations—is remedied by the time-to-pay arrangements, which should assist in righting any wrongs. There is also the remedy of an interest payment on top of the tax that was in dispute if it is found that it needs to be paid back to the taxpayer. If there is any unfairness as a result of the measures, it can be remedied by those other measures.Ian Mearns (Gateshead) (Lab): I am not trying to be unhelpful to my hon. Friend’s argument, but I have a sneaking suspicion that there will be greater and lesser levels of understanding among the people who are selling tax avoidance products and the purchasers. The seller of the product might have a very good understanding of exactly the points my hon. Friend has made, but the purchaser might not.
Shabana Mahmood: My hon. Friend makes an important point that has been made forcefully by the many members of the public who got in touch with members of the Committee. I would simply repeat a point made by the Minister and others: we have to look at the context in which the measures will take effect. In the vast majority of cases, people were aware, or were made aware, of what they needed to do in relation to DOTAS. That brings into play the fact that the tax is in dispute, a point made by the hon. Member for Dover in his speech. My construction of the measures before us leads me to believe that the measures are not retrospective, but I acknowledge that the point is at the very least arguable. Many of the professional bodies who have looked at it closely and the Law Society have made strong and forceful representations that the measures are retrospective in effect. I do not think it is possible for the Committee to dismiss that.
Charlie Elphicke (Dover) (Con): Does the hon. Lady agree that there is no such thing as a free lunch? The idea of a disappearing tax bill is something that at the very least puts the taxpayer on inquiry as to how that might have come to be so. Does she also agree that each taxpayer has a responsibility to ensure that their tax return is true, accurate and not misleading? Taxpayers must take that responsibility, but it also puts them on inquiry.
Shabana Mahmood: I agree with the hon. Gentleman that all taxpayers have a responsibility for the content of their tax return. They are entitled to take advice. Many people who do not understand the complexity of a very complex tax legitimately take advice. There is a point to be made about the reliance on advisers and remedies against advisers when things go wrong. The Committee should bear that in mind. If people are ticking the box in relation to a DOTAS disclosure, it is fair to say that they are on notice that things may change and they may have to pay the amount of tax levies in dispute.
Richard Fuller (Bedford) (Con): I thank the hon. Lady for her opening remarks, which clearly outlined the pros and cons of the current position. Indeed, I may wish to copy her comments and send them to some of my constituents. She has referred to representations
made by the Law Society and others, casting into question whether the Opposition’s view in supporting the Government is now a settled one or whether they are still open to representations from people who have come to a different conclusion about retrospection. For the record, will she clarify the Opposition’s position?Shabana Mahmood: I was coming on to exactly that point. I hope that once I have finished my remarks on retrospection, the hon. Gentleman will understand where the official Opposition are coming from. I will happily take further interventions from him to clarify things if necessary.
As I was explaining, my reading of the rules before us is that we are not talking about a retrospective measure in the normal way we understand retrospective measures. However, accepting that it is possible to plead the case in the alternative—that the measure is retrospective due to its impact on behaviour that cannot now be changed—taking on board the fact that many senior commentators and professional organisations have characterised the measures as retrospective, and thinking about first principles, my first point is that our legal system has well established principles of natural justice and procedural fairness, which retrospection would, by its nature, offend. Therefore, if we are to introduce retrospective measures, we should do so only in exceptional circumstances that are tightly controlled, and only when they deal with the mischief that we are trying to remedy and go no further. That was certainly the thinking behind the previous Labour Government’s introduction of one element of retrospection into the tax system, which we discussed this morning. That is certainly our approach now.
Looking at the retrospection case, as I said, on an alternative basis, I would say that there is still a strong case for the kind of action that we are discussing. On that basis, although the arguments about retrospection are important and it is right that such points are made, I would say that the practical and philosophical points merge, because the system as it stands is successfully gamed, which results in increased costs for the taxpayer. We all ultimately lose out when such delays occur in the system. It is important that Governments of all colours and persuasions take practical measures to sort out the practical problems with our system.
We have had some discussion about the fate of those who have made a DOTAS disclosure in order to be on the safe side. They were some of the concerns raised by my hon. Friend the Member for Erith and Thamesmead and members of the public. I am grateful for the Minister’s clarification on how DOTAS disclosures work and why he does not think that those concerns are engaged, but I remain concerned that there may be a reduced willingness to make DOTAS disclosures, which would be unwelcome.
I took from the Minister’s remarks this morning that he is aware of that risk. That is why we are going to get, as I understand it, a planned consultation on further strengthening of DOTAS. When he responds, I would be grateful if he could share any further detail on the matter with the Committee. I know that he will not be able to tell us totally what is coming up in the consultation, but some further detail would be welcome, particularly if we are responding to our constituents in relation to the argument about people doing things to be on the safe side and the behavioural change that might result in fewer DOTAS disclosures.
It would also be helpful for the Minister to give us some further detail on the representations he has received regarding accelerated payment notices and whether he has received any examples of the so-called “on the safe side” DOTAS disclosures. Again, if we could have some detail of such circumstances, it would be helpful for the Committee, particularly given the public’s interest in that aspect of the clauses.
I agree with the Minister that HMRC should not have its hands tied in enforcing powers on time to pay or pursuing bankruptcy notices against taxpayers who fail to pay due tax. When the Minister responds, will he help the Committee to understand better how HMRC currently uses its powers, the number of cases and how many bankruptcy notices are pursued? That would help the Committee respond to constituents’ concerns.
2.15 pm
The Minister touched on the following point but I did not catch all of his answer. HMRC guidance states:
“The allocation or notification of a scheme reference number does not indicate that HMRC accept that the scheme achieves or is capable of achieving any purported tax advantage.”
Will the Minister explain what criteria alongside scheme reference numbers will be used by HMRC officials to assess whether an accelerated payment notice will be issued? As I said, he touched on those points but unfortunately I missed the beginning of his remarks.
The level of revenue associated with accelerated payments will depend on the amount payable. The Minister will be aware that many, including the Chartered Institute of Taxation, are concerned about the proposed method for establishing the payable amount that lies solely with HMRC. HMRC has said that it will issue a payment notice to the best of the designated HMRC officers’ information and belief. I would like clarification of what that might mean in practice. Will the Minister give a more detailed account of how the amount of an accelerated payment notice will be calculated?
On a more technical point, will the Minister tell us what will happen when there is an overlap between follower cases, particularly where a follower case is withdrawn, and the DOTAS scheme? How will HMRC deal with that? Clarification is needed on the withdrawal of accelerated payment notices, following the withdrawal of a follower notice. Clause 220(3) obliges HMRC to withdraw an accelerated payment notice where
“the follower notice to which it relates is withdrawn”.
In contrast, clause 220(2)(a) gives HMRC the authority to withdraw an accelerated payment notice but the term “withdraw” is used only in connection with follower notices in the context of the alternative outcomes following HMRC’s consideration of a taxpayer’s representations against a follower notice. Will the Minister clarify whether that means that HMRC is obliged to withdraw an accelerated payment notice only where the related follower notice is withdrawn as a consequence of its consideration of the taxpayer’s representations? If that is not the case, will the Minister indicate in what other circumstances a follower notice would be withdrawn within the meaning of clause 220(3)?
Should taxpayers wish to dispute the accelerated payment notice, according to the clauses before us they will be able to make representations to HMRC. Will
HMRC publish guidance on that? The Minister will be aware that the CIOT has already suggested that the guidance should comprise four things. First, it should explain in what form representations should be made; secondly, explain the procedure that will be used to consider the representations; thirdly, explain what factors it will take into account when making decisions; and fourthly, provide an indication of how long it will take to make its decision. I would welcome the Minister’s comments on that CIOT suggestion, as well as further details of when guidance will be published.It is understandable that once an accelerated payment notice has been issued, HMRC would wish to collect the amount in dispute in a timely manner. Clause 219 seeks to encourage such behaviour by imposing a penalty where an accelerated payment is not made in accordance with the issued notice. The penalty structure looks very similar to that applying to the late payment of tax under the self-assessment regime. However, the significant difference is that the latter imposes 5% penalties after 30 days, six months and 12 months of the due date of the payment of tax. As a result, penalties associated with accelerated payment notices are incurred 30 days earlier than they would be under self-assessment, and consequently a taxpayer who has received an accelerated payment notice at the same time as a follower notice would have a 90-day period in which to consider whether to make representations against either, and contact HMRC to negotiate a time to pay arrangement. I would like to ask the Minister if there is a danger that such a system creates an incentive to make representations against an accelerated payment notice, potentially creating unnecessary work for HMRC. Has any assessment has been made of that? Did he consider whether aligning the accelerated payment notice penalty dates with the normal self-assessment penalty dates could work better and to the mutual advantage of HMRC and taxpayers?
We discussed HMRC resourcing earlier today and, as with follower notices, this measure is expected to have substantial HMRC resource implications as a large number of people begin a range of different legal challenges, potentially including judicial review proceedings, an increase in closure applications through the tribunal and disputed enforcement activity. The impact note states that
“Flexible legal resource options are being considered to meet the expected demands of this work”
“The Government will ensure that Departments have the necessary resources to deliver this key policy successfully.”
The Minister mentioned 800 new staff. I would be grateful for clarification about whether those are new recruits or people being deployed from other parts of HMRC. How far advanced is the process in terms of ensuring that new staff are ready to start dealing with APN cases as soon as the legislation becomes law?
The Exchequer Secretary to the Treasury (Mr David Gauke): It is a great pleasure to serve under your chairmanship this afternoon, Mr Caton, for the last of this year’s Finance Bill procedures in Committee. Let me seek to address the various issues raised by Members who rightly seek more information about the important measures. I am grateful for the tone of genuine inquiry but also note the Opposition’s broad support for the measures.
The issue of retrospection was raised by the hon. Member for Erith and Thamesmead, who brings her considerable experience in the tax world to these matters. I maintain that the measure is not retrospective for the reasons I set out earlier. The rules regarding whether the taxpayer’s scheme works are not being changed. What is changing is who holds the money while there is an ongoing dispute. We have to note that this is money the individual would have already paid if they had not entered into the avoidance scheme. The taxpayer can continue to dispute the case and will be paid with interest should they win. We are not restricting people’s rights. Prudent taxpayers should have recognised that tax avoidance carries a significant risk of not working. The tax will become payable and they should therefore make plans for such an outcome.
The point was made that, if this is about changing behaviour, it should only apply to arrangements people enter into after the measures come into effect. The point I would make in response is that new rules are intended to achieve two things: they change behaviour away from avoidance but have the additional objective of accelerating the resolution of the large number of existing cases and the receipt of the revenue tied up in them. We want all taxpayers in this type of dispute to be in the same predicament so that there is no reason to apply the rules differently depending on when the particular arrangements began.
Duncan Hames (Chippenham) (LD): I note the point that the Minister is making, but will he further clarify for the Committee whether the powers that he seeks reach back to disputed tax liabilities relating to periods prior to the introduction of the DOTAS reporting?
Mr Gauke: No, they do not. This applies to arrangements where a DOTAS notification has been made—DOTAS was introduced in 2004—or those that fail to comply with the general anti-abuse rule, which we introduced last year. It essentially goes back to the introduction of DOTAS. The structure of it means that it does not apply to any cases before that.
The hon. Member for Erith and Thamesmead asked whether HMRC already has enough powers in this respect. HMRC can already refuse repayments of tax in avoidance cases while the matter is investigated and mitigated. In fact, most people pay their tax up front and can apply for a refund afterwards, for example under PAYE, VAT or tax on interest income, but most avoiders can currently claim a tax advantage through self-assessment and hold on to the moneys during the often lengthy dispute. The measures before us will put people on the same footing and remove the cash flow advantage that some avoiders enjoy at the moment.
The question of time to pay and how many arrangements HMRC expects to agree is difficult to answer. It will depend on the specific circumstances of individual taxpayers. In cases of genuine hardship, HMRC will consider alternative payment arrangements, as it does with any debt. The priority in cases of genuine hardship will be to get people on to a payment track so that the debt is paid as quickly as possible. The hon. Member for Birmingham, Ladywood also asked about time to pay, seeking information on how it operates. HMRC will issue clear “pay now” notices to taxpayers setting out how much needs to be paid under the measures.
In cases of genuine hardship, as I have said, HMRC will consider alternative payment arrangements, as it does with any debt.HMRC always ensures that its action is proportionate. Where individuals do not immediately have the cash, it may be appropriate in some instances to back up a payment arrangement with a security against assets. In cases where, for instance, individuals have taken deliberate action to put their assets out of reach of HMRC—I have certainly received a tweet or two suggesting that people were going to do that—so that they cannot pay the tax, bankruptcy action may well be appropriate, but the particular action will always depend on the precise facts and circumstances of the taxpayer.
On some of the practical issues involving the impact on HMRC and the tribunal—the hon. Member for Birmingham, Ladywood asked about the impact of legal challenges on HMRC—the measures are expected to prompt a range of legal challenges, including judicial review proceedings, an increase in closure applications to the tribunal and disputed enforcement activity. Flexible legal resource options are being considered to meet the expected demands of the work. That legal resource will be increased and adapted depending on the scale and scope of any challenges. The Government will ensure Departments have the necessary resources to deliver this key policy successfully.
2.30 pm
The hon. Member for Erith and Thamesmead asked whether the tribunals and courts will be able to cope with the extra work. HMRC is in discussion with the Ministry of Justice to plan for the introduction of these measures and to deal with the likely consequences.
The hon. Member for Birmingham, Ladywood asked how we can be sure we get the yield that was included in the Budget scorecard, so I will say a little about how those numbers were calculated. The accelerated payment costings are based on HMRC administrative data, and the Office for Budget Responsibility certified that they are reasonable, given the information available. They include some assumptions about valid reasons why HMRC might not receive the full value of the payment, such as litigation losses and customer payment profiles, which have the effect of reducing the potential revenues to the estimates provided at Budget 2014. The costings take into account the direct effects of a policy, including, where appropriate, direct behavioural responses, such as levels of compliance and evidence of attrition in the yield, drawn from previous experience of anti-avoidance measures. The majority of the effects relate to DOTAS schemes, for the obvious reason that the GAAR has only just come into force, and it will take some time for the first cases to come through.
A question was asked about the average value of a win for HMRC. It is difficult to give an answer, but some assumptions were made for the calculation. HMRC expects the 80% success rate that we have talked about to be representative of the average amount. For the general anti-abuse rule, accelerated payments will be required only after the independent panel has given an opinion that the scheme is not reasonable. Therefore, the success rate should be at least as high, because it will have already received independent scrutiny.
On the issue of how the amount of payment is calculated, it is important for taxpayers and advisers to engage with HMRC, as I said earlier. HMRC will open an inquiry or raise an assessment that will usually provide a clear picture of the amount in dispute, and taxpayers should ensure HMRC knows about any other relief or allowance that will affect the tax in dispute. It is important to emphasise that that is the tax that the taxpayer will have to pay if their scheme fails, and no more. Taxpayers will have 90 days to discuss the calculation and make representations to HMRC if they think the amount is wrong.
I took one or two interventions on the issue of whether DOTAS disclosures are on the safe side. If disclosures are made but there is no additional tax, there will not be an accelerated payment. HMRC will publish a list of scheme reference numbers before Royal Assent to tell taxpayers which schemes will get a payment notice and which will not.
On the issue of ensuring the DOTAS rules work effectively, DOTAS has been in place for 10 years and has been revised at various times. We believe that now is the right time to look at its hallmarks to see whether they still work properly or whether they need updating. We also want to look at how compliance can be updated. We will publish a consultation in the summer, and HMRC will publish guidance around the time of Royal Assent. It will shortly publish draft guidance in consultation with professional bodies and other interested parties.
On the issue of why the penalty timing is not the same as for self-assessment, it is important to emphasise that the penalty is for late payment and not for an incorrect return, as in the case of self-assessment. We have set it in line with other late payment penalties already in the system, rather than penalties for an incorrect SA return. If a follower notice is ignored, a follower notice may be withdrawn following representations. If that happens, the payment notice is also withdrawn. If DOTAS was also relevant, the payment notice can still stand.
I hope I have addressed the questions and queries raised by the Committee. I am grateful for the level of scrutiny the measures have received today. I hope that they can stand part of the Bill, and I hope I have said enough to persuade the hon. Member for Erith and Thamesmead not to press her amendment.
Amendments made: 33, in clause 212, page 141, line 9, leave out
“resulting from the same tax arrangements”
and insert “and the chosen arrangements;”
Amendment 34, in clause 212, page 141, line 13, after “it” insert “and the chosen arrangements”—(Mr Gauke.)
Clause 212, as amended, ordered to stand part of the Bill.
Clause s 213 to 221 ordered to stand part of the Bill.
Schedule 28
Accelerated payments and partnerships
Amendments made: 36, in schedule 28, page 536, line 6, leave out “tax”
Amendment 37, in schedule 28, page 536, line 15, leave out
“resulting from the same tax arrangements”
and insert “and the chosen arrangements;”.
Amendment 38, in schedule 28, page 536, line 21, after “it” insert “and the chosen arrangements”.— (Mr Gauke.)
Schedule 28, as amended, agreed to.
Clause 222
Defined terms used in Chapter 3
Amendment made: 35, in clause 222, page 151, leave out line 18.—(Mr Gauke.)
Clause 222 , as amended, ordered to stand part of the Bill.
Clauses 223 to 226 ordered to stand part of the Bill.
Clause 227
Meaning of “relevant proposal” and “relevant arrangements”
Charlie Elphicke: I beg to move amendment 53, in clause 227, page 154, line 34, at end insert—
‘(5) “Tax abuse” means any arrangement that, having regard to all the circumstances, it would be reasonable to conclude is an arrangement that has no business, social or other purpose other than the obtaining of a tax advantage.’
The Chair: With this it will be convenient to discuss the following:
Amendment 54, in clause 228, page 155, line 35, at end insert—
‘(8) It shall be a summary offence to promote a relevant proposal or relevant arrangement which meets the definition of “tax abuse”.
(9) A promoter found guilty of an offence under subsection (8) shall be liable to a fine not exceeding level 1 on the standard scale.’
Clauses 228 to 230 stand part.
That schedule 30 be the Thirtieth schedule to the Bill.
Clauses 231 to 241 stand part.
Clauses 242 and 243 stand part.
Government amendments 40 to 43.
Clauses 244 to 250 stand part.
Government amendments 44 to 46.
Clauses 251 to 265 stand part.
Clauses 266 and 267 stand part.
That schedule 31 be the Thirty-first schedule to the Bill.
Clauses 268 and 269 stand part.
Clauses 270 and 271 stand part.
Clauses 272 to 274 stand part.
That schedule 32 be the Thirty-second schedule to the Bill.
Clauses 275 and 276 stand part.
2.39 pm
Sitting suspended for Divisions in the House.
3.4 pm
Charlie Elphicke: I rise to speak to amendments 53 and 54. It is worth noting that the Government have taken substantial action to counter the kind of egregious tax avoidance and aggressive tax planning that this country has seen for too long. The general anti-avoidance rule, the measures and promoters and the strong anti-avoidance tactics by HMRC, which has raised so much money, have ensured that the law and the protection of the Revenue are strongly on the side of hard-working people who pay their taxes and do the right thing. These probing amendments were tabled to hammer home the social acceptability message and to say to the tax avoidance industry that what it is doing—promoting schemes that will be struck down in due course by HMRC—is not just illegal, but goes a step beyond that and is so antisocial and socially unacceptable that it should be a criminal offence. I hasten to add that it should not be a serious criminal offence, but a summary justice criminal offence, with a level 1 fine. It is the fact of the crime that is so important. The proposed measure is targeted not at the beneficiaries of tax avoidance schemes, but at those who promote them.
Let me dispose of one case put against this provision. Someone said to me, “This would apply to someone selling an ISA. That would be made a criminal offence.” That was put to me in a parody account on Twitter. [ Interruption. ] Not my own parody account, I hasten to add. My answer is simple. The construction of the amendments is built on clauses 227 and 228, which deal with “relevant proposals” and “relevant arrangements” that are promoted by promoters.
Richard Fuller: I am sorry to drag my hon. Friend back to his point about making this a criminal offence, albeit not a serious one, but he also said he wanted to send a message. Which message is he sending: that it is a criminal offence or that it is not serious?
Charlie Elphicke: Every criminal offence is serious; I am talking about the severity of the penalty. Am I saying that a person promoting a scheme that is so egregious in its avoidance that it is a tax abuse should be sent to prison for life? No; I am saying that the penalty would be set at a low level and that the message sent by the fact of the criminal offence is one of social unacceptability. That is an important message, because people promoting such schemes are professionals and professionals will not go into an area where they know that the criminal law will hunt them down. Even if
the penalty was just a £200 fine, as opposed to life imprisonment, it would be career-defining for anyone engaged in the legal or accountancy professions or similar, allied professions. That is an important social message to send.The definition of “tax abuse” in my amendment builds on the definition of “tax advantage” in clause 227(3) and would include
“any arrangement that, having regard to all the circumstances, it would be reasonable to conclude is an arrangement that has no business, social or other purpose other than the obtaining of a tax advantage.”
One could loosely say that that is almost a codification of the principle of Furniss v. Dawson. We are talking about a transaction that has no purpose other than gaining a tax advantage—it would not have been entered into but for that—and taking money off the Revenue, thereby ensuring that the Revenue has less money and the rest of us have to pay more.
Richard Fuller: My hon. Friend is much more learned in these areas than me and I am enjoying listening to him. Just for my understanding, would a tax deduction for my pension fit the criteria for a tax abuse or not? If not, will he explain why not?
Charlie Elphicke: It would not, because saving, including saving for retirement, has a wider social purpose. This is about transactions that would not otherwise have been entered into.
Charlie Elphicke: Before I take an intervention from my hon. Friend, let me explain further and elucidate the principle I am defining.
Let us consider tax abuse and egregious tax avoidance done by companies such as Ingenious Media. Ingenious Media has an £8 billion film investment plan and attracted wealthy customers and investors. It was told by HMRC that its schemes were designed to avoid tax rather than to promote films. Wealthy investors in Mr McKenna’s schemes—he runs the company—won tax relief of £1.35 billion, with some individuals, such as Wayne Rooney, Lord Hollick and “Newsnight” presenter Jeremy Paxman, investing tens of millions of pounds. They all benefited. Would that amount to tax abuse? I would say that it does not fall within my definition of tax abuse, because one could say there was a wider social purpose for investing in and financing films.
Richard Fuller: I am concerned about phrases such as “in my opinion” and “one could argue that” if one is writing legislation. Do they not open up a tremendously uncertain field for people who might quite legitimately be looking to do certain things that my hon. Friend may believe has a social purpose, but which other people may not? I see the intent, which some of us may wish to applaud, but the somewhat arbitrary way in which he is going about it might give cause for concern to many.
Charlie Elphicke: My hon. Friend is constantly cautious about any measure that takes the battle to tax avoidance, and I respect that. I would say the proposed wording is not arbitrary, because the question is whether there is a
wider business or social purpose. Can we say that there is a wider business or social purpose to film finance? Probably yes. Someone might have entered into a transaction to finance a film for wider reasons than simply avoiding tax, particularly as the Government were promoting that.It is a similar case with Ingenious schemes such as Tamar Films LLP, in which one John Mills was an investor. In my judgment, the offence is not aimed at those schemes, although they amount to aggressive tax avoidance. The kind of behaviour engaged in by Ingenious Media is entirely wrong and amounts, invariably, to aggressive tax planning. The transactions I am particularly interested in targeting with my amendment are other schemes, which are without any social purpose whatever. Let me give my hon. Friend the Member for Bedford some examples.
Neil Masters of Mercury Tax promoted a £1 billion scheme called Liberty, which was one of the largest and most aggressive avoidance schemes available. By buying and selling dividends offshore, it generated more than £1 billion in artificial losses, which members could offset against their tax bills. A Liberty member paying £70,000 in fees could earn £1 million a year tax-free. The scheme was open only to higher rate taxpayers, who would normally pay income tax of between 40% and 50%. That was an entirely circular scheme. No one would ever invest in the scheme; it had no business or social purpose whatever. There was one purpose and one purpose alone: obtaining a tax advantage and avoiding tax. The definition of my proposed offence of “tax abuse” is aimed at such schemes.
Chris Heaton-Harris (Daventry) (Con): I wonder what the result of HMRC’s investigation into the Liberty scheme is.
Charlie Elphicke: The scheme was revealed by The Times, and my understanding is that HMRC’s investigations are still ongoing, although I stand to be corrected by the Minister.
Chris Heaton-Harris: Does that mean that HMRC already has the power to shut down such schemes? How is my hon. Friend’s proposal complementary to said scheme?
Charlie Elphicke: I guess the question is: at what point do we close the gate? Do we close the gate after the horse has bolted and we have to spend lots of money bringing it back into the pen; or do we keep the gate closed in the first place and locked securely? It is better to lock the gate before the horse bolts. That is the intent behind my suggestion and probing amendment.
Ian Swales (Redcar) (LD): In the case that the hon. Gentleman has just described, he used the expression “tax avoidance”, on the grounds that it is legal until proved otherwise. Does he not agree that a scheme that is structured in that way, with circular transactions and no perceived use other than avoiding tax, is in fact tax evasion and therefore criminal?
Charlie Elphicke: That is an important question. The offence of cheating Her Majesty’s Revenue requires proof of dishonesty. It is an indictable offence and a
much more complicated offence to prove. What I am defining is a much simpler test, which is: is there any purpose to a transaction for the promoter to be promoting it; or does it have no business purpose and no social purpose, but is simply about obtaining a tax advantage? This is about clearly sending a message to those engaged in promoting such schemes. It is specifically aimed at the promoters of the schemes, rather than the beneficiaries.3.15 pm
Matthew Jenner of No Tax Advisors devised a scheme called “Working Wheels”, in which Chris Moyles was famously involved, and there are others. The purpose of that scheme was simple: to claim to have run up losses of £1 million selling £3,731 of used cars. It was not a used car business; it was a tax scheme that had one purpose only, which was the avoidance of taxation. There was no wider business or social purpose. Chris Moyles tried to offset the £1 million loss in a year in which he had other income, including an estimated £700,000 salary from the BBC. The Revenue took that case on and he lost, but the point is whether such schemes should be promoted in the first place.
Jenner cooked up the NT Advisors’ Cup Trust scheme, which in my view is the most abusive scheme of all. It is outrageous and a complete abuse of the charity regime. I will briefly read the report on that scheme in The Times on 31 January 2013:
“One of Britain’s biggest charities is a front for tax avoidance, The Times can reveal. Wealthy donors used the Cup Trust to avoid £46 million in tax in an extensive abuse of Gift Aid incentives designed to encourage charitable donations. The registered charity raised £176 million over the two years 2010 and 2011. In 2010 it attracted more donations than the Royal Society for the Protection of Birds, the British Heart Foundation or the Salvation Army. But instead of using the money for its stated objective, to ‘improve the lives of young children and adults’, it carried out trades that artificially generated Gift Aid for donors to reduce their tax bills. Investors who ‘donated’ £1 million to the Cup Trust, for example, would receive most of their money back—but still be entitled to claim Gift Aid worth between £250,000 and £375,000.”
That was a completely and utterly shameless abuse of our charitable gift aid system. Many were critical of the Chancellor when he quite rightly brought forward legislation to tackle the abuse of charity law in that way. He was quite right to introduce measures to safeguard the public revenue. The promoters should not have promoted an entirely shameless, abusive avoidance scheme such as that in the first place.
My key point is that such transactions have no wider or social purpose whatever, other than the avoidance of taxation. There are other companies and accountancy firms that introduce their wealthy clients to those people. There is an extensive industry of barristers who give opinions on the matter and are engaged in the promotion of such schemes. It is time we said, “Enough is enough.” That kind of activity and behaviour has no social utility. Gaming the tax system is wrong. For example, if someone earning £10 million a year pays no tax, a whole load of our constituents—an entire constituency in some cases—will have to pay more tax as a result.
The sense of fairness and justice in getting the balance right, so that there is a balance in our tax system—that tax falls evenly and fairly, and contributions are made according to the rules set up—is the fundamental reason
why this is an important amendment. It is only a probing amendment, but I am moving it to make a serious and grave point. We need to send a social message that such behaviour—this kind of industry and gaming of the system—is unacceptable and beyond the pale.Ian Swales: It is a pleasure to serve under your chairmanship, Mr Caton. I will not detain the Committee long. I would like to back up the points made by the hon. Member for Dover.
I am a member of the Public Accounts Committee and we have had not only Google, Amazon and Starbucks come before us, but the big four accountancy firms, who have told us about their tax avoidance businesses. They put forward schemes where they have anything upwards from a 50% chance of success. At only 50%, they will recommend that an individual might follow such a scheme. As the hon. Gentleman pointed out, what they are promoting is a bit of a bet on red or black.
Even more interesting was our session with the people whose job it was to promote tax avoidance schemes. One of my abiding memories of being on the Public Accounts Committee was asking one of those people, “So, how many of the schemes that you have promoted over the last five or seven years are now illegal?” He just smiled and said, “All of them.” That is a good point as far as HMRC was concerned, but he was happily selling these schemes, possibly even in the knowledge that they would end up as illegal. That has to be seen as pretty shady business.
During my accountancy training, I learned that there were only two things: avoidance and evasion. We now have this new expression, “aggressive tax avoidance”. As I indicated in my intervention on the hon. Gentleman, I sometimes query whether aggressive tax avoidance should be in the realms of evasion and therefore a criminal activity. When we talk about companies that have been set up purely to avoid tax—I am talking about bogus transactions, money moving on and offshore, circular transactions designed to manufacture huge tax losses, and so on—surely we are talking about evasion. If people went into such rigmaroles to claim from the benefits system, they would be in jail as fast as the courts could catch up with them.
I feel that the public pound is the public pound. We need to start thinking about that when we talk about tax as well as about benefits and spending. As the hon. Gentleman pointed out, this is not a victimless crime. We all have to pay more or our public services are impoverished, so celebrities and other wealthy people who feel that they are engaged in some kind of sport need to remember that there is somebody on the other end of their tax avoidance.
Sheila Gilmore (Edinburgh East) (Lab): Does the hon. Gentleman also have a view on whether tighter provisions such as these would prevent some people from being sucked into such schemes? I am not necessarily talking about celebrities trying to be clever; there might be others who were told that a scheme would work for them—and who would no doubt pay somebody for it—but are likely to lose money. If they never got into it in the first place, they would not be complaining about any back tax or whatever.
Ian Swales: The hon. Lady makes a good point. Some of the representations I have received are about things that happened five or more years ago. I was self-employed at the time and potentially affected by IR35. My answer was simple: I paid my tax each year. The hon. Lady makes a good point about celebrities and others. Those who are tempted to engage in these sorts of activities need to bear in mind reputational risk as well as many other things. According to a recent article in The Times, people are engaging less in these activities. One of my e-mails in the last few hours has been from somebody who is about to lose their job in a tax avoidance company.
That leads me to the thrust of clause 277 onwards, which is about the whole issue of the promoters of tax avoidance vehicles—again, I am talking about the aggressive ones, not about paying a bit extra into a pension or whatever. These are the people who create structures and promote them, usually to relatively naive users. There must be a question mark over this area. If people were selling financial services products that were as sophisticated as some of these products, there would probably be legislation on the need for independent financial advice. Should the people selling such schemes be allowed to sell them directly to possibly naive users?
Some of the celebrities and others who found themselves on the other end of these things were engaged more in writing pop songs or playing them on the radio than in going into the details of their own financial affairs. We ought to look at rights of redress against promoters of tax avoidance schemes. As I indicated earlier, we should see more prosecutions, people being struck off and a lot more naming and shaming, not just of those who benefit from tax avoidance, but of the promoters. We should look not just at the small operators such as those we saw on the Public Accounts Committee. We also need to expose the banks and large accountancy firms that, in terms of volume, are often the main sellers of that sort of scheme. I welcome the fact that Barclays and other banks are reducing their wealth management divisions, because tax avoidance is often one of the main activities in wealth management. I think Barclays has closed its entire wealth management division, although I stand to be corrected on that.
We are moving in the right direction. I welcome clauses 227 onwards and hope that the Minister will be even more forceful in dealing with the promoters of such schemes, which are designed to steal money from the public purse.
Chris Heaton-Harris: It is a pleasure to serve under your chairmanship, Mr Caton, possibly for the last time, though as I have a lot to say, maybe not. I was not going to talk about the amendments until I heard them introduced by my hon. Friend the Member for Dover. The Public Accounts Committee, on which I sit with my hon. Friend the Member for Redcar, reported on several cases mentioned by my hon. Friend the Member for Dover. We had a whole session on the Cup Trust and how HMRC eventually found out about it, clamped down on it and shut it. At the end of the day, that was probably more of a problem for the Charity Commission than it was for HMRC.
I wanted to talk about aggressive tax avoidance and tax avoidance in general. As far back in history as I can remember, as long as there have been taxes, there have been people who have tried to avoid paying them. That
is because it is essentially the state taking away some of a person’s earnings. The core of the problem is that people avoid tax because tax is too high to pay legitimately. If someone has enough money they will try to find a way around paying that. The element missing from our discussion is that taxes are too high in this country.Sheila Gilmore: If the hon. Gentleman’s argument were correct, when taxes fall, as the Conservative party favours, we should surely see avoidance eliminated. It is important for people to pay for the services they want for their country. That might be defence, social services or all sorts of things. We should encourage people to feel positive and not negative about that.
Chris Heaton-Harris: I appreciate the hon. Lady’s comments on my argument without having heard it. I completely understand why we pay taxes. I am an unhappy taxpayer and always have been since I started earning. I hope I always will be an unhappy taxpayer. I demand value for money, which is why I am happy to sit on the Public Accounts Committee to try to drive better value for money. Equally, there is an argument for a tax system without politics. Art Laffer was a lecturer on my masters degree, so it can be guessed what is coming next.
If we could depoliticise the argument, there is an ideal level of tax out there that brings in the most revenue. Surely those on the other side of the argument—the Opposition—would want to see the highest amount of tax revenue coming in to pay for public services of the highest level they require. It is obvious that if someone is taxed at 100%, there is no point in earning, so the state receives no revenue. If someone is taxed at 0%, the state does not get any revenue, so the Government cannot function, and somewhere in the odd-shaped curve that Art Laffer drew a couple of decades ago is the ideal point, where at a certain level of tax, the most revenue is got in. Surely that is the sort of place we should be aiming for in our aspiration for the tax system.
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Charlie Elphicke: I would like to reinforce my hon. Friend’s outstanding argument. Many Government Members are strong advocates of lower, simpler, flatter taxes, and indeed, not so long ago, I made the case for a flat corporation tax in the UK of just 10%, which we could get by axing all the reliefs that exist in business taxation and by having a very simple flat tax system that makes us more internationally competitive. I urge him to continue expanding his argument.
Chris Heaton-Harris: It is not a surprise to many Government Members that the fifth-largest French city is now London, because so many French people have come over to live here. With a 75% higher rate of tax, the best thing they can do is skip across the channel and not pay tax in France. The revenues being received by the French Exchequer at this time are collapsing because the people who pay the most tax do not reside or pay tax in France any more.
David Rutley (Macclesfield) (Con): My hon. Friend is making a very important point. Will he remind the Committee which Government is in power in France?
Chris Heaton-Harris: Well, it is fairly obviously a French Government—[ Interruption. ] Yes, I have to say that it is a socialist Government as well, but again, I was trying to depoliticise the issue. I am trying to make the point that if people could have an argument without politics on the amount paid, they would aim for the most revenue that they could get in to the Exchequer. Therefore, if that was done, plenty of arguments could be made for how that could be spent, and we could have the political debate about the spending of that money.
The Chair: Order. Mr Heaton-Harris, can I implore you to get on to the subject of tax avoidance, rather than taxation philosophy?
Chris Heaton-Harris: I could not believe that I strayed from it—I am very apologetic. The simple point is that if we manage to get the tax rate at exactly the right level, where we are getting the most revenue in, we will be able to make the social arguments whereby people will feel even more deeply uncomfortable about making bogus transactions and circular transactions. That relates to all the work that has been done on the Public Accounts Committee on making companies pay what the PAC Chair would say is their fair tax. The simple point is that I understand what my hon. Friend the Member for Dover is trying to do, but the best way of cutting down on tax abuse is to reduce taxes in the first place.
Shabana Mahmood: The clauses in the group also fall under the stream of Government consultations called, “Raising the stakes on tax avoidance”, which we discussed this morning and earlier this afternoon. The clauses on follower notices and accelerated payments, which we have just debated, are also part of the strategy. It is worth bearing in mind that a further measure has been proposed to give HMRC the power to directly collect debts from individuals’ bank accounts. It is not, however, part of the Bill. It is currently subject to a consultation and has been subject to a great deal of media scrutiny already, as have the measures before us.
The aim of the clauses is to identify those promoters of tax avoidance schemes whose behaviour is deemed to be high risk. Once identified, they will be issued with a conduct notice to encourage improved behaviour, but if compliance is not forthcoming in a prescribed period, a monitoring notice may be issued under the authority of the first-tier tribunal. That will lead to further sanctions for the promoter, including publication of that status by HMRC, as well as additional information and compliance burdens. According to the recent guidance, HMRC expects monitoring notices to be issued in only a small number of cases.
In more detail, clauses 227 to 229 deal with the definitions that will be applied to the terms “promoter”, “intermediary” and so on. Clauses 230 to 234 and schedule 30 relate specifically to conduct notices. The clauses introduce the concept of a conduct notice, which may be issued if a promoter has triggered a threshold condition in the previous three years. HMRC expects that, in most circumstances, there will be discussions
with a promoter that has met a threshold condition with the aim of understanding why it happened, and reaching an agreement on appropriate standards for the future. HMRC will aim to develop a working relationship with promoters that it hopes will lead to issues being resolved informally and without the need for the issue of a conduct notice.Insignificant breaches of certain threshold conditions may be ignored, but certain threshold conditions would always lead to a conduct notice—for example, receiving a conduct notice as a dishonest tax agent—unless HMRC deems a notice inappropriate due to the minimal impact on the level of collection of tax. For example, if the promoter fails to disclose a notifiable proposal under DOTAS, and if that is significant but there are no users of the proposal, it would not be appropriate to issue a conduct notice. In contrast, if the promoter omits 300 clients from a DOTAS client list, that will probably have a significant impact on the collection of tax and so would be included.
The clauses set out what needs to be contained in a conduct notice, such as the conditions that the recipient must comply with, and also gives a recipient the opportunity to comment on the proposed terms. Significantly, however, there is no right of appeal, and points have already been made in relation to that. The clauses allow an authorised HMRC officer to withdraw the notice if there is evidence that the underlying reason for it has been addressed. Finally, the clauses set the maximum length for a conduct notice at two years.
Clauses 235 to 242 contain the procedures for monitoring notices. Where a promoter fails to comply with a conduct notice, an authorised HMRC officer must apply to a tribunal to approve a monitoring notice. Only a tribunal may issue a monitoring notice and may refuse to do so. The promoter must be made aware of the application to the tribunal. The monitoring notice will state the reasons for its issue and, in particular, the condition in the conduct notice that the promoter has breached. One effect of a monitoring notice is that the promoter may be subject to specific information notices with penalties for non-compliance. The Bill will allow the promoter to make a case to the tribunal that a monitoring notice is not appropriate—for example, because the original condition in the conduct notice was unreasonable—and the tribunal may amend the proposed monitoring notice if it so wishes. The proposed law also allows HMRC to publish details of promoters subject to a monitoring notice, including the conditions in the conduct notice that were breached. The promoter must inform its clients that it is being monitored, and regulations may be added to require the promoter to include the fact that it is being monitored in marketing literature and on the web.
Clauses 243 to 246 refer to promoter reference numbers. Once a monitoring notice takes effect, HMRC will issue a promoter reference number to the relevant promoter who, in turn, will be required to pass on that number to all its clients. That will enable HMRC to direct its compliance efforts towards those particular clients.
Clauses 247 to 253 relate to information powers. The clauses give HMRC wide-ranging powers to request information from monitored promoters on arrangements and proposals that they set up once a monitoring notice has been given.
Clauses 254 to 259 give additional powers to enable an authorised HMRC officer to request information or documents that had not been provided in previous notices or where the officer suspects that the promoter has withheld particular information or documents. There is a right of appeal by the promoter against these information notices. Clauses 260 to 266 set out the form and manner in which requests for information are to be made and provide some exemptions on producing certain documents.
Clauses 267 to 273 and schedule 31 set out the penalties that may be levied for non-compliance with various aspects of the new rules. They can be substantial—up to about £1 million. The clauses also introduce a higher standard of reasonable excuse for failing to comply with the new regulations. In particular, an individual cannot rely on legal advice provided to them by a monitored promoter to claim that they have taken reasonable care with their tax affairs, which could otherwise be used as an argument to mitigate a penalty. Clauses 274 to 276 provide supplemental, technical provisions, including the introduction of schedule 32, which extend the rules to partnerships.
We support the motives behind the new regulations. However, it would be useful to have some clarity on precisely what types of tax avoidance the Government are prepared to allow to continue. I say that because, according to HMRC guidance:
“The regime involves a graduated series of sanctions, which carefully balances the rights of promoters against the need to prevent and defeat tax avoidance.”
Given our discussion and, in particular, the thrust of the amendments tabled by the hon. Member for Dover, my reading of that guidance is an apparent acceptance that the industry exists. It would therefore be helpful to know where the Minister draws the line on tax avoidance. Which behaviours would he deem to be acceptable, and which must be stopped? The HMRC guidance talks about a balancing of rights, not the elimination of rights or of a particular type of activity. Further clarification on that would be helpful, especially as the use of aggressive tax avoidance schemes is almost exclusively the preserve of wealthy individuals and corporates.
What consideration has the Minister given to the argument that it is time for promoters of tax avoidance schemes to face the same fines as their clients when their schemes fail? All too often, promoters have already pocketed substantial fees from their attempts to deprive the public purse of much needed revenue. Perhaps more is needed to persuade them to pursue a career that, to coin the phrase used by the hon. Member for Dover, is of “more societal value”. What is the Government’s view on taking such measures forward to what may be considered natural conclusions, such as penalties and other sanctions, that go beyond mere notices?
Broadly speaking, the Minister will be well aware that the reaction from the accountancy firms and professional bodies to the initial consultation on high-risk promoters was negative, but that adverse reaction appears to have softened somewhat, as HMRC has now addressed some of the issues raised in the consultation process. However, concerns remain over particular clauses and a wider question is being raised about HMRC going to the trouble of getting the new clauses introduced to act against what appears to be a small number of promoters. In doing so, the professional bodies are concerned—we
might think that they would say this—that the clauses might catch legitimate activity. It would therefore be useful to hear what activity the Minister considers to be legitimate.We know that about 20 businesses are potentially high-risk promoters that HMRC wants to target. It would be helpful to have the Minister’s explanation of what consideration was given to its existing powers and whether they were sufficient to deal with those promoters. Each promoter will approach its work differently and have different levels of risk in its proposals. We could argue that, rather than a generic definition for all, which might catch people that the Government do not intend, a more targeted approach using existing rules might be better. It would be helpful for the Minister to tell us how he has come to a different conclusion. The Committee needs to be satisfied that the action we are taking will catch all those whom it is intended to catch.
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Ian Swales: The shadow Minister has clearly done her homework. Has she considered the definition question? There was a high profile case where a hedge fund manager had nearly £19 million of tax losses through a scheme that the press said was marketed by a film company, Goldcrest, but then sold by HSBC, so presumably in the legislation the promoter would be the film company and the intermediary would be HSBC. But when we look at the levels of financial sophistication of those two companies, we would have to question who was really the promoter of such a scheme.
Shabana Mahmood: I am grateful to the hon. Gentleman; he makes an important point. Again, it will be helpful to hear from the Minister how the definition will play out in practice. We know who the 20 high-risk promoters are. Any of us who go on the internet to look into such matters will quickly work out who those companies are. We know who we are trying to get to as a result of these measures. There is a question about whether those are the only promoters that the Government are seeking to catch as a result of the measures or whether there is an intention to go further. If we are going further, that is a perfectly reasonable route to take, given some of the examples of tax avoidance that have made it into the public domain and into public discourse. In going down that road, it would be helpful to know how the Government’s approach will be shaped and what more might be needed as the proposals and measures bed in.
There is no right of appeal to the issue of a conduct notice. As I mentioned earlier, we have already had some debate about other measures in this section of the Bill that do not attract a right of appeal. I simply reiterate the points I made earlier that rights of appeal are an important feature of our legal system. If we are going to derogate from them and remove them, as legislators we must be sure that there is no other way of crafting a right of appeal to guard against the opportunity, in this example, for some promoters unacceptably to delay the effectiveness of the high-risk promoters provisions by making multiple appeals. Perhaps the Minister will address that point and satisfy the Committee that, in removing the right of appeal, he was sure that there was no way of phrasing or crafting a right of appeal that
could guard against that opportunity for promoters to cause further and unacceptable delay.Much comment was made during the consultation process that tax avoidance grows as the complexity of tax law increases. Members of previous Finance Bill Committees, who have dealt with Finance Bills much longer than the one we have been scrutinising over the past few weeks, will attest that, even with an Office of Tax Simplification, the tax law that we pass feels like an ever-growing beast. Will the Minister provide an update on the Government’s view on simplification of the tax code? What more are they planning? Do the Government recognise that there is an interplay between greater complexity of tax law and the way in which further avoidance activity appears to spring up like a many-headed hydra?
What steps will the Government take to ensure that a firm clampdown on promoters will not simply drive their activities below the HMRC radar or offshore, where they will be even harder to regulate? Has any assessment been made of that risk and is there more that can be done to try to prevent that? Similarly, does the Minister share the concern of the Chartered Institute of Taxation that some high-risk promoters could wear the naming and shaming that is envisaged as a result of these measures as a badge of honour, or worse, as approval by HMRC that they provide schemes that work, and that he is therefore potentially providing a valuable marketing tool for the most unscrupulous individuals? It would be helpful to know what assessments have been made to measure that risk.
I return to a question on resourcing, which has been a theme of all our debates today. HMRC is getting more powers and therefore its resources are brought under sharper scrutiny. Given the wide-ranging information powers in the legislation, is there a risk that HMRC might be inundated with a huge volume of material, to the extent that they cannot cope, especially as the information in these measures is not limited to just DOTAS cases, let alone to just avoidance cases? HMRC will presumably need to allocate more resources to dealing with this information. Has any analysis been done comparing the costs of using the current rules to go after the 20 known high-risk promoters as a targeted approach, with that of the wider measures? What is the required resource for the approach that has been adopted as a result of the legislation?
The hon. Members for Dover, for Redcar and for Daventry are right to point out that tax avoidance has been greatly discussed by ordinary members of the public. It comes up as a doorstep issue, especially given that some of the cases of the most aggressive tax avoidance adopted by people who are described as celebrities have filtered through the public consciousness and elevated the debate, making it a higher political priority. Given the financial circumstances of the country, it is ever more important that we ensure that we collect all the tax that is due in a timely way. The Government are right, therefore, to focus on what happens when tax avoidance occurs and who the people that engage in this behaviour are. A necessary aspect of that debate is to think about sanctions and penalty regimes for promoters and people who engage in that activity. However, that would lead to a wider system of regulation to make the whole system work, which raises further important questions about the way in which the professions operate.
I know that the House of Lords Economic Affairs Committee has looked at those questions a number of times. They are issues that we continue to receive representations on, as I am sure the Minister does. They are important points to be considered, given where we are with the public debate.Mr Gauke: It is a great pleasure to respond to this debate this afternoon. We have had an extensive debate about avoidance in connection with previous measures and I welcome the discussions on tax avoidance both in Committee and across the country. I am sure that the Government’s track record, in their drive to tackle tax avoidance, speaks for itself.
The measure’s origin can be found in our consultation “Lifting the Lid on Tax Avoidance Schemes” from the summer of 2012 when the activities of these promoters were brought into sharp focus. Quite rightly, there was outrage that someone could be running a business, the sole aim of which was to help and encourage people, often in large numbers, to avoid paying tax. As with other proposals, the professional bodies and business groups want us to take action and I am grateful to them for engaging with us to refine some of the detail during the recent consultations. The measure is about tackling promoters who set up and market tax avoidance schemes and then refuse to engage with HMRC to sort out the consequences.
My hon. Friend the Member for Dover has tabled amendments to these clauses and I will come to those shortly. First, however, there are also amendments in this group in my name. Before I turn to the amendments, I will give some background to explain why the measure was proposed and how it will operate.
Clauses 227 to 276 and schedules 30 to 32, which introduce the high-risk promoters rules, are part of the Government’s strategic response to avoidance and are intended to deter the use of avoidance schemes by influencing the behaviour of promoters, intermediaries and clients. The Government are committed to tackling the unacceptable behaviour of promoters of avoidance schemes. A small but persistent minority of promoters sell avoidance schemes that patently do not work and waste their clients’ time and resources. Some avoid their obligation to disclose the schemes to HMRC and seek deliberately not to co-operate with HMRC in trying to resolve their clients’ tax affairs.
The new measure will change the playing field by imposing minimum standards of behaviour, supported by onerous information powers and stiff penalties if promoters do not comply. It is designed to change the behaviour of the promoters who behave unacceptably, and encourage them back into compliant behaviour.
Let me set out in a bit more detail the changes that the clauses will make. There are two stages to the legislation. First, clauses 227 to 235 and schedule 30 give the promoter the chance to change their behaviour before the serious consequences in the second stage apply. Secondly, clauses 236 onwards and schedule 31 allow HMRC to use significant new information powers on the promoter, with penalties of up to £1 million for failing to comply. The legislation identifies promoters by using objective threshold conditions, which are described in schedule 30. If the promoter triggers a threshold condition—for example, by being charged with a criminal
tax offence—clauses 230 and 231 allow HMRC to issue the promoter with a conduct notice that requires them to change their behaviour. The conduct notice can cover the avoidance schemes that the promoter sells, the way they treat their customers and their compliance with their tax obligations, and it can last for up to two years. HMRC has the power to check whether the promoter is complying with the conduct notice.If at any time during that period the promoter breaches the terms of the conduct notice, the second stage is triggered. Clause 235 gives HMRC the power to apply to the tribunal for approval to issue a monitoring notice, which allows it to use information powers against the promoter to get full details of their schemes and clients. Once a monitoring notice has full effect, clause 241 allows HMRC to name the promoter as subject to a monitoring notice, and clause 242 requires the promoter to tell their intermediaries and customers. Failure to comply with those obligations can lead to penalties of up to £1 million. The penalties are described in schedule 31.
Clauses 248, 251 and 253 extend the information powers and penalties for intermediaries who continue to act for the monitored promoter. It is not only the promoters and intermediaries but their clients who get new responsibilities under the legislation. Clause 246 requires clients to tell HMRC that they have used the monitored promoter, and clause 270 introduces an extended 20-year time limit for HMRC to bring assessments on them if they fail to do so. There will be a higher standard for reasonable excuse and reasonable care for promoters and their clients, which will prevent promoters from hiding behind poor quality legal advice as a justification for their behaviour.
Schedule 31(9) prevents clients of high-risk promoters from relying on legal advice provided to them by the promoter to avoid penalties. Those clients are required to seek independent legal advice on their rights and obligations. To encourage better communication with HMRC, intermediaries and clients can also rely on clause 266, which overrides confidentiality agreements with the promoter and allows them to talk to HMRC voluntarily about any of the monitored promoter’s schemes. Finally, schedule 32 describes how the legislation applies to high-risk promoters who are partners in partnerships, and how the behaviour of a partner may have consequences for the partnership.
The measure began with a consultation in 2012, which was followed by a consultation a year later, “Raising the stakes on tax avoidance”, which made proposals for the structure of the regime. More than 30 responses to “Raising the stakes” were received, most of which were supportive of the policy, with many suggesting ways in which the regime could be improved. The consultation on the draft legislation earlier this year generated over 20 responses and was used to refine it. Again, I thank those who responded to the consultation and commented on the draft legislation.
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These measures will impact most heavily on a small number of the highest-risk promoters whose behaviour is designed to disrupt and frustrate HMRC in its vital role of tackling avoidance. It is right that we take steps to tackle that behaviour and I am grateful to the wider promoter community for their support.
I hope that by now those who engage in tax avoidance have got the message: the Government have introduced a general anti-abuse rule, closed down loopholes and taken action to get the tax in disputed avoidance schemes paid up front. These measures are the next step in building up pressure on those who market and those who use tax avoidance schemes. The promoters and avoiders should be under no illusion that we will stop there—as long as they continue to try to frustrate the tax system and try to pay less tax than the law clearly intends, we will continue to act against them.
Before turning to the amendments tabled by my hon. Friend the Member for Dover, I will respond to points raised by the hon. Member for Birmingham, Ladywood on the measures relating to promoters of tax avoidance schemes. She asked whether HMRC already has sufficient powers to tackle abusive schemes. The legislation before us is about promoters, not schemes. The aim is to reduce the supply of avoidance schemes by tackling promoter behaviour. To do that effectively, HMRC needs specific powers to require promoters to comply with conduct notices and when a monitoring notice is in place HMRC will be able to use new information powers and penalties.
I was asked where the line is drawn for the high-risk promoter regime. The rules are aimed at a small number of individuals who display the most recalcitrant behaviour. They sell schemes that generally do not work and they do not co-operate with their clients and HMRC in resolving tax disputes. Most promoters do not display this behaviour and it would not be right to use these powers against tax advisers who are co-operative.
I was asked whether the measures could be too broad and whether innocent tax advisers could be caught up. A person has to be a promoter of schemes that give a tax advantage and to have made a significant breach of a threshold condition to fall within the legislation. The vast majority of tax advisers will not be in that position. The definition of promoter can be narrowed by a statutory instrument and any refinements to the definition can be retrospective to Royal Assent. To come within these rules, a threshold criterion must be triggered; examples of the threshold criteria include a breach of the banking code of practice or disciplinary action by a professional body.
I was asked if promoters should face fines if a scheme fails. These measures will ensure that promoters who display recalcitrant behaviour will not be allowed to get away with it any longer; any further developments in this policy will require detailed consultation. We have worked on the basis of wanting to consult properly. However, the Government will consider their options in future.
In response to concerns raised over naming and shaming—the Chartered Institute of Taxation said that naming could be seen as a badge of honour—the wording that the promoter will have to use when named will be prescribed in the regulations. The wording will make it clear that being named is not a source of pride. In many cases, taxpayers will find that that is more of a deterrent than an appeal.
A wide point was made about avoidance and complexity. There is no doubt that there are times when complexity in the tax system results in avoidance behaviour, as taxpayers and their advisers seek to take advantage of particular complexities. However, sometimes the behaviour
of the taxpayer or promoter of a scheme is extremely complex, and relatively simple rules can be exploited by such behaviour.The relationship between avoidance and complexity is in itself quite complicated and runs in different directions. Often, the simplest approach is for a taxpayer to pay the tax that is due without any artificial and contrived behaviour, but we live in a world where some will engage in such behaviour. As a consequence, we sometimes have to ensure that HMRC has proper powers and sometimes, unfortunately, we need additional complexity in the tax system to deal with such contrived and artificial behaviour.
However, I stress that the Government take simplification seriously. The Office of Tax Simplification has made a large number of recommendations, round about the majority of which have been implemented by this Government in the course of our proceedings in recent weeks. We have implemented a number of OTS recommendations, but it is not a panacea for all areas of tax avoidance.
A question was asked about HMRC’s resources and whether it will be able to implement the new powers before us. The high-risk promoter rules will be operated by the new counter-avoidance directorate in HMRC, consisting of 800 experienced HMRC officers, who will be responsible for tackling marketing avoidance. We believe that the resources are sufficient.
It is worth pointing out that, going back to the comprehensive spending review of 2010 and subsequent Budgets and autumn statements, as a Government we have invested £1 billion over this period to ensure that HMRC can do more to deal with avoidance and evasion. So far that seems to be working well, with record levels of HMRC yields.
The amendments tabled by my hon. Friend the Member for Dover would introduce a tax offence for promoting abusive tax avoidance schemes. While I appreciate my hon. Friend’s reasons for tabling the amendments, he will not be surprised to learn that I will not be supporting them. However, he has raised some important points for the Committee.
As I said, there is no doubt that, as a Government, we have a strong record in tackling avoidance. In the past two years, we have introduced some groundbreaking anti-avoidance legislation: the general anti-abuse rule; follower notices; accelerated payments; and the high-risk promoter rules; as well as more targeted legislative changes.
We have demonstrated our resolve to act against tax avoidance, and we will not hesitate to act further if necessary. The GAAR is specifically designed to tackle abusive avoidance schemes. If a scheme falls foul of the GAAR, the promoter is within the bounds of this legislation. We expect that the GAAR and the high-risk promoter rules, alongside the existing sanctions that HMRC has against promoters, will be sufficient to ensure that promoters cease to market abusive tax avoidance schemes.
The changes proposed by the amendments are outside the remit of the extensive consultations that we have undertaken. They have informed our thinking on the area, and we would not want to undermine the valuable contributions made by those who responded by changing the policy at this late stage. The amendments would also
increase the complexity of the legislation and provide operational challenges to implement it. I am therefore not inclined to accept them. However, I am grateful to my hon. Friend for his provocative speech and for his contribution to this important debate.Let me turn briefly to the amendments tabled by the Government, which will ensure that the legislation works as intended. Amendment 39 is a technical amendment to clarify the drafting of clause 242. Amendments 40 to 43 make two sets of changes. The first includes in clause 244 an obligation on a promoter to inform certain of its intermediaries of its promoter reference number. The second clarifies the time limit in which the promoter has to notify its promoter reference number to certain clients who have used its schemes.
Amendments 44 to 46 are three identical amendments to clause 251 and clarify internal inconsistencies in the clause that arise due to the use of the terms “request” and “requirement”. Amendment 47 ensures that clause 226 allows the relevant client or relevant intermediary to provide documents as well as information to HMRC. Amendment 48 to clause 270 includes inheritance tax and a 20-year extended time limit to recover any tax lost due to a person’s failure to inform HMRC of their promoter reference number. Amendment 49 narrows the application of clause 272 so that it does not go beyond the policy intent of the measure. Amendment 50 is a minor change to schedule 31 to reflect the changes to clause 244. Finally, amendment 51 to schedule 32 makes it clear that Scottish partnerships are not included in the partnership provisions because they are legal entities in their own right.
As I said at the outset, this is a major new development. If a promoter tries to pull the wool over HMRC’s eyes, the likelihood is that they will quickly find themselves in this regime, having to improve their behaviour or face stiff penalties. I believe that taking these steps is the right and fair approach. It is fair to promoters who play by the rules and fair to the millions of taxpayers who pay their tax on time. It is right to target those who try to escape their obligations and avoid tax. I hope that these clauses and schedules, as amended, can stand part of the Bill.
Charlie Elphicke: I shall seek to withdraw my amendment at the appropriate moment but I wish to touch briefly on clause 264 to which I tabled an amendment which, quite rightly, was not selected as it would turn the clause on its head. Clause 264 states:
“Nothing in this Part requires any person to disclose to HMRC any privileged information.”
Would the Minister consider further the whole issue of privileged information? This is legal professional privilege, which is not to be confused with parliamentary privilege. As parliamentary privilege is to the day and to the sunshine, legal professional privilege is to the dark corner and the night. Parliamentary privilege allows that which is hidden to be revealed. It is the power of free speech. It is the power to name and shame, which I used a few moments ago and from time to time use in this House. Legal professional privilege is the privilege to hide, to keep secret, to take advice from a client to their lawyer and for it never to come to light. So it remains for ever in a dark corner.
Both types of privilege and all privilege are a great responsibility. In using the power under the Glorious Revolution, the Bill of Rights, to name and shame and
to bring things to light, we have a great responsibility in speaking out. But under legal professional privilege things can be hidden away to prevent people from getting to know what has been going on. The reason why this is extremely important, and the reason why I raise this issue, is that legal professional privilege is so often not used responsibly, so that things that should come to light are hidden away.This form of privilege does not apply, under the Prudential case, to accountants. It does apply to lawyers. What happens is this. A scheme is devised. The documents are written up by a firm of accountants—the promoter. They are given to the lawyers. The lawyers write an opinion on it. The documents therefore become subject to privilege, being opined upon, and the other documents are shredded. My brief question to the Minister is, could it be amended?
Mr Gauke: My hon. Friend raises an interesting point. It would be fair to say that legal professional privilege is a common law and fundamental right and any change to that position would have to undergo a full consultation. I have certainly received representations from groups representing, for example, the accountancy profession who argue that there is a distortion in the legal market as a consequence. I am grateful to my hon. Friend for raising the point. I would simply say that any change would be a significant matter and would require considerable thought and consultation before anything was done.
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Charlie Elphicke: I thank the Minister for that. To close, I note that the judgment in the Prudential case says that this is a matter for Parliament to sort out. The judgments of Lord Neuberger and Lord Hope clearly say that. The privilege I am looking at is that which is used to further a scheme; it is not where a taxpayer seeks to defend a scheme and takes advice in connection with that offence. It is a privilege that is used to cloak the existence of the scheme that makes it very hard for HMRC to get to the bottom of what is going on. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 227 ordered to stand part of the Bill.
Clauses 228 to 230 ordered to stand part of the Bill.
Clauses 231 to 241 ordered to stand part of the Bill.
Clause 242
Publication by monitored promoter
Amendment made: 39, in clause 242, page 163, line 19, after “subsection (3)” insert “or (10)”—(Mr Gauke.)
Clause 242, as amended, ordered to stand part of the Bill.
Clause 243 ordered to stand part of the Bill.
Clause 244
Duty of monitored promoter to notify clients of number
Amendments made: 40, in clause 244, page 165, line 17, at end insert “, and
(d) any person who the monitored promoter could reasonably be expected to know is a relevant intermediary in relation to a relevant proposal of the monitored promoter.”
Amendment 41, in clause 244, page 165, line 34, at end insert—
‘( ) A person is a relevant intermediary in relation to a relevant proposal of a monitored promoter if the person meets the conditions in section 229(a) to (c) (meaning of “intermediary”) at any time while the monitoring notice in relation to the monitored promoter has effect.”
Amendment 42, in clause 244, page 165, line 36, leave out “or (2)(c)”
Amendment 43, in clause 244, page 165, line 41, at end insert—
“() in the case of a person falling within subsection (2)(c), the period of 30 days beginning with the later of the day of the notification mentioned in subsection (1) and the first day on which the monitored promoter could reasonably be expected to know that the person fell within subsection (4), and
‘() in the case of a person falling within subsection (2)(d), the period of 30 days beginning with the later of the day of the notification mentioned in subsection (1) and the first day on which the monitored promoter could reasonably be expected to know that the person was a relevant intermediary in relation to a relevant proposal of the monitored promoter.”—(Mr Gauke.)
Clause 244, as amended, ordered to stand part of the Bill.
Clauses 245 to 250 ordered to stand part of the Bill.
Clause 251
Duty of person dealing with non-resident monitored promoter
Amendments made: 44, in clause 251, page 170, line 39, leave out paragraph (b) and insert—
“() requires the person to provide the information.”
Amendment 45, in clause 251, page 171, line 11, leave out paragraph (b) and insert—
“() requires the person to provide the information.”
Amendment 46, in clause 251, page 171, line 19, leave out paragraph (b) and insert—
“() requires the person to provide the information.”—(Mr Gauke.)
Clause 251, as amended, ordered to stand part of the Bill.
Clauses 252 to 265 ordered to stand part of the Bill.
Clause 266
Confidentiality
Amendment made: 47, in clause 266, page 179, line 4, after “information” insert “or documents”—(Mr Gauke.)
Clause 266, as amended, ordered to stand part of the Bill.
Clause 267 ordered to stand part of the Bill.
Schedule 31
Penalties
Amendment made: 50, in schedule 31, page 546, line 34, leave out “client” and insert “clients and intermediaries”—(Mr Gauke.)
Schedule 31 , as amended, agreed to.
Clauses 268 and 269 ordered to stand part of the Bill.
Clause 270
Extended time limit for assessment
Amendment made: 48, in clause 270, page 180, line 45, at end insert—
‘( ) In section 240 of IHTA 1984 (underpayments)—
(a) in subsection (3) for “and (5)” substitute “to (5A)”,
(b) in subsection (5), for “those dates” substitute “the dates in subsection (2)(a) and (b)”,
(c) after subsection (5) insert—
“(5A) Proceedings in a case involving a loss of tax attributable to arrangements which were expected to give rise to a tax advantage in respect of which a person liable for the tax was under an obligation to make a report under section 246 of the Finance Act 2014 (duty to notify Commissioners of promoter reference number) but failed to do so, may be brought at any time not more than 20 years after the later of the dates in subsection (2)(a) and (b).”, and
(d) in subsection (8), for “, (5) and (6)” substitute “to (6)”.’—(Mr Gauke.)
Clause 270, as amended, ordered to stand part of the Bill.
Clause 271 ordered to stand part of the Bill.
Clause 272
Offence of concealing etc documents following informal notification
Amendment made: 49, in clause 272, page 182, line 13, leave out paragraph (b) and insert—
“() the officer of Revenue and Customs intends to seek the approval of the tribunal to the giving of the notice.”—(Mr Gauke.)
Clause 272, as amended, ordered to stand part of the Bill.
Clauses 273 and 274 ordered to stand part of the Bill.
Schedule 32
Promoters of tax avoidance schemes: partnerships
Amendment made: 51, in schedule 32, page 552, line 9, leave out sub-paragraph (2) and insert—
‘( ) But in this Part of this Act “partnership” does not include a body of persons forming a legal person that is distinct from themselves (and paragraphs 2 to 21 may accordingly be disregarded in applying this Part of this Act to such a body of persons).’—(Mr Gauke.)
Schedule 32, as amended, agreed to.
Clauses 275 and 276 ordered to stand part of the Bill.
Clause 277 ordered to stand part of the Bill.
Clause 278
The Code of Practice on Taxation for Banks: HMRC to publish reports
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op): I beg to move amendment 57, in clause 278, page 187, line 28, at end insert—
‘(1) Before bringing forward any further reform of The Code of Practice on Taxation of Banks, the Chancellor shall lay before Parliament a report considering the impact on the total receipts paid to the Exchequer since 2010 by—
(a) Uk banking groups;
(b) building society groups;
(c) foreign banking groups; and
(d) relevant non-banking groups.
(2) The report will pay particular attention to receipts from—
(a) corporation tax;
(b) the bank levy; and
(c) bank payroll tax.”
The Chair: With this it will be convenient to discuss the following:
Clauses 279 to 281 stand part.
Cathy Jamieson: We are getting there. I am sure people will be disappointed when these wondrous proceedings come to an end. Was that a cry for more? I suspect not. It is a pleasure to be here this afternoon to speak about these clauses. Of course, they arose following a consultation that was published back in May 2013 by HMRC on strengthening the code of practice on taxation for banks. That included draft legislation requiring HMRC to publish an annual report on the operation of the code.
The code is one element of the Government’s anti-avoidance strategy and is intended to change the attitudes and behaviours of banks towards tax avoidance. We have had a thorough debate on tax avoidance and are now looking at some of the specific issues around banks. Adoption of the code is voluntary, but the list of banks that have adopted it is published. So far, I understand that a total of 283 banks with UK operations have signed up to the code, including those defined as the so-called big banks.
The amendment would require the Government, prior to bringing forward any further reform of the code of practice, to lay before Parliament a report considering the impact on the total receipts paid to the Exchequer by UK and foreign banks, and building societies. We want specific attention paid to the receipts from corporation tax, the bank levy and the bank payroll tax.
It is important to recognise that clauses 278 to 281 require the tax commissioners for HMRC to publish a report on the operation of the code of practice on taxation for banks. The report must be published no later than the end of the calendar year in which a reporting period ends. The commissioners must determine breaches of the code and, where a breach has been established, may name the bank or entity in the report and must publish information relating to the breach, except in instances where that is not deemed to be reasonably practical. It also provides for the introduction of a governance protocol, delineating how the code will operate and setting out the rules for compliance. The protocol was published in December 2013 and is an
updated version of a previous protocol from 2012. It covers all banks that notified the commissioners that they have unconditionally committed to complying with the code on or after 31 May 2013, and sets out four possible views that the HMRC may have regarding a bank’s compliance with the code.I will not go into a great deal more detail about what the clauses do because I am sure the Minister will wish to say something about that, but I do want to make a couple of comments, raise some issues and ask some questions.
We support the underlying principle of the code of practice, which goes back to 2009, under the previous Government. It is important to ensure that banks and building societies meet their tax obligations and make every reasonable attempt to comply with the letter and spirit of the law. We support making the code more stringent, ensuring that banks that fail to comply are made to face the consequences. We welcome the distinction that has been drawn between the smaller and larger banks and building societies, with the former having to comply only with the first part of the code. However, we believe that the Government should take a more holistic approach to the bank taxation regime and that is why we have tabled the amendment.
It would be straying from the subject of the clause to move too much into discussion of how the bank levy has failed to generate anything like the revenues projected, so I will not succumb to the temptation to do that yet again at this point. However, it is important to understand the reasons for that, which is why we want the amendment to be passed so that the report would look at the taxation regime in the round.
A concern about the proposed changes to the code has been raised by the CIOT. The changes have been described as
“fundamentally flawed and potentially damaging to the UK’s reputation as a place for inward investment…The proposals need to be reconsidered to ensure that they are proportionate, fair, workable and do not damage the UK’s reputation.”
That highlights an uncertainty that may surround what could be described as the intentions of Parliament and the spirit of the law in determining whether a bank has breached the code. Some respondents to the consultation argued that a participating bank could, quite reasonably, have a different interpretation of the intentions of Parliament from that of HMRC. This would be a good opportunity for the Minister to address that point because it is suggested that HMRC is being established as “judge, jury” and, indeed, “executioner” and I am sure that Ministers would not wish to have that tag attached to it but, none the less, want to deal with the questions raised.
The Law Society felt that HMRC had been granted too much discretion, arguing:
“It is not appropriate for HMRC to set itself up as the only arbiter of parliamentary intention in relation to matters within the code. This is a matter ultimately for the courts to interpret on the basis of the legislation passed by Parliament and the surrounding circumstances.”
It also raised concerns about the supposed voluntary nature of the code, pointing out that it is hardly voluntary when banks that have not signed up can be publicly named and suffer adverse publicity as a result. It would be interesting to hear the Minister’s comments on that.
I understand that the Government have, to some extent, picked up on and revised the protocol in the light of the concerns of some of the respondents to the consultation. However, it is a concern that some issues have not yet been addressed by revisions and I would be interested to hear the Minister’s view on some of the points raised. I have a few questions. Can he provide any information on the impact of the code to date on the level of taxation paid by the banks? What does he have to say on the observations of the CIOT, the Law Society and others that responded to the consultation that the revised code grants HMRC disproportionate power with insufficient safeguards to ensure that it is fairly exercised? That is one of the themes that has run through today. Everyone wants to see as much as possible done to ensure that individuals and organisations pay the appropriate taxes but, at the same time, proper checks and balances have to be built in. I would like to hear from him on that.
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Do the Government agree with the recommendation that HMRC should consult the Financial Conduct Authority and Prudential Regulation Authority before publicly naming a bank found to be in breach of the code? Does the Minister consider it fair that HMRC can supersede the conclusions of the independent reviewer in deciding whether a bank has breached the code? Does that not risk undermining the legitimacy of the review system?
We have not had the opportunity to discuss the shadow banking sector in detail in this debate, but during the past few days concerns have been raised about it. Will the Minister consider extending the code to encompass that sector to address those concerns? So that we can understand the Government’s thinking, does he have any comment on the assertion to which I referred that the code could damage inward investment? I would like to hear his response before deciding whether to press the amendment.
Mr Gauke: Clauses 278 to 281 require HMRC to produce annual reports from 2015 on how the code of practice on taxation for banks has operated. The reports will provide details of those banks and building societies that have signed up to the code as well as those that have not. It may also name any bank or building society that HMRC determines has not met its commitments under the code.
The voluntary code was introduced in 2009. Its purpose is to encourage banks to follow the spirit as well as the letter of the tax law. It is a key element of the Government’s anti-avoidance strategy and was designed to change the attitudes and behaviour of banks towards avoidance, given their unique position as potential users, promoters and funders of tax avoidance schemes. Since the code’s introduction, HMRC has seen a positive response from banks in their tax planning and transparency, which is in large part down to changing attitudes by banks towards avoidance. The code has been a significant factor in that change.
However, the code lacks public transparency. There are also no obvious downsides for banks in not adopting the code and no codified consequences for a bank’s
non-compliance with its code commitments. To address that, at Budget 2013 the Government announced plans to strengthen the code by making its operation more transparent. Banks were then asked to re-adopt on that basis. At autumn statement 2013, following consultation with the sector, HMRC published a list of those banks and building societies that had adopted the strengthened code. An updated list including further banks was published at Budget 2014.Clauses 278 to 281 introduce legislation requiring HMRC to produce an annual report on the operation of the code. The first report will be published next year and will cover the period ending 31 March 2015. Clause 278 sets out the groups and entities to which the code applies, which are those in the scope of the bank levy provisions. The clause also provides that, in the annual report, HMRC may name any bank or building society that it determines has breached the code.
Clause 279 provides that banks and building societies wishing to sign up to the code must write to HMRC confirming unconditional commitment to the code. To withdraw from the code, a bank or building society must write to HMRC confirming that it is no longer unconditionally committed to the code. Where a bank or building society is named in an annual report as having breached the code, it will be treated as having withdrawn from the code until such time as HMRC is satisfied that it has once again met its commitments under the code.
Clause 280 provides that a governance protocol will set out how the code will operate. The protocol was published alongside the draft legislation and the autumn statement and sets out a number of safeguards, including the requirement for HMRC to commission a report from an independent reviewer before naming a bank or building society as having breached the code. Clause 281 provides that HMRC must consult members of the bank and building society sector before it publishes or changes any future guidance on the code.
I am conscious that during last year’s consultation, concerns were raised by the banks and legal profession about HMRC rather than an independent third party having the ultimate decision on whether a bank should be publicly named for being non-compliant. The Government listened carefully to those concerns. Although we consider it is right that HMRC commissioners who are directly answerable to Parliament remain the final arbiter on whether a bank has breached its commitments to HMRC under the code, we have introduced additional robust safeguards. The independent reviewer is expected to be someone who is independent of both the banking sector and HMRC and is held in good standing by both, such as a retired High Court judge. HMRC may reach a different determination from the independent reviewer only in two limited and exceptional circumstances where, viewed objectively, the independent reviewer’s opinion is unreasonable based upon the Wednesbury test of reasonableness used in judicial review proceedings, or where, viewed objectively, there are other exceptional and compelling reasons for HMRC reaching a different conclusion.
Where, contrary to the opinion of the independent reviewer, HMRC determines that a bank or building society should be named as non-compliant, and the bank or building society commences judicial review proceedings against HMRC, the onus will be on HMRC
to prove that it acted reasonably in reaching a different opinion from that of the independent reviewer. This reversal of the normal burden of proof is in recognition of the possible commercial and reputational damage that may result from a bank or building society being named in an annual report.Turning to amendment 57, we already considered a similar amendment when we debated clause 113, and also during the Committee of the whole House. I do not know whether to be disappointed that Opposition Members are not showing more originality in their amendments or whether to be impressed by their consistency. Even when we have clauses setting out a requirement to produce reports, we still have an amendment requesting that different reports are produced, but there we go.
The amendment asks the Government to lay before Parliament a report that considers overall tax receipts from UK banks, foreign banks, building societies and relevant non-banking groups since 2010. As I have explained before, HMRC already publishes statistics on PAYE, the bank levy, corporation tax and bank payroll tax receipts from the banking sector each year, although not broken down by different groups of banks. The most recent publication, from August 2013, showed that the relevant tax receipts from the banking sector were £21.7 billion in 2012-13. This represented an increase of 6%—or £1.2 billion—on the previous year, despite corporation tax receipts continuing to be depressed by losses incurred during the financial crisis. The publication shows that 2012-13 receipts remain below the peak reached in 2010-11. However, the 2010-11 figure was inflated by receipts from the bank payroll tax, a one-off measure implemented on the day of the announcement, which the previous Chancellor said could not be introduced permanently. I am tempted to read the whole quote, but on this occasion I will not. However, hon. Members should be aware of it.
Bonuses in the banking sector have fallen markedly since the bank payroll tax applied, with the yield from a repeat tax likely to be much lower. The Government have also taken wider action since 2010-11 to tackle unacceptable remuneration and ensure that pay does not incentivise excessive risk-taking. Under the PRA’s remuneration code, large parts of bonuses must now be deferred and paid in shares. Firms are now required to have in place clawback policies to reduce or revoke pay where subsequent information on poor performance comes to light. That is why the Government chose instead to introduce a permanent tax on banks’ balance sheets, which helps to ensure a fair contribution from the banking sector while supporting the regulatory regime by encouraging banks to move towards safer funding profiles. I hope that will suffice to explain why we think the amendment tabled by Opposition Members is unnecessary.
The hon. Member for Kilmarnock and Loudoun asked whether HMRC was acting as judge, jury and executioner. As I said earlier, concerns were raised during the 11-week consultation exercise conducted over the summer. We have introduced the independent reviewer, as I mentioned. It is right that HMRC commissioners remain the final arbiter under the protocol of whether a bank has breached its commitments to HMRC under the code. Parliament, assisted by the National Audit Office, retains its oversight of HMRC’s decision-making processes.
Furthermore, as the code is about a bank’s behaviour, it follows that any decision on whether a bank should be named as not complying with its code obligations should be made close to the events. The inclusion of a formal appeals process could mean the decision was not published until years after the events, which would be counter to the code’s behavioural change objectives.
Could the provisions damage inward investment? There is no evidence so far to suggest that that will be the case. HMRC will clearly monitor the situation and keep it under review.
Do the Government intend to consult the PRA and the FCA before naming a bank? There are no proposals to do so, but we recognise that naming a bank is a potential source of reputational damage, which is why we have provided a number of significant safeguards to prevent banks from being incorrectly named.
I was asked how much additional tax has been brought in. It is not possible to determine how much has been paid as a result of the code, but the code increases transparency and HMRC’s ability to tackle avoidance in real time.
To conclude, now is the right time to strengthen the code. The changes made by clauses 278 to 281 help to provide full transparency on which banks have adopted the code and clear sanctions against those that breach it, while also providing robust safeguards for participating banks. That will help to reinforce the behavioural improvements already evident in the banking sector and support fairness in the tax system. I hope the clauses can stand part of the Bill.
Cathy Jamieson: I thank the Minister for his expansive answers, which took note of all my points, as well as laying out the Government’s views on a number of issues so that we have them on the record.
I do not know whether to be disappointed, although I am not surprised, that the Minister has once again failed to succumb to my pleas for a report, even though it is, on this occasion, just a different kind of report from the one he proposes to introduce. None the less, it is important to look at the wider issues around the taxation of the banking sector, so I will, on what is probably the last occasion I will have the opportunity to do so in this Committee, try one more time and press the amendment to a vote.
Question put, That the amendment be made.
The Committee divided: Ayes 14, Noes 18.
AYES
NOES
Question accordingly negatived.
Clause 278 ordered to stand part of the Bill.
Clause s 27 9 to 283 ordered to part of the Bill.
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Clause s 285 to 290 ordered to stand part of the Bill.
Clause s 291 to 295 ordered to stand part of the Bill.
New Clause 1
Lower rate of tax
‘(1) The Chancellor of the Exchequer shall, within six months of Royal Assent, lay before Parliament a report containing proposals for an income tax rate of 10 per cent on a band of income above the personal allowance.
(2) The report mentioned in subsection (1) above shall provide for the full benefit of the 10 per cent. rate not being available to taxpayers paying the higher or additional rates of tax.”—(Shabana Mahmood.)
Brought up, and read the First time.
Question put, That the clause be read a Second time.
The Committee divided: Ayes 13, Noes 18.
AYES
NOES
Question accordingly negatived.
New Clause 2
Higher rate of tax
“(1) The Chancellor of the Exchequer shall, within three months of the passing of this Act, undertake a review of the number of people paying the 40 per cent rate of income tax in the years—
(a) 2010-2011;
(b) 2011-2012;
(c) 2012-2013; and
(d) 2013-2014.
(2) The Chancellor of the Exchequer must publish the report of the review and lay the report before the House.”—(Shabana Mahmood.)
Brought up, and read the First time.
Question put, That the clause be read a Second time.
The Committee divided: Ayes 14, Noes 18.
AYES
NOES
Question accordingly negatived.
New Clause 3
Personal allowance for those born after 5 April 1948
“The Chancellor of the Exchequer shall, within three months of the passing of this Act, undertake a review of the impact of the removal of the age-related personal allowance on anyone who reached the age of 65 on or after April 2013 and place a copy in the Library.”—(Shabana Mahmood.)
Brought up, and read the First time.
Question put, That the clause be read a Second time.
The Committee divided: Ayes 14, Noes 18.
AYES
NOES
Question accordingly negatived.
New Clause 4
Capital gains tax and employee shareholders
“(1) The Chancellor of the Exchequer shall, within three months of the passing of this Act, undertake a review of the impact on tax revenues of employee shareholder status as defined by section 205A of the Employment Rights Act 1996, and set out the conclusion of the review in a report.
(2) The report referred to in subsection (1) above must in particular set out—
(a) the impact on total capital gains tax receipts paid to the Exchequer arising from the capital gains exemptions under section 236B of the Taxation of Chargeable Gains Act 1992;
(b) the estimated value of shares owned by employees working in employee shareholder jobs and the number of such employees.
(3) The Chancellor of the Exchequer must publish the report of the review and lay the report before the House.
(4) Subsequent reviews must be completed before the end of each period of 12 months beginning with the date on which the previous review was completed.”—(Shabana Mahmood.)
Brought up, and read the First time.
Question put, That the clause be read a Second time.
The Committee divided: Ayes 14, Noes 18.
AYES
NOES
Question accordingly negatived.
New Clause 5
Review of reform to the annual investment allowance
‘(1) The Chancellor of the Exchequer shall, within three months of the passing of this Act, undertake a review of the impact on business investment of changes to section 51A of the Capital Allowance Act 2001 made by the Finance Act 2011.
(2) The Chancellor of the Exchequer must publish the report of the review and lay the report before the House.”—(Shabana Mahmood.)
Brought up, and read the First time.
Question put, That the clause be read a Second time.
The Committee divided: Ayes 14, Noes 18.
AYES
NOES
Question accordingly negatived.
New Clause 7
False self-employment in the construction sector
‘(1) The Chancellor of the Exchequer shall, within three months of Royal Assent, undertake a review of disguised self-employment in the construction sector.
(2) The report referred to in subsection (1) above must in particular examine the setting of criteria for automatically deeming people to be employed for tax purposes if they meet those criteria.
(3) The Chancellor of the Exchequer must publish the report of the review and lay the report before the House.”—(Shabana Mahmood.)
Brought up, and read the First time.
Question put, That the clause be read a Second time.
The Committee divided: Ayes 14, Noes 19.
AYES
NOES
Question accordingly negatived.
New Clause 8
Pension flexibility: Treasury analysis
‘(1) The Chancellor of the Exchequer shall, within six months of this Act receiving Royal Assent, publish and lay before the House of Commons any analysis prepared by the Treasury prior to the publication of Budget 2014 relating to the impact of changes made by sections 39 to 43 of this Act to Schedules 28 and 29 to the Finance Act 2004.
(2) The information published under subsection (1) must include—
(a) any assessment made of the impact of the provision for independent face to face guidance on the 2004 Act;
(b) the distributional impact, by income decile of the population, of changes made by sections 39 to 43 of this Act;
(c) a behavioural analysis; and
(d) the financial risk assessment.”—(Shabana Mahmood.)
Brought up, and read the First time.
Question put, That the clause be read a Second time.
The Committee divided: Ayes 14, Noes 19.
AYES
NOES
Question accordingly negatived.
Question proposed, That the Chair do report the Bill, as amended, to the House.
5 pm
Mr Gauke: On a point of order, Mr Caton. Before you put that Question, I should be grateful if the Committee would indulge me with its attention for a few more minutes. I am sure that hon. Members have not yet heard enough from me today—
The Chair: Order. I am sorry to interrupt you, Minister, but the programme order says that we must finish at 5 o’clock, so perhaps you would keep it brief. I am allowing a little leeway, but we are subject to a programme order to which we are supposed to be sticking.
Mr Gauke: Apologies, Mr Caton.
I am pleased that the Bill has received such scrutiny. Inevitably, we have focused on some aspects more than others, but our debate has been wide ranging. There have been many points on which Members have disagreed, but I am pleased that there has been consensus in some areas, including today on important matters of tax avoidance.
I am also pleased that the Committee’s scrutiny has been a model of efficiency. Last Thursday, we had the shortest sitting of the Finance Bill Committee in memory, when we got through 74 clauses and three schedules in 36 minutes. I was sad that we did not manage to keep up that rate all the way through our consideration.
I am grateful to Mr Streeter and to you, Mr Caton, for your valuable input. I thank the representative bodies and other interested parties who have played—
The Chair: Order. I am sorry, Minister, but I must stop you there. Thank you for your kind words.
Shabana Mahmood: Further to that point of order, Mr Caton. I am sure that the Minister was about to thank the officials, Clerks and Whips who have served the Committee so well. I put on record my thanks to all members of the Committee for how they have engaged with our debates on and scrutiny of the Bill. I thank the ministerial team for its courtesy and diligence in responding to our many points and questions, and my Front-Bench colleagues for their contributions.
I thank Mr Streeter and you, Mr Caton, for chairing the Committee and getting us through to the end. We are most grateful.
Bill, as amended, accordingly to be reported.
5.3 pm
Written evidence reported to the House