Clause 313 - Source of income

Proceeds of Crime Bill – in a Public Bill Committee am 12:30 pm ar 15 Ionawr 2002.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Dominic Grieve Dominic Grieve Shadow Minister (Home Affairs) 12:30, 15 Ionawr 2002

I beg to move amendment No. 477, in page 181, line 32, leave out subsection (1).

This is one of the most important issues that we shall discuss this morning. The clause, more than anything else, is the point at which ordinary taxation law and the powers of the director separate. That may be a good thing, but we must consider it carefully. Subsection (1) states:

''For the purpose of the exercise by the Director of any function vested in him by virtue of this Part it is immaterial that he cannot identify a source for any income.''

As I am not as well versed in tax law as I would like to be, it would be helpful if the Minister explained how the system works at present with the Inland Revenue. My understanding is that, before the Inland Revenue levies a tax on income, it must identify a source. The burden to do that is on the Inland Revenue rather than anybody else. That is a complex area and I am not aware of the board's powers and what assumptions, if any, may be made evidentially. We need an explanation.

The clause would not be in the Bill unless it had a purpose, which as I understand it is that in the future it will be possible to tax income without the identification of its source. Presumably, the burden will be on the individual or company to rebut the assumption that is made by the director and to show that money came from a source that should not be taxed, such as a gift or a win on the pools. However, income would be liable to taxation, so this is an important additional power.

It is all very well to say that the director steps into the Inland Revenue's shoes and is more focused, but we are giving him a power to tax in a way that the board cannot. I want to hear from the Minister how the distinction will work in practice.

The amendment is probing. If I had wanted to carry out a comprehensive amendment of the clause, I would have had to table amendments to other subsections. I deliberately did not set out to do that. Subsection (2) would require amendment. However, the matter is important because we have decided to bend or break tax rules for the purpose of reducing crime. We should know what we are doing before we agree to the clause, because we are trying to reduce crime by the mechanism of taxing people.

Photo of Bob Ainsworth Bob Ainsworth The Parliamentary Under-Secretary of State for the Home Department 12:45, 15 Ionawr 2002

I hope that the hon. Gentleman was not saying that I deliberately suggested that the power is not the exception but a power that we are giving overtly to the director that is not part of the taxation system as it is operated at present, because it is.

The amendment would require the director always to identify the source of any income when he uses his taxation functions. Therefore, it would limit the director's actions, when using his taxation functions, to cases in which he can identify a source of income.

There will be a number of cases in which the director will be unable to use criminal confiscation or civil recovery to recover the proceeds of crime. However, in those cases, he may suspect that there is income or gain that results from criminal conduct and he may use his taxation functions as a further means to recover the proceeds of crime. The director would not have been able, through his investigations, to gain evidence at the civil standard that assets are the proceeds of crime, because otherwise he would have pursued the matter under part 5 and sought to confiscate the assets in their entirety. However, he may be suspicious that criminal conduct is a feature of the cases.

It follows that many such cases will be characterised by the lack of a clear audit trail of the source of certain assets and their financing. If the director is bound to identify the source of any income or gain, his efforts will be frustrated in the majority of the cases in which he wishes to use his taxation functions. If he is to make effective use of taxation functions, he should not be required to identify the source of income.

Photo of Mr Paul Stinchcombe Mr Paul Stinchcombe Llafur, Wellingborough

Why do we need both subsections (1) and (2)?

Photo of Bob Ainsworth Bob Ainsworth The Parliamentary Under-Secretary of State for the Home Department

Subsection (1) is needed to allow the director to carry out his revenue functions, including that of the making of a no-source assessment, notwithstanding that he has no knowledge of any source for the income or gains. Subsection (2) upholds the validity of the assessment once it is made.

The appeals that are provided for in other taxation regulations offer safeguards, as they will apply to the director.

The Revenue's practice of identifying a source arises as a result of a mixture of legislation in the Taxes Acts and case law. Some judgments in case law have resulted in the Revenue accepting that it must identify a source of income before it makes an assessment, and that has effectively become established in tax law. If we impose that limitation on the director, we will render the powers under part 6 entirely—or almost entirely—inoperable. That is why this single departure from normal taxation law is necessary.

Photo of Mr Nick Hawkins Mr Nick Hawkins Ceidwadwyr, Surrey Heath

I understand what the Minister has said about subsections (1) and (2), but I am puzzled, because subsection (3) seems to be somewhat circular—although that might be due to my failure to understand it. Although I understand that it is necessary to make specific arrangements with regard to section 29 of the Taxes Management Act 1970, where there is a service on the board of a notice of withdrawal, I do not understand the use of the word ''invalid''. Can he explain why that word is included in subsection (3)?

Photo of Bob Ainsworth Bob Ainsworth The Parliamentary Under-Secretary of State for the Home Department

Where the director withdraws his notice, he is effectively handing the case back to the normal taxation regime, and we are anxious not to extend the powers of the Revenue. We want the director to use his powers to pursue particular individuals in particular cases, and we also want to keep that separate from the rest of the taxation system. If subsection (3) did not exist, where the notice had been withdrawn, we would effectively be handing back to the Revenue the ability to levy a sourceless tax liability.

Photo of Mr Nick Hawkins Mr Nick Hawkins Ceidwadwyr, Surrey Heath

That is what I understood to be the intention of subsection (3). I agree with the Minister. I would not want the legislation to extend the Revenue's general powers, and I understand his point that the director is being given special powers that are, for good reasons, wider than those of the Revenue.

However, I am still puzzled by the use of the word ''invalid'' in subsection (3). I am unsure whether the wording of that subsection will do what the Minister thinks it will. Surely, it should be saying something along the lines of, ''When the director withdraws from

the use of his powers, and they return to the Revenue, only the general powers will apply.'' I do not understand why any question of invalidity should arise. Subsection (3) is very oddly drafted.

Photo of Bob Ainsworth Bob Ainsworth The Parliamentary Under-Secretary of State for the Home Department

There might be a mixture of liability. That is the point that is being addressed. The notice is being withdrawn, and the tax power is effectively being handed back to the normal taxation system. Therefore, the assessment is invalid only to the extent that it does not specify a source of income. If other parts of that assessment do specify a source of income, they remain valid and remain a liability, because those are the powers that the Revenue would have had anyway, had it been in charge of the case in that period. With regard to that part of the assessment where no source of income has been identified, the assessment should be rendered invalid because the Revenue does not have that power.

Photo of Mr Nick Hawkins Mr Nick Hawkins Ceidwadwyr, Surrey Heath

Would not it be more logical and sensible to put the phrase the other way round? Rather than the assessment being invalid to one extent, the provision could state that it remains valid only where a source for the income is disclosed. Would not that be a neater, more positive and clearer expression?

Photo of Bob Ainsworth Bob Ainsworth The Parliamentary Under-Secretary of State for the Home Department

It could well be, but I am told that once an assessment has been made, it cannot be unmade, except in accordance with the Taxes Management Act 1970. I hope that that goes some way towards explaining the reasoning behind the wording.

Photo of Mr Nick Hawkins Mr Nick Hawkins Ceidwadwyr, Surrey Heath

Perhaps I may pursue the point a stage further now by making a short speech, rather than continuing to make interventions. I hope that the Minister will agree at least to reconsider the wording of subsection (3). A tax assessment would not have to be unmade in order to improve the wording. Surely, the provision should state that if the assessment is passed back to the normal Revenue processes, it remains valid where the source of income is specified? It could be rewritten to read, ''Any assessment is valid only to the extent that it does specify a source for the income.'' That would be make the issue clearer, ensuring that everybody understands that when the powers are operated, the normal powers of the Revenue are working only to their proper extent. In other words, subsection (3) introduces a totally unnecessary double negative that is confusing and unclear.

Photo of Bob Ainsworth Bob Ainsworth The Parliamentary Under-Secretary of State for the Home Department

I do not pretend to be a taxation expert, and I do not think that the hon. Gentleman is one. It is not the first time that I have seen double negatives in legislation, nor will it be the last. I do not pretend to have the skills that parliamentary counsel have. I will, of course, consider the issue that the hon. Gentleman has raised. If the suggested rewording improves the clarity of the Bill, I will certainly consider it.

Photo of Dominic Grieve Dominic Grieve Shadow Minister (Home Affairs)

Again, I am grateful to the Minister for having explained the import and impact of clause 313. We will have, I suppose, to wait to see how it works in practice. I can see the point behind it. Let us suppose that a person finds £25,000 in a cardboard box in somebody's cupboard—I must correct myself at this

point, because in those circumstances, I expect that the other powers under the Bill would be used. I have a niggling difficulty in trying to think of situations in which the director will want to exercise those Revenue functions because his other powers are insufficient. How would he identify a source of income? If he could not do so, would he say, ''I cannot identify the source, but I'm going to tax it.'' I suppose one example would be when there is a regular payment into a bank account, the source of which cannot be identified.

If £25,000 is found in a box in somebody's house, that person would probably be prosecuted under other

provisions for civil recovery. Alternatively, the confiscation provision could be used. Let us suppose that a person had no previous convictions and the confiscation provisions could not apply. If, on the balance of probabilities, it could not be shown that the money had been acquired through unlawful conduct, the money could be taxed on the basis that the burden would be on the person to show its provenance and demonstrate that it is not income.

It being One o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o'clock.