Schedule 24

Finance Bill – in a Public Bill Committee am 6:30 pm ar 5 Mehefin 2007.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Penalties for errors

Photo of John Healey John Healey The Financial Secretary to the Treasury

I beg to move amendment No. 215, in schedule 24, page 260, line 33, leave out ‘HMRC think that’.

Photo of Eric Illsley Eric Illsley Llafur, Barnsley Central

With this it will be convenient to discuss the following: Amendment No. 2, in schedule 24, page 260, line 33, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendment No. 216

Amendment No. 3, in schedule 24, page 262, line 18, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendments Nos. 217 and 218

Amendment No. 4, in schedule 24, page 262, line 41, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendment No. 219

Amendment No. 5, in schedule 24, page 265, line 22, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendments Nos. 220 and 221

Amendment No. 6, in schedule 24, page 265, line 26, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendments Nos. 222 and 223

Amendment No. 7, in schedule 24, page 265, line 30, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendments Nos. 224 and 225

Amendment No. 8, in schedule 24, page 265, line 34, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendments Nos. 226 and 227

Amendment No. 9, in schedule 24, page 265, line 38, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendments Nos. 228 and 229

Amendment No. 10, in schedule 24, page 265, line 42, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendment No. 230

Amendment No. 11, in schedule 24, page 266, line 2, leave out ‘think it right’ and insert

‘have reasonable grounds for believing it to be necessary’.

Government amendment No. 231

Amendment No. 12, in schedule 24, page 267, line 10, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendment No. 232

Amendment No. 13, in schedule 24, page 267, line 19, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Government amendment No. 233

Amendment No. 14, in schedule 24, page 269, line 9, leave out ‘think’ and insert

‘have reasonable grounds for believing’.

Photo of John Healey John Healey The Financial Secretary to the Treasury

There is a great deal in this group and I have a great deal of briefing for it, but I think that I can boil it down to its essentials. Clause 96 and schedule 24 contain a couple of important features, because together they provide a single new penalty regime for incorrect returns for income tax, corporation tax, PAYE, national insurance contributions and VAT. They will replace the separate—and very different—regimes that we currently have for each of those elements.

The penalty will be determined by the amount of tax understated, the nature of the behaviour giving rise to the understatement, and the extent of disclosure by the taxpayer. There will be a right of appeal against all penalties. The penalties will be set as a percentage of  the understated tax. For failing to take reasonable care, the penalty will be 30 per cent.; for deliberate action, 70 per cent., and for deliberate and concealed action, 100 per cent. Importantly, the legislation lays down substantial reductions for prompted or unprompted disclosure. In special circumstances, HMRC will have discretion to reduce the penalty further.

A different measure of penalty will apply where inaccuracy results in tax being declared late rather than not at all. In addition, a new concept of suspended penalties will be introduced, so that HMRC may suspend all or part of a penalty for careless inaccuracies. The significance of that is to prevent the penalties from becoming a barrier to people coming forward when things have gone wrong.

There will therefore also be substantial reductions for unprompted disclosure by taxpayers, including down to nil. Disclosure means telling HMRC about the inaccuracy, taking active steps to correct it and giving HMRC access to check the details. To encourage taxpayers to work with HMRC to establish the correct tax position, there are also reductions to penalties for prompted disclosure, when a disclosure is made in response to a challenge from HMRC. Setting out the penalty and reduction levels, and the approach, in this way in statute for the first time is a major step towards making the regime more visible, effective and transparent.

I come now to the Government amendments, which I pay tribute to the hon. Member for Falmouth and Camborne for prompting. We discussed the issue in Committee of the whole House and I undertook to consider the matter further and to return with my own amendments, which are set out on the amendment paper. She and others reflected a concern about the phrase “HMRC think”, which occurs in a number of places in schedule 24. The Government amendments remove that phrase without replacing it in each instance. Let us be clear. The meaning and effect of the schedule are not changed by the amendments, but they have helped to reassure certain representative bodies, and the CIOT made it clear that it would welcome such an amendment.

There is one place where we consider that the word “think” should be retained, which is paragraph 11(1), which states:

“If they think it right because of special circumstances, HMRC may reduce a penalty”.

The distinction is that this is a discretionary measure and therefore different from the other places where we are making the amendment. The word “think” remains appropriate in that place in the schedule.

There has been extensive consultation, as part of the wider HMRC powers and penalties review, on the provisions. They have met with broad approval, in principle and, largely, in detail, too. The legislative framework in the Bill is only the first stage of the work. Work will continue to develop the guidance required to underpin it, in consultation with interested groups. We will ensure that that is then widely published and communicated. In due course, people will look back on this aspect of the Finance Bill as a significant reform of our penalties regime.

Photo of Mark Francois Mark Francois Shadow Paymaster General 6:45, 5 Mehefin 2007

The background to the Government amendments to schedule 24 is the now somewhat infamous wording of “HMRC think”. Those words as included in the Bill would have given HMRC the power to penalise a taxpayer in cases in which it thought that they had done something wrong. Those highly controversial words were, in characteristic fashion, buried in the small print of the Budget and, despite a prior period of consultation on wider issues, took the accountancy profession somewhat by surprise when they were included in the Bill.

John Whiting, the respected PricewaterhouseCoopers tax expert, said in Financial Director magazine on 5 April that everyone had objected to the wording and expected that changes would have been made to the Bill. He said:

“The worry is ‘HMRC think’ is far too loose and arbitrary.”

John Cullinane, the then president of the Chartered Institute of Taxation, followed that in a CIOT press release, dated 10 April and entitled, “Alice in Wonderland Tax Penalties”, which argued:

“When this was first suggested by HMRC, the CIOT objected, as did other bodies. On Budget day HMRC admitted that there was almost universal disquiet about the statutory formula ‘If HMRC think’...Despite objections to this subjective clause, it remains in the draft legislation. The CIOT recognises that HMRC have engaged in constructive consultation over many issues. We are doubly disappointed that in this instance they do not appear to be listening.”

The Institute of Chartered Accountants in England and Wales also raised serious concerns. In its Committee briefing for the Finance Bill, it says:

“Paragraph 1(1) includes the phrase ‘HMRC think.’ The Explanatory Notes to the Schedule suggest this is little more than the use of modem language. We disagree.”

The ICAEW went on to argue:

“‘HMRC thinks’ does not suggest that HMRC are using their best judgement or taking a reasonable approach. We believe this phrase will lead to confusion and court cases to determine its true meaning.”

For good measure, the London Society of Chartered Accountants, which is affiliated to ICAEW, simply said this about “HMRC think”:

“This is at best otiose and at worst adds an unnecessary ambiguity.”

It appears that Ministers picked up on the weight of professional opposition to their proposal and a climbdown began. In the debate on HMRC powers in Committee of the whole House, the Financial Secretary dropped a broad hint that some reversal would be forthcoming when he told the House:

“In recognition of the anxiety that has been expressed and in response to those representations that have been made, I intend to table an amendment in the Public Bill Committee to clause 96 and to schedule 24 on civil penalties.”

He did better than that; he tabled more than a dozen. As the Financial Secretary may recall, I welcomed his comments at the time by saying in the next column:

“As the Minister mentioned it, may I say quickly that Conservative members welcome his admission that there has been concern on clause 96. We have received representations on the matter and we look forward to seeing his amendment in due course.” —[Official Report, 1 May 2007; Vol. 459, c. 1460-61.]

Now that we have the amendments before the Committee, in the same spirit, I welcome what the Minister is doing. Conservative Members think that he  has done the right thing and that he has listened to the weight of professional opinion on the matter. Therefore, we support his amendments as they will improve the Bill.

As I understand it, there is one example in the schedule where the wording “HMRC think” will remain in the Bill. That is at paragraph 11(1), entitled “special reduction”, which will allow HMRC discretion in “special circumstances” to reduce the penalty but not to increase it. I think that the Minister said that that interpretation is correct and, if it is, will he briefly give some simple examples of what those sorts of special circumstances might be?

Finally, before concluding my discussion of the amendments, it would clearly be desirable to prevent such a situation from arising again. It would have been better if the Government had not gone there in the first place, so, with that in mind, will the Minister say how the situation came about? Were the words inserted on the insistence of Ministers, on the advice of parliamentary draftsmen, or did someone just get out of bed the wrong side one morning? What actually happened and how can we prevent it from happening again?

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

I will perhaps be more generous to the Minister than the hon. Member for Rayleigh because my view is that the explanatory notes were clear that there was never any intention to introduce a new spectrum of subjectivity to how penalties would be applied. However, genuine concerns were expressed by the various representative bodies that contacted the Minister about how the law would be interpreted. There was a real fear that we would see the introduction of a more subjective test to whether penalties would apply, rather than an objective one. I will not raise everything from the debate on the Floor of the House, which was not in relation to the schedule but to earlier clauses that also used the word “think”.

Essentially, by withdrawing the phrase “HMRC think”, the Government’s amendments achieve the same result as my amendments, which try to introduce a more objective sense to the use of particular language. That is clearly an improvement and allows the representative bodies to welcome the rationalisation more broadly than they were initially able to.

In addition to the points made by the hon. Member for Rayleigh, I would appreciate the Minister clarifying the following matter. I notice from the Minister’s letter that the meaning and effect of the schedule will not be changed by the amendments. If the intention was, as I am assuming, to try and make the legislation more straightforward, what impact has the little exchange between representative organisations had on the drafting of future legislation? We know from the Financial Secretary’s letter to the Committee on 22 May that

“‘think’ is used in over 3,000 instances in other statutes, including in Finance Bills”.

Will there be a policy change from now on? Are we going to see HMRC officers, or anyone else, “thinking” about future Finance Bills and other legislation?

Photo of John Healey John Healey The Financial Secretary to the Treasury

For future drafting, we will use the formula of “HMRC think” when we think that it is appropriate. As the hon. Lady said, that formula is well  established in legislation, in Finance Bills and more widely. Where appropriate, it seems sensible to use it. In this case, we took the view that it was clearer and more transparent to have “HMRC think” in the original drafting. We put it out to consultation on that basis and many were persuaded of our point of view, but some were not. There are still concerns out there, however, which is why we have responded with these amendments. As I explained, in our view, the practical effect of the clause and the schedule will be unaffected by the amendments. I hope that hon. Members feel that they have played an important part and are satisfied with the reframing of the Bill.

On specific examples of special circumstances, the Bill is designed not to reflect circumstances of which we are aware already, otherwise we would have framed the provisions in the clause and schedule in order to deal with that. In a sense, it is a safety valve should such unforeseen circumstances arise where a further reduction is required.

If I may ask your indulgence, Mr. Illsley, I must apologise and provide some clarification to the Committee about something that I mentioned earlier concerning clause 87 and the capacity of the white space on the self-assessment tax form. Having checked the capacity, I find that it is not about 30,000 characters, but 9,180. I apologise to the Committee for that misleading information earlier. I say simply that that figure is still sufficient to contain a short speech by the hon. Member for Rayleigh.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

I welcome the amendments, which do not change the meaning of the Bill. As the hon. Member for Falmouth and Camborne said, the Financial Secretary’s letter said that there are 3,000 instances elsewhere in legislation where that drafting is used. In respect of remarks that I made earlier, I note that the meaning and effect of various other parts of the Bill would not be affected if the word “but” was removed. If I am foolish enough to serve on another Finance Bill Committee, I do not want to get a letter saying that “but” starts 3,000 subsections elsewhere because we did not clean that up in this Bill.

Amendment agreed to.

Amendments made: No. 216, in schedule 24, page 262, line 18, leave out ‘HMRC think that’.

No. 217, in schedule 24, page 262, line 18, leave out ‘them,’ and insert ‘HMRC,’.—[John Healey.]

Photo of Mark Francois Mark Francois Shadow Paymaster General

I beg to move amendment No. 248, in schedule 24, page 262, line 19, leave out ‘30’ and insert ‘60’.

Interesting to finish my career shadowing the Treasury with a sex change. Paragraph 2 of schedule 24 is designed to give HMRC the power to penalise a taxpayer if they have

“failed to take reasonable steps to notify them, within the period of 30 days beginning with the date of the assessment, that it is an under-assessment.”

Our amendment is simply designed to increase the period that a taxpayer has to 60 days. The amendment is necessary because, in the words of the ICAEW,

“The 30 day time limit looks unreasonable, particularly given that the 30 days starts from the date that is on the assessment rather than the date it is received by the taxpayer. We think it would be more reasonable to give a 60 day period.”

The point about the time that it takes to receive the assessment after the 30-day clock has already started ticking seems valid, not least because the taxpayer could be on holiday when the assessment arrives. Similarly, any disruption to the postal service, say as a result of industrial action, could eat into a good part of the 30-day period. That seems pertinent in light of the stand-off between Royal Mail and the trade unions, which could lead to the first national postal strike in many years.

In addition, the assessment in the case of a complicated return might take some time to check, and the taxpayer might be reliant on their adviser to do it for them and to communicate the information to them. That can all take time. I would be grateful if the Minister could clarify whether the clause is intended to be used in all cases of HMRC errors that lead to an underassessment or, as I believe has been suggested to some members of the professions, it is likely to be used in practice only in cases of default assessments issued in the absence of a completed tax return. Subject to the answer to my question, we believe that it would be reasonable to extend the period that the taxpayer has to receive and check their assessment from 30 to 60 days. I commend the amendment to the Committee.

Photo of John Healey John Healey The Financial Secretary to the Treasury 7:00, 5 Mehefin 2007

It is indeed a provision that relates to the default responsibility of HMRC to raise an assessment when no return has been made by the taxpayer at all. In relation to holidays, the provisions of the clause will come into effect—because this is where the process starts—only in relation to a taxpayer who fails to make any return at all. To make it clear, any taxpayer who sends their return on time will not receive such assessments because they will have self-assessed and so the penalty will not apply.

Some coverage has suggested that somehow taxpayers will be penalised for HMRC errors. That is not the case. I accept that some confusion has arisen from the rubric for paragraph 2 of schedule 24, which was entitled “Error in HMRC assessment”. I am making steps to change that to a more appropriate and accurate “Underassessment by HMRC”. The taxpayer knows the facts or is in a position to find them out, and they should decide whether an HMRC assessment is too low. All they have to do within 30 days is to tell HMRC that an assessment might be too low. They can take longer to work it out, correct the figures or file a correct return. Extending the period in this way would be out of line with similar obligations in the Taxes Act 1988. I urge the hon. Gentleman not to press the amendment.

Photo of Mark Francois Mark Francois Shadow Paymaster General

As the Minister rightly admitted, there has been some confusion about this matter with regard to the rubric. I hope that we have performed some small service in tabling the amendment by getting that explanation on the record. I am grateful to the Minister for that commitment, and I hope that it helps to clarify the point. Before I go to the Foreign Office, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 218, in schedule 24, page 262, line 41, leave out ‘HMRC think that’.

No. 219, in schedule 24, page 265, line 22, leave out ‘HMRC think that’.

No. 220, in schedule 24, page 265, line 24, leave out ‘HMRC think’.

No. 221, in schedule 24, page 265, line 26, leave out ‘HMRC think that’.

No. 222, in schedule 24, page 265, line 28, leave out ‘HMRC think’.

No. 223, in schedule 24, page 265, line 30, leave out ‘HMRC think that’.

No. 224, in schedule 24, page 265, line 32, leave out ‘HMRC think’.

No. 225, in schedule 24, page 265, line 34, leave out ‘HMRC think that’.

No. 226, in schedule 24, page 265, line 36, leave out ‘HMRC think’.

No. 227, in schedule 24, page 265, line 38, leave out ‘HMRC think that’.

No. 228, in schedule 24, page 265, line 40, leave out ‘HMRC think’.

No. 229, in schedule 24, page 265, line 42, leave out ‘HMRC think that’.

No. 230, in schedule 24, page 265, line 44, leave out ‘HMRC think’.

No. 231, in schedule 24, page 267, line 10, leave out ‘HMRC think that’.

No. 232, in schedule 24, page 267, line 19, leave out ‘they think that’.

No. 233, in schedule 24, page 269, line 9, leave out ‘HMRC think’.—[John Healey.]

Schedule 24, as amended, agreed to.

Further consideration adjourned.—[Kevin Brennan.]

Adjourned accordingly at three minutes past Seven o’clock till Thursday 7 June at Nine o’clock.