Digital reporting and record-keeping for income tax etc

Finance Bill – in a Public Bill Committee am 9:45 am ar 24 Hydref 2017.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader, Shadow SNP Spokesperson (Economy) 9:45, 24 Hydref 2017

I beg to move amendment 37, in clause 60, page 71, line 16, leave out ‘paragraph 2’ and insert ‘paragraphs 1A and 2.

1A (1) The provisions of this Schedule shall not apply to a person specified in paragraph 1(1) except in accordance with the provisions of this paragraph.

(2) No person shall be subject to the provisions of this Schedule unless they fall within a class of persons specified in regulations made under sub-paragraph (3).

(3) The Commissioners may by regulations specify a class of persons to whom this Schedule applies provided that the relevant conditions in sub-paragraphs (4) to (9) are met.

(4) The condition in this sub-paragraph is that the first regulations may not be made until after the Commissioners have undertaken an assessment of the impact of the implementation of the provisions of this Schedule on—

(a) small businesses that have limited technological connectedness,

(b) businesses in rural areas, and

(c) businesses that are likely to have been affected by the closure of HMRC offices.

(5) The condition in this sub-paragraph is that the first regulations may not apply to more than 25 per cent of persons to whom paragraph 1(1) applies.

(6) The condition in this sub-paragraph is that the Commissioners have prepared an assessment of the likely effects of making regulations in the form of a draft which has been laid before the House of Commons by the Treasury.

(7) The condition in this sub-paragraph is that the House of Commons has resolved that regulations should be made in the form of a draft laid in accordance with sub-paragraph (6).

(8) The condition in this sub-paragraph is that the second regulations may not be made—

(a) until at least twelve months have elapsed since the making of the first regulations,

(b) unless, taken together with the first regulations, they apply to no more than 90 per cent of persons to whom paragraph 1(1) applies.

(9) The condition in this sub-paragraph is that the third set of regulations may not be made until at least twelve months have passed since the making of the second regulations.’

This amendment would provide for a staged implementation of the provisions for making tax digital in relation to income tax, with review of impact on specific groups and provision for each new stage to be subject to approval by resolution of the House of Commons.

With this it will be convenient to discuss the following:

Amendment 7, in clause 60, page 75, line 7, at end insert—

‘(1A) Regulations under sub-paragraph (1) must in particular require a person or partnership to record service charges separately from other income.’

This amendment imposes a duty on HMRC to require separate records to be kept of service charges.

Amendment 8, in clause 60, page 75, line 7, at end insert—

‘(1B) Regulations under sub-paragraph (1) must in particular require a person or partnership to maintain separate records in respect of each employee and in respect of any prescribed time period of service charges received and to make those records available in a prescribed manner.

(1C) In sub-paragraph (1B), “prescribed” means prescribed by regulations.’

This amendment imposes a duty on HMRC to require separate records of service charges to be kept in respect of each employee and in respect of prescribed period to be made available in a prescribed manner.

Amendment 39, in clause 60, page 75, line 7, at end insert—

‘(1B) Regulations under sub-paragraph (1) must in particular require a person or partnership to maintain separate records in respect of each employee and in respect of any prescribed time period of service charges received and to make those records available to those employees.

(1C) in sub-paragraph (1B), “prescribed” means prescribed by regulations.’

This amendment imposes a duty on HMRC to require separate records of service charges kept in respect of each employee and in respect of prescribed period to be made available to those employees.

Amendment 33, in clause 60, page 78, line 19, after ‘day’, insert

‘no earlier than 1 January 2022’.

This amendment provides that the provisions for digital reporting in Clause 60 may not be brought into force before 2022.

Amendment 40, in clause 60, page 78, line 20, at end insert—

‘(4A) No regulations may be made under subsection (4) until after 90 days after the Chancellor of the Exchequer has laid a report before the House of Commons which sets out—

(a) the steps which HMRC has undertaken to establish that suitable software is available;

(b) the results of the testing by HMRC and others of that software; and

(c) the reasons why mandatory use of the software is in the interest of HMRC and taxpayers.’

This amendment would require the Chancellor of the Exchequer to report on software suitability and testing before giving effect to the provisions of Clause 60.

Clause 60 stand part.

Amendment 34, in clause 61, page 78, line 34, after ‘day’, insert

‘no earlier than 1 January 2022’.

This amendment provides that the provisions for digital reporting in Schedule 14 and Clause 61 may not be brought into force before 2022.

Clause 61 stand part.

That schedule 14 be the Fourteenth schedule to the Bill.

Amendment 35, in clause 62, page 79, line 12, at end insert—

‘(5A) No regulations may be made under sub-paragraph (5) on a day prior to 1 January 2022.’

This amendment provides that the provisions for digital reporting in Clause 62 may not be brought into force before 2022.

Amendment 38, in clause 62, page 79, line 12, at end insert—

‘(5A) But no regulations may be made by the Commissioners unless the conditions in sub-paragraphs (5B) to (5D) are met.

(5B) The condition in this sub-paragraph is that the first regulations may not be made until after the Commissioners have undertaken an assessment of the impact of the implementation of the provisions of those regulations on—

(a) small businesses that have limited technological connectedness,

(b) businesses in rural areas, and

(c) businesses that are likely to have been affected by the closure of HMRC offices.

(5C) The condition in this sub-paragraph is that the Commissioners have prepared an assessment of the likely effects of making regulations in the form of a draft which has been laid before the House of Commons by the Treasury.

(5D) The condition in this sub-paragraph is that the House of Commons has resolved that regulations should be made in the form of a draft laid in accordance with sub-paragraph (5C).’

This amendment would provide for implementation of the provisions for making tax digital in relation to VAT to take place only following a review of impact on specific groups and provision for regulations to be subject to approval by resolution of the House of Commons.

Amendment 36, in clause 62, page 79, line 19, at end insert—

‘(6A) Regulations under sub-paragraph (5) may not impose mandatory requirements for businesses to generate quarterly updates.’

This amendment provides that any system for quarterly updates to be generated must not be mandatory.

Amendment 10, in clause 62, page 80, line 13, at end insert—

‘(12) Before making regulations under sub-paragraph (5) and in any case within three months of the passing of the Finance (No. 2) Act 2017, the Commissioners shall lay before the House of Commons an assessment on the effects on compliance with the requirements of those regulations by small businesses of the United Kingdom’s withdrawal from the European Union.’

This amendment requires HMRC to publish an assessment of the effects on electronic VAT records requirements for small business of the UK’s withdrawal from the EU.

Clause 62 stand part.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader, Shadow SNP Spokesperson (Economy)

The Scottish National party has previously raised concerns about the moves to digital reporting. It is not that we do not support the principle of moving towards digital reporting. We have been clear that we think this could be a positive move. The concerns that we have raised previously have been about the timing of the moves and the way in which smaller companies were expected to move to digital reporting first. The Minister, to his credit, has changed the proposed plans and come up with a much more sensible direction and timeline for moving to digital reporting than the Government previously suggested.

Our amendment highlights specific concerns about the move to digital reporting, which, despite the Government’s changes and moves, we still feel have not been adequately answered. The amendment deals with the impact on specific groups that we feel might be negatively affected by the move to digital reporting.

The first group is small businesses that have limited technology for connectedness. There are small businesses that do not make that much use of the internet. There are some coming through that are wholly internet-based, and for which it is very important; but some are still starting that are not technologically advanced and do not use the internet much. We are concerned about the impact on them of having to report digitally online, in view of their access to technology. The businesses in question are not only in rural areas; they may just be run by someone who does not make huge use of the internet.

The second group is businesses in rural areas. In those areas in particular, even though commitments have been given by the Scottish and UK Governments about improving access to digital connectivity, at the moment not everyone has a fast enough internet connection to enable them to access the relevant services. If it is mandatory for businesses to use online digital reporting, that will be a problem for those without access to adequate technology—particularly in rural areas. Areas in England are affected, as well as those in more remote parts of Scotland. I understand that there have been Government commitments to get people on to digital systems, but we are not quite there yet.

Photo of Ruth George Ruth George Llafur, High Peak

Does the hon. Lady agree that, in areas such as the remoter parts of Scotland, as in areas of my constituency, broadband access can be intermittent? The Government have excluded from the provision those who are completely digitally excluded. However, there are areas with patchy broadband—people have it on some days but not others—and there could be a problem for people who do not fall in the group that the Government have excluded.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader, Shadow SNP Spokesperson (Economy)

I agree. In Kingswells in my constituency, which is a large suburb of Scotland’s third city, there are significant issues about access to fast broadband. There is access to slow broadband, and it is sometimes intermittent, for reasons to do with historical infrastructure. Broadband companies were put on the grid to begin with and they now find it more difficult to upgrade the historical technology. I appreciate the point that the hon. Lady has made; it is important to note that for some people intermittent access can be as difficult as no access.

The third category of businesses we have chosen is those likely to be affected by the closure of HMRC offices. I have needed to do tax returns online only since I became an MP. The problem with some of the questions is that yes or no are the options but my answer has been “maybe” or “kind of”. Despite the fact that the online form was fairly clear, I needed to phone someone to get some advice on whether to tick yes or no. If businesses lack advice and information from HMRC about the correct option to choose in some cases, it will be more difficult for them to fill out the forms.

It is important that businesses should be given the advice, information and support they need to fill in the forms correctly online. I am sure that no businesses will be trying to make errors; they will be looking for advice. My concern, particularly regarding HMRC offices, is the lack of access to advice that people might have.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

The important point is that, for many years, people have not simply been walking into or getting an appointment at their local HMRC office. The fact that we are drawing offices together into 13 beefed-up regional centres is particularly important in the context of telephone advice, which the hon. Lady is alluding to and which will still very much be available for exactly the circumstances she describes.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader, Shadow SNP Spokesperson (Economy)

I appreciate the Minister’s point. In an earlier sitting, he mentioned the positive timelines when people phone HMRC for advice; apparently the phone is answered very quickly. I get that he says the statistics show that, but people are walking into my surgeries and into my constituency office saying that they have tried for hours to phone HMRC and have really struggled to get through. Despite him saying that the statistics show one thing, the lived experience of my constituents is very different. That is why I have these concerns, and even if one person or a handful of people cannot get through on the phone and fill in their form on time because they are not able to answer the question, it is a concern. I implore the Minister to continue working on call times and to ensure that, when people phone, they get through as quickly as possible and that the calls are answered, and that the advice provided is correct so that people can make the correct choice, particularly with online forms.

Labour Members have tabled a number of amendments to the clause. We were clear in the SNP manifesto that we supported a phased move to digital reporting, so what the Minister has proposed is now much more in line with what we were thinking. I ask that Labour Members, in speaking to the amendments, explain why they chose 2022, and I will make a call after that on whether we think supporting them is relevant. One Labour amendment suggests that we should not move towards digital reporting, which would be a concern for us because our manifesto commitment was positive about digital reporting. I look forward to hearing the comments from the Opposition and the Minister.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

As ever, I am eager to serve under your chairmanship, Mr Howarth. I come to the Committee with a series of amendments on what digital reporting might offer us to resolve some of the challenges faced by employers and employees in our country. There are two issues in particular, which I will come to in turn, because as ever with the Finance Bill, they are technical.

First, I will deal with the treatment of the lowest-paid staff in our country—Office for National Statistics data show that, of all low-paid people, waiters and hospitality staff get paid the least—and what we can do to help them with their incomes. Secondly, I will look at how digitisation could help us to address compliance, which is one of the biggest issues for small businesses. To prefigure the Minister’s comments, I know he will say that that is for another Bill, but given how important it is for the systems to work together, I think this is an issue for this Bill. I hope he will bear with me.

I turn first to amendments 7 and 8—amendments 8 and 39 are identical—which concern the treatment of waiters and hospitality staff. Many Members may be familiar with campaigns on the treatment of tips, service charges and gratuities and with evidence showing that some employers were using those to top up people’s wages and to avoid paying the national minimum wage. Members might therefore be relieved that legislation was brought in to prevent that, but it has become clear that many employers still use tips, service charges and gratuities to avoid paying their staff properly. The amendments go to the heart of how we can address that.

In particular, Members might not be aware that people are supposed to pay tax and national insurance on their tips. If an employee is paid their tips through a tronc, where their employer collects the money usually using an online system, which is what we are debating today, the employer is supposed not only to pool the tips and share them out—after all, I think we would all recognise that as well as the person who serves a meal, the people who work in the kitchen deserve recognition of their work—but to check that the employee has paid national insurance and tax.

I do not know which restaurants Members eat at or which hotels they stay in, but if they were to go to Nando’s, Jamie Oliver’s or Pizza Express, they would be given the opportunity to pay their tip electronically by credit card, which a tronc scheme would pick up on.

Some employers pass that money on in full to staff, subject to national insurance and tax, while some charge a massive surcharge and, in doing so, dip into that money for their own purposes. A restaurant called Turtle Bay in Walthamstow was charging employees 3% of an evening’s total sales on tables and telling them that they would get than money back in tips while using it to fund its recruitment and training charges. Indeed, I supplied the Minister with a copy of the contract specifying that employees had to pay that charge. That is not a unique situation.

There is a particular concern about how tronc schemes are being used not only to lower wages and, therefore, pension obligations, but to scam employees for the money that they have earned through their good service and skills. HMRC guidance E24—I did say this was going to be quite technical—says that where a tronc is run genuinely by the staff rather than by an employer, they do not have to pay national insurance, even if the scheme is run through the payroll. We now have widespread evidence of employers using that to offer lower wages to staff, claiming that they can make the money back in the tronc, or using that money to subsidise the wages of restaurant management, rather than paying them a fair wage and recognising the service charges that staff have collected.

To give one example, a scheme was introduced in two workplaces. The staff were told that a tronc scheme was being introduced and that they would be entitled to a fixed-income share of the service charges as part of that arrangement, as long as they signed up to an agreement saying that their hourly rate of pay would be cut to the basic national living wage. The scheme was sold on the basis that they would get an additional guaranteed income that would not be subject to national insurance. However, that meant most of the staff were forced into taking a pay cut in order to get their tips.

Unite and the GMB have done a lot of work on representing people in the sector and they give the example of a sous chef who was offered a salary of £28,000 per annum and accepted the position on that basis. When he received his contract, he saw that his actual salary was £16,000 and he was told not to worry, because the remaining £12,000 would be guaranteed as a fixed income generated by the tronc scheme. I am glad that the hon. Member for Hitchin and Harpenden looks shocked at that.

Photo of Bim Afolami Bim Afolami Ceidwadwyr, Hitchin and Harpenden 10:00, 24 Hydref 2017

On the question whether a scheme is being run by the employer or by employees or staff, is the hon. Lady alleging that employers are acting contrary to existing guidance and legislation? I am not entirely sure.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

Yes, that is the concern. There is a lot of evidence that the exemption, which lets staff run their own tips scheme—it is like staff in a small café sharing the money in the jar, but across a large restaurant chain—is being used by major employers to avoid paying national insurance and, indeed, pension obligations further down the line, especially given auto-enrolment.

Another issue to which the amendments relate is the variations in charges that employers apply to employees for administering such schemes. Some restaurant chains will pass on 100% of the tips paid to a member of staff, while others will charge up to 20% in administration fees for doing it through an electronic system. Clearly, that is not fair and I warrant that customers have never had a restaurant explain to them how much they will charge the employee to pass on the tip that customers want to give them. The amendments are designed to help us understand what is going on.

I hope that the Minister will have strong words with his colleagues in the Department for Business, Energy and Industrial Strategy, because if, as we fear, a tax take is being avoided and the lowest-paid people in our country are being exploited as a result, surely we all agree that we need to do something about that. That is why I tabled the amendments. Indeed, 18 months ago, many of us took part in a Government consultation on precisely those issues—that is, how to ensure a fair system for administering tips, service charges and gratuities. I have to tell the Minister that, 18 months on, the Government have not even published the results of that consultation, let alone looked at what could be done to make sure that neither the Exchequer nor the employer is being short-changed.

The Bill offers the Minister an opportunity to make progress on an issue that his ministerial colleagues have kicked into the long grass. If we are digitising records, we can ask employers to clarify precisely what is being collected in tips, service charges and gratuities, and what is income. The amendments address exactly that point: they simply propose that an employer should record the different forms of income—with electronic systems that should be a relatively easy thing to do—and an employee would then be able to access that information.

That is important because if someone is self-employed and working in restaurants—my colleagues from north of the border have mentioned people administering their own tax records—they ought to know what their liabilities are. At present, however, someone who is part of a tronc system does not necessarily know what they are being paid in tips, gratuities and service charges. These simple amendments ask the employer to set out precisely the different streams of income, which their computer systems will easily collate for them, so that our tax system acts more efficiently.

If the Minister is not prepared to accept the amendments and acknowledge the need to make progress—we are, after all, talking about the poorest-paid employees in our country—will he commit to asking his ministerial colleagues in BEIS why it is that, 18 months on, when so many people have provided information about how we could solve the problems, nothing has happened? Indeed, I have regularly asked when the consultation results might at least be published, but the answer has always been, “Sometime in the future.” I am sure that the Minister would agree that the people who serve him a cup of coffee in a restaurant deserve better service from us in making sure that they are not exploited.

Amendment 10 relates to an issue that has come up very little in this Committee—we should correct that—namely the Japanese knotweed that is Brexit, which has taken up so much of our time. I appreciate that the Minister will say that the amendment is not needed because he has published a White Paper on how customs and VAT should fit together. However, having read that White Paper, I must draw attention to an omission from it.

I am sure that Government Members will judge me because I have become slightly obsessed with things such as the 13th directive on VAT, and I am sure they would all like to do a pub quiz on it too. Normal VAT rules allow that businesses registered in the UK can recover UK VAT. People understand that: for most businesses, VAT compliance is one of their biggest pieces of work. The issue with the 13th directive, which the amendment addresses, is the question of what happens when businesses trade in Europe. After all, Europe is still the primary market for the vast majority of businesses: 63% of members of the Federation of Small Businesses have said that Europe is their priority market. That means that if a salesman goes to Sweden and stays in a hotel, the hotel might charge VAT and there is no way that that business would be able to deduct Swedish VAT on its UK VAT return. At the moment, however, under the single market procedures, there is a process by which foreign VAT can be recovered directly from the country in which it was incurred.

For those Members who are VAT geeks, that provision is in articles 170 and 171 of Council directive 2006/112/EC, the prime VAT directive. I will, of course, pass that detail on to Hansard. The detailed rules are in Council directive 2008/9/EC. That is implemented in our own domestic legislation, in section 39 of the Value Added Tax Act 1994 and regulation 20 of the Value Added Tax Regulations 1995. In practice, that means that each European state is obligated to make a VAT refund. Obviously, there are rules on that, but it works pretty straightforwardly through an online electronic system, which is why it is relevant to the charge under discussion. I can see the Whip wondering where I am going with this, but there is a direct connection.

A similar scheme applies across the EU to businesses that are not established in the EU. That is the 13th VAT directive, which is implemented by section 39(2)(b) of the 1994 Act and is a more complicated system. The amendment is simple. When we leave the EU, we will no longer be able to rely on the simplicity of the intra-country VAT collection scheme that has helped businesses in Britain to trade and provide services, particularly in Europe. We will, therefore, need to move to the 13th directive, or we may move to something else. The customs White Paper, for instance, mentions an “innovative” scheme, but I am pretty sure that other countries, for which the intra-country scheme works well, would not be particularly willing to undertake such innovation. I think they would be happy for us to move to the 13th directive.

I am concerned that there is a lot of evidence that the 13th directive and its administration is not very effective for countries outside the EU. In particular, the 13th directive states that member states must refund VAT to foreign traders. It also states:

“Member states may make the refunds…conditional upon the granting by third states of comparable advantages regarding turnover and taxes.”

One could argue that the Bill’s introduction of an online electronic system provides a comparable advantage, but my amendment asks the simple question being asked by many businesses, including local businesses in my constituency, which are starting to panic about how they will manage their VAT returns in future. How will the proposed electronic scheme fit in with regard to both the current regulations relating to intra-EU VAT refunds and the 13th directive?

Having looked at the Minister’s document, I am concerned that, although it talks a lot about what the UK will do, it does not talk a lot about the 13th directive and what it will mean for British businesses. Page 19 refers to contingency in case there is no deal—of course, we all know that that is a sensitive question for the Cabinet—but what British businesses need to know now is, if they are going to continue to trade in Europe, how they can do that in a cost-effective and red-tape-free way?

One of the more bizarre elements of Brexit is that we seem to be arguing about red tape as though the other side wants more of it, and those of us who wanted to stay in the European Union are bad for wanting less of it. This issue is a great example of that challenge, where being part of the European Union had simplified a process for British businesses. A quarter of FSB members have said that the introduction of any tariff or complication with trading with Europe would put them off trading altogether. We need this Bill to match what is going to happen in future, so that businesses using an online system will not have to change it very quickly as a result of the rules of the 13th directive implemented by other countries making it harder for them to use.

If the Minister will not accept my very simple amendment asking him to set out just how this Bill will impact on the 13th directive, will he commit to discussing with British businesses what the directive might mean for them in terms of VAT compliance and recouping their costs, and what the consequences for them will be in terms of administering the scheme? All small businesses in our constituencies that are looking at that future trading relationship will want to know how much additional paperwork they are going to get, and they deserve an answer.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

I will to speak to clauses 60 and 61, schedule 14 and clause 62 together, as they represent a package of measures that would introduce powers and regulations surrounding digital reporting and record keeping for both VAT and income tax.

The Opposition’s concerns about the Government’s plans for making tax digital are well-versed. We raised them on Second Reading of the March Finance Bill, before they were dropped, and raised them again in the debate on the Ways and Means resolution for this Bill, as well as on its Second Reading. We fully support digitalised tax reporting, which we can all agree has the potential to drastically reduce the amount of time individuals and business owners will have to spend filling out long and complicated tax returns. We could also free up some of HMRC’s time, so that it is better spent clamping down on tax avoidance.

The benefits of the technological tax-reporting revolution that will happen in the UK in the next decade are not in dispute. What we are debating is the question of when it will be rolled out and under what circumstances. The Government have already shown that they are willing to listen to the Opposition and others on this important issue. It is clear that the concerns we expressed throughout the general election campaign were heard, and they perhaps helped lead to the Treasury’s announcement over the summer that it would delay the introduction of digital reporting of VAT until 2019.

The Minister also announced the delay in when businesses would have to provide quarterly digital records until at least 2020. However, while such things are acknowledged and welcomed, they represent only a short pause in the Government’s plans and they do not address the wider problems with the timetable, which many consider to be a little rushed. All the stakeholders to whom we have spoken in the business sector and the tax community over the past few months continue to raise deep concerns about their ability to be ready for digital reporting of VAT, particularly as it will come when Britain will be leaving the European Union.

Owners of small and medium-sized businesses are already worried about the stark changes that they are faced with making in 2019 to prepare for Brexit. They are concerned about the possibility of a no-deal scenario and the overnight effect that would have on costs and supply chains. There is also the potential introduction of tariffs and the impact on staff who are EU citizens. It is not unfair to say that the Government have continuously failed to provide any certainty on those points, so it is little wonder that business confidence is pretty low, notwithstanding the Minister’s performance and attempts to push that up.

To further burden businesses with the cost of digital reporting will only make matters worse for many struggling businesses. What is more, few people inside or outside the Government believe that HMRC is actually ready. It feels like the Government believe that making tax digital is some holy grail that will allow HMRC to operate with less funding and fewer resources. In fact, we have seen little to no evidence of how much it will cost to train HMRC staff on the new software. We have yet to receive any reports of the pilots that have been run. To the best of my knowledge, HMRC has the same problems as many of the businesses that will be required to begin digital reporting in 2019. It is a distraction and depletion of the resources that are having to be focused on Brexit.

Those concerns are echoed by tax professionals, such as the Institute of Chartered Accountants in England and Wales and the Chartered Institute of Taxation, which both believe that the current timetable is unrealistic and unworkable for HMRC and the business community. That is why the Opposition propose delaying digital reporting for VAT and income tax to the end of the Parliament in 2022. Hope springs eternal in relation to the date of the next election, I suspect. The delay to digital reporting would give HMRC and small and medium-sized businesses the time they need to prepare adequately and to properly implement new software in their businesses.

If the Government are to stick to their 2019 timetable and ignore our very reasonable request for a delay in the implementation of digital reporting until the end of the Parliament, there must be adequate time to properly test and pilot the software, because that is a key element. So far there is little evidence to suggest that the Government will meet their target to have the software fully tested and ready to be implemented by 2019, but the Minister may be able to reassure us on that point. He has said that the Treasury aims for a pilot programme to be tested in spring 2018, but if that timetable comes to fruition, it will not give businesses enough time for a full cycle of four quarterly VAT updates to be submitted before April 2019.

I am also aware that HMRC began a small-scale income tax pilot on 3 April 2017. My understanding is that the intention was gradually to increase the number of businesses admitted into the pilot, so that eventually several hundred thousand businesses would be involved. However, that has not happened and the income tax pilot is still operating on an extremely small scale, with fewer than 50 businesses taking part, as I understand it.

The question whether the software will be properly piloted and available to businesses before the implementation date is at the heart of the Opposition’s concerns. That is a legitimate operational concern, which is why amendment 40 would require the Chancellor to report on software suitability and testing before giving effect to making tax digital provisions.

Our greatest difference with the Government on digital reporting is the defined need for quarterly reporting. In our manifesto, we made it clear that we would permanently exempt small businesses that were below the VAT threshold from quarterly reporting. We recognise the huge administrative burden that quarterly reporting would place on them, as well as the added cost.

While quarterly reporting may benefit some types of businesses—no one suggests it would not—overall, it is unnecessary and we see no reason why it should be mandatory. That is why amendment 36 would ensure that it remains optional.

Digital reporting, if handled in the correct manner and implemented gradually, has the ability to free up the time of business owners and HMRC. It would change the way people report taxation for decades to come. However, the Government’s current timetable risks bringing with it chaos and confusion, unless the concerns of the business community are fully addressed.

It feels as though the Treasury is rushing through these changes because it has already pocketed the revenue that it believes these measures would raise. I hope the Minister takes this point in the spirit it is intended: he would rather invite further burdens, in my view, and add strain to small and medium-sized businesses than acknowledge that delaying making tax digital would add to the growing black hole in public spending. We are not quite sure where that stands at the moment.

Genuinely, and point scoring apart, the Minister needs to recognise that few people believe that the Government’s timetable is realistic. Even fewer businesses, both large and small, want the extra and unnecessary burden of quarterly reporting. There has been little in the way of evidence so far that the pilot programmes and software will actually be ready.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General 10:15, 24 Hydref 2017

These clauses introduce the requirements for making tax digital for businesses. That is a major step in our journey towards a system in which technology makes it easier for businesses to get their tax right. The majority of businesses, as we have heard, want to get their taxes right but, none the less, make honest and avoidable mistakes in fulfilling their tax obligations. Not only does that cause them concern and frustration when HMRC intervenes to put it right, but taxpayer error and failure to take reasonable care cost the Exchequer £8 billion a year.

VAT has been online since 2010 and more than 98% of registered businesses already send VAT returns to HMRC in this way; many do it themselves, some use agents to do it for them. Making tax digital will be voluntary for income tax and national insurance contributions for those who fall below the VAT threshold, even if they are registered for VAT. Hon. Members will note that provisions in the Bill relating to income tax—that is, clauses 60 and 61—cannot enter into force until an appointed day order is made by the Treasury. The Government have committed that that will not happen before 2020.

The hon. Member for Bootle very generously welcomed, as did other Members, the timetable changes that I announced in July. The hon. Gentleman suggested that we have not gone far enough. I would point him to the remarks of Mike Cherry, the FSB chairman, who welcomed the delay that I announced in July. He said that it makes

“the roll-out of the changes far more manageable for all of the nation’s small firms”.

Many similar comments were made by businesses and organisations representing businesses at that time.

Let me set out in detail a few aspects of the legislation for making tax digital and we can pick up some of the points made by hon. Members. Clause 60 provides the framework for a future extension of making tax digital to income tax and class 4 national insurance. It sets out to whom the rules would apply—broadly, any unincorporated trading business or landlord with turnover of more than £10,000 a year. Clause 60 provides that the regulations made using these powers cannot mandate the provision of information more frequently than once a quarter, so we can be very clear on the frequency issue in the legislation. That output will be generated automatically by software and sent at the press of a button to HMRC. There will be no requirement for businesses to pay income tax or national insurance alongside their final year update.

Clause 61 introduces schedule 14, which makes consequential amendments to the existing income tax administration rules. Clause 62 amends the powers in the VAT Act 1994, enabling HMRC to amend the existing VAT regulations to provide for digital record keeping and information reporting.

The hon. Member for Bootle has suggested a number of amendments to clauses 60 to 62. He also asked several questions relating to those clauses in Committee last week, which I hope to address today. Amendments 33 to 35 would have the effect of delaying making tax digital implementation until 2022 at the earliest. Having consulted widely and received feedback both from external stakeholders and Members, the clear message was that, although digitising tax was a positive step, some had concerns about the scope and pace of change.

As many Members have reflected today, on 13 July we announced significant changes to the scope and timetable for making tax digital, giving 3.5 million businesses more time in which to prepare. Businesses will not now be mandated to join making tax digital until April 2019, and then only to meet the VAT obligations. Businesses with a turnover below the VAT threshold will be exempt from making tax digital altogether. That change was widely welcomed—as I pointed out, it seems a realistic path to implementation. Trade representative bodies and other stakeholders who previously expressed concerns are now engaging with HMRC to ensure a successful roll-out of the programme. HMRC has already started piloting the changes for income tax, allowing for at least three years of testing on a voluntary basis before mandation.

Changing the timetable further would create uncertainty for businesses and undermine our ability to pilot the changes properly. Digital software is increasingly part of the way that businesses operate; further delay to making tax digital would result in increased divergence between the way that businesses run themselves and the way they do their tax. Making tax digital is about ensuring that businesses get their tax right and helping HMRC to address the £8.7 billion tax gap. We need to balance ensuring that businesses and agents have time to prepare with ensuring that everyone can experience the benefits of doing tax digitally at the earliest opportunity. I am confident that the current timetable strikes the right balance.

The hon. Member for Bootle also tabled an amendment to stipulate that there should be no requirement under MTD for mandatory quarterly updates for VAT. Under our current plans for MTD for VAT, no business will be required to provide updates to HMRC more frequently than they do now. Most already submit VAT returns quarterly and they will provide the same information with the same frequency. The difference is that the updates will be sent to HMRC from digital records.

The hon. Gentleman’s final amendment would require my right hon. Friend the Chancellor to lay a report relating to the software used for MTD before the House. HMRC has begun piloting MTD services and intends to test the system extensively. That pilot will be used to test the range of software products available to businesses. HMRC is working with the software developer industry and others to ensure that products are available to businesses and agents at a range of different price points. As it emerges from the pilots, HMRC will publish information about available software products on gov.uk to enable businesses to choose appropriate products.

The hon. Member for Walthamstow has tabled three amendments to clause 60—I would expect no less than three; it is very modest of her, on this occasion, though I think one amendment was submitted twice—which seek to ensure that businesses record service charges separately for each employee. As the hon. Lady knows and has pointed out, the Department for Business, Energy and Industrial Strategy has consulted on service charges on these matters. The issue is of course very important: I know that she has pursued it for a long time and given an eloquent and lengthy discourse on many of its byways and alleyways. As perhaps was demonstrated by the intervention of my hon. friend the Member for Hitchin and Harpenden, these particular matters are complex. It is the Government’s contention that this is not the right forum in which to start trying to address, tempting though it is, through making tax digital, some of what I accept may be iniquities in the operation of companies’ tips and service charge systems. We have to wait for the results of the BEIS consultation.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow 10:30, 24 Hydref 2017

I am a little surprised, given that we have presented evidence today that tax may be being avoided by using HMRC’s E24 guidelines, that the Minister says that we have to wait. We have been waiting 18 months for the consultation even to be published. If he will not accept the amendments today, can he just tell us how long he is prepared to wait and how many people he is prepared to see exploited by the regulations before the Government act?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

I thank the hon. Lady for what is a slightly loaded question, if I may say so. I am certainly not prepared to wait for abuses of any kind, but I am prepared to wait, and it is right to wait, for a deep and considered consultation, as opposed to a short debate in the context of the Finance Bill. That is the critical point to bear in mind on this matter.

The clauses before us provide for making tax digital for business. That concerns the way in which businesses record and report their tax liabilities. The hon. Lady made some powerful points about the treatment of service charges, but I believe that they would be better pursued through the Department for Business, Energy and Industrial Strategy. It has responsibility for this area and is best placed to ensure that tips, gratuities and service charges are treated in line with the principles of clarity and transparency set out in its recent consultation. Dealing with the matter through legislation on digital taxation would risk missing crucial elements for employees or businesses that have been captured in the submissions to the consultation.

Photo of Ruth George Ruth George Llafur, High Peak

Bearing in mind that national minimum wage legislation can be implemented by BEIS only on an individual basis, when an individual complains, and such cases can be settled only on an individual basis, does the Minister not agree that a wider remit than that of BEIS will be required to tackle substantive abuses that go across whole workforces, as described by my hon. Friend the Member for Walthamstow?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

The hon. Lady raises an extremely important matter, which is those employers who do not adhere to the requirements of the national minimum wage. HMRC and the Treasury take that extremely seriously, and we have mechanisms in place, as she may know, for reporting instances of that where they occur. I can assure her that the Treasury is the Ministry directly responsible for strategic oversight of HMRC and that HMRC takes any abuse of the national minimum wage requirements and regulations in this country extremely seriously, and pursues and brings to book those who commit abuses.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

Will the Minister therefore commit today to investigating the use of the E24 guidelines and the tronc schemes, to which we have referred? He may not accept our wider point about protecting people and the tips that they have rightly earned, but HMRC’s E24 guidelines fall directly within his remit, and it is precisely that scheme that we are worried employers are abusing, so will he commit today, given that he has just explained to my hon. Friend the Member for High Peak that he cares very much about this matter, to an investigation and to publishing the results, so that we can all be confident that no one is being exploited in that way?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

HMRC can already investigate when it suspects the kind of abuse to which the hon. Lady alludes. To be specific, if HMRC opens an inquiry into whether PAYE or NICs are being operated correctly, it will be able to ask the employer or the troncmaster how they have recorded service charges and tips and how those have been allocated, and trace them back even to which customers paid for them. The tools are there, the willingness is there and the evidence is there that HMRC is doing precisely what the hon. Lady would expect it to do in pursuing this matter.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

Just so that we are all clear, because I can see that Government Members are also concerned that there may be abuse of the E24 guidelines—this is not about individual companies—will the Minister commit today to his officials doing an investigation on whether the E24 guidelines are being abused in the way that has been described and to reporting back to all of us in the House?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

As I just said to the hon. Lady, we can say in relation to any aspect of HMRC’s operation or any of the rules that it is there to clamp down on that we want regular reporting and all the rest of it. The point is that as a Ministry, the Treasury is there to have strategic oversight of HMRC and to ensure that it is behaving in an appropriate way and chasing down tax avoidance, evasion and non-compliance in whatever form they may appear, including the forms that she has raised. We will continue to do just that.

Photo of Ruth George Ruth George Llafur, High Peak

Bearing in mind that individuals have to raise a complaint in order to secure an investigation by HMRC compliance, and that the workers we are talking about are some of the most vulnerable and most susceptible to exploitation, immediate dismissal or changes to their terms and conditions because they are often not in the workplace for a substantial length of time, does the Minister agree that it would be helpful if HMRC were able proactively to investigate these schemes, rather than having to wait for individual vulnerable employees to put themselves at risk by raising a complaint?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

The hon. Lady overlooks the fact that it is often possible for those who wish to complain to do so anonymously through their trade union or other representatives. That is what happens in many cases. HMRC does not have to rely on a specific complaint to conduct an investigation. It may have suspicions of its own for a variety of reasons. I do not think that we are in a position where people are unable to come forward, as she suggests.

The hon. Member for Aberdeen North has tabled two amendments that seek to review the impact of MTD on specific groups. I recognise her concerns, but the Government have been clear from the outset that businesses that are unable to go digital will not be required to do so.

If you will indulge me, Mr Howarth, it is worth looking at some of the detail of the Bill at this point. The hon. Lady has raised a very important point about potential digital exclusion. Clause 60 covers exemptions, as I am sure she is aware. New sub-paragraph (4) of paragraph 14 of schedule A1 states:

“The digital exclusion condition is met”— for those who would not be required to put in their returns digitally—

“in relation to a person or partner if…for any reason (including age, disability or location)”— the hon. Lady rightly raised rural localities—

“it is not reasonably practicable”— that is not the same as completely impossible—

“for the person or partner to use electronic communications or to keep electronic records”.

I think that is a well-crafted clause to catch the kind of circumstances about which the hon. Lady and I are concerned.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader, Shadow SNP Spokesperson (Economy)

The concern raised by the hon. Member for High Peak was about intermittency. The issue is not about people who do not have access to the internet at all, but those who have only intermittent access. The clause may not be lenient enough for them to make a case for not having digital access. Does the Minister have a view on that?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

I thank the hon. Lady for her further point. I guess it comes down to interpretation. It seems to me that if it is not reasonably practical for a person or company to use electronic communications, the reliability of the service—another way of describing the point she raised—would be an important part of the judgment that would be made.

The clause continues with “Further exemptions”. Proposed new paragraph 15(1) states:

“The Commissioners may by regulations make provision for further exemptions.”

New paragraph 15(1) states:

“The exemptions for which provision may be made include exemptions based on income or other financial criteria.”

There is therefore a recognition in the Bill that not only do we need to get it right for the current circumstances, but we need the flexibility to be ready for any circumstances that might present themselves and which we have not considered at this stage. Those would need to be addressed further down the line.

For those who can go digital but require additional assistance, HMRC will continue to provide a diverse range of digital support, including webinars, helplines and YouTube videos, to help them meet the requirements of making tax digital.

The hon. Member for Aberdeen North also seeks to provide for a phased implementation period, with the commencement of each new stage requiring approval by the House. We have already revised the implementation to start with businesses that report quarterly, and stakeholders are operating on the basis of the new timeline. We are phasing in the implementation by piloting the changes and by starting with mandation only for VAT and those above the VAT threshold. The secondary legislation required to lay out the detailed operation of MTD will be laid before the House in due course, offering Members a further opportunity to scrutinise our plans and consider our proposals.

The hon. Member for Walthamstow has tabled an amendment to require HMRC to publish an assessment of the effect of our exit from the European Union on MTD for VAT for small businesses. HMRC wants to give businesses plenty of time to adapt to MTD and is allowing for a full year of piloting the changes before mandation applies and before the UK leaves the European Union. If businesses wish to begin keeping their records digitally before we leave the EU, they will be able to do so.

The hon. Lady raised specific issues in respect of VAT and the 13th directive. The Government do not consider there to be an MTD issue here. MTD is about how records are kept and reported, rather than the nature of the VAT regime itself. The regulations will be consistent with the requirements of the 13th VAT directive, but if she has specific concerns, HMRC will be happy to look into them.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

I am happy to clarify. At the moment, the intra-country VAT scheme is administered online, which makes it relatively simple for people in the UK to reclaim VAT they have incurred in other countries. As we know, the 13th directive requires every single other country to come up with its own VAT scheme, so there is a question about the compliance of different schemes with our scheme. If we have a digitised system, it needs to be able to interact with 27 other countries’ VAT schemes, rather than one EU-wide scheme. Has the Minister’s Department done any work on how the other 27 schemes will interact with our online scheme, so that businesses can be assured of the frictionless transfer that his Government so often promise on these issues?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

The hon. Lady raises a very specific point within what is a large set of negotiations on all the issues of customs, excise and VAT. She will be aware that a customs and excise Bill will be presented to Parliament fairly shortly.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

I have looked at the Minister’s White Paper, and it does not mention the 13th directive at all. If he could clarify that a second White Paper will address this issue with the 13th directive, I am sure that many small businesses would be relieved.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

As I am sure the hon. Lady knows, the White Paper sets out that the Bill will be a framework Bill. The purpose of the Bill will be to ensure we can enact through legislation—largely secondary legislation—whatever arrangements we arrive at as a consequence of the negotiations we are in the middle of. It is not my position here today to prejudge exactly where we will end up on VAT, but I can reassure the hon. Lady that all the preparations and legislation will be in place to accommodate in as frictionless a manner as possible—as she rightly says—the exercise of VAT between ourselves and our former European partners, as well as customs at the borders and all the other important issues that will arise once we leave the European Union.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

The Minister is being incredibly generous. I hope he will forgive me; sometimes I must feel like a bear of very little brain on these issues. The 13th directive is the manner by which EU countries deal with non-EU countries’ VAT claims. It is an immovable part of the post-Brexit landscape, as I am sure the Minister agrees. Can he clarify that it is the 13th directive that his Department is engaging with? He said that the White Paper was a framework document. Will the customs union legislation deal with the 13th directive, or does he think there will somehow be a completely different scheme? I know that the White Paper talks about innovation, but it seems a bit pie in the sky to suggest that the 13th directive will not be part of this. Why is he not talking about it?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General 10:45, 24 Hydref 2017

I refer the hon. Lady to my last reply: the customs Bill is not there to map out every single eventuality as to how VAT will be handled, what rules and regulations we may or may not operate with under World Trade Organisation rules or what agreement we will have with the EU on all the issues, including those she has raised, or otherwise. It will be a framework Bill that will ensure that we are in a position promptly and effectively to bring in whatever measures we need to move forward in the orderly manner she referred to. On that note, I think we have given her amendments a thorough examination.

The Government’s ambition is for the UK to be the best place in the world to start and grow a business, and for HMRC to be one of the most digitally advanced tax administrations in the world. Making tax digital will be a major step forward in the way that businesses conduct their record keeping and interact with HMRC. I commend the clauses to the Committee.

Question put, That the amendment be made.

The Committee divided:

Ayes 2, Noes 10.

Rhif adran 8 Seasonal Working — Digital reporting and record-keeping for income tax etc

Ie: 2 MPs

Na: 10 MPs

Ie: A-Z fesul cyfenw

Na: A-Z fesul cyfenw

Question accordingly negatived.

Amendment proposed: 8, in clause 60, page 75, line 7, at end insert—

“(1B) Regulations under sub-paragraph (1) must in particular require a person or partnership to maintain separate records in respect of each employee and in respect of any prescribed time period of service charges received and to make those records available in a prescribed manner.

(1C) In sub-paragraph (1B), ‘prescribed’ means prescribed by regulations.”—

This amendment imposes a duty on HMRC to require separate records of service charges to be kept in respect of each employee and in respect of prescribed period to be made available in a prescribed manner.

Question put, That the amendment be made.

The Committee divided:

Ayes 9, Noes 10.

Rhif adran 9 Seasonal Working — Digital reporting and record-keeping for income tax etc

Ie: 9 MPs

Na: 10 MPs

Ie: A-Z fesul cyfenw

Na: A-Z fesul cyfenw

Question accordingly negatived.

Amendment proposed: 33, in clause 60, page 78, line 19, after “day”, insert

“no earlier than 1 January 2022”. —(Peter Dowd.)

This amendment provides that the provisions for digital reporting in Clause 60 may not be brought into force before 2022.

Question put, That the amendment be made.

The Committee divided:

Ayes 9, Noes 10.

Rhif adran 10 Seasonal Working — Digital reporting and record-keeping for income tax etc

Ie: 9 MPs

Na: 10 MPs

Ie: A-Z fesul cyfenw

Na: A-Z fesul cyfenw

Question accordingly negatived.

Amendment proposed: 40, in clause 60, page 78, line 20, at end insert—

“(4A) No regulations may be made under subsection (4) until after 90 days after the Chancellor of the Exchequer has laid a report before the House of Commons which sets out—

(a) the steps which HMRC has undertaken to establish that suitable software is available;

(b) the results of the testing by HMRC and others of that software; and

(c) the reasons why mandatory use of the software is in the interest of HMRC and taxpayers.”—

This amendment would require the Chancellor of the Exchequer to report on software suitability and testing before giving effect to the provisions of Clause 60.

Question put, That the amendment be made.

The Committee divided:

Ayes 9, Noes 10.

Rhif adran 11 Seasonal Working — Digital reporting and record-keeping for income tax etc

Ie: 9 MPs

Na: 10 MPs

Ie: A-Z fesul cyfenw

Na: A-Z fesul cyfenw

Question accordingly negatived.

Clause 60 ordered to stand part of the Bill.

Clause 61 ordered to stand part of the Bill.

Schedule 14 agreed to.

Clause 62