Penalties for enablers of defeated tax avoidance

Finance Bill – in a Public Bill Committee am 10:45 am ar 24 Hydref 2017.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

With this it will be convenient to consider the following:

Amendment 41, in schedule 16, page 609, line 4, leave out “may” and insert “must”.

This amendment would remove HMRC’s discretion over whether to publish information on people have incurred a penalty and the conditions of paragraph 46 have been met.

Amendment 42, in schedule 16, page 611, line 27, at end insert—

51A (1) The Commissioners must publish information about the operation of the penalty scheme in relation to each tax year within six months of the completion of that tax year.

(2) Such information shall cover in particular—

(a) the nature of the abusive tax arrangements giving rise to penalties,

(b) the extent to which such arrangements relate to offshore income, assets and activities,

(c) the extent to which people who would otherwise have been liable for a penalty under these provisions were not liable due to being convicted of a criminal offence in accordance with paragraph 52.”

This amendment would broaden the requirement for HMRC to publish information on penalties to cover the nature of the abusive tax arrangements, the extent to which they involve offshoring and the instances where successful criminal prosecution is used instead.

That schedule 16 be the Sixteenth schedule to the Bill.

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

Clause 65 and schedule 16 introduce a new penalty for any person who enables the use of tax avoidance arrangements that are later defeated by HMRC. Currently, tax avoiders face significant financial costs when HMRC defeats them, but those who enable them bear little risk; they gain financially while their clients foot the bill. The purpose of the penalty is to deter people from enabling tax avoidance arrangements, reducing the number of schemes on the market.

Enablers of tax avoidance arrangements will now face penalties of 100% of the fees that they earned from the failed avoidance. The measures ensure that there are powers to tackle the full supply chain of avoidance arrangements. The penalty is designed to have a behavioural impact on the minority who continue to supply abusive avoidance arrangements, while ensuring that the vast majority of professionals who advise on genuine commercial arrangements are not affected. The measures are targeted carefully to capture abusive arrangements that no reasonable person could consider to be a reasonable course of action, and only those enablers who knowingly enable such arrangements that are later defeated.

The measure was developed after extensive consultation last year with representative bodies and large accountancy and law firms. Following the publication of draft legislation in December 2016, HMRC held a significant number of meetings with stakeholders to help refine the technical detail of the legislation. That engagement has been constructive, and stakeholders have welcomed HMRC’s collaborative approach, acknowledging that many of their concerns have been addressed.

For too long, those who enable tax avoiders have been able to gain financially from schemes, knowing that they face little sanction when their scheme is defeated. It is time that that is put right.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury) 11:00, 24 Hydref 2017

As the Minister has helpfully set out, the measures will introduce new penalties for tax avoidance enablers. Specifically, penalties charged will be equal to the amount of consideration received or receivable by the enabler for their role in enabling the tax avoidance arrangements that were defeated.

Our amendments 41 and 42 would require the publication of information about how the new scheme will operate. Specifically, we think it is necessary for lawmakers, the public and others to be aware of who is being penalised through these new tax measures; the nature of the abusive tax arrangements that have been uncovered and dealt with; the extent to which they apply to offshore income, assets and activities; and the extent to which successful criminal prosecution is used rather than this penalty.

We think that that information is necessary because we are concerned that, although it is a welcome step, this measure is potentially insufficient. We are concerned that the Minister’s aspirations for this measure to have a behavioural impact might not be realised, and that concern relates specifically to the extent of the penalty.

As I have said, the penalties charged will be equal to the amount of consideration received or receivable by the enabler for their role in enabling the tax avoidance. Therefore, in effect, they will be required to pay back merely the payment they received for the inappropriate arrangement in the first place. That payment might not even cover HMRC’s costs of investigation and recovery.

As I understand it, penalties have been reduced after consultation, which is regrettable. Given that this is the Finance Bill, we cannot suggest that those penalties should be restored to a level that would cover HMRC’s costs—that would be inadmissible. None the less, we can ask for the information that we will require to assess whether this regime is watertight and driving the behavioural change suggested by the Minister.

Photo of Ruth George Ruth George Llafur, High Peak

Does my hon. Friend think that the clause provides HMRC with any impetus to investigate such schemes at an early stage? At that point, very little tax may be recoverable, resulting in a smaller penalty. That would create a perverse incentive to delay investigations until greater charges can be levied in order to cover HMRC’s costs. I would hope that the Minister would want to incentivise the early investigation of such schemes.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

My hon. Friend makes a good point about the potential perverse incentives created by focusing uniquely on HMRC receiving payment from the client for the creation of such schemes and the enrolling of individuals and firms on to them, rather than on the activity of creating those schemes in the first place and, above all, on HMRC’s costs as a result of investigating them.

All of us, as Members of Parliament, are well aware of the kinds of schemes under discussion. It was interesting to hear the Minister mention the principle of eliminating those schemes that no reasonable person would think should be followed by taxpayers. We have voluminous evidence that that is not currently the case. We need only look at some of the flow charts produced and revealed during the Lux and Panama leaks to be aware that there clearly is an industry in creating such tax avoidance schemes.

We need very tough measures against those schemes. Given that they could be costing the Exchequer dearly, we feel it is appropriate to have a greater amount of information about the measures and, in particular, to compel HMRC and the Government to publish that information in full so that we can assess their efficacy.

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

I make clear the Government’s total commitment to clamping down on tax avoidance. We have brought in £160 billion since 2010 by clamping down on avoidance, evasion and non-compliance. We have already introduced legislation that clamps down on those who generate abusive schemes, and the Bill seeks to catch up with those who have benefited or who expect to benefit from such schemes. That leaves us to deal with the enablers in the centre of the equation.

The hon. Member for Oxford East raised the issue of naming. The Bill will allow the flexibility to name those who have been enabling these schemes. We believe that a proportionality test should be applied to take account of how significant and widespread the abuse has been, but if a very serious level of abuse has occurred, there is provision for the individuals, partnership or company concerned to be named in the way she described.

The hon. Member for High Peak is entirely correct that HMRC should be encouraged to address these cases early, rather than letting them run on. The clause seeks not only to ensure that we can catch up with these things quickly, but to prevent them from happening in the first place. It is about behavioural change, which is so important. We have seen a lot of evidence that many of these schemes are beginning to close down because we are sending the right signals and getting tough and serious about it.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

I am concerned about incentives. HMRC is not being given specific additional resources, and some of the investigations may be quite detailed. As my hon. Friend the Member for High Peak asks, where is the incentive to crack down on the schemes early? The funds receivable may be very small because the schemes are unlikely to be used by a large number of taxpayers. I am concerned that we may be making it difficult for HMRC to take action, because the Bill does not include a requirement to cover its costs.

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

The incentive for HMRC and for the Government is to squeeze the tax gap and minimise the number of people avoiding tax. If we do not get on with clamping down on those individuals and companies in a timely fashion, we will make things worse right across the piece and generate less tax as a consequence. We have a clear incentive to ensure that these measures bite at the earliest opportunity. It is about changing behaviour. The very best approach to tax avoidance is to ensure that it does not happen in the first place.

Question put and agreed to.

Clause 65 accordingly ordered to stand part of the Bill.

Schedule 16