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

With this it will be convenient to discuss the following:

Amendment 24 to schedule 23, page 247, line 35, leave out “2 years” and insert “3 months”.

This amendment reduces the time limit for assessment of a penalty for failure to make a return in the more common situations.

That schedule 23 be the Twenty-third schedule to the Bill.

That schedule 24 be the Twenty-fourth schedule to the Bill.

Clause 113 stand part.

Amendment 3 to schedule 25, page 264, line 9, leave out “15” and insert “30”.

This amendment would remove the proposed penalties at 15 and 30 days after the due date.

Amendment 4 to schedule 25, page 264, line 11, leave out “15” and insert “30”.

This amendment would remove the proposed penalties at 15 and 30 days after the due date.

Amendment 5 to schedule 25, page 264, line 12, leave out “15” and insert “30”.

This amendment would remove the proposed penalties at 15 and 30 days after the due date.

Amendment 6 to schedule 25, page 264, line 15, leave out paragraph 5.

This amendment would remove the proposed penalties at 15 and 30 days after the due date.

Amendment 7 to schedule 25, page 264, line 31, leave out paragraph 6.

This amendment would remove the proposed penalties at 15 and 30 days after the due date.

Amendment 8 to schedule 25, page 264, line 40, leave out paragraph 7.

This amendment would remove the proposed penalties at 15 and 30 days after the due date.

Amendment 9 to schedule 25, page 265, line 8, leave out “Second”.

This amendment would remove the proposed penalties at 15 and 30 days after the due date.

Amendment 10 to schedule 25, page 265, line 26, leave out “Second”.

This amendment would remove the proposed penalties at 15 and 30 days after the due date.

Amendment 25 to schedule 25, page 265, line 35, leave out sub-paragraph (2) and insert—

“(2) If HMRC gives the person notice that a penalty is payable under paragraph 5, the penalty is confined to Amount B.”

This amendment would ensure that taxpayers who enter into a time to pay arrangement with HMRC within 15 days of their tax being due are not subject to high penalties where they fail to meet the terms of that agreement.

Amendment 11 to schedule 25, page 265, line 36, leave out sub-paragraph (2).

This amendment would remove the proposed penalties at 15 and 30 days after the due date.

Amendment 12 to schedule 25, page 266, line 16, leave out sub-sub-paragraph (a).

This amendment would remove the proposed penalties at 15 and 30 days after the due date.

Amendment 13 to schedule 25, page 266, line 22, leave out sub-sub-paragraph (c).

This amendment would remove the proposed penalties at 15 and 30 days after the due date.

Amendment 14 to schedule 25, page 266, line 23, leave out sub-sub-paragraph (d).

This amendment would remove the proposed penalties at 15 and 30 days after the due date.

That schedule 25 be the Twenty-fifth schedule to the Bill.

Clause 114 stand part.

Amendment 26 to schedule 26, page 275, line 14, leave out paragraph 36.

That schedule 26 be the Twenty-sixth schedule to the Bill.

New clause 6—Penalties: review of effect on tax revenues—

“(1) The Chancellor of the Exchequer must review the effects on tax revenues of sections 112 to 114 and schedules 23 to 26 and schedule 28 of this Act, and lay a report of that review before the House of Commons within six months of the passing of this Act.

(2) A review under this section must consider—

(a) the expected change in corporation and income tax paid attributable to the provisions, and

(b) an estimate of any change, attributable to the provisions, in the difference between the amount of tax required to be paid to the Commissioners and the amount paid.

(3) The reference to tax required to be paid in subsection 2(b) includes taxes payable by the owners and employees of Scottish limited partnerships.”

This new clause would require a report on the impact of these provisions of the Bill on narrowing the tax gap by comparing: (a) the expected change in corporation and income tax paid attributable to the provisions and (b) an estimate of any change, attributable to the provisions, in the difference between the amount of tax required to be paid to the Commissioners and the amount paid. In particular, this includes taxes payable by the owners and employees of Scottish limited partnerships.

I thank you, Dame Angela, and all Committee members for sticking with us for our fourth sitting in Public Bill Committee.

These clauses introduce a new approach to how Her Majesty’s Revenue and Customs penalises the small minority of taxpayers who fail to file or pay their tax on time. The reforms are designed to improve compliance and to enhance public trust in the tax system. They are built on fairness and proportionality. The change addresses long-standing taxpayer concern about existing penalties and draws on four successive public consultations. It is an important step in delivering the Government’s ambition to build a trusted, modern tax administration system.

The clauses apply this new approach to VAT and income tax self-assessment, also known as ITSA. Clause 112 and schedules 23 and 24 introduce a new points-based approach to penalties for regular tax return obligations. That replaces the existing penalties for VAT and income tax self-assessment. It also introduces a separate penalty for the deliberate withholding of information that prevents an assessment of tax due. Clause 113 and schedule 25 introduce a new two-penalty model for VAT businesses and ITSA taxpayers who fail to pay their tax on time. Clause 114 and schedule 26 introduce joint consequential amendments arising from clauses 112 and 113.

The changes will take effect by way of regulations: for VAT taxpayers, for accounting periods beginning on or after 1 April 2022; for ITSA taxpayers with an income over £10,000 per year who are required to submit quarterly returns digitally, for accounting periods beginning on or after 6 April 2023; and for all other income tax self-assessment taxpayers, for accounting periods beginning on or after 6 April 2024. The changes made by the clauses will impact those who are required to submit a return for VAT and/or income tax self-assessment. They will also affect anyone working on behalf of taxpayers such as tax agents.

I recognise, and HMRC recognises, that taxpayers may need some time to familiarise themselves with the new approach. I can confirm that HMRC will adopt a light-touch approach in the first year. As long as taxpayers have made reasonable efforts to fulfil their obligations, the first late payment penalty of 2% will not be applied after 15 days. In effect, therefore, for the first year taxpayers will have 30 days to contact HMRC before any late payment penalties are charged. That is a proportionate and balanced approach, ensuring the new regime is fair to all.

If I may, I will respond briefly to amendments that have been tabled in this group. Amendment 24, which relates to schedule 23 to clause 112, would reduce the time limit for HMRC to assess a penalty for failure to make a return from two years to three months. That two-year time limit, however, is long standing, and the Government do not intend to change it through these reforms. The two-year time limit strikes a careful balance between giving taxpayers sufficient notice that a penalty has accrued and allowing adequate time for HMRC to make an assessment. That helps to ensure the integrity of the tax system and benefits us all. In the vast Majority of cases, penalties will be levied quickly and automatically close to the date of any missed obligation. Of course, there will be times when HMRC needs longer to conduct its investigations, which is why the two-year time limit is required. I therefore urge Members to reject the amendment.

Amendments 3 to 14 relate to clause 113 and schedule 25, and would remove the first penalty entirely, leaving only the second penalty. Our approach has evolved in line with feedback from several consultations and it strikes a balance between encouraging early engagement with HMRC and penalising those who avoid doing so. The first late payment penalty is essential to incentivise compliance and protect the public finances. Although the vast majority of taxpayers comply with their tax obligations and try their best, a minority consistently fail to meet their tax obligations. If they faced no consequences, they would have an unfair advantage over the vast majority of taxpayers who follow the rules and pay on time. As I mentioned earlier, it is also the case that no penalty will be charged if a taxpayer approaches HMRC to request a “time to pay” arrangement within the first 15 days.

Amendment 25 also relates to clause 113 and schedule 25, and would remove any penalty for a taxpayer who agrees a “time to pay” arrangement with HMRC but then fails to fulfil the terms of that agreement. Of course, some taxpayers may encounter difficulty in paying their taxes on time and HMRC recognises that there are often valid reasons for that. “Time to pay” arrangements are designed to help taxpayers who are struggling to meet their obligations and HMRC strongly encourages those taxpayers to talk to HMRC as soon as possible, if they need to do so. HMRC will always look to agree a “time to pay” arrangement tailored to the taxpayer’s needs. If a taxpayer’s circumstances change, “time to pay” arrangements can themselves be renegotiated.

HMRC must strike a balance between supporting taxpayers who are struggling to meet their obligations and identifying those who are deliberately avoiding them. If a taxpayer has not upheld a “time to pay” arrangement and has not approached HMRC to amend that arrangement to reflect a change in their circumstances, it is appropriate that a penalty is applied. This is designed to encourage anyone who may be struggling to meet their obligations to engage actively with HMRC in order to agree further support. It is also designed to ensure that those taxpayers who regularly meet their obligations are not put at an unfair disadvantage.

I turn now to new clause 6, which relates to clauses 112 to 114, and to schedules 23 to 26 and 28. New clause 6 would require the Government to review the effects of the changes being made by these measures on reducing the tax gap and, within six months of the Act being passed, report to the House on these changes, including the expected change in corporation tax and income tax being paid that is attributable to the provisions. The new clause specifies that these should include taxes payable by owners and members of Scottish limited partnerships.

The Government publish information each year on the tax gap. Sanctions are only one of a series of tools used to tackle non-compliance and reduce the tax gap, so the effect of the changes made by these measures should not be viewed in isolation. The Government are committed to open policy making and we ensure that systematic evaluation of the effectiveness of policy is built into the policy-making process at every stage. With regard to new clause 6, the Government have set out, within the tax information and impact note published at Budget 2021, that this measure will be monitored through information gathered from HMRC systems, and that implementation will be monitored closely, collecting stakeholder feedback to inform future policy development.

Furthermore, the first financial penalties levied under these measures will not occur until after six months of the Act being passed, so it simply would not be possible to provide any worthwhile estimates of tax saved in that time period. Corporation tax is currently out of scope of these reforms. Therefore, we do not believe that a review of the type being proposed is necessary and we urge Members to reject the new clause.

Finally, I will briefly respond to amendment 26, proposed by the Opposition. It relates to clause 114 and schedule 26, which deal in consequential amendments, removing redundant references to the VAT default surcharge, which of course is being replaced by clauses 112 and 113 in the Bill. The amendment would confusingly and mistakenly retain references to the repealed default surcharge. Therefore, it serves no purpose and I urge Members to reject it.

As many in this Committee will be aware, the vast majority of taxpayers fulfil their obligations by submitting their returns and paying their taxes on time. Therefore, these changes should only affect a small number who do not do so. It is right that HMRC has in place appropriate penalties to discourage such behaviour. I therefore move that these clauses and schedules stand part of the Bill.

It is a pleasure to serve on this Committee with you in the Chair, Dame Angela.

I am pleased to begin by discussing Clause 112, which, as we heard, introduces two new schedules. The first, schedule 23, sets out a new points-based penalty system for the failure to make, or the late submission of, various returns. The second, schedule 24, makes minor changes to the penalty for deliberately withholding information from HMRC by failing to submit returns.

We welcome the stated aim of the Government: to encourage compliance without wanting to punish taxpayers who make occasional mistakes. It is right to give people in the regular course of events an opportunity to clear penalty points without incurring a penalty charge, while making sure a stronger deterrent is provided in cases where behaviour is shown to be deliberate. The explanatory notes for the clause point out that the regime has been developed through three separate consultations. However, as the Low Incomes Tax Reform Group—LITRG—makes clear, while HMRC has taken on board comments on the structure of a new penalty regime, it considers legislation in the Bill to be far more complex than originally envisaged.

LITRG points out that taxpayers come under Making Tax Digital for VAT for the first time in April 2022, and Making Tax Digital for income tax self-assessment for the first time in April 2023, so they face a complex and unfamiliar penalty regime at the same time as having to get to grips with their obligations under Making Tax Digital. For people with a single source of income, Making Tax Digital for income tax self-assessment appears to have six separate filing obligations over the course of a year, for which penalties could be incurred: four periodic updates, one end-of-period statement, and one final declaration.

I welcome the fact that the Minister set out his view of the suggestion by LITRG that the introduction of the new penalty regime should be delayed to allow those taxpayers time to familiarise themselves with the new obligations before they begin to accrue penalty points for non-compliance. I would also welcome the Minister’s thoughts on the suggestion by LITRG that the legislation should include an obligation on HMRC to keep taxpayers regularly informed of their penalty points total.

Clause 113 introduces schedule 25, which includes a new two-penalty model for businesses and individuals that fail to pay their tax liability on time. The first penalty is 2% of the amount of tax unpaid 15 days after the due date, plus 2% of the amount of tax unpaid 30 days after the due date. The second penalty is a penalty interest rate of 4% per annum that applies from the 31st day of the tax being unpaid. Again, the Low Incomes Tax Reform Group has expressed a number of concerns about the operation of this new regime, including concern about the interaction of time-to-pay arrangements with the new late-payment penalty regime. We would welcome the Minister’s views on that point.

Clause 114 introduces schedule 26, which, as we heard, is consequential to previous clauses and schedules that have been introduced. We tabled Amendment 26, which suggests leaving out schedule 26, paragraph 36. We do not intend to press the amendment, but we welcome the Minister’s clarification on the point we sought to raise by tabling it. Our understanding was that schedule 26, paragraph 36 amended section 1303 of the Corporation Tax Act 2009. We were concerned that the amendment appeared to remove a prohibition on any surcharge in VAT, a penalty for missed payment, late payment or non-payment of VAT being written off as a loss in the company’s taxes. We therefore welcome the Minister’s clarification regarding the intention behind that amendment, particularly the message that it sends.

It is a pleasure once again to serve with you in the Chair, Dame Angela. As the Minister pointed out, the intention behind Amendment 24 is to reduce HMRC’s time limit to assess whether a penalty is due if someone is late in submitting their statutory return. Although the Minister is right that the two years have been there for a long time, that does not mean that two years is right. It seems unfair, considering how quickly potential taxpayers are expected to respond to queries from HMRC, which has been known to take two years to make an assessment for which it already has all the necessary information. The stated policy intention of the new regime is to be proportionate, penalising only the small minority who persistently miss their submission obligations, rather than those who make occasional mistakes. However, the Bill as drafted provides for penalties to be levied against people who have made occasional mistakes and allows HMRC up to two years—and an even longer period in some cases not covered by our amendment—to assess a penalty.

If I had a requirement to submit something to HMRC today, it would know tomorrow if I had not submitted it. It should not take it much longer after that to look at what I submitted and assess whether it was complete before it assessed whether it was accurate and so on. I am not talking about the time it takes HMRC to assess the liability based on that return; it needs only to assess whether the return is there.

By tomorrow, HMRC will know whether I have complied with its requirement and whether I should be assessed for a penalty. It is reasonable to allow a bit of time for delays in the post or for problems with technology, and possibly even to allow another gentle reminder before moving on to the penalty phase if it thinks that appropriate. A few months should be enough for that; it should not routinely take two years. While there may be specific circumstances in which much longer is needed, why cannot those circumstances be identified in the Bill rather than giving carte blanche to HMRC to take two years in every instance? The Bill’s wording, allowing for two years in every circumstance, makes me wonder whether the real problem and the real reason why a lot of these penalties take so long to be assessed is because there are not enough people in HMRC to get through the workload in time. If that is the reason, that is not good enough. It is not good practice to set the rules of law enforcement on the assumption that we will not adequately resource the enforcers to do their job properly and effectively.

Amendments 3 to 14 are not quite a job lot, but they would all seek to simplify the proposed penalties regime for late payment of income tax and VAT, especially when a payment is received, or an arrangement to pay is set up, within a short time of the payment date and where that is a relatively rare occurrence. We are not looking to make it easy for people constantly to fail to pay their taxes and we are certainly not looking to make it easier for people to delay paying their taxes by months or even years, which was sometimes an issue in the past. We have no issue with the fact that people should pay their taxes when they are due, and there must be consequences for anyone who flagrantly refuses to do so, but the penalties regime must be proportionate and, in our judgment, the proposal in schedule 25 is not proportionate. I agree with the Institute of Chartered Accountants in England and Wales that the proposed regime is too complex. When things are too complex, too many people will not understand, and a deterrent that people cannot understand is not a deterrent. It may lead to more sanctions being imposed or to more penalties being raised, but if people do not understand the direct link between what they do and the sanction imposed, there can be no deterrent.

The SNP is also concerned that the period between the 15 days and the 30 days might not realistically be enough time for much to happen other than for the taxpayer to clock up a second stage of penalty. Will that be enough time to make arrangements for a time to pay agreement, for example, given how hard pressed HMRC is already? Would it not be better simply to say that the cut-off period is at 30 days and, at that point, the penalties begin to kick in? It may be that the rate at which a penalty is charged after 30 days needs to change from what is in the Bill. We would not have an issue with that in principle, but it seems to me that we are taking a system that has flaws but is at least fairly simple and we are making it significantly more complex. Not enough has been said about any benefit in making it more complex to convince me.

Amendment 25 looks at the specific instance in which someone has entered into a time to pay arrangement and there is a single isolated failure to keep to that arrangement. On our reading of the Bill, someone who has tried to do the right thing and come to an arrangement to pay, but has then missed a payment by a short period, is in danger of being treated exactly the same as somebody who made no attempt at all to make an arrangement. That just does not seem correct.

The Bill as it is proposed produces disproportionately high penalties that, again, undermine a central principle of the new penalty regime. If the purpose of the regime is to encourage people to do what is right, sometimes we have to give them a wee bit more laxity. If someone has shown a willingness to do what is right, we should not be too quick to jump on their head as soon as they do something slightly wrong.

Finally, on new Clause 6—there are obviously issues that go well beyond the scope of the Bill—we are asking for a report that looks at the impact that the decisions in the Bill have had on the amount of tax collected, particularly on what is known as the tax gap. The tax gap is estimated by HMRC, certainly for 2018-19, to be just over £30 billion. That was picked up in an NAO report last year and subsequently by the Public Accounts Committee in October last year. We have to bear in mind a couple of things. First, the reported tax gap is a very rough approximation—it is obviously difficult to get the exact number; there are so many uncertainties. There might need to be a degree of what is now termed counter-factual thinking to arrive at the exact tax gap.

My issue, and certainly the issue flagged up by the Public Accounts Committee last year, is that none of that uncertainty or degree of vagueness of approximation has been acknowledged by HMRC. It publishes annual reports where it quotes the tax gap and even individual components of the tax gap down to such levels of precision as to clearly imply that it knows the number very precisely and accurately. But it simply does not.

Other issues might be just as significant. Usually when HMRC talks about the tax gap, it does not talk about what it would describe as the policy gap, which is the amount of tax lost by legal—universally regarded as thoroughly undesirable—tax avoidance schemes. It is correct that we should attempt to measure how much tax has been lost by deliberate evasion or deliberate fraud, and we should certainly expect HMRC to be able to tell us how much it thinks it has recovered by the compliance and enforcement measures.

Often one of the biggest areas of tax loss to the Treasury is from people who exploit loopholes in the law, and at the moment there is no way to measure that. Not enough is being done to identify what loopholes are being exploited and the extent to which they are being exploited. As the Minister pointed out, our amendment and indeed the SNP generally has a significant issue with the continued abuse of what is termed Scottish limited partnerships. Despite the name, the regulation or lack of regulation of those organisations is almost entirely resolved through the United Kingdom Government. When we look at the organisations, which are almost similar to organisations that I mentioned in other business yesterday in the Chamber, we wonder why so many British businesses need an office in the Cayman Islands and why they need a Scottish limited partnership component. Very often it is for reasons that are not in the public interest and not to the public benefit.

Although the amendment is not exclusively aimed at Scottish limited partnerships, it is our way of saying to the Government what we and others have been telling them for years: the way in which Scottish limited partnerships can be abused by some very sophisticated and significant players in the international criminal world is something the Government have to face up to and start taking action on.

I am not minded to press the clutch of amendments 3 to 14 to a vote just now, but there is an issue about the timescales proposed in the Bill. I know that if we put our amendments to the vote, the Government would not accept them, but I ask them to think again about the timescales and particularly about the penalties for failure to submit returns. They need to ask themselves again whether they have got those right; if they have not, I hope they will table amendments at a later stage.

I thank both colleagues for their contributions. I reassure the hon. Member for Glenrothes that the Government take seriously all such interventions and all our serious interactions with other political parties and hon. Members across the House.

The hon. Members for Ealing North and for Glenrothes both mentioned complexity. When introducing any new regime, let alone one in an area as complex as tax, there is inevitably an impression of complexity and a worry about the initial uptake. However, these concerns can be addressed and are being addressed in the legislation.

I remind the Committee that the reforms have been widely welcomed. The Chartered Institute of Taxation says that it

“welcomes the harmonisation of interest rules…and that HMRC will apply a light-touch…This will allow otherwise compliant taxpayers enough time to adjust to the new rules.”

The Low Incomes Tax Reform Group, which both hon. Members mentioned, says:

“HMRC have consulted on many aspects of the penalty regime in recent years, particularly with a view to ensuring that it is fit for purpose for Making Tax Digital. This is welcome, as is the fact that a number of LITRG concerns have been taken on board.”

It is good to see that; I am glad that the group recognises it, because this has been a carefully considered piece of legislation. An organisation called Buzzacott, which describes itself as a UK top 20 accountancy firm, says:

“This is a big change…but the system ought to be fairer because it takes account of the number of filings a business has to make, and it’s also less likely to excessively penalise a trader…The light touch in the first year is welcome”.

That ought to give colleagues a degree of comfort on the issue of complexity, but of course it is important to raise it, and Ministers and HMRC are aware of it.

The hon. Member for Glenrothes raised the two-year period; I think that he was trying to score a political point about HMRC staffing. I remind him that the SNP was expressing concerns about alleged staffing issues at HMRC before the extraordinary events of the past 12 months, in which HMRC has proven its outstanding ability to deal with the covid schemes and has been through everything that one could imagine in the pandemic.

I do not think there is any serious suggestion that the tax agenda, which antedates any concerns that the SNP has expressed with respect to the two-year period, is seriously being put at risk. The fact is that some people have very complex tax affairs and sometimes, in a small minority of cases, HMRC requires some time to reflect on them before it makes a judgment. As a matter of justice, as well as of combating tax avoidance, the two-year period should allow it a proper process of reflection.

The hon. Gentleman mentioned the idea of removing the first penalty, but as I pointed out the effect would be to remove a great deal of the early energy that incentivises people to comply with their tax obligations, and which is actually rather important. The SNP’s recommendation might have the effect of diminishing the number of people who comply with their tax obligations, because it would remove that initial first penalty, which is a little nudge.

I take the Financial Secretary’s point that what we suggest might make things better or worse than what the Government suggest. Leaving aside the possible practical issue with the timescales of some of the reports that we suggested, does he admit that it would be a good idea to bring back a report at an appropriate juncture to see whether the new regime encourages compliance in comparison with the current regime? Will he agree to table an Amendment similar to our new Clause 6, but with a different timescale, in due course?

No. The hon. Gentleman has tabled a series of amendments and I have given clear reasons why the Committee should reject them. In one case, it would remove an incentive to comply early with the tax system—I will come to the light-touch issue in a second—and in the second case, it would make the system less able to deal with more complex cases with a potential issue about justice or, indeed, combating avoidance. So I do not accept the point that he makes.

I think the hon. Gentleman dragoons into the conversation a point about Scottish limited partnerships. Of course, those are handled not by the Treasury but by the Department for Business, Energy and Industrial Strategy, and he will know that that Department set out in December 2018 the Government’s plans for reforms of limited partnerships. It is a complex area. They include tightening registration requirements, greater transparency in relation to UK connections, and powers for the registrar to strike limited partnerships from the register in certain circumstances. They have to reflect on limited partnerships that are dissolved, that are no longer conducting business or where a court orders that their activity is not in the public interest. The reforms require primary legislation, and that is what the Government will be doing when parliamentary time allows.

The hon. Gentleman is, of course, right to raise the issue about communications. HMRC does communicate very regularly with taxpayers. It has made a commitment to informing taxpayers, at regular intervals, about points or penalties that they may have incurred. The legislation requires HMRC to notify the taxpayer when a point or penalty is levied; and of course, for the vast Majority of taxpayers, that will be quickly and automatically, close to the date of any obligation. For those wishing to check their digital tax accounts, the points totals will be displayed there, but all taxpayers will also receive a written letter notifying them of their points total.

I should add, in conclusion, that although there is complexity, it is important to recognise that the two-stage payment approach is designed to give the proper and, indeed, fairer incentives to nudge people towards a final decision. HMRC has said that it will take a light-touch approach. It is also worth pointing out that the reforms will not take effect until 22 April for VAT businesses and until the 2023-24 tax year for income tax self-assessment taxpayers. There will therefore be plenty of time for those affected to adjust themselves to the new circumstances.

Question put and agreed to.

Clause 112 accordingly ordered to stand part of the Bill.

Schedules 23 and 24 agreed to.

Clause 113 ordered to stand part of the Bill.

Schedule 25 agreed to.

Clause 114 ordered to stand part of the Bill.

Schedule 26 agreed to.