Clause 23
Finance (No. 2) Bill

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

May I begin by welcoming you to the Chair, Mr. Benton? I have had the pleasure of serving previously under your chairmanship and that of your co-Chair, Mr. O’Hara. I look forward to doing so again.

It may not feel like it to members of the Committee, but we have now reached part 3, chapter 1 of the Bill. Clause 23 imposes income tax for the year 2006-07. The starting rate of 10p, that we first introduced in 1999, means that more than 3 million low earners continue to see their marginal rate of tax halved. We have kept our election promises not to raise the basic or the top rate of tax, which remain at 22p and 40p respectively, and the 22p basic rate is the lowest basic rate in the UK for more than 70 years. The income tax rates set out in the clause are part of the Government’s commitment to maintaining macro-economic stability and sound public finances. I commend the clause to the Committee.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

I, too, welcome you to the Chair, Mr. Benton. The stand part debate presents an opportunity to mention the issue of the proposed shortening of filing deadlines for income tax self-assessment returns, as outlined in the Carter review that was published at the time of the Budget. The review’s recommendations were accepted by the Government. For those submitting their tax returns for the 2007-08 tax year online, the filing date will be 30 November 2008, whereas for those submitting their income tax returns on paper, as all Members of the House currently have to do, the deadline will be 30 September 2008, instead of the existing filing date of 31 January in the year following the end of the tax year.

The consternation that the proposal has caused among tax advisers can be imagined—they are concerned about the impact that it will have on them and on their clients. The news section of TaxationWeb has an item that says:

“FILING DATE PROPOSAL HAS TAX ADVISERS ‘UP IN ARMS—A campaign against a proposed 30 November deadline...has signed up 2,500 supporters in less than four weeks.

The specialist magazine Taxation launched its ‘No to November’ campaign on 13 April. Editor Mike Truman told TaxationWeb that completed forms were still arriving at the rate of about 100 a day. Only one correspondent so far has said he agrees with the proposal.

Frank Askew, of the ICAEW”—

I should declare that I am a non-practising member of the Institute of Chartered Accountants in England and Wales—

“said ‘It is very disappointing that this recommendation has been accepted by the Government with no debate and consultation.’

Ann Redston”—

the chair of personal taxes at the Chartered Institute of Taxation—

says ‘There has been no consultation with taxpayers or agents on this measure. HMRC should first find out if this idea is practicable before they announce such a radical change. Consultation should precede decisions, not follow them.’

She continued:

“This is putting the ‘Carter’ before the horse.”

Helen Goodman (Bishop Auckland, Labour)

Is the hon. Gentleman not aware of the National Audit Office report on tax collection, which was produced at the end of last year? The NAO, and indeed the Public Accounts Committee, found that the long deadlines are one of the reasons why people make mistakes and do not submit their tax returns at all. That is one of the main reasons for changing the administration.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

The hon. Lady makes an interesting comment and I shall return later to the report of the Public Accounts Committee. However, shortening deadlines could also lead to more mistakes and problems with tax return submission.

Tax advisers have good reason to be concerned about the lack of public consultation. It is certainly not in line with the HMRC’s guidelines on consultation, and the lack of consultation has been remedied not by publishing and circulating a consultation document but by asking professional advisers to comment on the partial regulatory impact assessment. That is not a very satisfactory way to gain tax advisers’ and their clients’ consent and agreement to the change.

The other aspect that concerns me is the impact that the proposals will have on three key groups: taxpayers, their agents and the HMRC itself. Taxpayers must produce information to enable them to complete their returns on time. Hon. Members will know from completing their own tax returns that, depending on how simple or complex they are, a great deal of information can be needed. Some of that information is supplied in line with statutory deadlines. For example, Members should receive a P60 by 31 May and, where applicable, a P11D by July of each year.

For other providers, however, no such statutory requirements exist. Often, information is provided only on an annual basis—for instance, on the anniversary of a particular policy or investment—and there is no consensus on when that information should be received. Taxpayers will have to wait for information before they complete their tax returns, and will have a shorter period in which to complete them.

Taxpayers in seasonal occupations are also an issue. We mentioned that topic in debate last week. Many people who complete self-assessment forms are self-employed in small owner-managed businesses. They will face challenges when trying to achieve those deadlines. Businesses will have to use the time between the end of March and September to finalise their returns. By bringing forward the filing dates for assessment, the Government will compress the time that small businesses have to complete their returns for tax and other purposes, placing an additional burden on them.

We know that certain sectors have seasonal peaks in their work load. A large amount of the tourism and hospitality sector’s business is done during the time when the new filing deadlines will require businesses to complete and finalise their returns. The farming sector spends the time between July and September bringing in the harvest. Farmers will want to use those hours to harvest their crops, not to complete income tax self-assessment forms.

As we heard on Thursday, auctioneers and people who work in the art market find their own seasonal peak in the summer. They too will find it difficult to produce their returns. According to research undertaken by the Association of Chartered Certified Accountants, 54 per cent. of its members feel that the revised dates will have a negative impact on businesses engaged in seasonal trade. The pressure of assembling the information required for self-assessment during that period and completing the form will place additional burdens on individuals at their busiest time of the year.

A number of people will employ agents to complete their tax returns. Such agents will have issues managing their work load. In April, they will need to complete year-end returns for the HMRC; in May, they will deal with P60s on their clients’ behalf; in June, they will deal with P11Ds; and they then normally experience a lull in their work load until September when some paper returns are finalised and again in January when returns are finalised.

That is not to say that outside those peaks, agents are twiddling their thumbs. Often, they do audit and accountancy work on their clients’ behalf and offer high-quality business advice. Such agents will find their work load and their ability to manage it challenged. Some 91 per cent. of respondents to research on the impact believe that the Carter review will have a significant impact on tax agents’ working practices.

Agents want to ensure an even flow of work throughout the year. They have an interest, as does the HMRC, in doing so. It is easy to forget the scale of operations undertaken by some tax agents. A medium-sized practice with 13 individuals in its tax department might process as many as 3,500 returns. It normally starts to receive information from the majority of its clients in early August. By the end of November, a practice of that size has received back the information required for about 80 per cent. of its clients, submitted draft returns for approval to about 65 per cent. and filed about half of those returns with the HMRC already. That is by November, the latest date under these recommendations for filing online returns. If the deadlines were brought forward, that would bring forward the timetable for clients and their agents.

It is not just advisers and their clients who will have a problem; the HMRC needs to deal with the issue as well. It has two work load peaks, one near the self-assessment filing date in January and the other at the annual return deadline in May. The concern is that the arrangements will not smooth that workload but will bring forward the peaks. The industry would hope to see taxpayers and agents receiving greater encouragement to file their returns earlier, so as to spread the work load. Tax advisers welcome a great deal of Lord Carter’s report, and they support his proposal to align the inquiry window with the actual, rather than the statutory, filing date, as they believe that that would encourage the smoothing of the work load.

The hon. Member for Bishop Auckland (Helen Goodman) referred to mistakes and errors in relation to the later filing deadlines. If the deadline were earlier, advisers, agents and businesses might submit provisional or estimated figures in order to meet the September deadline for paper returns or the November one for online returns.

Andrew Selous (Whip, Whips; South West Bedfordshire, Conservative)

An accountant in my constituency has informed me that the Revenue website cannot cope with partnership returns, capital gains or foreign income. Is my hon. Friend aware that people who receive such income will not be able to benefit from the two-month extension?

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

Indeed, and those are not the only types of income or clients that the Revenue’s website has a problem with. Members of Parliament cannot submit returns online at the moment. There is a great deal of work to be done to ensure that agents and their clients can submit online a range of returns reflecting the complexity of our tax system.

There is a risk that, with the shortening of the deadline, people will submit estimates or provisional figures. In addition, there is no electronic system for amending a tax return, so the HMRC will receive manual amendments that correct, update and revise data submitted online in accordance with the suggested deadline. As my hon. Friend the Member for South-West Bedfordshire (Andrew Selous) said, the current system for submitting tax returns online has limitations. As well as being unable to deal with the forms of income that he mentioned, the HMRC cannot accept additional documentation online so that, too, has to be submitted in paper format. It is clear that the implementation of the recommendations of the Carter review will create problems not just for advisers and their clients but for the HMRC.

The Public Accounts Committee report on theissue contains interesting evidence from the HMRC. On page 18 of the evidence section of the report,David Varney, the chairman of the HMRC, says of moving the paper filing deadline to September:

“Whilst this would provide a single combined date that already has currency for SA taxpayers, it would create an un-manageable paper filing peak in September as well as clashing with the tax credits renewal peak.”

Even the chairman of the HMRC recognises the problems that will be created by the Carter recommendation to bring forward that filing deadline. The report contains a graphic illustration of the peaks. The graph on page 16 demonstrates that there are peaks in both September and January for returns that are filed by post. If we move the deadline for filing paper returns from January  to September, we will create a huge spike in the HMRC’s work load, dwarfing the number of returns submitted online at the moment. Even the HMRC recognised that problem, as did the Public Accounts Committee’s report, which acknowledged the major peaks in work load at the time of the September and January filing deadlines and highlighted issues around smoothing those peaks and improving the accuracy and efficiency of the tax system.

In conclusion, issues need to be resolved that affect taxpayers, their agents and the HMRC to ensure that their work loads are dealt with sensibly. It would be no answer to the PAC’s recommendations for smoothing the work loads if those of the HMRC, businesses and their advisers are simply compressed into short spaces of time creating an increase in the number of errors, estimates and re-statements that would require a long tail of remedial action.

It is a pity that those changes have not been introduced in line with the HMRC’s code of practice on consultation. That has caused a great deal of unhappiness and disappointment among tax advisers. In recent weeks, we have heard about the importance of consultation and agreement before major changes from the Treasury, yet it seems keen on pre-emptive announcements and deadlines for changes. It would have been far better to have discussed the matter with interested parties, rather than to have sprung the decision on them without warning.

Joe Benton (Bootle, Labour)

Before I call the next speaker, may I take this opportunity to remind the Committee that the clause is about rates and that although it is not unreasonable to allow those on the Front Bench a little latitude, we cannot have repetitive debate? I insist on that.

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth and Camborne, Liberal Democrat)

I shall attempt to return to the substance of the clause, which is actually very straightforward because it leaves income tax rates as they have been for some time.

There is an issue of fairness. In a fair taxation system, those with higher incomes should pay a higher proportion of tax than those in the lower income brackets. In our taxation system, however, the bottom 20 per cent. of households pay 39.5 per cent. of their gross income in tax, whereas the top 20 per cent. of earners pay only 34.2 per cent. That might not be because of the income tax levels themselves, but because of other increases in, for example, national insurance and council tax, which year on year have risen above the rate of inflation. That has led to inequality in the system. What plans does the Financial Secretary have to make taxation fairer given those inequalities that still exist despite the existing rates of income tax?

George Young (North West Hampshire, Conservative)

I welcome you, Mr. Benton, to the Chair. I wish to add a brief footnote to the excellent speech that my hon. Friend the Member for Fareham (Mr. Hoban) made  from the Front Bench. Much of the Finance Bill has little impact on the average taxpayer, but the change that he mentioned will by its nature impact on everybody who submits a tax return. They, and indeed the Committee, are entitled to a better explanation than the one that we have had so far for bringing forward the dates.

First, if we make those changes, there will be a penalty on those who, for whatever reason, cannot submit their tax returns electronically. They will have an earlier filing date. It would be helpful if the Financial Secretary explained why, 10 years after self-assessment was introduced—I was the Financial Secretary who introduced it—it is still not possible for Members or civil servants to submit their tax returns electronically.

Secondly, it would be helpful also if we could have up-to-date figures for the numbers of tax returns—electronic and paper—submitted between September and January so that we can see the impact of the proposed reforms. My hon. Friend referred to such figures from a PAC report. Those reforms would compress dramatically from July to January—the current time frame—to July to September or November, the effective working time in which tax returns are produced. Inevitably, that will concentrate them more in the holidays. It would have been better if there could have been slightly more effective consultation with those involved before those reforms were introduced.

According to a survey produced by the Society of Professional Accountants, 84 per cent. stated that the earlier filing dates were not readily attainable. I am sure that the Government do not want to introduce a reform that those who will have to deliver it believe to be unattainable. If the Government want to move the dates forward, perhaps they could stage the process and bring them forward one month at a time rather than all at once. That would allow the accountancy profession and taxpayers more time to adjust to the demanding schedule that the Government wish to impose.

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

Clause 23 sets income tax rates only for the current financial year, but I have some sympathy with the hon. Member for Fareham, who tabled amendments to the clause that were judged to be outside the scope of the Bill. I say to him that the measures following Carter’s review are not in the Bill. We intend them to be in next year’s Finance Bill.

I shall pick up the point about consultation made by the right hon. Member for North-West Hampshire(Sir George Young) and the hon. Member for Fareham. In July 2005, we asked Lord Carter to advise us on increasing the usage of the HMRC’s online services. I do not accept that there has been no consultation. Many representations were made to Carter’s review team, which contained several tax agents from different fields. We published Lord Carter’s report at the Budget, and we issued alongside it a partial regulatory impact assessment. We specifically invited views and evidence on Carter’s recommendations from those in the fields involved and from anyone else, and we have set a deadline of 30 June for those consultations. There has been plenty of time to contribute and to influenceLord Carter’s thinking in the preparation of his report and our thinking on how we may implement his recommendations in next year’s Finance Bill.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

I recognise that certain changes need primary legislation and will be introduced in the 2007 Finance Bill. It is interesting to note that evidence to the PAC suggested that the changes would have to be introduced in this year’s Finance Bill to be effective, in line with the recommendations of the Carter report.

For a change of such magnitude, tax advisers would have expected a discussion paper to be published and debated in the industry, rather than the Carter review being published and the Government saying that they would accept its recommendations. They expected a more formal process of consultation, rather than simply having to comment on the effectiveness of recommendations that the Government have already committed to accept and implement.

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

I had not yet finished dealing with the process that we are going through to get in place eventually the measures that we feel are appropriate following the review that we asked Lord Carter to make. It is out for consultation and we have invited, and welcome, views and evidence. I shall take the hon. Gentleman’s comments in Committee as part of that process.

My hon. Friend the Member for Bishop Auckland was right to refer us to the National Audit Office report published in February. I say to the hon. Member for Fareham that the PAC takes a tougher line thanLord Carter on the mandatory filing of electronic returns. The purpose of the Carter review and of implementing its recommendations is quite clear: it is to have the most efficient tax service and system possible for taxpayers and to continue to support the necessary and proper efforts of the HMRC to ensure compliance. I do not want to get into the detail of Carter’s recommendations; we will have a full opportunity to do so when next year’s Finance Bill is published. I simply say that nobody will be required to file a self-assessment return online. We are looking to simplify the self-assessment to take as many as possible of those whose tax affairs are relatively simple out of the self-assessment system altogether.

Having rightly pointed out that the clause is straightforward, the hon. Member for Falmouth and Camborne (Julia Goldsworthy) asked a much more general question about fairness in the tax system. I remind her that, as a result of the personal tax and benefit reforms that the Labour Government have put in place since 1997, in real terms this year, households will, on average, be £950 better off. Families with children will, on average, be £1,500 better off and families with children in the poorest fifth about whom she is worried will, on average, be £3,400 better off.

When we consider the income tax rates under the clause alongside the operation of the tax credit system, about four in 10 families now pay no net tax. A two-child family earning up to £21,000 as a result of the combination of the tax and tax credit system pay no net tax. I say to the hon. Lady that, in my book, that is a fair tax system and it is one that we are keen to protect and develop.

I welcome the contribution of the right hon. Member for North-West Hampshire who was a much more distinguished Financial Secretary. It is still not possible for Members of Parliament to file their tax  affairs online. He will know that there remain long-standing concerns about the additional safeguards that are judged appropriate for the tax affairs and personal data of MPs. There have been lengthy debates on the subject that, in some cases, pre-date the current Government. That is why the HMRC still handles those tax returns separately from the system that is set up for other taxpayers.

I hope that with my explanation and my final reassertion of the fact that we expect to bring forward a packet of measures to implement specific proposals following Carter in next year’s Finance Bill, when there will be a full opportunity for the sort of the debate that the hon. Member for Fareham wants in Committee this morning, the Committee will allow the clause to stand part of the Bill.