My Lords, it is a pleasure to take part in this debate. It allows me to place on record my admiration for my noble friend Lord Forsyth’s insightful chairmanship of the Finance Bill Sub-Committee, in which I had the honour to take part. I fully support what my noble friend said on the engagement of Treasury Ministers in the sub-committee. It is little short of disgraceful for Ministers to obstruct this House from holding the Executive to account. It is also extremely discourteous. I hope that my noble friend the Minister will take back to the Treasury our extreme displeasure at the stance taken, in this instance, by the Financial Secretary.
Our two reports deal with different things, but they have a unifying theme of fairness—whether the HMRC’s powers treat taxpayers fairly and whether the plans to make tax digital for VAT are fair on small businesses. Noble Lords may note that our reports are careful to refer to “taxpayers”. We do not use the language of “customer”, which is used throughout the Government’s responses and has been used by HMRC and its predecessor bodies since the early 1990s, when it became fashionable for government departments to talk about their interactions with citizens using the language of customer service. I have never been convinced that “customer” language sits comfortably with organisations that have to enforce the law. Being a customer implies a consensual relationship; HMRC’s so-called customers have no choice whatever. The police and the courts do not talk about customers. HMRC’s top objective is, according to its plan, to maximise revenues due and bear down on avoidance and evasion. This is not appropriately described in customer language.
I turn to fairness. There are two aspects to fairness: substantive fairness and procedural fairness. Procedural fairness is at the heart of much that is in our reports. That is what our call for more safeguards and access to justice for taxpayers, as set out in our HMRC powers review, was about. Sadly but predictably, the Government have largely rejected our recommendations. Similarly with our report on Making Tax Digital, we called for concerns about the readiness of smaller businesses to be reflected in further time before implementation and for HMRC to do more to make it easier for small businesses. That, too, was rejected by the Government. Procedural fairness should be a hallmark of our tax system, but it is not clear that the Government share this ideal.
We also cover substantive fairness, in particular in relation to the loan charge legislation, which my noble friend Lord Forsyth explained. Substantive fairness is about how particular taxpayers or groups of taxpayers are treated in practice. The loan charge is a way of tackling tax avoidance and I certainly acknowledge that the Government are right to target that, including disguised remuneration schemes. What is much harder to accept is how the Government have tackled it. They have used retroactive legislation, taxing up to 20 years of income as if it were received in one lump sum on
It was strongly represented to the committee that many individuals had no idea that further tax could be due. They spent the money that they received. They were not holding in reserve sums just in case a bill for 10 or 20 years of tax turned up; they believed that they did not need to. They are now overwhelmed by the debts that they are told they owe. It might well have been fair for HMRC to target the promoters of the schemes who profited from these unfortunate taxpayers, but many are out of reach and overseas. HMRC has instead targeted the little people.
I first raised whether this was fair for taxpayers last November, when we debated the Budget. I specifically asked my noble friend Lord Bates, who was then the Minister before he went walkabout, to go back to the Treasury after the debate and determine for himself whether it was fair. My noble friend duly wrote to me after the debate. The only time that fairness was mentioned in my noble friend’s two-page letter was when he said that,
“the Government believes it is unfair to the ordinary taxpayer to let anybody continue to benefit from contrived tax avoidance of this sort”.
A question whether something is fair was answered by saying what is unfair. This is a common HMRC and government tactic. In the Government’s March report to the other place on the loan charge, they avoided saying what was fair for some taxpayers by inverting the argument into what might be unfair for the totality of other taxpayers. That misses the point that fairness has a dimension which is taxpayer-centric.
The Government’s view seems to be that individual taxpayers can have no excuses for getting involved in schemes which avoid tax. My noble friend Lord Bates’s letter to me stated:
“It is an individual taxpayer’s responsibility to ensure the accuracy of their tax return and to understand the consequences of their decisions”.
That sounds like a simple proposition, but it is not realistic. There have been many studies of financial literacy in the UK, and all of them point to shocking levels of lack of financial knowledge. Over one-third cannot work out the impact of inflation; 16% do not know what the balance is on their bank statement; 40% cannot apply a discount to a price. Let us not kid ourselves about the competence of taxpayers.
I will bring this back to whether taxpayers are customers. Regulators are increasingly concerned about how businesses treat vulnerable customers. The Financial Conduct Authority claims that nearly half of the population is vulnerable in one or more ways at any one time. The FCA places responsibility on financial institutions to ensure that vulnerable customers are identified and then dealt with in a way which reflects the vulnerability. The onus is not on the customer to be able to make the right decisions. In their March loan charge report, the Government said:
“The government and HMRC takes the wellbeing of customers extremely seriously … HMRC’s teams are trained to identify and help vulnerable customers and, where appropriate, refer them to organisations such as Samaritans and Mind”.
Let that sink in. The Government’s solution is to refer people to the Samaritans. I am clear that if a bank said that that was its policy towards vulnerable customers, the FCA’s response would be immediate enforcement action.
The Government’s approach is particularly shocking against the background of a number of reported suicides, as referred to by my noble friend Lord Forsyth. These are people who are said to have been unable to cope with the consequences of the loan charge legislation. HMRC has referred itself to the Independent Office for Police Conduct in respect of one such case, which is a start, but neither the Government nor HMRC are facing up to the fact that the basic policy is not fair to some taxpayers and no amount of procedure such as helplines or extended payment terms will counter the harm that is being done.
I have spent a long time on the loan charge because I feel strongly that its lack of fairness is a blot on our tax system, but I also want to say a few words about Making Tax Digital. We all know that the future is digital and that digitisation has benefits for businesses and for government, but it is wrong for the Government to mandate digital solutions until it is clear that the vast majority of taxpayers can comply with ease and with minimal additional cost. That clarity simply does not exist, for all of the reasons that we set out in our report. We found that:
“HMRC is alone in its confidence that all one million businesses will be ready for Making Tax Digital for VAT in April 2019”.
I looked at last month’s edition of Economia—I do not expect noble Lords to know what Economia is, as it is the house magazine of the Institute of Chartered Accountants, of which I am a member. The latest survey it reported by the tax faculty of the institute found that only 28% of chartered accountants—this is only last month—believe that SMEs have a good awareness of Making Tax Digital and that only 22% think that they are well prepared. That is far too many businesses to put at risk. The top two concerns were the cost and administrative burden of implementation, followed by a lack of guidance from HMRC. This exactly mirrors the evidence that the sub-committee received. The next concern, at nearly 20%, was fear of software and technological change. Our evidence was that small and simple businesses did not need digital records for their own purposes. They are being forced on them by a dogmatic approach in the Treasury and HMRC. So far, Making Tax Digital has benefited only the software industry and professional accountants. We will find out over the next few months how much harm it does to the small businesses on which our economy depends.
I look forward to my noble friend’s reply to this debate. I hope that he does not merely repeat the Treasury’s refusal to face the difficult issues in our reports.