My Lords, it is very good that we have an opportunity today to debate the two excellent reports produced by the Economic Affairs Committee under the chairmanship of my noble friend Lord Forsyth of Drumlean. I congratulate my noble friend on the sub-committee’s reports and on securing this debate today.
Your Lordships’ House is rightly well regarded in its role as champion of the ordinary person against the powerful. In matters concerning tax, against the background of changes that have increased the powers of HMRC, it is most important that it continues to hold the Government to account in discharging that role.
There used to be a clear difference between tax evasion and tax avoidance. Tax evasion was illegal, and accountants and other professional advisers would give clear advice if their clients were considering evading tax properly due. On the other hand, to avoid paying tax which the law did not require a taxpayer to pay was a perfectly legitimate and, indeed, responsible way to conduct a business. Indeed, the manager of a business who unnecessarily paid more tax than he was legally liable to pay could be accused of wrongfully disadvantaging the owners of the business.
Will the Minister ask HMRC to look again at its definitions of tax avoidance? Its definition of tax evasion is clear enough, but HMRC states that the hitherto acceptable behaviour of tax avoidance,
“involves bending the rules of the tax system to gain a tax advantage that Parliament never intended”.
It adds that tax avoidance,
“involves operating within the letter, but not the spirit, of the law”.
Who is HMRC to opine on exactly what Parliament intended? How does it know? Does it not have a conflict of interest? If a taxpayer operates within the letter of the law, it is very hard to condemn his behaviour. If HMRC considers that Parliament intended that such behaviour should not be permitted, the Government should ask Parliament to change the law. There should not be any room for the subjective judgment of HMRC on the supposed failure to comply with the spirit of the law on the part of a taxpayer.
Concerning the proposed new powers for HMRC, it is surprising that the Government have proposed to treble the time limit for assessing income tax and capital gains tax from four years to 12 years. Victoria Todd of the Low Incomes Tax Reform Group is right in saying that the current timescales—four years normally and six years where a taxpayer has failed to take reasonable care—are reasonable. Where there is deliberate non-compliant behaviour amounting to fraud, there is already a 20-year limit. For inheritance tax, the limit is four years.
It is clear that significant extensions of the time limits, as proposed, will be very bad for the ordinary, honest taxpayer, for several reasons. First, the present limits make it incumbent on HMRC to look into all disputed cases relatively quickly. This means that taxpayers can more reasonably be expected to remember, or at least to discover, the facts relating to any tax-related queries.
Secondly, if HMRC does not have to raise any queries with taxpayers for 12 years, it will significantly reduce the incentive for HMRC staff to do so. HMRC’s staff resources and systems mean that it is better able to discover facts in an efficient and timely manner several years down the road than the average small business owner or individual taxpayer. Therefore, the balance of power is stacked in HMRC’s favour in the case of an inquiry into a tax event that took place 10 years ago more than in an inquiry into one that happened two years ago.
Thirdly, the case for longer time limits for offshore matters, compared with onshore matters, is becoming weaker rather than stronger. The adoption of the common reporting standard by more than 100 countries has led to the current situation where HMRC is receiving an unprecedented amount of information from many overseas tax authorities, as Keith Gordon of Temple Tax Chambers informed the committee. The Government’s response to the committee’s recommendation that they should start a fresh dialogue with representatives of tax professionals is disappointing. HMRC has dialogue with such representatives, of course, but it does not need to listen to their concerns. Regrettably, it seems not to have done so in this instance. I would like the Minister to explain the rationale for the removal of the safeguard provided by the tax tribunal’s oversight of HMRC’s attempts to obtain information from third parties, especially when the Government have not yet completed their consideration of the responses to their public consultation on this subject last year.
The committee considers the loan charge and disguised remuneration schemes, such as those involving the use of employee benefit trusts, an example of unacceptable tax avoidance. I would prefer them to be considered tax evasion because of the difficulty in drawing a line between acceptable and unacceptable tax avoidance. A loan that is not intended to be paid back and where the recipient of the loan is told that he or she will never have to do so, is, quite simply, not a loan at all. Furthermore, I do not think that all individuals using these schemes must accept any significant degree of culpability for placing an unfair burden on other taxpayers. Whether the employee was a care worker or an investment banker, the responsibility for a part of their remuneration to be made through such a scheme rested entirely with the employer; in most cases, the employee had absolutely no influence over this matter. It is especially regrettable that the Government rejected the committee’s recommendation to exempt from the loan charge those loans made in years when taxpayers disclosed their participation in these schemes to HMRC or which would otherwise have been closed. I look forward to the Minister’s comment on that point.
The committee rightly focused on HMRC’s changing culture. In common with my noble friend Lady Noakes, I agree with the committee’s policy to refer to individuals as “taxpayers”, not “customers”. HMRC’s recent decision to start referring to taxpayers as customers is very irritating—even more so than the fact that the London Underground and train operating companies no longer refer to “passengers”. I find HMRC referring to a taxpayer as a customer condescending. The taxpayer does not have a choice between offering his custom to HMRC or not. The Government’s partial acceptance of the committee’s recommendations in this area seems a bit reluctant and grudging, although it is encouraging that they accept the need to balance clamping down on tax avoidance and evasion with taxpayer protections.
Turning briefly to the committee’s report, Making Tax Digital for VAT, I agree entirely with the committee’s recommendation that the date for introducing a mandatory digital VAT system for small businesses should have been deferred for at least one year. It is correct that most small businesses are not prepared for it, and that many are still unaware of it or of how to respond. Many firms of accountants only contacted their clients about the changing requirements immediately before, or even after,
It is true that HMRC invited small businesses to participate in webinars held in February, but many recipients of this invitation may not have understood the urgency or even how to participate in a webinar. The Institute of Chartered Accountants in England and Wales and the Chartered Institute of Taxation are among those industry bodies that have supported the committee’s recommendation that the mandatory date for digital VAT be deferred by at least one year. Many small businesses thought that VAT was already digital because for some time they have had to file it online anyway. It is disappointing that the Government have not accepted this recommendation although they have agreed not to pursue filing or recordkeeping penalties where businesses are “doing their best” to comply with the law. But, again, do we really believe that HMRC is in a position objectively to decide which businesses are doing their best and which are not?
It is to be welcomed that the Government have undertaken not to introduce the compulsory digitalisation of other taxes until HMRC has had time to assess the evidence from the income tax pilots and from VAT. However, can the Minister explain why the Government have rejected the recommendation to make no other taxes subject to compulsory digitalisation until 2020 at the earliest? Surely it is not realistic to continue to maintain that compulsory digitalisation will have been sufficiently tested and shown to work as early as next year; it will not even be enforced until September of this year, which means for the quarter ending
Again, I congratulate the committee on two excellent reports and I look forward to the contributions of other noble Lords and the Minister’s winding-up speech.