Clause 25 - Liability of officers for sums paid to employers

Tax Credits Bill – in a Public Bill Committee at 4:30 pm on 22 January 2002.

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Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 4:30, 22 January 2002

I beg to move amendment No. 105, in page 18, line 2, leave out 'or neglect'.

The amendment stands on its common-sense interpretation. The clause puts a liability on culpable officers. Officers could be secretaries and clerks as well as managers and directors, and they would be liable not just for fraud, but neglect. It is not clear what the regulations will do. What does ''liability'' mean under the clause? Does it involve recovering money paid by the Revenue, and does it mean that legal proceedings can be brought?

More important still is the inclusion of the word ''neglect''. No one doubts that people should be pursued for fraud, but neglect is a different matter. First, it is impractical to pursue for neglect as many businesses subcontract their payroll arrangements, so it is not be easy to identify the guilty person when there has been sloppiness. Secondly, ''neglect'' is a loose concept. Thirdly, it is inherently unreasonable for companies to undertake a task for the Revenue when the Government have made it clear that they have no intention of paying the costs thereof. It is inappropriate to pursue people for neglect.

Paragraph 103 to the explanatory notes suggests that in circumstances such as those that I described this morning, in which a company receives funds from

the Revenue to pay the tax credits and then collapses, the clause might be used to pursue the officers—not just senior members of staff, but officers at all levels—for the money that had gone because the company collapsed. An important point is that neither the Confederation of British Industry nor other representative bodies are aware that the clause can be interpreted in that way. The explanatory note suggests that, substantially, that is why it is there. It is wrong that that should be the intent of the Bill.

Fraud is a different matter. Let us suppose that there is a case of neglect. A company may have gone under due to adverse economic circumstances or being overburdened with Government regulations, its staff having done their best in the circumstances and having certainly not committed fraud. Not surprisingly, if people are struggling to save a business, they may be a little sloppy in administering tax credits. As the whole structure of tax credits is so sloppy anyway, it is unreasonable for the Government to have the power to pursue individuals personally—down to the payroll clerks—to recover money from them for neglect.

We want to know the Government's intention and what is meant by paragraph 103 of the explanatory notes. We are earnest in our belief that neglect is not appropriate.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I join the hon. Member for Arundel and South Downs in welcoming you, Mr. Beard, to the Chair this afternoon. It is a pleasure to serve under your chairmanship for the first time.

Clause 25 allows regulations to be made to hold an officer of a company—in practice, that is usually a director—personally liable for the company's tax credits debts, when it is believed that the debt has arisen through fraud or neglect by that person. The amendment would limit the scope of the measure to cases of fraud and remove from it cases of neglect.

In practice, the Revenue would use the regulations when there appears to have been deliberate exploitation of companies' limited liability and the tax credit system, for a director or other officer's personal benefit. Sadly, there are occasions when unscrupulous directors attempt to use the status of limited liability to enrich themselves. It is necessary always to provide for that possibility.

It may seem, as the hon. Gentleman put it, that only the fraud test is needed, but there are two reasons why it is right to maintain the fraud or negligence test. First, there is an important argument of principle. Neglect simply means a failure to take reasonable care. It is right that, when companies have received significant sums of public money to fund the payment of working tax credit to their employees, the officers of the company should be expected to take reasonable care to ensure that the money is used for that purpose. That is not unreasonable.

Secondly, there are practical difficulties with a fraud only test. There will be cases when it is clear that there has been either fraud or neglect, but it may be difficult

to demonstrate categorically that there has been fraud rather than neglect.

Photo of James Clappison James Clappison Shadow Spokesperson (Treasury)

I am grateful to the Financial Secretary for giving way. Of course, we all know how important it is to take good care of public money. I want to give him a slight warning. He did not spell it out, but there was an implication that businesses had asked for the responsibility. The Government are placing the responsibility on businesses. By and large, that responsibility is unwanted by them, and is of no benefit.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury 4:45, 22 January 2002

I take great exception to the notion that the provision, which is designed to address a real need on the part of our fellow citizens, is unwanted by businesses. There is no evidence to support that proposition. Responsible business people are concerned to ensure that the needs that the measure seeks to deal with are addressed. The measure is in the interests of social cohesion and good business and is welcomed by responsible business people. I do not accept that there is anything inimical to business interests in what we propose. The reverse is true.

The danger of the amendment is that the deliberately dishonest would be able to hide behind the cloak of negligence, making it more difficult to counter such abuse. There is nothing new in the clause. Opposition Members would have come across such a clause on numerous occasions in the course of their service in the House when debating those who exploit limited liability companies. It is sad but true that some people—mercifully only a few—are unscrupulous and do not hesitate to exploit that particular status.

There is nothing new in the potential application of the clause to cases in which there has been negligence on the part of company officers. The Inland Revenue already has such powers in relation to the working families tax credit, the disabled person's tax credit and national insurance contributions, which go back many years. The amendment would be a backwards step in tackling such behaviour.

In an uncharacteristic display of party political rancour, the hon. Member for Arundel and South Downs suggested that, as a result of excessive regulation by this Administration, more businesses are going under—the implication being that fewer went under during the previous Conservative Government. As the hon. Gentleman knows, the reverse is true. In the four or five years since Labour came to power in 1997, many more businesses have been created than under the previous Conservative Government and their stewardship of the economy. Those businesses have also tended to last longer. In his heart, the hon. Gentleman knows that such a suggestion and his claim that the clause will be damaging to business is not supported by the facts.

Nevertheless, the hon. Gentleman raises a serious point about insolvency and I am happy to deal with that. By the nature of our system of enterprise, there will, quite properly, be some companies that genuinely fail. Directors of such companies will be unaffected by the provision. The power will be used only in cases in which directors have engineered the insolvency of their

own companies to avoid paying the working tax credits for which they received funding. Such individuals are unlikely to suffer personally, as I hope the hon. Gentleman accepts.

Photo of Richard Younger-Ross Richard Younger-Ross Liberal Democrat, Teignbridge

The Minister used the word neglect when he spoke about companies that, through no fault of their own, find themselves in difficulty and make errors in their tax credit calculations. He referred earlier to hon. Members who had not been in the House for long. I apologise because I have not been a Member of Parliament for long and may not understand everything. Perhaps more learned hon. Members who come from the legal profession know better than me. I come from a simple trade—I do drawings. Is the Minister not talking about wilful rather than simple neglect? There may be a fear that the term ''neglect'' may penalise those who have inadvertently made an error.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I do not think that inadvertent error is caught by the clause. The important point is that people should be able to demonstrate that they have exhibited reasonable care, which is not a concept understood only by lawyers—there is common-sense application of the phrase ''reasonable care''. We all know it when we see it, and the courts are capable of judging whether reasonable care has been taken. With regard to those who exhibit reasonable care, there is no need to inject concepts of wilfulness. That would simply give lawyers a licence to make yet more money by arguing about the difference between wilful neglect and neglect.

Those who take reasonable care have nothing to fear from the provision, but that is not the case with regard to those who do not fall into that category. Some people utilise the status of limited liability for their own purposes and follow a practice that is known as phoenixism. That is an interesting phrase. I had not come across it before but, on reflection, one can see why it is called that—a phoenix rises from the ashes. Those who deliberately engineer the insolvency and winding up of their companies for personal benefit and those who do not take reasonable care will be caught. It is right that that should be the case, and I hope that Opposition Members have been persuaded, by the explanations that they have received, not to press the matter to a Division.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

Nobody would disagree with the proposition that directors who have used limited liability to engineer an insolvency to purloin Revenue tax credit funding should be pursued—and I take on board the point that full-blooded fraud might not be involved. That is what we want the Bill to do, but that is not what it says. It gives a much wider power. There is a meaningful distinction between neglect and wilful neglect. If a company goes under, it is likely that there will be neglect, because everything will be at sixes and sevens.

The Minister rightly made the point that it is likely that the people whom the Revenue will want to pursue are the directors. However, the Bill employs the phrase ''culpable officers'', and the definition of officer includes managers, secretaries, and any Tom, Dick and Harry.

It is unacceptable that legislation should prescribe wider powers than are needed, and which could subsequently be used in a different context. With regard to a company that has failed, the Bill currently gives the Revenue wide powers to go after the staff to recover whatever is owing. That is unacceptable, particularly as the Bill forces the task of administering the tax credits on companies, without paying them for the extra work.

We made it clear that it would be better if the Revenue performed that task. With regard to that, my hon. Friend the Member for Hertsmere (Mr. Clappison) was not arguing that businessmen do not support the concept of a fair society; the issue is whether businesses or the Revenue should administer that task.

I consulted a leading counsel on this clause. He forcefully took the view that it was inappropriate for it to contain the bare word neglect. To some extend the Minister's comments have had the effect of putting on the record an interpretation of the clause that can be used in legal proceedings. The Government may have allowed themselves, understandably, to be egged on by the Revenue to give it more powers than are necessary. Such powers should be defined more precisely to address the pheonixism that the Minister accurately described.

We are minded to vote on the amendment because it is a bad principle of law to introduce provisions that allegedly deal with problems, but are not sufficiently specific and consequently can be applied in a wider context.

Question put, That the amendment be made:—

The Committee divided: Ayes 6, Noes 10.

Division number 6 Adults Abused in Childhood — Clause 25 - Liability of officers for sums paid to employers

Aye: 6 MPs

No: 10 MPs

Aye: A-Z by last name

No: A-Z by last name

Question accordingly negatived.

Clause 25 ordered to stand part of the Bill.

Clause 26 ordered to stand part of the Bill.