Clause 29 - Reduction of penalty under section 25 or 26

Finance Bill – in a Public Bill Committee at 11:00 am on 20th May 2003.

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

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

Again, a representation has been made to us to make sure that this matter is put on the record, so that there is no question of it not being properly considered as part of our scrutiny. The Institute of Chartered Accountants of England and Wales recognised that the clause is intended to replicate section 70(4) of the VAT Act 1994 in respect of clauses 25 and 26. It is seriously concerned that, where penalties are considered to be of a criminal level, subsection (3)(c) would deny taxpayers a defence that goes to the heart of the motive test.

A penalty under the clause is relievable on the ground that the taxpayer had a reasonable excuse, but if the taxpayer is precluded from arguing that they acted in good faith, that sabotages any possible argument that they had a reasonable excuse. The denial of this defence, moreover, allows for a challenge on the ground of the infringement of human rights legislation and therefore weakens the clause. The ICAEW goes on to say that that comment would apply equally to any existing section 70 provisions that are applicable to penalties of a criminal level.

I raise the point on the same basis as on the previous clause.

Photo of John Healey John Healey The Economic Secretary to the Treasury

The clause permits mitigating circumstances to be taken into account so that a civil penalty can be reduced. At the same time, it sets out the circumstances in which a reduction cannot be considered. Mitigation of a penalty amount will be appropriate in many cases. For example, where a business or an individual actively assists Customs and Excise to establish the extent of the arrears, thereby saving officials time, that assistance will be recognised

by a reduction in the amount of penalty assessed. As we draw comparisons to the VAT civil evasion regime that is already in place, it may be of interest to the Committee that the average penalty applied in cases of VAT civil evasion is currently just over 40 per cent. of the tax evaded. That figure shows the reduction in penalty that many taxpayers earn through co-operation with Customs and Excise investigations.

The hon. Member for Eddisbury asked why a person who acts in good faith might be precluded from being taken into account by Customs or a tribunal in considering whether a penalty can be reduced under clause 29. I will try to clarify the situation in the following way. When a person is liable to a penalty under clause 25 for evasion through dishonesty, there can be no question that he acted in good faith. In contrast, there is a general recognition that taxpayers have acted in good faith where dishonesty is not an issue. That has been recognised in setting the maximum penalty in clause 26 at a figure well below the maximum provided in clause 25, and in the decision to step the non-evasion penalty. Allowing further mitigation for good faith would in effect give the taxpayer dual relief. Decisions about whether to reduce a penalty, and if so, by how much, will initially lie with Customs, but its decisions are appealable to the independent VAT duties tribunal. On that basis, I hope that the Committee will support the clause.

Question put and agreed to.

Clause 29 ordered to stand part of the Bill.