The background to the Government amendments to schedule 24 is the now somewhat infamous wording of “HMRC think”. Those words as included in the Bill would have given HMRC the power to penalise a taxpayer in cases in which it thought that they had done something wrong. Those highly controversial words were, in characteristic fashion, buried in the small print of the Budget and, despite a prior period of consultation on wider issues, took the accountancy profession somewhat by surprise when they were included in the Bill.

John Whiting, the respected PricewaterhouseCoopers tax expert, said in Financial Director magazine on 5 April that everyone had objected to the wording and expected that changes would have been made to the Bill. He said:

“The worry is ‘HMRC think’ is far too loose and arbitrary.”

John Cullinane, the then president of the Chartered Institute of Taxation, followed that in a CIOT press release, dated 10 April and entitled, “Alice in Wonderland Tax Penalties”, which argued:

“When this was first suggested by HMRC, the CIOT objected, as did other bodies. On Budget day HMRC admitted that there was almost universal disquiet about the statutory formula ‘If HMRC think’...Despite objections to this subjective clause, it remains in the draft legislation. The CIOT recognises that HMRC have engaged in constructive consultation over many issues. We are doubly disappointed that in this instance they do not appear to be listening.”

The Institute of Chartered Accountants in England and Wales also raised serious concerns. In its Committee briefing for the Finance Bill, it says:

“Paragraph 1(1) includes the phrase ‘HMRC think.’ The Explanatory Notes to the Schedule suggest this is little more than the use of modem language. We disagree.”

The ICAEW went on to argue:

“‘HMRC thinks’ does not suggest that HMRC are using their best judgement or taking a reasonable approach. We believe this phrase will lead to confusion and court cases to determine its true meaning.”

For good measure, the London Society of Chartered Accountants, which is affiliated to ICAEW, simply said this about “HMRC think”:

“This is at best otiose and at worst adds an unnecessary ambiguity.”

It appears that Ministers picked up on the weight of professional opposition to their proposal and a climbdown began. In the debate on HMRC powers in Committee of the whole House, the Financial Secretary dropped a broad hint that some reversal would be forthcoming when he told the House:

“In recognition of the anxiety that has been expressed and in response to those representations that have been made, I intend to table an amendment in the Public Bill Committee to clause 96 and to schedule 24 on civil penalties.”

He did better than that; he tabled more than a dozen. As the Financial Secretary may recall, I welcomed his comments at the time by saying in the next column:

“As the Minister mentioned it, may I say quickly that Conservative members welcome his admission that there has been concern on clause 96. We have received representations on the matter and we look forward to seeing his amendment in due course.” —[Official Report, 1 May 2007; Vol. 459, c. 1460-61.]

Now that we have the amendments before the Committee, in the same spirit, I welcome what the Minister is doing. Conservative Members think that he  has done the right thing and that he has listened to the weight of professional opinion on the matter. Therefore, we support his amendments as they will improve the Bill.

As I understand it, there is one example in the schedule where the wording “HMRC think” will remain in the Bill. That is at paragraph 11(1), entitled “special reduction”, which will allow HMRC discretion in “special circumstances” to reduce the penalty but not to increase it. I think that the Minister said that that interpretation is correct and, if it is, will he briefly give some simple examples of what those sorts of special circumstances might be?

Finally, before concluding my discussion of the amendments, it would clearly be desirable to prevent such a situation from arising again. It would have been better if the Government had not gone there in the first place, so, with that in mind, will the Minister say how the situation came about? Were the words inserted on the insistence of Ministers, on the advice of parliamentary draftsmen, or did someone just get out of bed the wrong side one morning? What actually happened and how can we prevent it from happening again?