Clause 222 - Information powers

Finance Bill – in a Public Bill Committee at 7:45 pm on 26th June 2012.

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

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education)

Clause 222 extends the information powers in schedule 26 of the Finance Act 2008. The current rules were introduced by the Labour Government in 2008 as part of an alignment exercise following the merger of HM Customs and Excise and the Inland Revenue. They allow HMRC to obtain details of a taxpayer whose identity is not known, but only when HMRC can persuade a tribunal to issue a notice on the basis that there has been a serious likelihood of tax loss by the taxpayer. Under this clause, these rules have been extended to obtain these details without the need of a tribunal notice nor any expectation of a serious likelihood of tax loss. May I ask the Minister why he has removed that requirement?

The request for information must be relevant to the collection of tax covered by the agreement rather than just a fishing expedition. How will a fishing expedition be defined and identified? Overall, there is very poor definition of when HMRC should be allowed to request the identity information from third parties. The clause states simply that HMRC should already hold “sufficient data”, but what is “sufficient”? How will that be clarified? Without proper detail on how much data HMRC must already hold, there is a risk that it could be subject to appeals and litigation when it makes an application that it feels is “sufficient” but has not been legally defined as such. Given that recent reports state that the backlog of  tribunal cases at HMRC would take 38 years to clear at the current rate, clearly such a situation must be avoided. Will the Minister publish guidance on that matter? Will the Government design a better way for third parties to notify HMRC that records have been destroyed, so that they do not have to go through an incredibly bureaucratic procedure that involves a long wait for a penalty notice? We strongly urge the Minister to address the weakness of the appeal system.

Another potential safeguarding problem is the lack of clarity over how the clause will interact with confidentiality laws. Data protection laws would not allow banks, for example, to disclose their clients’ details without express authorisation. Will the measure override that? Will notices be allowed that will force banks to disclose data to HMRC? Clarification on that point would be welcome.

Other aspects of the drafting of the clause may have unintended consequences. New paragraph 5A(7), which was introduced after the initial consultation, may enable HMRC to check the tax position of a class of persons as well as an individual taxpayer. We understand that the provision was intended to cover situations where information is required about joint accounts, but it is written far more widely than that and it could in theory extend to all bank customers with UK addresses but overseas bank accounts.

Although we welcome attempts to strengthen HMRC’s hand in uncovering the details of people who are trying to avoid it, the legislation must be properly drafted. I hope the Minister will be able to respond to my queries about the potential problems in clause 222, and I would be grateful for his comments on whether it might be appropriate to require HMRC to report on the functioning of the new requirement so that a proper assessment can be made of how much difficulty the issues raised in Committee have caused.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 222 concerns the information powers of HMRC, and it applies if HMRC possesses some information about a person but not enough to make their identity clear. A third party who knows basic details about that person, such as their name and address, would be required to provide them to HMRC.

The Government are committed to tackling tax evasion in the UK and overseas. Effective exchange of information between tax authorities is crucial to achieving that, so the UK plays a leading role in the OECD, which has been at the forefront of setting common standards for tax compliance across the world. It is equally important that we meet requests from overseas tax authorities in line with those international standards.

In 2010, the global forum on transparency and exchange of information for tax purposes conducted a peer review of the United Kingdom. They identified a deficiency in schedule 36 to the Finance Act 2008, which is the legislation mainly used by HMRC to obtain information. Schedule 36 allows HMRC to issue information notices to taxpayers whose identity is known and to third parties where the identity of a person is unknown. That “identity unknown” power can be used only if the tribunal first agrees that there is serious prejudice to the assessment or collection of tax.

The peer review found that schedule 36 does not meet the international standards, because it does not allow HMRC to require information from a third party if HMRC is unaware of the full identity of the taxpayer but has some partial information, using which the full identity could be ascertained from a third party. For example, HMRC might know a branch code and account number or a credit card number, but not know to whom it belongs. Clause 222 allows HMRC to issue a notice to a third party who can be reasonably expected to know the name and address of the person in question. In the example I have just given, that would be the bank or credit card issuer. The information that may be required is very limited, consisting of only the name, address and, where appropriate, the date of birth of the person. Those basic details may be enough to satisfy an overseas request for assistance. Further information will be sought, if necessary, from the taxpayer or from third parties under HMRC’s existing information powers. We consulted on a number of options in July last year, and it was agreed that that was the best way to achieve the policy aim. The legislation has been published in draft twice for comment.

I would also like to mention the relevant safeguards. The test of serious prejudice for the current “identity unknown” cases and the need for advance tribunal approval are linked; the first is the reason for the second. However, the international standards require that countries, including the UK, be able to respond to requests fully and promptly. We cannot do so if we replicate the serious prejudice condition, nor should we delay requesting the information from third parties. Unlike HMRC’s current “identity unknown” requests, the issue of a notice under clause 222 will not require advance tribunal approval.

It is worth pointing out that the same approach was taken in a similar provision in the Finance Act 2009, which allows HMRC to trace a debtor. That is because that legislation was also limited to obtaining basic contact details from third parties. That does not mean that there are no safeguards. All requests must satisfy the tests set out in the clause. The officer must first hold some information and can only issue a notice to a person who can be expected to have obtained the missing identity details in the course of their business. Secondly, a notice can only be issued by an authorised officer of HMRC, with the protections that brings. Finally, any information requested by overseas tax authorities must be foreseeably relevant to the assessment of a tax covered by a particular tax treaty or other arrangement. Together, those measures ensure that the power cannot be used for fishing expeditions.

In addition, this change will attract other safeguards, including the right of a third party to appeal on the ground of onerousness. Although this change has been prompted by international issues, we should not distinguish between UK and non-UK residents, which was recognised by those responding to the initial consultation.

On domestic use, the clause would allow HMRC to obtain the details of someone who has only a UK tax position, and to initiate these requests itself, rather than reacting to requests from overseas. However, in most domestic cases, HMRC will want far more than just the narrow details allowed for in the clause, so by default, most of these cases will require an “identity unknown” notice and will therefore need to meet the serious prejudice  test. For those few cases where HMRC might only be interested in the name and address, the process for domestic use will be tightly controlled. HMRC envisages that the authorised officers for these purposes will be the same as those authorised for “identity unknown” requests. They will consider the proportionality of domestic requests and whether it is the kind of case we would take up in this way if asked by an overseas tax authority. In every case they will also have to consider whether it would be more appropriate to use HMRC's existing powers. This will be reflected in HMRC guidance, which will be exposed for comment.

In response to the question raised by the hon. Member for Newcastle upon Tyne North about confidentiality, as with other areas of the law, banks can lawfully disclose confidential information if there is a statutory request. As to the concern that the class of persons is too wide, and specifically relating to paragraph 5A(7), any information provided to HMRC, either initially or in response to a notice, might relate to more than one person, but HMRC cannot begin to know the numbers of persons or what type of person they are. The tests in paragraphs 5A(2) to (5) must be able to apply meaningfully to the group generically. Although there is some common characteristic derived from the identifying information, given where paragraph 5A sits within schedule 36, “class of persons” is the correct way to frame the legislation.

To some extent I have addressed the serious prejudice test, but it is worth pointing out that paragraph 5 to schedule 36 of the old legislation does have a serious prejudice test before HMRC can issue a notice. Although the identity of the taxpayer is unknown, it is this test that prevents existing UK legislation from meeting international standards. Therefore reproducing it would defeat the point of the change that we have introduced. I hope that I have addressed the concerns that the hon. Lady raised about fishing expeditions. Any request for information by an overseas authority will be rigorously examined by a small specialist team within HMRC to ensure that it is foreseeably relevant to the assessment, collection or enforcement of a tax covered by the agreement. All requests must be authorised by a senior HMRC officer.

In conclusion, the clause is proportionate, supports the UK stance on global tax compliance and fulfils our international obligations. I hope that it will stand part of the Bill.

Question put and agreed to.

Clause 222 accordingly ordered to stand part of the Bill.