Clause 192 - Overview of Part 4

Finance Bill – in a Public Bill Committee at 9:10 am on 17 June 2014.

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

Photo of Gary Streeter Gary Streeter Conservative, South West Devon

With this it will be convenient to discuss the following:

Clauses 193 to 202 stand part.

That schedule 26 be the Twenty-sixth schedule to the Bill.

Clauses 203 to 208 stand part.

That schedule 27 be the Twenty-seventh schedule to the Bill.

Clauses 209 to 211 stand part.

That schedule 29 be the Twenty-ninth schedule to the Bill.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

Thank you, Mr Streeter. It is a pleasure to serve under your chairmanship. You are right in saying that we are coming to the end of our consideration of the Bill in Committee.

Part 4 of the Bill is made up of four chapters, all of which cover various tax avoidance measures. Chapter 1 provides an overview of part 4 and outlines some of the main definitions. Chapter 2 introduces a new obligation on users of an avoidance scheme that Her Majesty’s Revenue and Customs has defeated at a tribunal or court hearing in another party’s litigation to concede their position to reflect that decision. That obligation will take the form of a follower notice and is the subject matter of this first group of proposals.

Chapter 3 makes provision for issuing accelerated payment notices on the same grounds as follower notices, but in addition to the cases disclosed under the disclosure of tax avoidance schemes—DOTAS—or those cases in which HMRC is taking counteraction under the general anti-abuse rule, which is known as the GAAR.

Finally, as we will discuss later, chapter 4 makes special provision covering the application of part 4 to stamp duty land tax and annual tax for unfit dwellings, in addition to conferring a power to extend the provisions of this part to other taxes and making consequential arrangements. As the Minister and the Committee will be aware, the measures have been subject to much comment and I look forward to exploring them in more detail during our final day in Committee.

On clauses 197 to 211, the Opposition support measures to tackle tax avoidance. It is important that everyone plays their part and pays their fair share of tax. These measures are the result of backlogs in the current system and the feeling that it is easy at the moment to game the system and to extend the time for resolution of a case, which is in the interests of the party that has sought to engage in tax avoidance, but less in the interests of ordinary taxpayers who end up paying more overall as HMRC takes longer to resolve cases.

This chapter in the Bill falls under the Government’s broader consultation, “Raising the stakes on tax avoidance”. Follower notices were subject to consultation from 12 August to 4 October 2013. They focus on encouraging users of avoidance schemes to settle their tax affairs after similar cases have been lost in court. As the consultation document outlines, buyers of tax avoidance schemes will submit their returns to HMRC on the assumption that the schemes will reduce their tax liability. When a tax avoidance scheme is mass marketed, as they often are, HMRC is presented with a large number of returns based on the same assumption that the scheme will have reduced the person’s tax liability in a particular way. When HMRC holds that the scheme does not work, it follows that it will argue that any returns based on that scheme are incorrect.

When faced with a large number of similar cases, it is sometimes more efficient for HMRC to investigate representative cases, taking them to litigation if necessary. However, when HMRC wins a representative case in the courts, other taxpayers who have used the same or similar schemes sometimes see little incentive in settling their cases with HMRC. When HMRC pursues litigation in similar cases, tribunal rules allow for them to be heard together in certain circumstances but, unfortunately, that applies only to cases that have been notified to the tribunal. To get to that stage, HMRC has to investigate those cases to litigation standard and then close the tax inquiry. That uses up the tribunal’s resources, places a strain on HMRC’s compliance resources and often delays the collection of the correct tax.

In his autumn statement last year, the Chancellor of the Exchequer announced:

“We are introducing a new, limited power that requires people to pay their taxes up front where the scheme they used has already been struck down by the courts.”—[Official Report, 5 December 2013; Vol. 571, c. 1107.]

That measure will introduce a new obligation for users of an avoidance scheme that HMRC has defeated in a tribunal or court hearing in another party’s litigation to concede their position to reflect that decision.

Earlier this year, on 24 January, the Government published a further consultation document, “Tackling marketed tax avoidance”. The consultation closed exactly  a month later on 24 February 2014. The consultation received more than 100 responses, more than half of which came from one website.

However, concerns were expressed by several stakeholders and members of the public who will be affected by the measures that the consultation period was insufficient. For many of them, particularly the accounting organisations, the consultation took place at their busiest time of the year and therefore contained their ability, they say, to take part fully in the consultation process and to respond as they would have liked. In its response to the consultation, the Institute of Chartered Accountants in England and Wales said that there was

“so little time for comment that one month is not long enough, given their length, complexity and contentious nature”.

I am sure the Minister will tell us that a total of 800 responses received suggests that the length of time given for the consultation was sufficient, but I am a little concerned that so many key stakeholders were upset about the length of time for consultation and said that it did not give them enough time to discuss with their members in detail the measures before us today. They fear that they may have missed opportunities to improve the legislation—not necessarily the principles behind what the Government are trying to achieve, but some of the more technical aspects of how those ends will be achieved. When the Minister responds, I would be grateful if he explained to the Committee the thinking behind the length of consultation period adopted by the Government. Is he concerned that the short consultation period might mean that there was insufficient opportunity for HMRC and the stakeholders it regularly works with to build confidence about the impact of the measures and how they will be implemented when the Bill is passed?

The consultation document outlined follower notices and the expansion of the accelerated payment notice scheme, which the Committee will discuss later today. The main concerns discussed in the summary of responses document focus on the absence of a right of appeal, the implications for the HMRC’s resources, and the processes that will be adopted internally as it takes important decisions on whether to apply a follower notice to a tax inquiry.

We must recognise the challenge facing HMRC because of the number of cases. It is estimated that there are around 65,000 open cases involving marketed tax avoidance schemes, representing potentially billions of pounds of uncollected taxes. We all want to ensure that tax due is collected as quickly as possible. However, the process of collection and litigation that is currently undertaken by HMRC can take several years to complete. There is a sense that it is quite easy to game the system and for individuals challenging the decisions of HMRC at the tribunal stage to cause delay. Opposition Members therefore support the principle of follower notices as a practical measure that should—hopefully—decrease the amount of time it takes to settle those matters and ensure that the currently uncollected tax is collected quickly.

The responses to the consultation from many of the membership bodies show support in principle for the idea of follower notices when cases are the same or very similar, in recognition of the need to deal with the many tens of thousands of outstanding mass-marketed avoidance schemes. The stakeholders accept that the position is untenable and is causing great strain on HMRC and the  tribunal system. However, those same stakeholders have serious concerns that dealing with this backlog with follower notices risks taking away a taxpayer’s normal safeguards and rights of appeal. They are also concerned that the measure risks shifting a considerable amount of power from the legislature and the judiciary straight back to the Executive, meaning, in this case, HMRC officials.

One of the biggest concerns about the balance of power relates to the removal of a right of appeal. Much more will depend on officials at HMRC making decisions about whether a follower notice should be applied. Some stakeholders have described that as putting the taxpayer at the mercy of the bureaucrat. Given that there is no right of appeal, stakeholders fear that far too much of power is concentrated in HMRC and they are not confident that HMRC can be relied on always to get it right. Many members of the public have commented that, because the new powers sit within HMRC, HMRC is becoming judge, jury and executioner. There is therefore a fair amount of concern about how the balance of power will sit in relation to such decisions. The Minister will be aware of the reaction of members of the public who may now get follower notices and it will be interesting to know how much confidence he has in the system overall and its robustness to deal with the lack of confidence that has been expressed so far.

Another issue concerns the fact that tribunal group rulings from the first-tier tribunal can act as the basis for follower notices. Therefore, the clauses within the chapter make the provision for HMRC to issue a follower notice on the basis of a judicial ruling that HMRC deems to be relevant to the taxpayer’s chosen arrangements. The definition of judicial ruling appears to include first-tier tribunals. First-tier tribunal members are judges and deputy judges drawn from the former special commissioners, the former VAT and duties tribunal chairmen, assignees from other tribunals and non-legal recruits who are selected by open competition, possibly including ex-general commissioners. In most cases the decisions of the first-tier tribunal are made by a judge and two other members, although this can vary between chambers and sections, and sometimes depends on the nature of the case.

There is no issue about the robustness of the FTT in and of itself, but the use of FTT rulings as the basis for follower notices has been met with considerable opposition throughout the consultation process. As the Law Society observes, it is rare in our legal system for decisions of the lower tribunals to be used in that way because they have no precedential value. In the normal run of things, FTT decisions are not capable of setting a legal precedent that then has to be followed in all other cases that flow. Is the Minister satisfied that the use of FTT decisions is satisfactory from a legal point of view? What conversations has he had with the Law Officers and his colleagues in the Ministry of Justice about that slight change to the way in which lower tribunal decisions are treated within our legal system? It can be difficult enough, when a tax-related or a non-tax-related case gets to the upper tribunals, to work out the exact basis for the decision that the lower tribunal judges made. Often, lawyers—I confess I was one in my pre-political life—will spend many hours and earn a lot of money trying to work out the whether the comments of a judge are the rationale for the decision, and whether the comments go to the heart of a decision or are obiter dicta.

Photo of James Duddridge James Duddridge Chair, Regulatory Reform Committee, Chair, Regulatory Reform Committee 9:15, 17 June 2014

I apologise for interrupting the hon. Lady. Is she suggesting that, when looking at the first-tier tribunals and generalising from a decision made, there should be a difference between the merit of cases that are similar compared with those that are identical where, effectively, the same scheme is sold to multiple individuals, which I suspect is the bulk of the 65,000 to which she refers?

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

I am grateful to the hon. Gentleman for his comments. He is right. The thrust of the measures that we support deals with the latter example that he gave—cases in which the same scheme has been marketed and used in exactly the same way in each case, but there will be some differences. The question is, looking at FTT decisions, whether there will be enough in that ruling to be able to work out what the similarities are. Often, legal argument does not necessarily turn just on the features of one marketed tax avoidance scheme. There may be other elements to a case, which might be lost. That is why I am putting that point to the Minister.

There is a principle of law and of the way our legal system works, which relates to what type of decisions have the ability to set a precedent that has to be followed in all cases thereafter. A good feature of the measures is that there is a small number of boutique practices that put together marketed tax avoidance schemes, which are almost exactly the same in nature all the time. That is what we are trying to tackle.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

Is the hon. Lady’s position that the provisions should not apply unless there has been a ruling in the court of appeal or higher?

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

No, I am merely testing the Government’s case to ensure that the rules that end up on the statute book are as robust as possible. In principle, I have no objection to an FTT decision being capable of setting a precedent for all cases thereafter but I would not be doing my job if I did not press the Minister as hard as possible, given the concerns expressed, particularly by the Law Society.

If we are going to change fundamental principles of the English legal system and the way it functions—whether taking away rights of appeal, potentially introducing retrospection, which I am sure we will discuss in greater detail in the next group, or changing the basis on which precedents are set—as legislators, it is our duty to ask as many questions as possible to ensure that we know the scope of what we are trying to achieve so that the people who watch the debate understand exactly what they are dealing with and know that we do not make the decisions lightly or easily.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

Does the hon. Lady agree that the expertise of the judges in the first-tier tribunal is often extremely high and specialised, and that they know what they are doing and understand the principles of the cases to such a level that we can have trust and confidence in them and their decisions?

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

That is exactly why I explained the level of seniority and the long experience that those making decisions at FTT level have. I am making no comment about the value of their judgments. I am  merely saying that, as a long-standing principle of our legal system, lower courts are often not capable. In a personal injury claim, the average county court does not set a precedent that is followed. That is normally set by higher courts. That is just how our legal system works and a similar principle is applied in this case. I have no objection to departing from that because I recognise that a backlog of 65,000 cases with potentially billions of pounds of uncollected tax is no good for anybody. We need to think of practical ways to deal with that problem but, before departing from fundamental principles of our legal system, we should test them to ensure that we know what we are doing and that we are doing the right thing.

Photo of James Duddridge James Duddridge Chair, Regulatory Reform Committee, Chair, Regulatory Reform Committee 9:30, 17 June 2014

The hon. Lady mentioned marketed tax avoidance schemes and the 65,000 cases. Does she have a feel, in her investigations, for how many individual marketed schemes there are? Her case would be more powerful if there were a very limited number, but I suspect there are quite a few and that there would be significant cost in going beyond the tribunal stage, which may or may not be necessary but is a factor to consider.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

I am grateful for that intervention because I was going to put that question to the Minister. It would be good to know how many of the 65,000 marketed schemes HMRC expects to fall within the number of known marketed schemes causing the real mischief behind the backlog, so that we know how many we can hopefully strike out quickly and start collecting tax that ought to have already been collected.

HMRC, I think in relation to the objections raised by the Law Society, argued that FTT decisions ought to be used when it comes to deciding whether a follower notice can be applied, because if they were unavailable—if a follower notice could be applied only to a higher court decision—taxpayers might not appeal unfavourable decisions in order to avoid setting a precedent that would give rise to follower notices. The Law Society said that it was not convinced by that argument and felt that

“it would require an unusual degree of altruism toward other taxpayers on behalf of the litigant choosing not to appeal”— something it believes is “rarely seen in practice.”

I am sure that many stakeholders have been speaking to the Minister and his officials at length about this aspect of the measures. I would be grateful if he explained how the Government arrived at the position of allowing FTT decisions to be included and if there might be some scope for looking at whether the system needs additional safeguards. For example, the Chartered Institute of Taxation suggests that, at the end of a lead case, it might be appropriate to ask a judge to make a declaration that the case is apt for follower notices to be issued. That might provide an opportunity for the judge briefly to state the points of law and fact that helped them arrive at that decision, so as to remove uncertainty when that case is used as the basis for follower notices in other cases.

It would be helpful to know if the Minister considered alternative methods of bringing greater clarity to the regime as envisaged by the legislation and why the  Government seem to be coming down in favour of HMRC assessment of a judgment. Do the Government think it is worth considering, perhaps once we have seen how the measures work out in practice, whether there is scope for such a declaration to be made by a judge so that there is less debate about the facts and features of a scheme that led a judge to make that decision? That might also assist with the change we envisage in our system to allow the lower tribunal to set a precedent.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

The issue is that many of these schemes are mass-marketed. One example is the Eclipse 35 scheme, of which Sir Alex Ferguson was a member. Let us say the case was taken against him. There are 289 investors; I would say that the other 288 cases are exactly the same and that there would be an appropriate case for saying, “These cases are all the same. This is what is called a cookie-cutter transaction in the legal profession; they should all fall over at the same time.” Would the hon. Lady agree that is the right principle?

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

Yes. I have no different analysis of or principled objection to that. It will be helpful if the Minister can give us a feel for how many of the 65,000 will fall into this cookie-cutter type case. We would assume, for example, that the 289 cases within the Eclipse 35 scheme would all be exactly the same. We all know that there are always cases in the legal system where there are some differential elements and we need to ensure that our rules are robust enough to deal with the many and varied facts that are adjudicated upon by our tribunals day in, day out. In the normal run of things, we would think there would not be any issues, but, if we are going to change the law, we need to ensure that we allow for the odd cases that sit outside the cookie-cutter type or those where the cutter has gone wrong and the cookie has come out a slightly different shape. Those are the cases that we need to worry about and ensure that the rules are robust enough to deal with.

Another main concern is the lack of a right of appeal when a follower notice is issued. Many of the concerns expressed by stakeholders, as well as by members of the public, relate to the fact that they feel it represents an erosion of a taxpayer’s access to justice. Getting the balance right between ensuring that we are able to clear backlogs, thereby saving taxpayers lots of money, and collect tax that is due, and ensuring that the justice system is fair, is tricky. It is important and necessary that if we are going to make these changes—I have no objection in principle to the rules of appeals and follower notices—and take away rights of appeal, we must ensure that we have really stress-tested the case for doing so and ensured that the new arrangements are well understood and people know exactly what they are dealing with.

The Association of Taxation Technicians has raised deep concerns about the lack of any right of appeal against the follower notices. It says that the result is

“that a taxpayer who wishes to pursue negotiation or litigation with HMRC must accept the likelihood of the imposition of a substantial penalty even if they are prepared to pay on account the full amount of the disputed tax.”

It feels that that

“involves a unique and disturbing tipping of the scales in favour of the executive beyond the extent required to address the targeted mischief.”

Even if a person is prepared to pay up front the amount of tax that is in dispute, they are still liable for penalty and their rights of appeal are still affected. The legislation means that if a taxpayer is not prepared to abandon their entitlement, or negotiate or litigate with HMRC in respect of the effectiveness or otherwise of the adoptive arrangements, they are at risk of the penalty. All that the taxpayer can do is notify HMRC that they dispute its conclusion and wait for HMRC to either withdraw or confirm the notice.

While it may be possible in theory to pursue judicial review, which is fast becoming the first and last resort for many people under the changes to our justice system over the last few years and is, of course, an expensive procedure, there is no direct appeal to an independent court of tribunal in relation to either the follower notice or the accelerated payment notices scheme, which we will discuss later. The Law Society says

“this equates to the imposition of a substantial contingent cost for access to justice” and that it

“should only be created if there is absolutely no credible alternative.”

Will the Minister establish that there was no credible alternative and the rules that we have ended up with in the Bill are the only formulation that could be adopted in order to relieve us of the severe problem of the backlog of the cases? Will he tell us what advice he took on the lack of a right of appeal and how the penalties will operate? What discussions did he have with colleagues? Was some of the thinking around bureaucracy and further delays to the system if appeal rights were put back into the legislation? Was any assessment made of what further delays might be caused if the follower notices legislation went forward but included some limited right of appeal? Were different types of appeal processes considered and rejected? It would be helpful to have more detail.

The last concern is around HMRC resourcing. It is clear that the new arrangements will place a significant burden on HMRC at a time when existing resources are being spread ever thinner. The Association of Revenue and Customs believes that HMRC is facing a demographic time bomb. More than half its work force is aged over 45, with 18% over 55. That proportion is higher at senior level where around 30% of grade 6 employees are over 55.

Will the Minister inform us at which grade the decisions about issuing follower notices will be taken, so that we can establish that they will taken by appropriately senior individuals with the requisite amount of experience, and get an idea of whether they are all people who are likely to retire soon?

The Minister and I have often discussed HMRC resourcing and retirement figures. I have often tabled parliamentary questions that the Minister has not been able to answer because there is no set retirement age in HMRC. I understand that, but in terms of how these measures are implemented, it would be helpful to know the numbers of staff who will make the decisions about the imposition of a follower notice and are also coming up to retirement. If it is likely that many of those staff will soon retire, it would be helpful to know the contingency planning in HMRC to ensure that they are replaced by people with appropriate experience, so that there is no gap in how the scheme is enacted.

Is the Minister confident that ensuring seniority of decision makers on follower notices will not mean that other aspects of HMRC work face a detrimental transfer of expertise? Are we in danger of seeing exceptional performance of the team that deals with follower notices but a decrease in performance in another team because people have been transferred? It would be helpful to have some detail about how that will work at HMRC in practice.

The operational detail on how HMRC will handle the new regime was highlighted by the Chartered Institute of Taxation in its response to the consultation. It said that the key point that needs to be addressed is that if there is a transfer of power from the legislature to the Executive, the efficient and fair function of the Executive becomes critical. Its concern, and that of the vast majority of respondents to the consultation, relates to the practical operation, including an understanding of seniority of staff. HMRC will effectively be operating a Chinese wall where the decision about issuing a follower notice will be taken by a senior official wholly removed from the team that was dealing with the case up to the point at which a decision had to be made about a follower notice.

Many barristers’ chambers and solicitors’ firms often have people in them acting for both sides; it is not unusual to see a Chinese wall in our legal system. However, if so much power is to be vested at Executive level, it is important that the arrangements have the confidence of the public who will be issued with the notices and of the stakeholders who will act for those parties. It would be good to get an understanding of how robust the procedures within HMRC will be.

Many stakeholders have asked for a clear official explanation of the internal governance processes. Will the Minister address that suggestion in his comments to the Committee and his work with stakeholder groups after the Bill passes? Will HMRC issue comprehensive guidance to outline which situations will be tackled by the new legislation? Has consideration been given to what might be included in such guidance? If guidance will be issued, will the Minister give us an idea of the time scale he has in mind for publishing it?

Finally, many people have asked for a formal review of the measures and how they will operate not only in HMRC but in the courts and the tribunal service. The Government response to the consultation used the usual formulation, and said that they keep taxation measures under regular review. However, I felt that it held out the possibility that HMRC recognises that the new rules are radical and remove substantial rights from taxpayers to deal with a real problem. I wonder whether that is a hint that the review will say something more than that they will keep everything under review, and that HMRC is looking at how the measures will be implemented. I want to get an idea from the Minister about whether that is wishful thinking on the part of those who want a review, or whether something is going on.

Photo of David Gauke David Gauke The Exchequer Secretary 9:45, 17 June 2014

It is a great pleasure to serve under your chairmanship this morning, Mr Streeter. I thank the  hon. Member for Birmingham, Ladywood for her questions. She is right that it is incumbent on her to ask testing questions about this significant policy. I welcome the tone in which she set out her questions. She said she is supportive in principle, but she wants to understand the detail. I shall endeavour to respond to her concerns.

Clauses 192 to 211 speed up the settlement of avoidance disputes by encouraging taxpayers whose avoidance scheme has been shown to fail in another party’s litigation to promptly settle their dispute with HMRC. Before I respond to the points that have been raised, I will set out the background. The Government have taken a firm line on tackling tax avoidance. It is not acceptable that a small but persistent minority try to find ways around our tax laws to avoid paying their fair share, especially at a time when the public finances are under considerable pressure. It is not right that would-be avoiders can frustrate efforts to resolve their cases, often spinning things out only to settle their case on the steps of the tribunal. These clauses introduce a follower notice that is designed to highlight the choice for taxpayers.

Many avoidance schemes are marketed widely, often with minor variations. When HMRC wins a case, the tribunal or court’s decision and reasoning will in all likelihood decide the related cases as well. However, some taxpayers and their advisers do not see it that way, and argue that tiny differences in the arrangements mean that the judgment does not apply to them. They will now have to make a choice. If they decide to proceed with their case in the face of the evidence and the court’s decision, they run the risk of a penalty when the case is closed. If they can show that the grounds of their case were different, there will be no penalty. The penalty will be a percentage of the tax advantage wrongly claimed by the scheme user, but it will be substantially reduced if those involved decide to co-operate with HMRC to settle their case.

I will now set out in more detail the changes made by the clauses and schedules. The first substantive clause—clause 197—sets out the circumstances in which a follower notice may be issued. Four criteria must apply, two of which I would like to emphasise. First, there has to be an open inquiry into a return or claim, or an appeal in progress. That is important, as the taxpayer involved will know that HMRC is challenging their tax return, so the process should not come to as a surprise to them. Secondly, the return, claim or appeal has to be made on the basis that a tax advantage is gained from a set of tax arrangements—in other words, that the taxpayer has used a scheme with the intention of avoiding tax. The policy is therefore about not routine inquiries, but taxpayers who have knowingly used schemes that they hope will reduce their tax bills, often by large amounts.

Clause 198 sets out when a legal ruling can trigger follower notices. If a taxpayer’s scheme failed merely because he did not apply it carefully, that cannot trigger follower notices for other users. The ruling needs to be relevant, finding that the scheme was defective regardless of how it was applied and explaining why. If the appeal process has been exhausted, that ruling may be used as a basis for follower notices to be issued.

Clause 199 sets out that a follower notice has to identify the judicial ruling on which it is based and to explain why HMRC believes that it is relevant. The notice must also set out the person’s right to object to the notice and the consequences of ignoring it.

Clause 200 deals with a taxpayer’s right to ask HMRC to reconsider a notice. The purpose of follower notices is to discourage certain taxpayers from spinning out their disputes unreasonably with HMRC. One professional body recently said that HMRC

“should be able to root out hopeless cases that clog up the system at the expense of the courts”.

It also called for a formal appeal right, but allowing taxpayers to appeal against follower notices would simply exchange one dispute for another, which would not speed up the process at all.

It is right, however, to provide a safeguard for taxpayers so that they can raise objections if they believe that a notice has been wrongly issued, so clause 200 allows a taxpayer to make representations about a notice within 90 days and requires HMRC to consider them. Having done so, if HMRC confirms the follower notice, the taxpayer is given a further 30 days to take corrective action. I reassure the Committee that HMRC will apply firm governance to such notices, which will be approved by senior officials in the organisation.

Clause 201 applies a penalty if a taxpayer is served with a follower notice, but does not take corrective action within the specified period. The penalty is charged on the amount of tax advantage denied: the extra tax that becomes due, or the reduction in tax repayable, when the scheme is counteracted. That is defined in schedule 26, and there are special rules to deal with denied loss relief and with tax arrangements that purport to delay a payment or bring forward a repayment of tax.

Clause 201 also sets out the steps that a taxpayer should take in response to a follower notice by making suitable amendments and contacting HMRC.

Photo of Ian Swales Ian Swales Liberal Democrat, Redcar

Some members of the Committee have received representations regarding retrospection. The Minister said earlier that none of the notices should come as a surprise to a taxpayer. Will he say more about retrospection and whether anyone who is about to be subject to a notice will not be expecting it?

Photo of David Gauke David Gauke The Exchequer Secretary

As I said earlier, none of the notices should come as a surprise to taxpayers. We will no doubt turn to the issue of retrospection in greater detail when we discuss accelerated payments. We are presently debating situations in which there is a dispute between HMRC and a taxpayer when there has been a court or tribunal hearing against another taxpayer related to a similar scheme, and about HMRC being able to take action in respect of that so that the system is not clogged up.

Photo of Nicholas Dakin Nicholas Dakin Opposition Whip (Commons)

The Minister is explaining things well and comprehensively. Representations have also been made about appeals. He has spelled out clearly the actions that individuals can take on appeals, but will he pick up on whether independent appeal is appropriate?

Photo of David Gauke David Gauke The Exchequer Secretary

I am grateful for that intervention. As the hon. Gentleman was kind enough to say, I am working through this in good order so, if I may, I will complete my run through of the various clauses before turning to various points, including rights to appeals, which he was right to raise because they are important.

Photo of Ian Swales Ian Swales Liberal Democrat, Redcar

Perhaps I may clarify my question. Is anyone likely to get a follower notice unexpectedly? Will they already know that they are part of a scheme that may be subject to a follower notice?

Photo of David Gauke David Gauke The Exchequer Secretary

As I said a moment ago, we are talking about cases in which there is an open inquiry into a return or claim, or an appeal in progress. The taxpayer will be aware of that open inquiry and that HMRC is challenging their tax return, so a follower notice really should not come as a surprise. I hope that my hon. Friend finds that reassuring.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

Just to be clear, is it not the case that generally those people who receive follower notices have engaged in tax avoidance schemes? They knew what they were doing—they were playing with fire—they have been caught out and they are having the book thrown at them, so they are not really in a position to complain.

Photo of David Gauke David Gauke The Exchequer Secretary

My hon. Friend puts it in characteristically punchy terms. I would say to him that taxpayers will be aware of a dispute. The purpose of these measures is to bring those disputes to a head and not permit those who have very similar arrangements to those found to have failed by a court or tribunal—we must remember that such schemes fail in the vast majority of cases when a court or tribunal looks at them—to drag proceedings out over a long period.

Let me turn to clause 202, which provides that the penalty under clause 201 is set at 50% of the denied tax advantage. That is in line with the scale of penalties for inaccurate returns, which range from 30% to 100%, depending on behaviour. To encourage taxpayers to co-operate with HMRC to resolve their case, clause 203 allows the penalty due to be reduced to as little as 10% to reflect any co-operation.

Clauses 204 to 206 are administrative provisions that detail the information that must be included in a penalty notice and the deadline for charging a penalty. They contain protections in relation to the amount of the penalty, including repayment by HMRC if the value of the tax advantage underpinning the penalty is changed. Clause 207 sets out the taxpayer’s right to appeal against a follower penalty. If a tribunal thinks that the basis of a follower notice is wrong, any penalty will be cancelled or reduced.

Photo of Richard Fuller Richard Fuller Conservative, Bedford

I want to delve into the Minister’s mind on this issue. Are the Government proposing this complex range of measures because they are concerned about the backlog of cases and HMRC’s ability to deal with that, or because the Treasury believes that this is, in principle, a better way of managing such tax arrangements?

Photo of David Gauke David Gauke The Exchequer Secretary 10:00, 17 June 2014

We think it is not fair to the general taxpayer that those who have entered into tax avoidance arrangements that are very similar to others that have been shown to fail can drag on proceedings over a long period while a matter is being disputed when, ultimately, it is very likely indeed that they will lose.

On the point about backlogs—I may return to this later—I would not want the Committee to be under the impression that this is simply a matter of HMRC not having the resources to deal with cases, meaning that a backlog is created. Such legal proceedings can be complex matters and the wheels of justice sometimes turn slowly. If a taxpayer is determined not to settle and looks for every opportunity to delay, the process can take a very long time. That enables the taxpayer to benefit, as they may hold the money for a considerable period. We will come to another aspect of that when we turn to accelerated payments, but it is right and proper that we deal with the specific problem of when people who have entered into arrangements similar to those that have failed even so continue to dispute the sum. At the end of the process, when we get to the tribunal, the taxpayer or the adviser often concedes at the very last minute. That involves a huge cost, including opportunity costs for HMRC, and gives that taxpayer an unfair advantage. I hope that I have been helpful in explaining the Government’s thinking.

Photo of Richard Fuller Richard Fuller Conservative, Bedford

That is very helpful, so I hope that the Minister will forgive my coming back another time. For those of us of a conservative disposition, any extension of the Executive’s authority in areas of the judiciary warrants a little more inspection. As I understand it, after a ruling has been made, the executive branch of HMRC will be able to apply it to other cases. There may be other aspects of jurisprudence in this country where that takes place, but what are they? I know that in environmental law there is deeming—because something has been followed, other cases should therefore follow—but it would be helpful if the Treasury commented on the fact that this is an extension of an executive branch into what the judiciary would otherwise determine.

Photo of David Gauke David Gauke The Exchequer Secretary

It is difficult to come up with precise parallels because of the nature of the tax system. My hon. Friend mentions environmental law, but it is difficult to find an area other than tax in which there is such complex behaviour and where structures of great complexity can be created to give an individual a particular advantage. Rather than attempting to persuade him on the basis of parallels elsewhere in the legal system, I come back to the first principle: is it right that somebody who has arrangements that are designed to reduce their tax bill should be able to continue their dispute with HMRC even when the precedent has been set that they will lose? In such circumstances, I do not think it is right to permit that situation to continue, and I hope the Committee agrees. It is right that HMRC’s powers are extended so that it is able to address such circumstances, because that is fair for the general taxpayer.

Clause 207 sets out the taxpayer’s right to appeal against a follower penalty. If a tribunal thinks that the basis of a follower notice is wrong, any penalty will be cancelled or reduced. Clause 208 introduces schedule 27, which provides rules to deal with the special nature of partnership returns. It specifies the penalty on partnerships and details how any penalty is divided between the partners. Clause 209 suspends the operation of follower notices if the taxpayer in the litigation on which the  notice relies is given late leave to appeal, meaning that the case cannot, for the moment, be regarded as final.

Clause 210 and schedule 29 deal with transitional and consequential provisions. There have been comments about the measure being retrospective, but let me be clear that this is not retrospective legislation. It does not create any new tax liability; it simply creates an incentive to settle for those who are disputing their liability with HMRC, despite all the evidence showing that their case is unlikely to succeed.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

In my role as a member of the Committee, I have been contacted an awful lot about this matter, but I do not think that I have been contacted by a single one of my constituents. I suppose that all hon. Members would want HMRC to ensure that, in pursuing such claims, we are not in any way creating more problems than we are solving. If an individual’s assets are tied up with a business that employs people, we would not want the pursuit of the assets to make life worse for those employees. I have received correspondence citing the potential for bankruptcy. Can we ensure that we do not create more problems than we solve in pursuit of the aim?

Photo of David Gauke David Gauke The Exchequer Secretary

The hon. Gentleman raises an important point. Committee members have been lobbied hard about a number of the measures that we will debate this morning, especially regarding accelerated payments and, to some extent, follower notices.

As someone who believes in lower taxes and—when the public finances permit—allowing people to keep more of their own money, thus putting in place an environment that is likely to lead to greater wealth creation, more business investment and so on, I hear the arguments that are made, but there is also an obligation on people to pay the tax due under the law. People may well say, “I’d be able to invest more in my business if I didn’t have to pay as much tax,” and that might be true, but they still have to pay the tax. That is a matter for the House and the Government, and people should pay the tax due under the law. Some people say, “I avoided tax some years ago and pay very little tax now, but now you are asking me to pay a tax bill and that will have an impact.” That may be the case, but the fact is that people still have to pay the tax, and all Committee members would probably agree about that.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

To clarify the point, let me describe a scenario. If someone who avoided tax used the proceeds of that avoidance to invest in a business, meaning that the asset was entirely tied up in that investment—in capital equipment or the enlargement of a business premises—and the pursuit of that tax bill were harsh, the attempt to retrieve the debt in a short time could have a detrimental impact on the running of the business, and perhaps on the livelihoods of people who had no part in that avoidance.

Photo of David Gauke David Gauke The Exchequer Secretary

The hon. Gentleman makes a perfectly reasonable and practical point. I should not be surprised if we returned to this issue on the debate on accelerated payments, but let me make two points in response, about practical enforcement of the new powers.

First, in certain circumstances HMRC enters into and operates a time-to-pay arrangement with taxpayers, to allow them additional time in which to pay off a debt. That is a sensible, practical response to particular circumstances. There is no reason why the time-to-pay arrangements could not also apply in the circumstances that we are talking about.

People sometimes ask for a guarantee that HMRC will not bankrupt any taxpayer as a consequence of such powers. I simply cannot give that assurance; to do so would be dangerous and would undermine the effectiveness of the policy. I have no doubt that people would then make arrangements so that the only measure available to HMRC in pursuit of the debt would be to issue a bankruptcy order. If I said, “HMRC will not issue a bankruptcy order,” we can quickly guess that that will have a behavioural impact. We may return to this issue in the debate about accelerated payments, but I am happy to put that point on the record now. I hope that hon. Members can understand precisely why HMRC should not have its hands tied in these circumstances.

Photo of Ian Swales Ian Swales Liberal Democrat, Redcar

I thank the Minister for giving way again—this might be the wrong time to raise this point, but I think it follows on from what the hon. Member for Gateshead said. We are all getting representations, and the largest number concern one of the sins of our fathers: the Finance Act 2008. It effectively went retrospectively into arrangements that many contractors and others were using in the period up to 2008. The nub of many of the criticisms of what we are doing this morning concerns that retrospection. The 2008 Act effectively caught out a load of people from before then. Does the Minister agree with that analysis and does he believe that special arrangements should be made for those who were doing something in good faith that, at the time, did not appear to be against the law, even by HMRC’s own analysis?

Photo of David Gauke David Gauke The Exchequer Secretary

The hon. Gentleman leads me into another area, but it is perfectly reasonable for him to raise that point. There is no doubt that those who campaigned against section 58 of the 2008 Act have also taken the opportunity to highlight this issue. It has been a long-standing campaign in the context of the further powers contained in the Bill. The point I would make with regard to the 2008 Act is on the record. I raised significant concerns about the action taken by the previous Government at that time. We must also remember that, since then, those who used what was undoubtedly an aggressive tax avoidance scheme and clearly a contrived and artificial arrangement took their case for judicial review. They argued that HMRC and the previous Government had acted unreasonably. The courts took the view that that was not the case and that exceptional circumstances applied.

In the light of that decision, the Government have not abolished section 58. We believe it is reasonable for it to remain, in the light of where we currently are. Notwithstanding the sometimes impassioned lobbying we have received, it is right for us to put in place legislation that fundamentally ends the use of some of these aggressive and contrived tax avoidance schemes. The measures before us, along with those we will debate later this morning, clearly represent a comprehensive set of policies that will result in a lot fewer contrived  and artificial avoidance schemes of the kind that so irritate, annoy and anger the vast majority of our constituents. We are already seeing a significant decline in the use of tax avoidance schemes compared with where we were six years ago, but these measures will continue to assist us.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

I am grateful to the Minister for giving way; he is showing his usual generosity. On the issue of bankruptcy, there will be cases where there is a fine balance. I am quite happy for HMRC to go down that route when there is no alternative; however, there can be a risk of forgoing other tax revenue. For instance, declaring an individual bankrupt means closing a business and losing income tax revenue from perhaps two or three employees, as well as the VAT generated by the business. There are some fine balances to be considered. One would hope that such circumstances would be closely looked at, to ensure that we are not robbing Peter to pay Paul.

Photo of David Gauke David Gauke The Exchequer Secretary 10:15, 17 June 2014

I understand precisely where the hon. Gentleman is coming from. The points he raises are not unique to these powers—[ Interruption. ] He nods in assent. HMRC’s record over recent years in the judgment it has shown in granting taxpayers additional time to pay has, by and large, been extremely good. Large numbers of businesses have benefited from those arrangements. I suspect that many members of the Committee can think of examples in their constituencies where businesses have been granted time to pay.

However, there comes a point when if a business is viable only if it consistently pays tax late, it could be described as “not viable”. A fine judgment has to be made. The hon. Gentleman’s points are reasonable. There is no reason why time-to-pay arrangements in respect of this matter would not be available. I stress that I do not desire and I do not believe it would be sensible—in respect of these or other powers we will debate this morning—to tie HMRC’s hands, so that it does not have access to the full insolvency powers that it would in a normal case.

Photo of David Rutley David Rutley Conservative, Macclesfield

I welcome the Minister’s important points. We have corresponded about a case in my constituency. Does he recognise that some companies have perhaps not been given the best advice on tax arrangements and are now in a difficult position? The hon. Member for Gateshead made the point that bankruptcy is not the optimum outcome in many of these situations. Will the Minister assure the Committee that he and HMRC will make every effort, if not to be sympathetic, then at least to ensure that appropriate arrangements are put in place for such payments?

Photo of David Gauke David Gauke The Exchequer Secretary

My hon. Friend makes an important point. I know he has been assiduous on behalf of his constituents who may be affected by some of these measures. He makes an interesting and valid point that in some circumstances the taxpayers have perhaps been guilt of naivety. However, a lot of the culpability for their difficulties may well lie with their advisers and promoters of these schemes, who consistently say, for example, “This has all been signed off by HMRC;  there’s nothing to worry about,” “It’s all absolutely fine; there’ll be no problems with the scheme,” or, “You don’t need to worry about paying tax; HMRC won’t cause you any difficulties whatsoever,” when they know, or should know, that this will be a disputed and controversial matter that is likely to drag out for many years. I have had representations from people who deeply regret becoming involved in such schemes. In some cases they are angry with the Government for taking steps to address the matter, but they are also very angry with the promoters who led them into this area without giving them full information or explaining exactly what the risks were. That is why we are determined to deal with those promoters.

Photo of Chris Heaton-Harris Chris Heaton-Harris Conservative, Daventry

Following on from that point, two of my constituents came to see me who were wary about a product they had been told about that was too good to be true, although the scheme was supposedly registered with HMRC. They therefore took out an insurance product in case it turned out to be too good to be true, which is common across a swathe of this industry. On thing they were concerned about is HMRC’s efficiency at notifying people if, at the end of the day, the scheme is not right and a certain amount of tax is liable, which would trigger their insurance policy. Does the Minister have any words for the Committee to reassure my constituents that, should that happen, HMRC will be effective in issuing notice?

Photo of David Gauke David Gauke The Exchequer Secretary

I am grateful to my hon. Friend, who used an important phrase when he said that the schemes appear to be “too good to be true”. Often, that is exactly right. It might be more appropriate to discuss his important point about the administration of these matters in our debate on accelerated payments, but it is right that HMRC administers these powers effectively. I will say a little more about that in a moment.

As we have heard, this measure was subject to two consultations. The first was the policy consultation entitled “Raising the stakes on tax avoidance”, which ran for eight weeks in August to October last year and generated 31 responses. It was shorter than the standard length, to ensure time to digest the responses before the autumn statement. The second was the consultation on the draft legislation, which ran for four weeks in January and February this year, to which there were 22 responses. The response periods were shorter than normal because we were keen to ensure that we could progress this matter on a Budget timetable and make it part of the Finance Bill. HMRC made every effort to ensure that anyone who wanted to make a comment was able to, and it continued to accept responses and meet with concerned parties after the consultation formally closed.

The majority of those who responded agreed that delaying the settlement of cases involving failed schemes is a problem that needs to be solved. Some commentators felt the first draft of the Bill was not sufficiently focused on schemes shown to fail and would allow HMRC to issue follower notices after winning any litigation about avoidance. The Bill was amended to make it clear that that will not be possible and that notices can be issued only when a scheme has been shown by the courts not  to work. However, avoidance disputes that get to the tribunals or courts are largely decided in HMRC’s favour, and taxpayers in that position must be encouraged to settle their cases and not drag them out in hope of a more lenient offer.

The hon. Member for Birmingham, Ladywood made a number of important points, which I will address. She probed the idea of using first-tier tribunals for creating a precedent. HMRC wins an overwhelming majority of avoidance cases at tribunal, and most taxpayers who lose accept the tribunal’s decision and do not take their case further. Therefore, in most cases the first-tier tribunal settles the matter. However, if a case is appealed further, follower notices cannot be issued until the litigation is finally settled in HMRC’s favour. Excluding first-tier cases would remove an important source of judicial decisions and might lead to taxpayers deliberately avoiding an appeal against and adverse judgment, so it could not be used to generate follower notices.

The hon. Lady asked why there is no right of appeal against a notice. The purpose of the measure is to release the logjam and speed up the resolution of slow cases. Creating a right of appeal against a notice would simply clog up the process and not deliver a saving. Taxpayers will be able to require HMRC to reconsider any notice that they receive. There will be a full right of appeal against any penalty issued and against any amendment made to the taxpayer’s return if the taxpayer does not amend it himself. HMRC will be ensuring strict governance over the issue of notices, which will have to be authorised by senior leaders.

That takes me to HMRC’s internal process. Taxpayers will still be able to continue their appeal against their tax liability if they disagree with a follower notice. Taxpayers who disagree with a notice can request HMRC to carry out a formal review, which will be carried out by an independent person within HMRC who did not take part in the decision to issue a notice. They will review the facts of the case and decide whether it was reasonable to issue the notice in those circumstances.

If the taxpayer does not ask for a review, or if HMRC upholds the notice, they can choose not to make the amendments to their return. They can then appeal in the normal way against any assessment or amendment to their return by HMRC to recover the tax. Taxpayers will be able to appeal against any penalty that they are charged.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

Will those independent individuals reviewing the decision about the follower notice be from within the same team of HMRC officials that look at these cases, or will they be from a different team?

Photo of David Gauke David Gauke The Exchequer Secretary

HMRC recognises that powers must be applied consistently and fairly for all taxpayers, and clear governance will be established. A clear separation will be established so that reviews of follower notices will be carried out independently of the original issuing team. Clear internal guidance and training will be provided to HMRC senior officials to ensure complete understanding of how to apply the rules. I hope that provides the hon. Lady with a degree of reassurance.

I will return to first tier tribunal decisions and whether they are always clear, because a point was raised about the CIOT’s suggestion that it would be better if tribunal  judges declared relevant points of law. HMRC will have to consider a wide range of factors, including the nature and clarity of the tribunal’s decision, before deciding whether the case should be treated as a relevant judicial ruling. HMRC will not do so if the follower notices issued were not soundly grounded in a good case. The purpose of the measure is to push cases through the system quickly and speed up their resolutions. Extra requirements at tribunal could blunt the measure and slow things down and, as I said, HMRC will issue notices only if a decision is clear.

A couple of hon. Members raised the scale of the issue. The published tax information and impact note sets out that 43,000 payment notices will be issued. It also provides detail about how much money relates to followers and how much to the general anti-abuse rule and disclosure of tax avoidance schemes measures. The number of taxpayers involved is 65,000; the vast majority of schemes are used by more than one person or business.

HMRC’s resources were also raised as an issue. In November 2013, HMRC created a new counter-avoidance directorate to bring together all marketed avoidance work in one place. The directorate is mainly made up of departmental resources that were already working in the marketed avoidance area rather than additional resource, but about 100 of its 850 people will be funded from new money announced by the Chancellor at the Budget to deliver accelerated payments. We do not believe there will be a detrimental impact on HMRC’s other operations. HMRC expects to issue guidance for comment shortly, and it will be finalised in time for Royal Assent.

I have already touched on whether the measure is retrospective. It is not; it does not create new liability to tax. HMRC will be able to issue follower notices to cases on hand only once the courts have shown the avoidance scheme to fail. In other words, the tax is already due and it is not right that a minority can delay payment even longer.

The clauses and schedules we are debating constitute a major new development in the Government’s continued fight against tax avoidance. If someone wants to string out a dispute with HMRC, even though a court has shown their scheme to fail, they are still at liberty to do so. However, if they cannot satisfy a tribunal or court that their case is really different, they will face a penalty for not settling promptly when given the chance. I believe that that approach is right and fair—fair to the millions of taxpayers who pay their tax on time and expect others to do so. The Committee has scrutinised the measure closely this morning, but I hope it will support these clauses and schedules and that they stand part of the Bill.

Question put and agreed to.

Clause 192 accordingly ordered to stand part of the Bill.

Clauses193 to 202 ordered to stand part of the Bill.

Schedule 26 agreed to.

Clauses 203 to 208 ordered to stand part of the Bill.

Schedule 27 agreed to.

Clauses209 to 211 ordered to stand part of the Bill.