Clause 212 - Circumstances in which an accelerated payment notice may be given

Finance Bill – in a Public Bill Committee at 2:00 pm on 17 June 2014.

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Amendment proposed (this day): 32, in clause 212, page 141, line 3, leave out “tax”.—(Mr Gauke.)

Question again proposed, That the amendment be made.

Photo of Martin Caton Martin Caton Labour, Gower

I remind the Committee that with this we are discussing the following:

Government amendments 33 and 34.

Amendment 56, in clause 212, page 141, line 35, at end insert—

“(8) The Chancellor of the Exchequer shall, within six months of this Act receiving Royal Assent, publish a post implementation review.

(9) The Review referred to in subsection (8) above must in particular examine—

(a) the total number of accelerated payment notices issued;

(b) the number of accelerated payment notices issued to cases involving a disclosure made under DOTAS prior to the Act receiving Royal Assent,

(c) the total revenue collected through accelerated payment notices;

(d) the total revenue collected through penalties arising as a result of accelerated payment notices;

(e) the number of representations made to Her Majesty’s Revenue and Customs following the issuing of an accelerated payment notice;

(f) the number of accelerated payment notices that have been subsequently withdrawn;

(g) the financial consequences resulting from the issuance of accelerated payment notices for the businesses and taxpayers involved.

(10) The Chancellor of the Exchequer must publish the report of the review and lay the report before the House.”.

Clause stand part.

Clauses 213 to 221 stand part.

Government amendments 35 to 38.

That schedule 28 be the Twenty-eighth schedule to the Bill.

Clauses 222 to 226 stand part.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

Thank you very much, Mr Caton. In our previous session I introduced my remarks to this set of proposals, so I will not do so again. However, before I comment on the points raised during the debate this morning, I want to look at the financial impact of the changes.

The impact notes for the provisions estimate that accelerated payment notices relating to existing avoidance cases currently in dispute will be issued to 33,000 taxpayers. The revenue associated with the provisions is substantial. Her Majesty’s Revenue and Customs estimates the notices will result in receipts of £340 million this year, £1.3 billion in 2015-16, £1.3 billion in 2016-17, £750 million in 2017-18 and £385 million in 2018-19. It is important to stress that this is not a new revenue stream—the measures bring forward money HMRC expects to collect by several years.

The revenue expected to be raised by the extension of accelerated payments to cases covered by disclosure of tax avoidance schemes and by the general anti-abuse rule is significant, particularly as no cases have been deemed to have breached the GAAR yet. Will the Minister explain how he has calculated those figures, especially in terms of the interplay with the GAAR? It would be helpful if he could explain the methodology that was used. We briefly discussed that point on Second Reading. Will he explain the details when he responds?

We know that HMRC has an 80% win rate for the cases it pursues to litigation, which is an excellent rate to achieve, and we all hope it remains intact. However, the win rate is different from the value of the claims that are won—they are two different things. Will the Minister tell the Committee the average value of an HMRC win? That would help the Committee to interrogate the figures that were used in the costings. How confident is the Minister that the same success rate will apply to cases heard on the GAAR since no cases have been heard under the rule yet?

Our debate this morning was about retrospection and the concerns of members of the public who fear they will be caught by accelerated payment notices, and of professional bodies. The debate turned on whether the measures were retrospective. The Minister stated that, because there is no change to underlying tax liability, retrospection does not come into play. However, against that, the Committee heard the argument put forward by my hon. Friend the Member for Erith and Thamesmead, who pointed out that the measures impact on behaviour that cannot change because it has already occurred, and therefore that retrospection and all associated issues were engaged.

I found the Minister’s explanation on retrospection and the argument he and HMRC put forward to be persuasive. There is no indication of a new and unexpected tax liability—if that was the case, there would be no doubt that the measures are retrospective. However, I do not believe that is the case. This feels much more like a situation where, to borrow a concept from another aspect of our legal system, the legitimate expectations of a taxpayer have been changed. When that happens, as it does in other aspects of our law, particularly when  we discuss concepts of reasonableness in judicial reviews and other matters, if legitimate expectations of taxpayers or others are changed, that mischief—the changing of legitimate expectations—is remedied by the time-to-pay arrangements, which should assist in righting any wrongs. There is also the remedy of an interest payment on top of the tax that was in dispute if it is found that it needs to be paid back to the taxpayer. If there is any unfairness as a result of the measures, it can be remedied by those other measures.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

I am not trying to be unhelpful to my hon. Friend’s argument, but I have a sneaking suspicion that there will be greater and lesser levels of understanding among the people who are selling tax avoidance products and the purchasers. The seller of the product might have a very good understanding of exactly the points my hon. Friend has made, but the purchaser might not.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

My hon. Friend makes an important point that has been made forcefully by the many members of the public who got in touch with members of the Committee. I would simply repeat a point made by the Minister and others: we have to look at the context in which the measures will take effect. In the vast majority of cases, people were aware, or were made aware, of what they needed to do in relation to DOTAS. That brings into play the fact that the tax is in dispute, a point made by the hon. Member for Dover in his speech. My construction of the measures before us leads me to believe that the measures are not retrospective, but I acknowledge that the point is at the very least arguable. Many of the professional bodies who have looked at it closely and the Law Society have made strong and forceful representations that the measures are retrospective in effect. I do not think it is possible for the Committee to dismiss that.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

Does the hon. Lady agree that there is no such thing as a free lunch? The idea of a disappearing tax bill is something that at the very least puts the taxpayer on inquiry as to how that might have come to be so. Does she also agree that each taxpayer has a responsibility to ensure that their tax return is true, accurate and not misleading? Taxpayers must take that responsibility, but it also puts them on inquiry.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

I agree with the hon. Gentleman that all taxpayers have a responsibility for the content of their tax return. They are entitled to take advice. Many people who do not understand the complexity of a very complex tax legitimately take advice. There is a point to be made about the reliance on advisers and remedies against advisers when things go wrong. The Committee should bear that in mind. If people are ticking the box in relation to a DOTAS disclosure, it is fair to say that they are on notice that things may change and they may have to pay the amount of tax levies in dispute.

Photo of Richard Fuller Richard Fuller Conservative, Bedford

I thank the hon. Lady for her opening remarks, which clearly outlined the pros and cons of the current position. Indeed, I may wish to copy her comments and send them to some of my constituents. She has referred to representations  made by the Law Society and others, casting into question whether the Opposition’s view in supporting the Government is now a settled one or whether they are still open to representations from people who have come to a different conclusion about retrospection. For the record, will she clarify the Opposition’s position?

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

I was coming on to exactly that point. I hope that once I have finished my remarks on retrospection, the hon. Gentleman will understand where the official Opposition are coming from. I will happily take further interventions from him to clarify things if necessary.

As I was explaining, my reading of the rules before us is that we are not talking about a retrospective measure in the normal way we understand retrospective measures. However, accepting that it is possible to plead the case in the alternative—that the measure is retrospective due to its impact on behaviour that cannot now be changed—taking on board the fact that many senior commentators and professional organisations have characterised the measures as retrospective, and thinking about first principles, my first point is that our legal system has well established principles of natural justice and procedural fairness, which retrospection would, by its nature, offend. Therefore, if we are to introduce retrospective measures, we should do so only in exceptional circumstances that are tightly controlled, and only when they deal with the mischief that we are trying to remedy and go no further. That was certainly the thinking behind the previous Labour Government’s introduction of one element of retrospection into the tax system, which we discussed this morning. That is certainly our approach now.

Looking at the retrospection case, as I said, on an alternative basis, I would say that there is still a strong case for the kind of action that we are discussing. On that basis, although the arguments about retrospection are important and it is right that such points are made, I would say that the practical and philosophical points merge, because the system as it stands is successfully gamed, which results in increased costs for the taxpayer. We all ultimately lose out when such delays occur in the system. It is important that Governments of all colours and persuasions take practical measures to sort out the practical problems with our system.

We have had some discussion about the fate of those who have made a DOTAS disclosure in order to be on the safe side. They were some of the concerns raised by my hon. Friend the Member for Erith and Thamesmead and members of the public. I am grateful for the Minister’s clarification on how DOTAS disclosures work and why he does not think that those concerns are engaged, but I remain concerned that there may be a reduced willingness to make DOTAS disclosures, which would be unwelcome.

I took from the Minister’s remarks this morning that he is aware of that risk. That is why we are going to get, as I understand it, a planned consultation on further strengthening of DOTAS. When he responds, I would be grateful if he could share any further detail on the matter with the Committee. I know that he will not be able to tell us totally what is coming up in the consultation, but some further detail would be welcome, particularly if we are responding to our constituents in relation to the argument about people doing things to be on the safe side and the behavioural change that might result in fewer DOTAS disclosures.

It would also be helpful for the Minister to give us some further detail on the representations he has received regarding accelerated payment notices and whether he has received any examples of the so-called “on the safe side” DOTAS disclosures. Again, if we could have some detail of such circumstances, it would be helpful for the Committee, particularly given the public’s interest in that aspect of the clauses.

I agree with the Minister that HMRC should not have its hands tied in enforcing powers on time to pay or pursuing bankruptcy notices against taxpayers who fail to pay due tax. When the Minister responds, will he help the Committee to understand better how HMRC currently uses its powers, the number of cases and how many bankruptcy notices are pursued? That would help the Committee respond to constituents’ concerns.

The Minister touched on the following point but I did not catch all of his answer. HMRC guidance states:

“The allocation or notification of a scheme reference number does not indicate that HMRC accept that the scheme achieves or is capable of achieving any purported tax advantage.”

Will the Minister explain what criteria alongside scheme reference numbers will be used by HMRC officials to assess whether an accelerated payment notice will be issued? As I said, he touched on those points but unfortunately I missed the beginning of his remarks.

The level of revenue associated with accelerated payments will depend on the amount payable. The Minister will be aware that many, including the Chartered Institute of Taxation, are concerned about the proposed method for establishing the payable amount that lies solely with HMRC. HMRC has said that it will issue a payment notice to the best of the designated HMRC officers’ information and belief. I would like clarification of what that might mean in practice. Will the Minister give a more detailed account of how the amount of an accelerated payment notice will be calculated?

On a more technical point, will the Minister tell us what will happen when there is an overlap between follower cases, particularly where a follower case is withdrawn, and the DOTAS scheme? How will HMRC deal with that? Clarification is needed on the withdrawal of accelerated payment notices, following the withdrawal of a follower notice. Clause 220(3) obliges HMRC to withdraw an accelerated payment notice where

“the follower notice to which it relates is withdrawn”.

In contrast, clause 220(2)(a) gives HMRC the authority to withdraw an accelerated payment notice but the term “withdraw” is used only in connection with follower notices in the context of the alternative outcomes following HMRC’s consideration of a taxpayer’s representations against a follower notice. Will the Minister clarify whether that means that HMRC is obliged to withdraw an accelerated payment notice only where the related follower notice is withdrawn as a consequence of its consideration of the taxpayer’s representations? If that is not the case, will the Minister indicate in what other circumstances a follower notice would be withdrawn within the meaning of clause 220(3)?

Should taxpayers wish to dispute the accelerated payment notice, according to the clauses before us they will be able to make representations to HMRC. Will  HMRC publish guidance on that? The Minister will be aware that the CIOT has already suggested that the guidance should comprise four things. First, it should explain in what form representations should be made; secondly, explain the procedure that will be used to consider the representations; thirdly, explain what factors it will take into account when making decisions; and fourthly, provide an indication of how long it will take to make its decision. I would welcome the Minister’s comments on that CIOT suggestion, as well as further details of when guidance will be published.

It is understandable that once an accelerated payment notice has been issued, HMRC would wish to collect the amount in dispute in a timely manner. Clause 219 seeks to encourage such behaviour by imposing a penalty where an accelerated payment is not made in accordance with the issued notice. The penalty structure looks very similar to that applying to the late payment of tax under the self-assessment regime. However, the significant difference is that the latter imposes 5% penalties after 30 days, six months and 12 months of the due date of the payment of tax. As a result, penalties associated with accelerated payment notices are incurred 30 days earlier than they would be under self-assessment, and consequently a taxpayer who has received an accelerated payment notice at the same time as a follower notice would have a 90-day period in which to consider whether to make representations against either, and contact HMRC to negotiate a time to pay arrangement. I would like to ask the Minister if there is a danger that such a system creates an incentive to make representations against an accelerated payment notice, potentially creating unnecessary work for HMRC. Has any assessment has been made of that? Did he consider whether aligning the accelerated payment notice penalty dates with the normal self-assessment penalty dates could work better and to the mutual advantage of HMRC and taxpayers?

We discussed HMRC resourcing earlier today and, as with follower notices, this measure is expected to have substantial HMRC resource implications as a large number of people begin a range of different legal challenges, potentially including judicial review proceedings, an increase in closure applications through the tribunal and disputed enforcement activity. The impact note states that

“Flexible legal resource options are being considered to meet the expected demands of this work” and that

“The Government will ensure that Departments have the necessary resources to deliver this key policy successfully.”

The Minister mentioned 800 new staff. I would be grateful for clarification about whether those are new recruits or people being deployed from other parts of HMRC. How far advanced is the process in terms of ensuring that new staff are ready to start dealing with APN cases as soon as the legislation becomes law?

Photo of David Gauke David Gauke The Exchequer Secretary 2:15, 17 June 2014

It is a great pleasure to serve under your chairmanship this afternoon, Mr Caton, for the last of this year’s Finance Bill procedures in Committee. Let me seek to address the various issues raised by Members who rightly seek more information about the important measures. I am grateful for the tone of genuine inquiry but also note the Opposition’s broad support for the measures.

The issue of retrospection was raised by the hon. Member for Erith and Thamesmead, who brings her considerable experience in the tax world to these matters. I maintain that the measure is not retrospective for the reasons I set out earlier. The rules regarding whether the taxpayer’s scheme works are not being changed. What is changing is who holds the money while there is an ongoing dispute. We have to note that this is money the individual would have already paid if they had not entered into the avoidance scheme. The taxpayer can continue to dispute the case and will be paid with interest should they win. We are not restricting people’s rights. Prudent taxpayers should have recognised that tax avoidance carries a significant risk of not working. The tax will become payable and they should therefore make plans for such an outcome.

The point was made that, if this is about changing behaviour, it should only apply to arrangements people enter into after the measures come into effect. The point I would make in response is that new rules are intended to achieve two things: they change behaviour away from avoidance but have the additional objective of accelerating the resolution of the large number of existing cases and the receipt of the revenue tied up in them. We want all taxpayers in this type of dispute to be in the same predicament so that there is no reason to apply the rules differently depending on when the particular arrangements began.

Photo of Duncan Hames Duncan Hames Liberal Democrat, Chippenham

I note the point that the Minister is making, but will he further clarify for the Committee whether the powers that he seeks reach back to disputed tax liabilities relating to periods prior to the introduction of the DOTAS reporting?

Photo of David Gauke David Gauke The Exchequer Secretary

No, they do not. This applies to arrangements where a DOTAS notification has been made—DOTAS was introduced in 2004—or those that fail to comply with the general anti-abuse rule, which we introduced last year. It essentially goes back to the introduction of DOTAS. The structure of it means that it does not apply to any cases before that.

The hon. Member for Erith and Thamesmead asked whether HMRC already has enough powers in this respect. HMRC can already refuse repayments of tax in avoidance cases while the matter is investigated and mitigated. In fact, most people pay their tax up front and can apply for a refund afterwards, for example under PAYE, VAT or tax on interest income, but most avoiders can currently claim a tax advantage through self-assessment and hold on to the moneys during the often lengthy dispute. The measures before us will put people on the same footing and remove the cash flow advantage that some avoiders enjoy at the moment.

The question of time to pay and how many arrangements HMRC expects to agree is difficult to answer. It will depend on the specific circumstances of individual taxpayers. In cases of genuine hardship, HMRC will consider alternative payment arrangements, as it does with any debt. The priority in cases of genuine hardship will be to get people on to a payment track so that the debt is paid as quickly as possible. The hon. Member for Birmingham, Ladywood also asked about time to pay, seeking information on how it operates. HMRC will issue clear “pay now” notices to taxpayers setting out how much needs to be paid under the measures.  In cases of genuine hardship, as I have said, HMRC will consider alternative payment arrangements, as it does with any debt.

HMRC always ensures that its action is proportionate. Where individuals do not immediately have the cash, it may be appropriate in some instances to back up a payment arrangement with a security against assets. In cases where, for instance, individuals have taken deliberate action to put their assets out of reach of HMRC—I have certainly received a tweet or two suggesting that people were going to do that—so that they cannot pay the tax, bankruptcy action may well be appropriate, but the particular action will always depend on the precise facts and circumstances of the taxpayer.

On some of the practical issues involving the impact on HMRC and the tribunal—the hon. Member for Birmingham, Ladywood asked about the impact of legal challenges on HMRC—the measures are expected to prompt a range of legal challenges, including judicial review proceedings, an increase in closure applications to the tribunal and disputed enforcement activity. Flexible legal resource options are being considered to meet the expected demands of the work. That legal resource will be increased and adapted depending on the scale and scope of any challenges. The Government will ensure Departments have the necessary resources to deliver this key policy successfully.

The hon. Member for Erith and Thamesmead asked whether the tribunals and courts will be able to cope with the extra work. HMRC is in discussion with the Ministry of Justice to plan for the introduction of these measures and to deal with the likely consequences.

The hon. Member for Birmingham, Ladywood asked how we can be sure we get the yield that was included in the Budget scorecard, so I will say a little about how those numbers were calculated. The accelerated payment costings are based on HMRC administrative data, and the Office for Budget Responsibility certified that they are reasonable, given the information available. They include some assumptions about valid reasons why HMRC might not receive the full value of the payment, such as litigation losses and customer payment profiles, which have the effect of reducing the potential revenues to the estimates provided at Budget 2014. The costings take into account the direct effects of a policy, including, where appropriate, direct behavioural responses, such as levels of compliance and evidence of attrition in the yield, drawn from previous experience of anti-avoidance measures. The majority of the effects relate to DOTAS schemes, for the obvious reason that the GAAR has only just come into force, and it will take some time for the first cases to come through.

A question was asked about the average value of a win for HMRC. It is difficult to give an answer, but some assumptions were made for the calculation. HMRC expects the 80% success rate that we have talked about to be representative of the average amount. For the general anti-abuse rule, accelerated payments will be required only after the independent panel has given an opinion that the scheme is not reasonable. Therefore, the success rate should be at least as high, because it will have already received independent scrutiny.

On the issue of how the amount of payment is calculated, it is important for taxpayers and advisers to engage with HMRC, as I said earlier. HMRC will open an inquiry or raise an assessment that will usually provide a clear picture of the amount in dispute, and taxpayers should ensure HMRC knows about any other relief or allowance that will affect the tax in dispute. It is important to emphasise that that is the tax that the taxpayer will have to pay if their scheme fails, and no more. Taxpayers will have 90 days to discuss the calculation and make representations to HMRC if they think the amount is wrong.

I took one or two interventions on the issue of whether DOTAS disclosures are on the safe side. If disclosures are made but there is no additional tax, there will not be an accelerated payment. HMRC will publish a list of scheme reference numbers before Royal Assent to tell taxpayers which schemes will get a payment notice and which will not.

On the issue of ensuring the DOTAS rules work effectively, DOTAS has been in place for 10 years and has been revised at various times. We believe that now is the right time to look at its hallmarks to see whether they still work properly or whether they need updating. We also want to look at how compliance can be updated. We will publish a consultation in the summer, and HMRC will publish guidance around the time of Royal Assent. It will shortly publish draft guidance in consultation with professional bodies and other interested parties.

On the issue of why the penalty timing is not the same as for self-assessment, it is important to emphasise that the penalty is for late payment and not for an incorrect return, as in the case of self-assessment. We have set it in line with other late payment penalties already in the system, rather than penalties for an incorrect SA return. If a follower notice is ignored, a follower notice may be withdrawn following representations. If that happens, the payment notice is also withdrawn. If DOTAS was also relevant, the payment notice can still stand.

I hope I have addressed the questions and queries raised by the Committee. I am grateful for the level of scrutiny the measures have received today. I hope that they can stand part of the Bill, and I hope I have said enough to persuade the hon. Member for Erith and Thamesmead not to press her amendment.

Amendment 32 agreed to.

Amendments made: 33, in clause 212, page 141, line 9, leave out

“resulting from the same tax arrangements”

and insert “and the chosen arrangements;”

Amendment 34, in clause 212, page 141, line 13, after “it” insert “and the chosen arrangements”—(Mr Gauke.)

Clause 212, as amended, ordered to stand part of the Bill.

Clauses 213 to 221 ordered to stand part of the Bill.