Clause 227 - Meaning of “relevant proposal” and “relevant arrangements”

Finance Bill – in a Public Bill Committee at 2:30 pm on 17 June 2014.

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Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover 2:30, 17 June 2014

I beg to move amendment 53, in clause 227, page 154, line 34, at end insert—

‘(5) “Tax abuse” means any arrangement that, having regard to all the circumstances, it would be reasonable to conclude is an arrangement that has no business, social or other purpose other than the obtaining of a tax advantage.’

Photo of Martin Caton Martin Caton Labour, Gower

With this it will be convenient to discuss the following:

Amendment 54, in clause 228, page 155, line 35, at end insert—

‘(8) It shall be a summary offence to promote a relevant proposal or relevant arrangement which meets the definition of “tax abuse”.

(9) A promoter found guilty of an offence under subsection (8) shall be liable to a fine not exceeding level 1 on the standard scale.’

Clause stand part.

Clauses 228 to 230 stand part.

That schedule 30 be the Thirtieth schedule to the Bill.

Clauses 231 to 241 stand part.

Government amendment 39.

Clauses 242 and 243 stand part.

Government amendments 40 to 43.

Clauses 244 to 250 stand part.

Government amendments 44 to 46.

Clauses 251 to 265 stand part.

Government amendment 47.

Clauses 266 and 267 stand part.

Government amendment 50.

That schedule 31 be the Thirty-first schedule to the Bill.

Clauses 268 and 269 stand part.

Government amendment 48.

Clauses 270 and 271 stand part.

Government amendment 49.

Clauses 272 to 274 stand part.

Government amendment 51.

That schedule 32 be the Thirty-second schedule to the Bill.

Clauses 275 and 276 stand part.

Charlie Elphicke rose—

Sitting suspended for Divisions in the House.

On resuming—

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

I rise to speak to amendments 53 and 54. It is worth noting that the Government have taken substantial action to counter the kind of egregious tax avoidance and aggressive tax planning that this country has seen for too long. The general anti-avoidance rule, the measures and promoters and the strong anti-avoidance tactics by HMRC, which has raised so much money, have ensured that the law and the protection of the Revenue are strongly on the side of hard-working people who pay their taxes and do the right thing. These probing amendments were tabled to hammer home the social acceptability message and to say to the tax avoidance industry that what it is doing—promoting schemes that will be struck down in due course by HMRC—is not just illegal, but goes a step beyond that and is so antisocial and socially unacceptable that it should be a criminal offence. I hasten to add that it should not be a serious criminal offence, but a summary justice criminal offence, with a level 1 fine. It is the fact of the crime that is so important. The proposed measure is targeted not at the beneficiaries of tax avoidance schemes, but at those who promote them.

Let me dispose of one case put against this provision. Someone said to me, “This would apply to someone selling an ISA. That would be made a criminal offence.” That was put to me in a parody account on Twitter. [Interruption.] Not my own parody account, I hasten to add. My answer is simple. The construction of the amendments is built on clauses 227 and 228, which deal with “relevant proposals” and “relevant arrangements” that are promoted by promoters.

Photo of Richard Fuller Richard Fuller Conservative, Bedford

I am sorry to drag my hon. Friend back to his point about making this a criminal offence, albeit not a serious one, but he also said he wanted to send a message. Which message is he sending: that it is a criminal offence or that it is not serious?

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

Every criminal offence is serious; I am talking about the severity of the penalty. Am I saying that a person promoting a scheme that is so egregious in its avoidance that it is a tax abuse should be sent to prison for life? No; I am saying that the penalty would be set at a low level and that the message sent by the fact of the criminal offence is one of social unacceptability. That is an important message, because people promoting such schemes are professionals and professionals will not go into an area where they know that the criminal law will hunt them down. Even if  the penalty was just a £200 fine, as opposed to life imprisonment, it would be career-defining for anyone engaged in the legal or accountancy professions or similar, allied professions. That is an important social message to send.

The definition of “tax abuse” in my amendment builds on the definition of “tax advantage” in clause 227(3) and would include

“any arrangement that, having regard to all the circumstances, it would be reasonable to conclude is an arrangement that has no business, social or other purpose other than the obtaining of a tax advantage.”

One could loosely say that that is almost a codification of the principle of Furniss v. Dawson. We are talking about a transaction that has no purpose other than gaining a tax advantage—it would not have been entered into but for that—and taking money off the Revenue, thereby ensuring that the Revenue has less money and the rest of us have to pay more.

Photo of Richard Fuller Richard Fuller Conservative, Bedford

My hon. Friend is much more learned in these areas than me and I am enjoying listening to him. Just for my understanding, would a tax deduction for my pension fit the criteria for a tax abuse or not? If not, will he explain why not?

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

It would not, because saving, including saving for retirement, has a wider social purpose. This is about transactions that would not otherwise have been entered into.

Richard Fuller rose—

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

Before I take an intervention from my hon. Friend, let me explain further and elucidate the principle I am defining.

Let us consider tax abuse and egregious tax avoidance done by companies such as Ingenious Media. Ingenious Media has an £8 billion film investment plan and attracted wealthy customers and investors. It was told by HMRC that its schemes were designed to avoid tax rather than to promote films. Wealthy investors in Mr McKenna’s schemes—he runs the company—won tax relief of £1.35 billion, with some individuals, such as Wayne Rooney, Lord Hollick and “Newsnight” presenter Jeremy Paxman, investing tens of millions of pounds. They all benefited. Would that amount to tax abuse? I would say that it does not fall within my definition of tax abuse, because one could say there was a wider social purpose for investing in and financing films.

Photo of Richard Fuller Richard Fuller Conservative, Bedford

I am concerned about phrases such as “in my opinion” and “one could argue that” if one is writing legislation. Do they not open up a tremendously uncertain field for people who might quite legitimately be looking to do certain things that my hon. Friend may believe has a social purpose, but which other people may not? I see the intent, which some of us may wish to applaud, but the somewhat arbitrary way in which he is going about it might give cause for concern to many.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

My hon. Friend is constantly cautious about any measure that takes the battle to tax avoidance, and I respect that. I would say the proposed wording is not arbitrary, because the question is whether there is a  wider business or social purpose. Can we say that there is a wider business or social purpose to film finance? Probably yes. Someone might have entered into a transaction to finance a film for wider reasons than simply avoiding tax, particularly as the Government were promoting that.

It is a similar case with Ingenious schemes such as Tamar Films LLP, in which one John Mills was an investor. In my judgment, the offence is not aimed at those schemes, although they amount to aggressive tax avoidance. The kind of behaviour engaged in by Ingenious Media is entirely wrong and amounts, invariably, to aggressive tax planning. The transactions I am particularly interested in targeting with my amendment are other schemes, which are without any social purpose whatever. Let me give my hon. Friend the Member for Bedford some examples.

Neil Masters of Mercury Tax promoted a £1 billion scheme called Liberty, which was one of the largest and most aggressive avoidance schemes available. By buying and selling dividends offshore, it generated more than £1 billion in artificial losses, which members could offset against their tax bills. A Liberty member paying £70,000 in fees could earn £1 million a year tax-free. The scheme was open only to higher rate taxpayers, who would normally pay income tax of between 40% and 50%. That was an entirely circular scheme. No one would ever invest in the scheme; it had no business or social purpose whatever. There was one purpose and one purpose alone: obtaining a tax advantage and avoiding tax. The definition of my proposed offence of “tax abuse” is aimed at such schemes.

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

I wonder what the result of HMRC’s investigation into the Liberty scheme is.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

The scheme was revealed by The Times, and my understanding is that HMRC’s investigations are still ongoing, although I stand to be corrected by the Minister.

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

Does that mean that HMRC already has the power to shut down such schemes? How is my hon. Friend’s proposal complementary to said scheme?

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

I guess the question is: at what point do we close the gate? Do we close the gate after the horse has bolted and we have to spend lots of money bringing it back into the pen; or do we keep the gate closed in the first place and locked securely? It is better to lock the gate before the horse bolts. That is the intent behind my suggestion and probing amendment.

Photo of Ian Swales Ian Swales Liberal Democrat, Redcar

In the case that the hon. Gentleman has just described, he used the expression “tax avoidance”, on the grounds that it is legal until proved otherwise. Does he not agree that a scheme that is structured in that way, with circular transactions and no perceived use other than avoiding tax, is in fact tax evasion and therefore criminal?

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

That is an important question. The offence of cheating Her Majesty’s Revenue requires proof of dishonesty. It is an indictable offence and a  much more complicated offence to prove. What I am defining is a much simpler test, which is: is there any purpose to a transaction for the promoter to be promoting it; or does it have no business purpose and no social purpose, but is simply about obtaining a tax advantage? This is about clearly sending a message to those engaged in promoting such schemes. It is specifically aimed at the promoters of the schemes, rather than the beneficiaries.

Matthew Jenner of No Tax Advisors devised a scheme called “Working Wheels”, in which Chris Moyles was famously involved, and there are others. The purpose of that scheme was simple: to claim to have run up losses of £1 million selling £3,731 of used cars. It was not a used car business; it was a tax scheme that had one purpose only, which was the avoidance of taxation. There was no wider business or social purpose. Chris Moyles tried to offset the £1 million loss in a year in which he had other income, including an estimated £700,000 salary from the BBC. The Revenue took that case on and he lost, but the point is whether such schemes should be promoted in the first place.

Jenner cooked up the NT Advisors’ Cup Trust scheme, which in my view is the most abusive scheme of all. It is outrageous and a complete abuse of the charity regime. I will briefly read the report on that scheme in The Times on 31 January 2013:

“One of Britain’s biggest charities is a front for tax avoidance, The Times can reveal. Wealthy donors used the Cup Trust to avoid £46 million in tax in an extensive abuse of Gift Aid incentives designed to encourage charitable donations. The registered charity raised £176 million over the two years 2010 and 2011. In 2010 it attracted more donations than the Royal Society for the Protection of Birds, the British Heart Foundation or the Salvation Army. But instead of using the money for its stated objective, to ‘improve the lives of young children and adults’, it carried out trades that artificially generated Gift Aid for donors to reduce their tax bills. Investors who ‘donated’ £1 million to the Cup Trust, for example, would receive most of their money back—but still be entitled to claim Gift Aid worth between £250,000 and £375,000.”

That was a completely and utterly shameless abuse of our charitable gift aid system. Many were critical of the Chancellor when he quite rightly brought forward legislation to tackle the abuse of charity law in that way. He was quite right to introduce measures to safeguard the public revenue. The promoters should not have promoted an entirely shameless, abusive avoidance scheme such as that in the first place.

My key point is that such transactions have no wider or social purpose whatever, other than the avoidance of taxation. There are other companies and accountancy firms that introduce their wealthy clients to those people. There is an extensive industry of barristers who give opinions on the matter and are engaged in the promotion of such schemes. It is time we said, “Enough is enough.” That kind of activity and behaviour has no social utility. Gaming the tax system is wrong. For example, if someone earning £10 million a year pays no tax, a whole load of our constituents—an entire constituency in some cases—will have to pay more tax as a result.

The sense of fairness and justice in getting the balance right, so that there is a balance in our tax system—that tax falls evenly and fairly, and contributions are made according to the rules set up—is the fundamental reason  why this is an important amendment. It is only a probing amendment, but I am moving it to make a serious and grave point. We need to send a social message that such behaviour—this kind of industry and gaming of the system—is unacceptable and beyond the pale.

Photo of Ian Swales Ian Swales Liberal Democrat, Redcar 3:15, 17 June 2014

It is a pleasure to serve under your chairmanship, Mr Caton. I will not detain the Committee long. I would like to back up the points made by the hon. Member for Dover.

I am a member of the Public Accounts Committee and we have had not only Google, Amazon and Starbucks come before us, but the big four accountancy firms, who have told us about their tax avoidance businesses. They put forward schemes where they have anything upwards from a 50% chance of success. At only 50%, they will recommend that an individual might follow such a scheme. As the hon. Gentleman pointed out, what they are promoting is a bit of a bet on red or black.

Even more interesting was our session with the people whose job it was to promote tax avoidance schemes. One of my abiding memories of being on the Public Accounts Committee was asking one of those people, “So, how many of the schemes that you have promoted over the last five or seven years are now illegal?” He just smiled and said, “All of them.” That is a good point as far as HMRC was concerned, but he was happily selling these schemes, possibly even in the knowledge that they would end up as illegal. That has to be seen as pretty shady business.

During my accountancy training, I learned that there were only two things: avoidance and evasion. We now have this new expression, “aggressive tax avoidance”. As I indicated in my intervention on the hon. Gentleman, I sometimes query whether aggressive tax avoidance should be in the realms of evasion and therefore a criminal activity. When we talk about companies that have been set up purely to avoid tax—I am talking about bogus transactions, money moving on and offshore, circular transactions designed to manufacture huge tax losses, and so on—surely we are talking about evasion. If people went into such rigmaroles to claim from the benefits system, they would be in jail as fast as the courts could catch up with them.

I feel that the public pound is the public pound. We need to start thinking about that when we talk about tax as well as about benefits and spending. As the hon. Gentleman pointed out, this is not a victimless crime. We all have to pay more or our public services are impoverished, so celebrities and other wealthy people who feel that they are engaged in some kind of sport need to remember that there is somebody on the other end of their tax avoidance.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

Does the hon. Gentleman also have a view on whether tighter provisions such as these would prevent some people from being sucked into such schemes? I am not necessarily talking about celebrities trying to be clever; there might be others who were told that a scheme would work for them—and who would no doubt pay somebody for it—but are likely to lose money. If they never got into it in the first place, they would not be complaining about any back tax or whatever.

Photo of Ian Swales Ian Swales Liberal Democrat, Redcar

The hon. Lady makes a good point. Some of the representations I have received are about things that happened five or more years ago. I was self-employed at the time and potentially affected by IR35. My answer was simple: I paid my tax each year. The hon. Lady makes a good point about celebrities and others. Those who are tempted to engage in these sorts of activities need to bear in mind reputational risk as well as many other things. According to a recent article in The Times, people are engaging less in these activities. One of my e-mails in the last few hours has been from somebody who is about to lose their job in a tax avoidance company.

That leads me to the thrust of clause 277 onwards, which is about the whole issue of the promoters of tax avoidance vehicles—again, I am talking about the aggressive ones, not about paying a bit extra into a pension or whatever. These are the people who create structures and promote them, usually to relatively naive users. There must be a question mark over this area. If people were selling financial services products that were as sophisticated as some of these products, there would probably be legislation on the need for independent financial advice. Should the people selling such schemes be allowed to sell them directly to possibly naive users?

Some of the celebrities and others who found themselves on the other end of these things were engaged more in writing pop songs or playing them on the radio than in going into the details of their own financial affairs. We ought to look at rights of redress against promoters of tax avoidance schemes. As I indicated earlier, we should see more prosecutions, people being struck off and a lot more naming and shaming, not just of those who benefit from tax avoidance, but of the promoters. We should look not just at the small operators such as those we saw on the Public Accounts Committee. We also need to expose the banks and large accountancy firms that, in terms of volume, are often the main sellers of that sort of scheme. I welcome the fact that Barclays and other banks are reducing their wealth management divisions, because tax avoidance is often one of the main activities in wealth management. I think Barclays has closed its entire wealth management division, although I stand to be corrected on that.

We are moving in the right direction. I welcome clauses 227 onwards and hope that the Minister will be even more forceful in dealing with the promoters of such schemes, which are designed to steal money from the public purse.

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

It is a pleasure to serve under your chairmanship, Mr Caton, possibly for the last time, though as I have a lot to say, maybe not. I was not going to talk about the amendments until I heard them introduced by my hon. Friend the Member for Dover. The Public Accounts Committee, on which I sit with my hon. Friend the Member for Redcar, reported on several cases mentioned by my hon. Friend the Member for Dover. We had a whole session on the Cup Trust and how HMRC eventually found out about it, clamped down on it and shut it. At the end of the day, that was probably more of a problem for the Charity Commission than it was for HMRC.

I wanted to talk about aggressive tax avoidance and tax avoidance in general. As far back in history as I can remember, as long as there have been taxes, there have been people who have tried to avoid paying them. That  is because it is essentially the state taking away some of a person’s earnings. The core of the problem is that people avoid tax because tax is too high to pay legitimately. If someone has enough money they will try to find a way around paying that. The element missing from our discussion is that taxes are too high in this country.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

If the hon. Gentleman’s argument were correct, when taxes fall, as the Conservative party favours, we should surely see avoidance eliminated. It is important for people to pay for the services they want for their country. That might be defence, social services or all sorts of things. We should encourage people to feel positive and not negative about that.

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

I appreciate the hon. Lady’s comments on my argument without having heard it. I completely understand why we pay taxes. I am an unhappy taxpayer and always have been since I started earning. I hope I always will be an unhappy taxpayer. I demand value for money, which is why I am happy to sit on the Public Accounts Committee to try to drive better value for money. Equally, there is an argument for a tax system without politics. Art Laffer was a lecturer on my masters degree, so it can be guessed what is coming next.

If we could depoliticise the argument, there is an ideal level of tax out there that brings in the most revenue. Surely those on the other side of the argument—the Opposition—would want to see the highest amount of tax revenue coming in to pay for public services of the highest level they require. It is obvious that if someone is taxed at 100%, there is no point in earning, so the state receives no revenue. If someone is taxed at 0%, the state does not get any revenue, so the Government cannot function, and somewhere in the odd-shaped curve that Art Laffer drew a couple of decades ago is the ideal point, where at a certain level of tax, the most revenue is got in. Surely that is the sort of place we should be aiming for in our aspiration for the tax system.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover 3:30, 17 June 2014

I would like to reinforce my hon. Friend’s outstanding argument. Many Government Members are strong advocates of lower, simpler, flatter taxes, and indeed, not so long ago, I made the case for a flat corporation tax in the UK of just 10%, which we could get by axing all the reliefs that exist in business taxation and by having a very simple flat tax system that makes us more internationally competitive. I urge him to continue expanding his argument.

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

It is not a surprise to many Government Members that the fifth-largest French city is now London, because so many French people have come over to live here. With a 75% higher rate of tax, the best thing they can do is skip across the channel and not pay tax in France. The revenues being received by the French Exchequer at this time are collapsing because the people who pay the most tax do not reside or pay tax in France any more.

Photo of David Rutley David Rutley Conservative, Macclesfield

My hon. Friend is making a very important point. Will he remind the Committee which Government is in power in France?

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

Well, it is fairly obviously a French Government—[ Interruption. ] Yes, I have to say that it is a socialist Government as well, but again, I was trying to depoliticise the issue. I am trying to make the point that if people could have an argument without politics on the amount paid, they would aim for the most revenue that they could get in to the Exchequer. Therefore, if that was done, plenty of arguments could be made for how that could be spent, and we could have the political debate about the spending of that money.

Photo of Martin Caton Martin Caton Labour, Gower

Order. Mr Heaton-Harris, can I implore you to get on to the subject of tax avoidance, rather than taxation philosophy?

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

I could not believe that I strayed from it—I am very apologetic. The simple point is that if we manage to get the tax rate at exactly the right level, where we are getting the most revenue in, we will be able to make the social arguments whereby people will feel even more deeply uncomfortable about making bogus transactions and circular transactions. That relates to all the work that has been done on the Public Accounts Committee on making companies pay what the PAC Chair would say is their fair tax. The simple point is that I understand what my hon. Friend the Member for Dover is trying to do, but the best way of cutting down on tax abuse is to reduce taxes in the first place.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

The clauses in the group also fall under the stream of Government consultations called, “Raising the stakes on tax avoidance”, which we discussed this morning and earlier this afternoon. The clauses on follower notices and accelerated payments, which we have just debated, are also part of the strategy. It is worth bearing in mind that a further measure has been proposed to give HMRC the power to directly collect debts from individuals’ bank accounts. It is not, however, part of the Bill. It is currently subject to a consultation and has been subject to a great deal of media scrutiny already, as have the measures before us.

The aim of the clauses is to identify those promoters of tax avoidance schemes whose behaviour is deemed to be high risk. Once identified, they will be issued with a conduct notice to encourage improved behaviour, but if compliance is not forthcoming in a prescribed period, a monitoring notice may be issued under the authority of the first-tier tribunal. That will lead to further sanctions for the promoter, including publication of that status by HMRC, as well as additional information and compliance burdens. According to the recent guidance, HMRC expects monitoring notices to be issued in only a small number of cases.

In more detail, clauses 227 to 229 deal with the definitions that will be applied to the terms “promoter”, “intermediary” and so on. Clauses 230 to 234 and schedule 30 relate specifically to conduct notices. The clauses introduce the concept of a conduct notice, which may be issued if a promoter has triggered a threshold condition in the previous three years. HMRC expects that, in most circumstances, there will be discussions  with a promoter that has met a threshold condition with the aim of understanding why it happened, and reaching an agreement on appropriate standards for the future. HMRC will aim to develop a working relationship with promoters that it hopes will lead to issues being resolved informally and without the need for the issue of a conduct notice.

Insignificant breaches of certain threshold conditions may be ignored, but certain threshold conditions would always lead to a conduct notice—for example, receiving a conduct notice as a dishonest tax agent—unless HMRC deems a notice inappropriate due to the minimal impact on the level of collection of tax. For example, if the promoter fails to disclose a notifiable proposal under DOTAS, and if that is significant but there are no users of the proposal, it would not be appropriate to issue a conduct notice. In contrast, if the promoter omits 300 clients from a DOTAS client list, that will probably have a significant impact on the collection of tax and so would be included.

The clauses set out what needs to be contained in a conduct notice, such as the conditions that the recipient must comply with, and also gives a recipient the opportunity to comment on the proposed terms. Significantly, however, there is no right of appeal, and points have already been made in relation to that. The clauses allow an authorised HMRC officer to withdraw the notice if there is evidence that the underlying reason for it has been addressed. Finally, the clauses set the maximum length for a conduct notice at two years.

Clauses 235 to 242 contain the procedures for monitoring notices. Where a promoter fails to comply with a conduct notice, an authorised HMRC officer must apply to a tribunal to approve a monitoring notice. Only a tribunal may issue a monitoring notice and may refuse to do so. The promoter must be made aware of the application to the tribunal. The monitoring notice will state the reasons for its issue and, in particular, the condition in the conduct notice that the promoter has breached. One effect of a monitoring notice is that the promoter may be subject to specific information notices with penalties for non-compliance. The Bill will allow the promoter to make a case to the tribunal that a monitoring notice is not appropriate—for example, because the original condition in the conduct notice was unreasonable—and the tribunal may amend the proposed monitoring notice if it so wishes. The proposed law also allows HMRC to publish details of promoters subject to a monitoring notice, including the conditions in the conduct notice that were breached. The promoter must inform its clients that it is being monitored, and regulations may be added to require the promoter to include the fact that it is being monitored in marketing literature and on the web.

Clauses 243 to 246 refer to promoter reference numbers. Once a monitoring notice takes effect, HMRC will issue a promoter reference number to the relevant promoter who, in turn, will be required to pass on that number to all its clients. That will enable HMRC to direct its compliance efforts towards those particular clients.

Clauses 247 to 253 relate to information powers. The clauses give HMRC wide-ranging powers to request information from monitored promoters on arrangements and proposals that they set up once a monitoring notice has been given.

Clauses 254 to 259 give additional powers to enable an authorised HMRC officer to request information or documents that had not been provided in previous notices or where the officer suspects that the promoter has withheld particular information or documents. There is a right of appeal by the promoter against these information notices. Clauses 260 to 266 set out the form and manner in which requests for information are to be made and provide some exemptions on producing certain documents.

Clauses 267 to 273 and schedule 31 set out the penalties that may be levied for non-compliance with various aspects of the new rules. They can be substantial—up to about £1 million. The clauses also introduce a higher standard of reasonable excuse for failing to comply with the new regulations. In particular, an individual cannot rely on legal advice provided to them by a monitored promoter to claim that they have taken reasonable care with their tax affairs, which could otherwise be used as an argument to mitigate a penalty. Clauses 274 to 276 provide supplemental, technical provisions, including the introduction of schedule 32, which extend the rules to partnerships.

We support the motives behind the new regulations. However, it would be useful to have some clarity on precisely what types of tax avoidance the Government are prepared to allow to continue. I say that because, according to HMRC guidance:

“The regime involves a graduated series of sanctions, which carefully balances the rights of promoters against the need to prevent and defeat tax avoidance.”

Given our discussion and, in particular, the thrust of the amendments tabled by the hon. Member for Dover, my reading of that guidance is an apparent acceptance that the industry exists. It would therefore be helpful to know where the Minister draws the line on tax avoidance. Which behaviours would he deem to be acceptable, and which must be stopped? The HMRC guidance talks about a balancing of rights, not the elimination of rights or of a particular type of activity. Further clarification on that would be helpful, especially as the use of aggressive tax avoidance schemes is almost exclusively the preserve of wealthy individuals and corporates.

What consideration has the Minister given to the argument that it is time for promoters of tax avoidance schemes to face the same fines as their clients when their schemes fail? All too often, promoters have already pocketed substantial fees from their attempts to deprive the public purse of much needed revenue. Perhaps more is needed to persuade them to pursue a career that, to coin the phrase used by the hon. Member for Dover, is of “more societal value”. What is the Government’s view on taking such measures forward to what may be considered natural conclusions, such as penalties and other sanctions, that go beyond mere notices?

Broadly speaking, the Minister will be well aware that the reaction from the accountancy firms and professional bodies to the initial consultation on high-risk promoters was negative, but that adverse reaction appears to have softened somewhat, as HMRC has now addressed some of the issues raised in the consultation process. However, concerns remain over particular clauses and a wider question is being raised about HMRC going to the trouble of getting the new clauses introduced to act against what appears to be a small number of promoters. In doing so, the professional bodies are concerned—we  might think that they would say this—that the clauses might catch legitimate activity. It would therefore be useful to hear what activity the Minister considers to be legitimate.

We know that about 20 businesses are potentially high-risk promoters that HMRC wants to target. It would be helpful to have the Minister’s explanation of what consideration was given to its existing powers and whether they were sufficient to deal with those promoters. Each promoter will approach its work differently and have different levels of risk in its proposals. We could argue that, rather than a generic definition for all, which might catch people that the Government do not intend, a more targeted approach using existing rules might be better. It would be helpful for the Minister to tell us how he has come to a different conclusion. The Committee needs to be satisfied that the action we are taking will catch all those whom it is intended to catch.

Photo of Ian Swales Ian Swales Liberal Democrat, Redcar 3:45, 17 June 2014

The shadow Minister has clearly done her homework. Has she considered the definition question? There was a high profile case where a hedge fund manager had nearly £19 million of tax losses through a scheme that the press said was marketed by a film company, Goldcrest, but then sold by HSBC, so presumably in the legislation the promoter would be the film company and the intermediary would be HSBC. But when we look at the levels of financial sophistication of those two companies, we would have to question who was really the promoter of such a scheme.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

I am grateful to the hon. Gentleman; he makes an important point. Again, it will be helpful to hear from the Minister how the definition will play out in practice. We know who the 20 high-risk promoters are. Any of us who go on the internet to look into such matters will quickly work out who those companies are. We know who we are trying to get to as a result of these measures. There is a question about whether those are the only promoters that the Government are seeking to catch as a result of the measures or whether there is an intention to go further. If we are going further, that is a perfectly reasonable route to take, given some of the examples of tax avoidance that have made it into the public domain and into public discourse. In going down that road, it would be helpful to know how the Government’s approach will be shaped and what more might be needed as the proposals and measures bed in.

There is no right of appeal to the issue of a conduct notice. As I mentioned earlier, we have already had some debate about other measures in this section of the Bill that do not attract a right of appeal. I simply reiterate the points I made earlier that rights of appeal are an important feature of our legal system. If we are going to derogate from them and remove them, as legislators we must be sure that there is no other way of crafting a right of appeal to guard against the opportunity, in this example, for some promoters unacceptably to delay the effectiveness of the high-risk promoters provisions by making multiple appeals. Perhaps the Minister will address that point and satisfy the Committee that, in removing the right of appeal, he was sure that there was no way of phrasing or crafting a right of appeal that  could guard against that opportunity for promoters to cause further and unacceptable delay.

Much comment was made during the consultation process that tax avoidance grows as the complexity of tax law increases. Members of previous Finance Bill Committees, who have dealt with Finance Bills much longer than the one we have been scrutinising over the past few weeks, will attest that, even with an Office of Tax Simplification, the tax law that we pass feels like an ever-growing beast. Will the Minister provide an update on the Government’s view on simplification of the tax code? What more are they planning? Do the Government recognise that there is an interplay between greater complexity of tax law and the way in which further avoidance activity appears to spring up like a many-headed hydra?

What steps will the Government take to ensure that a firm clampdown on promoters will not simply drive their activities below the HMRC radar or offshore, where they will be even harder to regulate? Has any assessment been made of that risk and is there more that can be done to try to prevent that? Similarly, does the Minister share the concern of the Chartered Institute of Taxation that some high-risk promoters could wear the naming and shaming that is envisaged as a result of these measures as a badge of honour, or worse, as approval by HMRC that they provide schemes that work, and that he is therefore potentially providing a valuable marketing tool for the most unscrupulous individuals? It would be helpful to know what assessments have been made to measure that risk.

I return to a question on resourcing, which has been a theme of all our debates today. HMRC is getting more powers and therefore its resources are brought under sharper scrutiny. Given the wide-ranging information powers in the legislation, is there a risk that HMRC might be inundated with a huge volume of material, to the extent that they cannot cope, especially as the information in these measures is not limited to just DOTAS cases, let alone to just avoidance cases? HMRC will presumably need to allocate more resources to dealing with this information. Has any analysis been done comparing the costs of using the current rules to go after the 20 known high-risk promoters as a targeted approach, with that of the wider measures? What is the required resource for the approach that has been adopted as a result of the legislation?

The hon. Members for Dover, for Redcar and for Daventry are right to point out that tax avoidance has been greatly discussed by ordinary members of the public. It comes up as a doorstep issue, especially given that some of the cases of the most aggressive tax avoidance adopted by people who are described as celebrities have filtered through the public consciousness and elevated the debate, making it a higher political priority. Given the financial circumstances of the country, it is ever more important that we ensure that we collect all the tax that is due in a timely way. The Government are right, therefore, to focus on what happens when tax avoidance occurs and who the people that engage in this behaviour are. A necessary aspect of that debate is to think about sanctions and penalty regimes for promoters and people who engage in that activity. However, that would lead to a wider system of regulation to make the whole system work, which raises further important questions about the way in which the professions operate.  I know that the House of Lords Economic Affairs Committee has looked at those questions a number of times. They are issues that we continue to receive representations on, as I am sure the Minister does. They are important points to be considered, given where we are with the public debate.

Photo of David Gauke David Gauke The Exchequer Secretary

It is a great pleasure to respond to this debate this afternoon. We have had an extensive debate about avoidance in connection with previous measures and I welcome the discussions on tax avoidance both in Committee and across the country. I am sure that the Government’s track record, in their drive to tackle tax avoidance, speaks for itself.

The measure’s origin can be found in our consultation “Lifting the Lid on Tax Avoidance Schemes” from the summer of 2012 when the activities of these promoters were brought into sharp focus. Quite rightly, there was outrage that someone could be running a business, the sole aim of which was to help and encourage people, often in large numbers, to avoid paying tax. As with other proposals, the professional bodies and business groups want us to take action and I am grateful to them for engaging with us to refine some of the detail during the recent consultations. The measure is about tackling promoters who set up and market tax avoidance schemes and then refuse to engage with HMRC to sort out the consequences.

My hon. Friend the Member for Dover has tabled amendments to these clauses and I will come to those shortly. First, however, there are also amendments in this group in my name. Before I turn to the amendments, I will give some background to explain why the measure was proposed and how it will operate.

Clauses 227 to 276 and schedules 30 to 32, which introduce the high-risk promoters rules, are part of the Government’s strategic response to avoidance and are intended to deter the use of avoidance schemes by influencing the behaviour of promoters, intermediaries and clients. The Government are committed to tackling the unacceptable behaviour of promoters of avoidance schemes. A small but persistent minority of promoters sell avoidance schemes that patently do not work and waste their clients’ time and resources. Some avoid their obligation to disclose the schemes to HMRC and seek deliberately not to co-operate with HMRC in trying to resolve their clients’ tax affairs.

The new measure will change the playing field by imposing minimum standards of behaviour, supported by onerous information powers and stiff penalties if promoters do not comply. It is designed to change the behaviour of the promoters who behave unacceptably, and encourage them back into compliant behaviour.

Let me set out in a bit more detail the changes that the clauses will make. There are two stages to the legislation. First, clauses 227 to 235 and schedule 30 give the promoter the chance to change their behaviour before the serious consequences in the second stage apply. Secondly, clauses 236 onwards and schedule 31 allow HMRC to use significant new information powers on the promoter, with penalties of up to £1 million for failing to comply. The legislation identifies promoters by using objective threshold conditions, which are described in schedule 30. If the promoter triggers a threshold condition—for example, by being charged with a criminal  tax offence—clauses 230 and 231 allow HMRC to issue the promoter with a conduct notice that requires them to change their behaviour. The conduct notice can cover the avoidance schemes that the promoter sells, the way they treat their customers and their compliance with their tax obligations, and it can last for up to two years. HMRC has the power to check whether the promoter is complying with the conduct notice.

If at any time during that period the promoter breaches the terms of the conduct notice, the second stage is triggered. Clause 235 gives HMRC the power to apply to the tribunal for approval to issue a monitoring notice, which allows it to use information powers against the promoter to get full details of their schemes and clients. Once a monitoring notice has full effect, clause 241 allows HMRC to name the promoter as subject to a monitoring notice, and clause 242 requires the promoter to tell their intermediaries and customers. Failure to comply with those obligations can lead to penalties of up to £1 million. The penalties are described in schedule 31.

Clauses 248, 251 and 253 extend the information powers and penalties for intermediaries who continue to act for the monitored promoter. It is not only the promoters and intermediaries but their clients who get new responsibilities under the legislation. Clause 246 requires clients to tell HMRC that they have used the monitored promoter, and clause 270 introduces an extended 20-year time limit for HMRC to bring assessments on them if they fail to do so. There will be a higher standard for reasonable excuse and reasonable care for promoters and their clients, which will prevent promoters from hiding behind poor quality legal advice as a justification for their behaviour.

Schedule 31(9) prevents clients of high-risk promoters from relying on legal advice provided to them by the promoter to avoid penalties. Those clients are required to seek independent legal advice on their rights and obligations. To encourage better communication with HMRC, intermediaries and clients can also rely on clause 266, which overrides confidentiality agreements with the promoter and allows them to talk to HMRC voluntarily about any of the monitored promoter’s schemes. Finally, schedule 32 describes how the legislation applies to high-risk promoters who are partners in partnerships, and how the behaviour of a partner may have consequences for the partnership.

The measure began with a consultation in 2012, which was followed by a consultation a year later, “Raising the stakes on tax avoidance”, which made proposals for the structure of the regime. More than 30 responses to “Raising the stakes” were received, most of which were supportive of the policy, with many suggesting ways in which the regime could be improved. The consultation on the draft legislation earlier this year generated over 20 responses and was used to refine it. Again, I thank those who responded to the consultation and commented on the draft legislation.

These measures will impact most heavily on a small number of the highest-risk promoters whose behaviour is designed to disrupt and frustrate HMRC in its vital role of tackling avoidance. It is right that we take steps to tackle that behaviour and I am grateful to the wider promoter community for their support.

I hope that by now those who engage in tax avoidance have got the message: the Government have introduced a general anti-abuse rule, closed down loopholes and taken action to get the tax in disputed avoidance schemes paid up front. These measures are the next step in building up pressure on those who market and those who use tax avoidance schemes. The promoters and avoiders should be under no illusion that we will stop there—as long as they continue to try to frustrate the tax system and try to pay less tax than the law clearly intends, we will continue to act against them.

Before turning to the amendments tabled by my hon. Friend the Member for Dover, I will respond to points raised by the hon. Member for Birmingham, Ladywood on the measures relating to promoters of tax avoidance schemes. She asked whether HMRC already has sufficient powers to tackle abusive schemes. The legislation before us is about promoters, not schemes. The aim is to reduce the supply of avoidance schemes by tackling promoter behaviour. To do that effectively, HMRC needs specific powers to require promoters to comply with conduct notices and when a monitoring notice is in place HMRC will be able to use new information powers and penalties.

I was asked where the line is drawn for the high-risk promoter regime. The rules are aimed at a small number of individuals who display the most recalcitrant behaviour. They sell schemes that generally do not work and they do not co-operate with their clients and HMRC in resolving tax disputes. Most promoters do not display this behaviour and it would not be right to use these powers against tax advisers who are co-operative.

I was asked whether the measures could be too broad and whether innocent tax advisers could be caught up. A person has to be a promoter of schemes that give a tax advantage and to have made a significant breach of a threshold condition to fall within the legislation. The vast majority of tax advisers will not be in that position. The definition of promoter can be narrowed by a statutory instrument and any refinements to the definition can be retrospective to Royal Assent. To come within these rules, a threshold criterion must be triggered; examples of the threshold criteria include a breach of the banking code of practice or disciplinary action by a professional body.

I was asked if promoters should face fines if a scheme fails. These measures will ensure that promoters who display recalcitrant behaviour will not be allowed to get away with it any longer; any further developments in this policy will require detailed consultation. We have worked on the basis of wanting to consult properly. However, the Government will consider their options in future.

In response to concerns raised over naming and shaming—the Chartered Institute of Taxation said that naming could be seen as a badge of honour—the wording that the promoter will have to use when named will be prescribed in the regulations. The wording will make it clear that being named is not a source of pride. In many cases, taxpayers will find that that is more of a deterrent than an appeal.

A wide point was made about avoidance and complexity. There is no doubt that there are times when complexity in the tax system results in avoidance behaviour, as taxpayers and their advisers seek to take advantage of particular complexities. However, sometimes the behaviour  of the taxpayer or promoter of a scheme is extremely complex, and relatively simple rules can be exploited by such behaviour.

The relationship between avoidance and complexity is in itself quite complicated and runs in different directions. Often, the simplest approach is for a taxpayer to pay the tax that is due without any artificial and contrived behaviour, but we live in a world where some will engage in such behaviour. As a consequence, we sometimes have to ensure that HMRC has proper powers and sometimes, unfortunately, we need additional complexity in the tax system to deal with such contrived and artificial behaviour.

However, I stress that the Government take simplification seriously. The Office of Tax Simplification has made a large number of recommendations, round about the majority of which have been implemented by this Government in the course of our proceedings in recent weeks. We have implemented a number of OTS recommendations, but it is not a panacea for all areas of tax avoidance.

A question was asked about HMRC’s resources and whether it will be able to implement the new powers before us. The high-risk promoter rules will be operated by the new counter-avoidance directorate in HMRC, consisting of 800 experienced HMRC officers, who will be responsible for tackling marketing avoidance. We believe that the resources are sufficient.

It is worth pointing out that, going back to the comprehensive spending review of 2010 and subsequent Budgets and autumn statements, as a Government we have invested £1 billion over this period to ensure that HMRC can do more to deal with avoidance and evasion. So far that seems to be working well, with record levels of HMRC yields.

The amendments tabled by my hon. Friend the Member for Dover would introduce a tax offence for promoting abusive tax avoidance schemes. While I appreciate my hon. Friend’s reasons for tabling the amendments, he will not be surprised to learn that I will not be supporting them. However, he has raised some important points for the Committee.

As I said, there is no doubt that, as a Government, we have a strong record in tackling avoidance. In the past two years, we have introduced some groundbreaking anti-avoidance legislation: the general anti-abuse rule; follower notices; accelerated payments; and the high-risk promoter rules; as well as more targeted legislative changes.

We have demonstrated our resolve to act against tax avoidance, and we will not hesitate to act further if necessary. The GAAR is specifically designed to tackle abusive avoidance schemes. If a scheme falls foul of the GAAR, the promoter is within the bounds of this legislation. We expect that the GAAR and the high-risk promoter rules, alongside the existing sanctions that HMRC has against promoters, will be sufficient to ensure that promoters cease to market abusive tax avoidance schemes.

The changes proposed by the amendments are outside the remit of the extensive consultations that we have undertaken. They have informed our thinking on the area, and we would not want to undermine the valuable contributions made by those who responded by changing the policy at this late stage. The amendments would also  increase the complexity of the legislation and provide operational challenges to implement it. I am therefore not inclined to accept them. However, I am grateful to my hon. Friend for his provocative speech and for his contribution to this important debate.

Let me turn briefly to the amendments tabled by the Government, which will ensure that the legislation works as intended. Amendment 39 is a technical amendment to clarify the drafting of clause 242. Amendments 40 to 43 make two sets of changes. The first includes in clause 244 an obligation on a promoter to inform certain of its intermediaries of its promoter reference number. The second clarifies the time limit in which the promoter has to notify its promoter reference number to certain clients who have used its schemes.

Amendments 44 to 46 are three identical amendments to clause 251 and clarify internal inconsistencies in the clause that arise due to the use of the terms “request” and “requirement”. Amendment 47 ensures that clause 226 allows the relevant client or relevant intermediary to provide documents as well as information to HMRC. Amendment 48 to clause 270 includes inheritance tax and a 20-year extended time limit to recover any tax lost due to a person’s failure to inform HMRC of their promoter reference number. Amendment 49 narrows the application of clause 272 so that it does not go beyond the policy intent of the measure. Amendment 50 is a minor change to schedule 31 to reflect the changes to clause 244. Finally, amendment 51 to schedule 32 makes it clear that Scottish partnerships are not included in the partnership provisions because they are legal entities in their own right.

As I said at the outset, this is a major new development. If a promoter tries to pull the wool over HMRC’s eyes, the likelihood is that they will quickly find themselves in this regime, having to improve their behaviour or face stiff penalties. I believe that taking these steps is the right and fair approach. It is fair to promoters who play by the rules and fair to the millions of taxpayers who pay their tax on time. It is right to target those who try to escape their obligations and avoid tax. I hope that these clauses and schedules, as amended, can stand part of the Bill.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover 4:00, 17 June 2014

I shall seek to withdraw my amendment at the appropriate moment but I wish to touch briefly on clause 264 to which I tabled an amendment which, quite rightly, was not selected as it would turn the clause on its head. Clause 264 states:

“Nothing in this Part requires any person to disclose to HMRC any privileged information.”

Would the Minister consider further the whole issue of privileged information? This is legal professional privilege, which is not to be confused with parliamentary privilege. As parliamentary privilege is to the day and to the sunshine, legal professional privilege is to the dark corner and the night. Parliamentary privilege allows that which is hidden to be revealed. It is the power of free speech. It is the power to name and shame, which I used a few moments ago and from time to time use in this House. Legal professional privilege is the privilege to hide, to keep secret, to take advice from a client to their lawyer and for it never to come to light. So it remains for ever in a dark corner.

Both types of privilege and all privilege are a great responsibility. In using the power under the Glorious Revolution, the Bill of Rights, to name and shame and  to bring things to light, we have a great responsibility in speaking out. But under legal professional privilege things can be hidden away to prevent people from getting to know what has been going on. The reason why this is extremely important, and the reason why I raise this issue, is that legal professional privilege is so often not used responsibly, so that things that should come to light are hidden away.

This form of privilege does not apply, under the Prudential case, to accountants. It does apply to lawyers. What happens is this. A scheme is devised. The documents are written up by a firm of accountants—the promoter. They are given to the lawyers. The lawyers write an opinion on it. The documents therefore become subject to privilege, being opined upon, and the other documents are shredded. My brief question to the Minister is, could it be amended?

Photo of David Gauke David Gauke The Exchequer Secretary

My hon. Friend raises an interesting point. It would be fair to say that legal professional privilege is a common law and fundamental right and any change to that position would have to undergo a full consultation. I have certainly received representations from groups representing, for example, the accountancy profession who argue that there is a distortion in the legal market as a consequence. I am grateful to my hon. Friend for raising the point. I would simply say that any change would be a significant matter and would require considerable thought and consultation before anything was done.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover 4:15, 17 June 2014

I thank the Minister for that. To close, I note that the judgment in the Prudential case says that this is a matter for Parliament to sort out. The judgments of Lord Neuberger and Lord Hope clearly say that. The privilege I am looking at is that which is used to further a scheme; it is not where a taxpayer seeks to defend a scheme and takes advice in connection with that offence. It is a privilege that is used to cloak the existence of the scheme that makes it very hard for HMRC to get to the bottom of what is going on. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 227ordered to stand part of the Bill.

Clauses 228 to 230 ordered to stand part of the Bill.

Schedule 30 agreed to.

Clauses 231 to 241 ordered to stand part of the Bill.