Construction industry scheme and corporation tax etc

Finance (No.3) Bill – in a Public Bill Committee at 10:00 am on 11th December 2018.

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Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury) 10:00 am, 11th December 2018

I beg to move amendment 146, in clause 81, page 55, line 39, at end insert—

“(3A) No regulations may be made under this section unless the Commissioners have issued guidance on the conditions necessary for an officer of Revenue and Customs to be satisfied that the requirement for security is necessary for the protection of the revenue (for the purposes of the provisions of regulations made in accordance with the duty in subsection (2)).”

This amendment would require the Revenue and Customs Commissioners to issue guidance on how it is determined that security is necessary for the protection of the revenue.

Photo of Nadine Dorries Nadine Dorries Conservative, Mid Bedfordshire

With this it will be convenient to discuss the following:

Amendment 147, in clause 81, page 56, line 25, at end insert—

“(3A) No regulations may be made under this paragraph unless the Commissioners have issued guidance on the conditions necessary for an officer of Revenue and Customs to be satisfied that the requirement for security is necessary for the protection of the revenue (for the purposes of the provisions of regulations made in accordance with the duty in sub-paragraph (2)).”

This amendment would require the Revenue and Customs Commissioners to issue guidance on how it is determined that security is necessary for the protection of the revenue.

Amendment 148, in clause 81, page 56, line 44, at end insert—

“(4) The Chancellor of the Exchequer must review the effects of the changes made by this section on the construction industry and lay a report of that review before the House of Commons within six months of the passing of this Act.”

This amendment would require the Chancellor of the Exchequer to review the effects of the provisions of Clause 81 on the construction industry.

Clause 81 stand part.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

The overall aims of the clause appear sensible, providing HMRC with powers to make secondary legislation to require a person to provide security for corporation tax liabilities and construction industry scheme deductions that are or may be liable to HMRC. Under the clause, failure to provide security when required will be a summary offence and a person who has committed it will be subject to a fine.

As I understand it, securities may be required where a taxpayer has a poor compliance record, and in phoenix-type cases where a business accrues a tax debt, goes into liquidation or administration and the person responsible for the operation of the business sets up again, with the risk of running up further tax debts. Sadly, we have seen far too many of those cases.

The measure is effectively an extension of HMRC’s powers to require security in relation to some areas of business tax—the powers it has currently—to include VAT and PAYE, as well as national insurance contributions, insurance premium tax and some environmental and gambling taxes.

The Government maintain that the clause will be specifically targeted at the minority of businesses that seek financial gain from non-compliance with their tax obligations rather than those that are genuinely unable to pay. They argue that it will not affect those who are managing their debts with HMRC under agreed time-to-pay arrangements with which they are complying—we have touched on that subject previously.

The Government argue that the power will apply only where an HMRC officer considers that the provision of a security is necessary to protect revenue. None the less, we believe that the changes merit further scrutiny, and therefore have tabled a number of amendments.

Amendment 146 seeks to introduce a requirement for HMRC officials to issue guidance on their use of securities to protect revenue. It is a probing amendment that seeks to clarify the circumstances under which a security will be requested for revenue protection. We do not in principle object to the measures being taken to protect revenue—they appear essentially sensible—but we seek to understand better the scope offered to HMRC officials in making such a judgment or, conversely, the guidance they are offered by the Department in making such a decision.

Will the Minister clarify what guidance will be offered and undertake to publish it later? After all, in the Government’s consultation, the feedback was pretty clear. The feedback document stated:

“Most respondents wanted to see clear guidance put in place to support the introduction of the securities and ensure that securities will only be used where it’s appropriate and proportionate to do so. Two thought that legislation should be expanded to provide the rules under which the securities regime should operate.”

How have the Government responded to that point? It is clear that more transparency is needed.

With amendment 147, which follows the previous one, we are likewise seeking to determine what guidance HMRC commissioners would receive. As I said, we do not object in principle to the use of securities to protect tax revenues; we simply seek to understand how and when they will be applied and whether the guidance is determined by Government policy or subject to the discretion of officials. I hope the Minister will either provide that information to the Committee or accept our amendment, which would ensure that further information is provided before these powers are enacted.

The policy papers relating to the clauses suggest that that is necessary. They state:

“Experience from the existing securities regime has shown that, when used in a carefully targeted manner, securities can be very effective in changing the behaviour of non-compliant businesses and protecting future revenues against the risk of non-payment. Currently these powers apply only to certain taxes and duties.”

We need to understand how these powers will be targeted and which criteria will be used. I hope the Minister will respond to that reasonable request.

Through amendment 148, we seek to understand how the new measure will affect the construction industry. As I said, this is an extension of the security deposit legislation to the construction industry scheme and companies chargeable to corporation tax. The documents on the impact of the policy do not discuss the construction industry in detail. The expectation should be that anyone avoiding tax should pay, but it is clear that providing a security could reduce capital stock in some companies, so we need a sense of the impact on those who may be required to pay a security. Again, that was reflected in the Government’s consultation, which stated:

“Several respondents commented specifically on the implications for insolvency and commented that HMRC should give careful consideration in cases where viable businesses were struggling financially and a security could force the business into insolvency. Similarly, respondents did not want the use of securities to limit the rescue environment for financially distressed businesses. One respondent suggested that before extending the security deposit regime, HMRC should commission independent research into its current approach and the effect that demands for a deposit have on struggling businesses.”

The context is that HMRC has lost a large number of its experienced staff, who might have had expertise in security regimes in relation to other taxes. Therefore, we need to know what the impact is likely to be on businesses that may have to deal with HMRC officers who have less understanding of the construction industry than previously would have been the case.

Finally, I note that we are informed by the tax information and impact note that HMRC will need to make changes to its IT systems to process the new security cases. The cost of the changes is estimated to be in the region of £840,000. It will also incur operational costs currently estimated to be in the region of £5 million. Those costs seem fairly high to me. I hope the Minister will explain why they are of such a significant magnitude.

Photo of Kirsty Blackman Kirsty Blackman SNP Deputy Leader, Shadow SNP Spokesperson (Economy)

Very briefly, if the Labour party chooses to press these amendments to a vote, we will support it, because we think that what it is trying to achieve is very sensible.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

I thank the hon. Member for Oxford East for her questions, most of which I will come to in my general statement on the clause. It is good to hear that she broadly welcomes the general thrust of what we are doing. I think she said that amendments 146 and 147 are probing amendments, and raised various issues about the guidance. Of course, those who are to be affected by the measures will have a right of appeal—they will be able to go to a tribunal to dispute the imposition of advance payments. During the period of dispute, the payment is not required to be made. That is an important point. They will also be invited to comment with HMRC—and have a right to do so—on the proposed level of payment being sought during the process by which it is determined. If their circumstances change at any point in the process or thereafter, that is an opportunity for further discussion and potentially change in the amounts that might be involved. I will pick up one or two other points on guidance in my general remarks.

Clause 81 allows HMRC to require a security from businesses where there is a serious risk that they will not meet their corporation tax or construction industry scheme liabilities. It also makes it a criminal offence not to provide a security when one has been requested. This change addresses gaps in the coverage of the existing securities legislation and strengthens HMRC’s ability to deal effectively with deliberate defaulters, who pose a serious risk to revenue.

The clause also includes a technical amendment to the existing pay-as-you-earn securities legislation. That reflects changes made by the Legal Aid, Sentencing and Punishment of Offenders Act 2012, but does not alter the effect of the existing provisions. HMRC can already require a security—effectively, an upfront payment—for various taxes, including VAT, PAYE and the others that the hon. Lady referred to, when a significant amount of revenue is at risk and there is an established history of non-compliance.

Experience shows that when they are used in a carefully targeted and proportionate way, securities can be very effective in changing behaviours and protecting future revenues against the risk of non-payment. The non-compliant behaviours that trigger security interventions are not usually limited to a specific tax or duty, but are typically seen across all aspects of a business’s tax affairs. Extending securities to corporation tax and construction industry schemes deductions will therefore close the gaps in the current securities regime and prevent losses to the Exchequer in these areas of the tax system.

The changes made by clause 81 will affect only a minority of businesses that are determined not to pay, rather than cannot pay, tax that is due. The measure will affect businesses that are involved in phoenixism or contrived liquidations, and those that build up significant tax debt and fail to respond to contact from HMRC. Compliant businesses and those that are experiencing genuine difficulties will not be targeted by this measure. It is estimated that the reform will bring around 500 more cases within the scope of security action each year. Over the next five years, it will ensure that around £825 million of taxes that otherwise would not have been paid will go to fund vital public services.

Regulations made under these powers will be based on those for PAYE securities and will include the same extensive rights of appeal and robust taxpayer safeguards, some of which I have already identified. As it does now, HMRC will consider every security intervention on a case-by-case basis to determine whether there is sufficient evidence to justify security action and, if so, whether it would be proportionate and effective in the individual circumstances. Where appropriate, alternatives such as time to pay arrangements will be considered, and HMRC will engage with the taxpayer to ensure that decisions take into account all relevant factors.

Amendments 146 and 147 would require HMRC to set out in guidance the conditions for a security to be considered necessary for revenue protection. HMRC publishes its detailed operational guidance on securities online, and that will be updated to include corporation tax and construction industry scheme securities before they are introduced. The guidance sets out the process for risk assessing whether there is likely to be a loss of revenue if security action is not taken, and provides examples of risk indicators, such as evidence of phoenixism or businesses being run by disqualified shadow directors or those convicted of tax fraud. However, whether a security is necessary or proportionate will always be determined by the individual circumstances. It is important that officers working within the existing strict governance structures can decide whether a security is necessary for the protection of revenue by considering all the elements of each case in the round. It would be impractical for guidance to specify every relevant factor, or to stipulate rigid criteria that could be applied fairly and effectively across all cases.

Amendment 148 would require the Government to review the effects of this measure on the construction industry. That would be disproportionate and unnecessary. The highly targeted nature of the measure, and the degree of diligence required by HMRC, will mean that the number of businesses that will potentially be affected by it is extremely small, representing less than 1% of total construction industry businesses.

Securities have been a feature of the tax system for many years and experience has shown that they can be a very effective way of driving change in customer behaviour and protecting revenue at risk when they are used in a targeted and proportionate manner. Clause 81 will help HMRC to tackle the minority of businesses that choose not to meet their tax obligations at the expense of the compliant majority. I therefore commend the clause to the Committee.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury) 10:15 am, 11th December 2018

In the light of the Minister’s response, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 81 ordered to stand part of the Bill.

Clause 82