New clause 12—General anti-abuse rule: review of effect on tax revenues—
‘(1) The Chancellor of the Exchequer must review the effects on tax revenues of section 98 and Schedule 13 and lay a report of that review before the House of Commons within six months of the passing of this Act.
(2) The review under sub-paragraph (1) must consider—
(a) the expected change in corporation and income tax paid attributable to the provisions in this Schedule; and
(b) an estimate of any change, attributable to the provisions in this Schedule, in the difference between the amount of tax required to be paid to the Commissioners and the amount paid.
(3) The review under subparagraph (2)(b) must consider taxes payable by the owners and employees of Scottish Limited Partnerships.
This new clause would require the Chancellor of the Exchequer to review the effect on public finances, and on reducing the tax gap, of Clause 98 and Schedule 13, and in particular on the taxes payable by owners and employees of Scottish Limited Partnerships.
That schedule 13 be the Thirteenth schedule to the Bill.
One more clause unto the breach, dear friends; or close the wall up with our English dead, and possibly our Scottish dead as well—our British dead. We will rephrase the bard.
Clause 98 makes minor procedural and technical changes to the general anti-abuse rule referred to as the GAAR to strengthen its procedural efficiency and ensure that it operates as originally intended. The clause tackles a small minority of taxpayers who deliberately avoid, in this case, providing information and thereby frustrate HMRC’s ability to pursue inquiries into abusive tax arrangements under the GAAR.
The clause also introduces some minor amendments to remove ambiguity and to ensure that, where HMRC decides not to pursue a case using the GAAR, inquiries can continue using other arguments. This measure was announced at Budget 2018 and the Government published draft legislation for technical consultation in July 2019. The changes will help to protect over £200 million in tax revenue by ensuring that the GAAR works effectively.
As I have often said, the Government take a firm line against those who seek to avoid tax and try to circumvent the rules. The GAAR was introduced in July 2013 and it has become an important part of the Government’s strategy to clamp down on tax avoidance; to deter individuals from engaging in it in the first place; and to prevent promoters from marketing and selling such arrangements.
The GAAR focuses on tackling abusive tax avoidance. By abusive, I mean the sort of arrangements that push the boundaries of the law and are clearly not within the spirit of what Parliament intended. The GAAR legislation asks whether a specific tax arrangement is abusive and applies what is known as the “double-reasonableness” test. Tax arrangements are considered abusive if they cannot reasonably be regarded as a reasonable course of action. An independent advisory panel provides an opinion to HMRC on whether a tax arrangement constitutes a reasonable course of action.
The clause will strengthen procedural changes made to the GAAR previously in 2016 which tackle mass-marketed tax avoidance schemes. The changes in 2016 introduced provisional counter-action notices, which allowed HMRC a 12-month window to gather information and consider whether to continue a GAAR challenge or pursue a different approach.
Some taxpayers and advisers, I am sorry to say, have deliberately refused to co-operate with HMRC during that window, deliberately withholding information to prevent HMRC from making an informed decision. In effect, those people are seeking to run down the clock and it is right the Government take action to prevent this. At the moment, HMRC has no recourse against such people. Once that window closes, no further GAAR action is possible and HMRC is unable to pursue any alternative non-GAAR approaches.
The clause replaces the provisional counter-action notices introduced in 2016 with a simpler protective GAAR notice. This will enable HMRC to carry on its investigations beyond 12 months and it mirrors the way normal tax inquiry notices work. The amendments will also confirm that where HMRC decides not to pursue the GAAR, cases can still be pursued using a technical non-GAAR argument. That has always been the intention of the legislation.
The changes remove the incentive not to co-operate with requests for information and ensure that appropriate safeguards, such as appeal rights and the oversight exercised by the independent GAAR advisory panel remain in place. Given that the GAAR targets the abusive end of the avoidance spectrum, the changes proposed here will only affect a small minority—those who persistently go to extreme lengths to sidestep the rules. These changes are needed now to ensure that HMRC can take action against those who are constantly looking for new ways to avoid paying their fair share of tax.
New clause 12 in the name of the SNP requires the Chancellor of the Exchequer to review the impact of clause 98 and schedule 13 within six months of the Bill receiving Royal Assent. Specifically, it would require the Chancellor to review the effect on public finances and on reducing the tax gap, particularly on taxes payable by earners and employees of Scottish limited partnerships.
In response, I highlight to hon. Members that amendments to the GAAR are minor procedural changes designed to ensure the policy operates as originally intended. The effects of these changes to the regime will not be visible within six months’ time. As with all tax measures, however, we will continue to review and monitor the effect of this change, as is standard.
HMRC already publishes the “Measuring the tax gap” report annually which shows how the tax gap has changed year on year for different forms of behaviour and different taxpayer groups. HMRC also publishes an annual report and accounts that provide specific information on the impacts of the GAAR, including the number of GAAR opinion notices issued. For that reason, I ask the Committee to reject new clause 12.
To sum up, these amendments ensure that the GAAR remains an effective tool in HMRC’s armoury for tackling abuse of tax avoidance. I therefore commend the clause and the schedule to the Committee.
As the Financial Secretary outlined, this clause is designed to tweak the system. Therein lies my criticism and my concern. The challenges we face when it comes to tax avoidance and abuse have been well documented during this Committee in relation to the loan charge. Even where Government have sought to clamp down on avoidance and HMRC has put in place controversial but rigorous arrangements, there continue to be, to this day, companies and promoters that tout schemes that are patently against the spirit and letter of the law. HMRC has made it clear that such schemes do not work, but those companies and promoters are still at it.
The most recent examples I have seen are of umbrella companies targeting public sector workers in the NHS. Rather than just tweaking, Ministers should be trying to give the general anti-abuse rule more bite. For example, they could extend the general anti-abuse penalty rules to apply a 100% penalty for any tax avoidance scheme that fails the GAAR or, more likely, fails for some other reason, but would have failed the GAAR as well. They could prevent operators of avoidance schemes simply running away from their liabilities and victims, making directors, shareholders and other associated persons jointly liable for the new GAAR penalty, as I alluded to in the previous discussion.
Umbrella companies create a unique opportunity to flog tax avoidance schemes to low-paid workers. We see that exploitation taking place. We could counter that by making umbrella company directors and associated persons jointly liable for unpaid PAYE, national insurance and VAT. We should make the promoters, scheme designers and independent financial advisers jointly liable for unpaid tax and penalties from a failed scheme, with a safe harbour designed to protect people acting in good faith. For example that could be where a promoter followed specific tax advice from a regulated adviser, where factual assumptions in advice were reasonable or where advice was shared with scheme participants; the list goes on. There are reasonable exemptions, or reasonable assessments could be made, where people are acting in good faith, but we still see far too many examples of people designing or promoting schemes in the full knowledge that they will make a quick buck but will not pay the consequences.
As we have seen, the Government and HMRC are trying to clamp down. When they catch up with people who have followed advice, often in ignorance of tax rules and in the belief that they were following good, independent financial advice, the bite really hurts. Why are we not going after the scheme promoters much more aggressively? Despite all the controversy—the headlines generated off the back of the loan charge, the debates in Parliament, inquiries and grillings before the Treasury Committee—we still have not got to the heart of the issue.
In my opinion, and that of many people following our proceedings, the people who design, contrive and promote such schemes are still not paying the price for giving bad advice to their customers, who believe they are following good advice and the law. We are not going to quibble about clause 98 and the tidy up it is doing, but I am disappointed by the lack of aambition. The Treasury has to be much more aggressive with the promoters than it is currently.
In new clause 12, we mention the issue of Scottish limited partnerships. I make no apology for doing so, as they are still a problem. We only need to look at the ongoing campaign journalism by Richard Smith and David Leask on this issue to know that Scottish limited partnerships are being used in nefarious ways to move money and goods around the world. They have been involved in war crimes and all kinds of things. The loopholes existing in Scottish limited partnerships and Companies House must be closed by the Government. They are harming not only individuals who suffer the effects of these crimes, but Scotland’s reputation. They are called Scottish limited partnerships, but Scotland really has no part in it; they are an historic arrangement, but they are governed here.
There are still people not doing the simplest things such as registering persons of significant control. The answer to my recent parliamentary question suggested that 948 companies have still not registered a person of significant control. That is dramatically down from where it was, but it tells me that people are using other means to hide their money, rather than going through Scottish limited partnerships, and that no Government fines have been levied on the 948 companies that have not registered a person of significant control. That is money that the Government could have in their pocket. They are deciding that they do not want to pursue that for their own reasons. It really does stick in my craw that this is a continual issue: I have to raise it on the Finance Bill and the Scottish National party has to raise it in this House.
We are also concerned about the tax gap. The tweaks being made here are not really going to change that significant gap. In June 2019, HMRC published revised estimates, which put the tax gap at £35 billion for 2017-18, representing 5.6% of total tax liabilities. The Minister, no doubt, will say that the tax gap has fallen—it has—but that does not disguise the fact that it still exists, and that tax is money that could be coming into the revenues. It could be supporting businesses and individuals across the country and we could be abolishing policies such as the two-child limit, because the money would be there in the Government’s bank account. The Government could use that money rather than not collecting it. I could go into great detail, which I have here, about all the anti-avoidance mechanisms that have happened. I am sure other hon. Members are as warm as I am and would like to get some fresh air, so I will skip that in the interest of the patience of all colleagues.
We do need workable general anti-avoidance rules. They must tackle tax avoidance in all its forms. They must not exempt existing established abuse from action being taken. They must include international tax abuse within their scope. They must give the right to the tax authority to take action against tax avoidance, defined in an objective fashion capable of being numerically assessed, without the consent of the unelected authority. They must increase the burden of proof on this issue on to the taxpayer.
In 2014, the coalition Government announced the introduction of a system of follower notices and accelerated payment notices. In cases where someone is in dispute over their assessment, HMRC may issue a follower notice if this arises from the use of an avoidance scheme that is the same or similar to arrangements that HMRC has successfully challenged in court. In July 2017, HMRC reported that it issued over 75,000 such notices worth in excess of £7 billion and managed to collect nearly £4 billion. That is still a significant gap of £3 billion. HMRC must be able to collect the taxes it is due in real time instead of waiting for those judicial decisions.
With Scottish limited partnerships, the extent of the abuse of the current system is laid bare in the Global Witness report “Getting the UK’s house in order”, which highlights the deficiencies at Companies House that have been going on for many years. This needs to be dealt with soon. Reviews have been carried out, things have been talked about, but there has not really been any action. It makes no sense to me that we have such a system but do not allow it to catch the people it should be catching.
I sat on the pre-legislative Joint Committee for the Registration of Overseas Entities Bill in the last Parliament. That Bill seems to have disappeared completely. It would help to tackle some of the money laundering that goes on with property registered in the UK. People across the country, particularly in many London boroughs, see blocks of flats with nobody living in them. People could live in those flats. They are being used for money laundering and moving money about. We need to bring that Bill back and ensure those people are held to account. We should close these loopholes in the system and ensure that the tax that is due is collected for the benefit of all of us.
I am grateful to colleagues for their contributions. I want to take up some of the points made by the hon. Member for Ilford North. The delicacy and agility in his ability to pivot from detailed scrutiny to a swingeing extension of tax powers, and new taxes galore, is interesting to watch, but the fertility of his invention is great, and I will read his suggestions with some care, in the record. I am grateful to him for that.
The ugly truth of the matter is that tax avoidance and, in particular, the promotion of it, is an amoebic activity that tends to flow into empty spaces and to be parasitic, if amoebas can be parasitic—I am not sure whether they can—on good activity. So, right next to where we see good or lawful and legal activity, we can see some unpleasant, nasty and abusive tax avoidance.
The hon. Gentleman is right to focus on how we see new forms emerging. It means that the battle against tax avoidance and evasion is never fully won. I hope that he will take some comfort from all the work we are doing on the promoter strategy. It is designed not merely for potential new powers, but for a different way of thinking about disrupting the economics of the supply chain. To pick up on a point that he raised about effectiveness, the GAAR can lead to a fine of 60% of the counteracted advantage. It can be pretty substantial, and it has genuine teeth.
I hope what I say in responding to the point made by the hon. Member for Glasgow Central on Scottish limited partnerships falls within the framework of the Bill. The issue is well understood, and there is public concern about it, which is shared across the House. She will be aware that BEIS introduced some new reporting requirements for Scottish limited partnerships in June 2017. Since then, new registrations have declined sharply. Of course, there is a sump of existing partnerships and, as she will be aware, BEIS is consulting on wider reforms to prevent the criminal misuse of those partnerships but retain their core and, in many ways, effective and important other purpose. It announced reforms in that area as of December 2018, and the Government have made clear that they will legislate when parliamentary time admits. So although the matter does not, in its preponderance, fall directly within the clause, she is right to raise it and the Government are fully sighted in that regard, and fully seized of it.