Clause 95 - Discovery Assessments for unassessed income tax or capital gains tax

Finance (No. 2) Bill – in a Public Bill Committee at 9:45 am on 11 January 2022.

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

Photo of Christopher Chope Christopher Chope Conservative, Christchurch

With this it will be convenient to discuss clause 96 stand part.

Photo of Lucy Frazer Lucy Frazer The Financial Secretary to the Treasury

Clauses 95 and 96 concern tax administration provisions. They provide certainty that HMRC may use discovery assessments to take action in certain cases in which taxpayers have not declared or returned tax that is due. For consistency, fairness and certainty, they also make minor changes to the rules requiring notification of liability.

I will briefly explain the context for introducing the clauses. The upper tribunal recently found that HMRC did not have powers to recover an individual’s high-income child benefit charge, which I will refer to as “the child benefit charge”, by issuing a discovery assessment where the taxpayer had neither notified HMRC of their liability nor submitted a tax return. The purpose of notifying tax liability is for HMRC to know to ask a taxpayer to complete a tax return. A discovery assessment is the mechanism HMRC uses to collect tax that it finds out should have been assessed but has not been—essentially, HMRC sends the taxpayer a bill for the tax that they ought to have self-assessed. HMRC uses discovery assessments frequently and routinely for taxpayers who ought to but have not notified tax liability and completed a tax return, whether because they are evading tax or they have made a genuine mistake.

HMRC can use discovery assessments in two scenarios: where it discovers that income tax in a tax return has been understated, and where a tax return has not been submitted at all. We are concerned here only with the latter scenario. The tribunal did not dispute the validity of the child benefit charge; in fact, it confirmed that the charge was still due. However, the tribunal found that HMRC could not use discovery assessments in that case. HMRC firmly disputes that ruling and has appealed to the Court of Appeal. The ruling prevents HMRC from using the usual discovery assessment mechanism to collect the correct tax payable where taxpayers liable to the child benefit charge and similar charges have not notified their liability, and so have not been sent a tax return.

There are three related clauses: 95, 96 and 97. The first and most significant is clause 95, which ensures that discovery assessments can be used to recover the child benefit charge, as well as similar charges relating to pensions and gift aid, where taxpayers have failed to notify HMRC and self-assess those charges. I stress that the legislation does not create any new liabilities or obligations for taxpayers; it simply puts taxpayers who do not declare and pay the child benefit charge on an equal footing with the majority who do.

Without clause 95, a taxpayer who did not declare and return their liability might not have to pay the child benefit charge at all, while others in otherwise identical circumstances who had rightly notified HMRC of their position would have to pay. Clearly, even if that is an honest mistake, which it is in many cases, it is not right.

The legislation introduced under clause 95 will apply retrospectively to child benefit, gift aid and pension charges. For those three types of charge, the legislation will be treated as having always been in force and will ensure that previously issued discovery assessments remain valid. The Government do not introduce retrospective legislation lightly; we do so only in exceptional circumstances, and we will do so, on occasion, when a court ruling upsets the widely accepted way in which the law is understood to work.

In this instance, retrospection is necessary for two reasons: first, to protect public services by ensuring that tax that is properly due and that has been charged and paid through discovery assessments over a number of years remains undisturbed; and secondly to provide fairness to the general body of taxpayers who have declared their liability, submitted their returns and paid their tax. The retrospective element applies only to the use of discovery assessments where taxpayers subject to such charges have neither notified HMRC of their liability nor submitted a tax return; it does not affect anyone’s tax liability. It is important to emphasise that although this is retrospective legislation, it is not retrospective taxation.

Some taxpayers will not be subject to the retrospective effects of clause 95. It would be unfair for it to apply to those taxpayers who were part of the original litigation and those who submitted appeals to HMRC on the same basis before the tribunal judgment was handed down. To include them would overturn the upper tribunal’s judgment and curtail the appeal rights of taxpayers who will already have spent time and money bringing an appeal on the same grounds, so the Government are excluding those taxpayers from the retrospective element of the legislation, ensuring that they can continue to pursue their appeals.

The prospective effect of clause 95 is somewhat wider. It is sensible to future-proof the legislation so that it applies to any income tax or capital gains tax that ought to have been, but has not been, assessed.

Clause 96 is introduced with prospective effect only. It will provide certainty that taxpayers who become liable to certain tax charges, including the pension and gift aid charges that I mentioned in reference to clause 95, must notify HMRC of their tax liability. Taxpayers are required to notify HMRC that they are chargeable to income tax or capital gains tax for any given year when that tax has not otherwise been accounted for.

Recent litigation has called into question whether certain tax charges are adequately covered by the obligation to notify chargeability; clause 96 provides certainty that they are so covered. That will achieve consistency of treatment across the types of tax charge, ensuring that taxpayers are always obliged to notify HMRC in circumstances where HMRC might not otherwise become aware of their tax liability.

It is right that taxpayers are required to report and self-assess their tax liabilities and that HMRC can take the necessary action to recover tax when they do not. Clauses 95 and 96 will enable HMRC to carry on doing so, shoring up the tax administration provisions in response to litigation that could otherwise create confusion, unfairness and inconsistency, as well as putting public revenues at risk. I commend the clauses to the Committee.

Photo of Abena Oppong-Asare Abena Oppong-Asare Shadow Exchequer Secretary (Treasury)

It is a pleasure to serve under your chairship again, Sir Christopher. I thank the Minister for her explanation of clauses 95 and 96, particularly in respect of discovery assessments. As she says, clause 95 will amend the Taxes Management Act 1970 to provide certainty that HMRC can use discovery assessments to make good a loss of tax where it discovers that certain charges have not been accounted for; when the Bill gains Royal Assent, the clause will apply both retrospectively and prospectively.

The amendment to the 1970 Act has to be understood in the context of the legal challenge in HMRC v. Wilkes, in which the upper tribunal ruled that HMRC could not use discovery assessments to assess tax charges arising from sources that do not meet the definition of income within the relevant provision. Clause 95 will amend the law to enable HMRC to use discovery assessments in such circumstances. The background note in the explanatory notes states that the aim is to

“put the matter beyond doubt and confirm HMRC’s long-standing policy”.

Although there has clearly been historic doubt and an unsuccessful legal defence mounted by HMRC, and while this is being applied retrospectively, there is an exception for those who have appealed on the grounds that HMRC was inadequate at the time prior to the Wilkes case. However, as the Minister probably knows, the Low Incomes Tax Reform Group has raised the point that the retrospective application in the clause could be uneven and unfair.

While those who have appealed have been exempted, those who did not make the necessary appeal will face retrospective charges. Those who accepted the charge at face value and paid it will clearly not get their money back, despite the upper tribunal’s finding that HMRC’s use of discovery assessments in this way was outside the scope of its powers and, therefore, not legal. The Wilkes judgment will soon no longer be a legitimate basis for legal contest; I would be grateful if the Minister could make an assessment of the fairness of this uneven, retrospective application.

Under clause 96, there will be further amendments to the Taxes Management Act 1970. It will amend section 7 and extend the circumstances in which a person must make a notification under section 7 to the charges listed in section 30 of the Income Tax Act 2007. As the Minister mentioned, that requires the taxpayer to notify HMRC of any liability to income tax or capital gains tax charges per accounting year. The amendments to the fundamental piece of primary legislation have been extended to include liability, as set out in clause 95. For this reason, we will not be opposing the clause.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

It is a pleasure to see you in the Chair, Sir Christopher. While we support its broad principles, this type of clause brings me out in a cold sweat. I completed my self-assessment tax return last night, and I am now worrying that I have not done it right and at some point in the future HMRC will come running after me because I have ticked the wrong box on the form somewhere.

The clause goes to the sense of a lot of the things to do with the higher income child benefit charge, particularly this retrospective aspect. Since it was introduced in 2013, there have been challenges around the charge, in terms of people knowing about it and the way in which the system works. The child benefit and HMRC systems do not necessarily talk to one another, and people have been brought into self-assessment without realising it.

I can use myself as an example. When I first phoned HMRC to ask about the issue, it asked, “What is your husband’s income?” I said, “I have no idea—it is his income. It is nothing to do with me.” Many people will not know their partner’s income. There may be reasons why the partner does not want to tell them their income, and that will leave them in a very difficult position. People may be in a relationship of coercive or financial control, and they may not be aware of their partner’s income but may end up falling into liability under the rules that the Minister has set out.

What kind of mitigation, if any, may be put in place should people in future be held liable for something they were not aware of for entirely legitimate reasons? Will there be any such mitigation, or will HMRC try to claw back all the money regardless of the person’s situation? Many people may end up in a situation where they are having income clawed back that they were not aware of. How do the Government intend to continue to raise awareness of the higher income child benefit charge and whether people are going to be affected by it?

As the Low Income Tax Reform Group point out in its excellent evidence to the Committee,

“The number of families affected by the charge has increased substantially since it was first introduced because the £50,000 threshold has not been uprated for nine years”.

The effect is that every year it affects more people, who are then drawn into the charge without being aware of it.

The other area that I want to mention, just out of curiosity, is that the clause will affect gift aid as well. There may be entirely legitimate reasons for the Government’s wishing to look at people making claims under gift aid and whether they have done so properly, but I wonder how the Government are assessing any errors within gift aid. How are they chasing those up? Some time may have passed since the gift aid was claimed under people’s taxes, and some of the charities may have disappeared since that has happened. How will the retrospective element be applied to gift aid, and could the Minister give us some idea of the scale of the problem?

Clearly, if the Government are legislating for the issue, they think there is a problem, and it would be interesting for us as a Committee to know its estimated scale and how much money the Government think they are losing out on by people either misclaiming or defrauding through the gift aid system. The Government are bringing through a very serious means of retrospective action; it would be interesting for us all to know why they wish to do so and how they intend to go about it.

Photo of Lucy Frazer Lucy Frazer The Financial Secretary to the Treasury 10:00, 11 January 2022

Again, I thank hon. Members on the Opposition Benches for their contributions. The essence of the points made by the hon. Member for Erith and Thamesmead was one of fairness, and there are three points to make in response. The first is that, as I said, this is retrospective legislation but not retrospective taxation. The tax was due, has been due and is due, but it has not been paid. What was in question was the process by which it was recovered.

The second point is that, in terms of fairness, it is right that everyone pays the right amount of tax and does not manage to escape paying that tax because they do not declare it to HMRC. The essence of the issue is actually about fairness—that everyone is in the same position and that where tax is due, it is paid by everyone equally.

Thirdly, to build on the point I made earlier about the tax being due but the process being in error, the court found in HMRC v. Wilkes that the tax was due from the applicants but the discovery assessment process was not appropriate for recovering it. This legislative measure is fair because it ensures that people who have to pay tax do so and that everyone pays it equally.

I now respond to the points made by the hon. Member for Glasgow Central, who I am sure has completed her tax return successfully and correctly. I encourage everybody to do so, because the tax deadline is 31 January. Although HMRC has extended the deadline for a month and will not be charging penalties, people will still be paying interest on their tax if they have not filed their returns by the 31 January deadline. I am sure hon. Members present have all dutifully done so, but that is a little reminder.

The hon. Member for Glasgow Central mentioned the unfortunate circumstances of individuals. Having spoken to HMRC, I know that it looks carefully at individual circumstances where there is difficulty with paying. There is an essential procedure where people can have time to pay, and there is a vulnerable unit where we look very carefully at people’s vulnerabilities and treat them appropriately.

As I mentioned in my opening remarks, the provision will apply to gift aid, but I am very happy to answer any questions that the hon. Member for Glasgow Central has about that by following up in writing. For those reasons, I ask that the clauses stand part of the Bill.

Question put and agreed to.

Clause 95 accordingly ordered to stand part of the Bill.

Clause 96 ordered to stand part of the Bill.