Finance Bill

Public Bill Committee, 17 June 2014.

(Except clauses 1, 5 to 7, 11, 72 to 74 and 112, schedule 1, and certain new clauses and new schedules)

Gary Streeter (Conservative, South West Devon)

It is a matter of great sadness for all of us that this is our last day of consideration of the Bill in Committee. I will miss you all.

We now come to clause 192 and the start of part 4 of the Bill, which covers follower notices and accelerated payments.

Clause 192 - Overview of Part 4

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to discuss the following:

Clauses 193 to 202 stand part.

That schedule 26 be the Twenty-sixth schedule to the Bill.

Clauses 203 to 208 stand part.

That schedule 27 be the Twenty-seventh schedule to the Bill.

Clauses 209 to 211 stand part.

That schedule 29 be the Twenty-ninth schedule to the Bill.

Shabana Mahmood (Labour, Birmingham, Ladywood)

Thank you, Mr Streeter. It is a pleasure to serve under your chairmanship. You are right in saying that we are coming to the end of our consideration of the Bill in Committee.

Part 4 of the Bill is made up of four chapters, all of which cover various tax avoidance measures. Chapter 1 provides an overview of part 4 and outlines some of the main definitions. Chapter 2 introduces a new obligation on users of an avoidance scheme that Her Majesty’s Revenue and Customs has defeated at a tribunal or court hearing in another party’s litigation to concede their position to reflect that decision. That obligation will take the form of a follower notice and is the subject matter of this first group of proposals.

Chapter 3 makes provision for issuing accelerated payment notices on the same grounds as follower notices, but in addition to the cases disclosed under the disclosure of tax avoidance schemes—DOTAS—or those cases in which HMRC is taking counteraction under the general anti-abuse rule, which is known as the GAAR.

Finally, as we will discuss later, chapter 4 makes special provision covering the application of part 4 to stamp duty land tax and annual tax for unfit dwellings, in addition to conferring a power to extend the provisions of this part to other taxes and making consequential arrangements. As the Minister and the Committee will be aware, the measures have been subject to much comment and I look forward to exploring them in more detail during our final day in Committee.

On clauses 197 to 211, the Opposition support measures to tackle tax avoidance. It is important that everyone plays their part and pays their fair share of tax. These measures are the result of backlogs in the current system and the feeling that it is easy at the moment to game the system and to extend the time for resolution of a case, which is in the interests of the party that has sought to engage in tax avoidance, but less in the interests of ordinary taxpayers who end up paying more overall as HMRC takes longer to resolve cases.

This chapter in the Bill falls under the Government’s broader consultation, “Raising the stakes on tax avoidance”. Follower notices were subject to consultation from 12 August to 4 October 2013. They focus on encouraging users of avoidance schemes to settle their tax affairs after similar cases have been lost in court. As the consultation document outlines, buyers of tax avoidance schemes will submit their returns to HMRC on the assumption that the schemes will reduce their tax liability. When a tax avoidance scheme is mass marketed, as they often are, HMRC is presented with a large number of returns based on the same assumption that the scheme will have reduced the person’s tax liability in a particular way. When HMRC holds that the scheme does not work, it follows that it will argue that any returns based on that scheme are incorrect.

When faced with a large number of similar cases, it is sometimes more efficient for HMRC to investigate representative cases, taking them to litigation if necessary. However, when HMRC wins a representative case in the courts, other taxpayers who have used the same or similar schemes sometimes see little incentive in settling their cases with HMRC. When HMRC pursues litigation in similar cases, tribunal rules allow for them to be heard together in certain circumstances but, unfortunately, that applies only to cases that have been notified to the tribunal. To get to that stage, HMRC has to investigate those cases to litigation standard and then close the tax inquiry. That uses up the tribunal’s resources, places a strain on HMRC’s compliance resources and often delays the collection of the correct tax.

In his autumn statement last year, the Chancellor of the Exchequer announced:

“We are introducing a new, limited power that requires people to pay their taxes up front where the scheme they used has already been struck down by the courts.”—[Official Report, 5 December 2013; Vol. 571, c. 1107.]

That measure will introduce a new obligation for users of an avoidance scheme that HMRC has defeated in a tribunal or court hearing in another party’s litigation to concede their position to reflect that decision.

Earlier this year, on 24 January, the Government published a further consultation document, “Tackling marketed tax avoidance”. The consultation closed exactly a month later on 24 February 2014. The consultation received more than 100 responses, more than half of which came from one website.

However, concerns were expressed by several stakeholders and members of the public who will be affected by the measures that the consultation period was insufficient. For many of them, particularly the accounting organisations, the consultation took place at their busiest time of the year and therefore contained their ability, they say, to take part fully in the consultation process and to respond as they would have liked. In its response to the consultation, the Institute of Chartered Accountants in England and Wales said that there was

“so little time for comment that one month is not long enough, given their length, complexity and contentious nature”.

I am sure the Minister will tell us that a total of 800 responses received suggests that the length of time given for the consultation was sufficient, but I am a little concerned that so many key stakeholders were upset about the length of time for consultation and said that it did not give them enough time to discuss with their members in detail the measures before us today. They fear that they may have missed opportunities to improve the legislation—not necessarily the principles behind what the Government are trying to achieve, but some of the more technical aspects of how those ends will be achieved. When the Minister responds, I would be grateful if he explained to the Committee the thinking behind the length of consultation period adopted by the Government. Is he concerned that the short consultation period might mean that there was insufficient opportunity for HMRC and the stakeholders it regularly works with to build confidence about the impact of the measures and how they will be implemented when the Bill is passed?

The consultation document outlined follower notices and the expansion of the accelerated payment notice scheme, which the Committee will discuss later today. The main concerns discussed in the summary of responses document focus on the absence of a right of appeal, the implications for the HMRC’s resources, and the processes that will be adopted internally as it takes important decisions on whether to apply a follower notice to a tax inquiry.

We must recognise the challenge facing HMRC because of the number of cases. It is estimated that there are around 65,000 open cases involving marketed tax avoidance schemes, representing potentially billions of pounds of uncollected taxes. We all want to ensure that tax due is collected as quickly as possible. However, the process of collection and litigation that is currently undertaken by HMRC can take several years to complete. There is a sense that it is quite easy to game the system and for individuals challenging the decisions of HMRC at the tribunal stage to cause delay. Opposition Members therefore support the principle of follower notices as a practical measure that should—hopefully—decrease the amount of time it takes to settle those matters and ensure that the currently uncollected tax is collected quickly.

The responses to the consultation from many of the membership bodies show support in principle for the idea of follower notices when cases are the same or very similar, in recognition of the need to deal with the many tens of thousands of outstanding mass-marketed avoidance schemes. The stakeholders accept that the position is untenable and is causing great strain on HMRC and the tribunal system. However, those same stakeholders have serious concerns that dealing with this backlog with follower notices risks taking away a taxpayer’s normal safeguards and rights of appeal. They are also concerned that the measure risks shifting a considerable amount of power from the legislature and the judiciary straight back to the Executive, meaning, in this case, HMRC officials.

One of the biggest concerns about the balance of power relates to the removal of a right of appeal. Much more will depend on officials at HMRC making decisions about whether a follower notice should be applied. Some stakeholders have described that as putting the taxpayer at the mercy of the bureaucrat. Given that there is no right of appeal, stakeholders fear that far too much of power is concentrated in HMRC and they are not confident that HMRC can be relied on always to get it right. Many members of the public have commented that, because the new powers sit within HMRC, HMRC is becoming judge, jury and executioner. There is therefore a fair amount of concern about how the balance of power will sit in relation to such decisions. The Minister will be aware of the reaction of members of the public who may now get follower notices and it will be interesting to know how much confidence he has in the system overall and its robustness to deal with the lack of confidence that has been expressed so far.

Another issue concerns the fact that tribunal group rulings from the first-tier tribunal can act as the basis for follower notices. Therefore, the clauses within the chapter make the provision for HMRC to issue a follower notice on the basis of a judicial ruling that HMRC deems to be relevant to the taxpayer’s chosen arrangements. The definition of judicial ruling appears to include first-tier tribunals. First-tier tribunal members are judges and deputy judges drawn from the former special commissioners, the former VAT and duties tribunal chairmen, assignees from other tribunals and non-legal recruits who are selected by open competition, possibly including ex-general commissioners. In most cases the decisions of the first-tier tribunal are made by a judge and two other members, although this can vary between chambers and sections, and sometimes depends on the nature of the case.

There is no issue about the robustness of the FTT in and of itself, but the use of FTT rulings as the basis for follower notices has been met with considerable opposition throughout the consultation process. As the Law Society observes, it is rare in our legal system for decisions of the lower tribunals to be used in that way because they have no precedential value. In the normal run of things, FTT decisions are not capable of setting a legal precedent that then has to be followed in all other cases that flow. Is the Minister satisfied that the use of FTT decisions is satisfactory from a legal point of view? What conversations has he had with the Law Officers and his colleagues in the Ministry of Justice about that slight change to the way in which lower tribunal decisions are treated within our legal system? It can be difficult enough, when a tax-related or a non-tax-related case gets to the upper tribunals, to work out the exact basis for the decision that the lower tribunal judges made. Often, lawyers—I confess I was one in my pre-political life—will spend many hours and earn a lot of money trying to work out the whether the comments of a judge are the rationale for the decision, and whether the comments go to the heart of a decision or are obiter dicta.

James Duddridge (Conservative, Rochford and Southend East)

I apologise for interrupting the hon. Lady. Is she suggesting that, when looking at the first-tier tribunals and generalising from a decision made, there should be a difference between the merit of cases that are similar compared with those that are identical where, effectively, the same scheme is sold to multiple individuals, which I suspect is the bulk of the 65,000 to which she refers?

Shabana Mahmood (Labour, Birmingham, Ladywood)

I am grateful to the hon. Gentleman for his comments. He is right. The thrust of the measures that we support deals with the latter example that he gave—cases in which the same scheme has been marketed and used in exactly the same way in each case, but there will be some differences. The question is, looking at FTT decisions, whether there will be enough in that ruling to be able to work out what the similarities are. Often, legal argument does not necessarily turn just on the features of one marketed tax avoidance scheme. There may be other elements to a case, which might be lost. That is why I am putting that point to the Minister.

There is a principle of law and of the way our legal system works, which relates to what type of decisions have the ability to set a precedent that has to be followed in all cases thereafter. A good feature of the measures is that there is a small number of boutique practices that put together marketed tax avoidance schemes, which are almost exactly the same in nature all the time. That is what we are trying to tackle.

Charlie Elphicke (Conservative, Dover)

Is the hon. Lady’s position that the provisions should not apply unless there has been a ruling in the court of appeal or higher?

Shabana Mahmood (Labour, Birmingham, Ladywood)

No, I am merely testing the Government’s case to ensure that the rules that end up on the statute book are as robust as possible. In principle, I have no objection to an FTT decision being capable of setting a precedent for all cases thereafter but I would not be doing my job if I did not press the Minister as hard as possible, given the concerns expressed, particularly by the Law Society.

If we are going to change fundamental principles of the English legal system and the way it functions—whether taking away rights of appeal, potentially introducing retrospection, which I am sure we will discuss in greater detail in the next group, or changing the basis on which precedents are set—as legislators, it is our duty to ask as many questions as possible to ensure that we know the scope of what we are trying to achieve so that the people who watch the debate understand exactly what they are dealing with and know that we do not make the decisions lightly or easily.

Charlie Elphicke (Conservative, Dover)

Does the hon. Lady agree that the expertise of the judges in the first-tier tribunal is often extremely high and specialised, and that they know what they are doing and understand the principles of the cases to such a level that we can have trust and confidence in them and their decisions?

Shabana Mahmood (Labour, Birmingham, Ladywood)

That is exactly why I explained the level of seniority and the long experience that those making decisions at FTT level have. I am making no comment about the value of their judgments. I am merely saying that, as a long-standing principle of our legal system, lower courts are often not capable. In a personal injury claim, the average county court does not set a precedent that is followed. That is normally set by higher courts. That is just how our legal system works and a similar principle is applied in this case. I have no objection to departing from that because I recognise that a backlog of 65,000 cases with potentially billions of pounds of uncollected tax is no good for anybody. We need to think of practical ways to deal with that problem but, before departing from fundamental principles of our legal system, we should test them to ensure that we know what we are doing and that we are doing the right thing.

James Duddridge (Conservative, Rochford and Southend East)

The hon. Lady mentioned marketed tax avoidance schemes and the 65,000 cases. Does she have a feel, in her investigations, for how many individual marketed schemes there are? Her case would be more powerful if there were a very limited number, but I suspect there are quite a few and that there would be significant cost in going beyond the tribunal stage, which may or may not be necessary but is a factor to consider.

Shabana Mahmood (Labour, Birmingham, Ladywood)

I am grateful for that intervention because I was going to put that question to the Minister. It would be good to know how many of the 65,000 marketed schemes HMRC expects to fall within the number of known marketed schemes causing the real mischief behind the backlog, so that we know how many we can hopefully strike out quickly and start collecting tax that ought to have already been collected.

HMRC, I think in relation to the objections raised by the Law Society, argued that FTT decisions ought to be used when it comes to deciding whether a follower notice can be applied, because if they were unavailable—if a follower notice could be applied only to a higher court decision—taxpayers might not appeal unfavourable decisions in order to avoid setting a precedent that would give rise to follower notices. The Law Society said that it was not convinced by that argument and felt that

“it would require an unusual degree of altruism toward other taxpayers on behalf of the litigant choosing not to appeal”—

something it believes is “rarely seen in practice.”

I am sure that many stakeholders have been speaking to the Minister and his officials at length about this aspect of the measures. I would be grateful if he explained how the Government arrived at the position of allowing FTT decisions to be included and if there might be some scope for looking at whether the system needs additional safeguards. For example, the Chartered Institute of Taxation suggests that, at the end of a lead case, it might be appropriate to ask a judge to make a declaration that the case is apt for follower notices to be issued. That might provide an opportunity for the judge briefly to state the points of law and fact that helped them arrive at that decision, so as to remove uncertainty when that case is used as the basis for follower notices in other cases.

It would be helpful to know if the Minister considered alternative methods of bringing greater clarity to the regime as envisaged by the legislation and why the Government seem to be coming down in favour of HMRC assessment of a judgment. Do the Government think it is worth considering, perhaps once we have seen how the measures work out in practice, whether there is scope for such a declaration to be made by a judge so that there is less debate about the facts and features of a scheme that led a judge to make that decision? That might also assist with the change we envisage in our system to allow the lower tribunal to set a precedent.

Charlie Elphicke (Conservative, Dover)

The issue is that many of these schemes are mass-marketed. One example is the Eclipse 35 scheme, of which Sir Alex Ferguson was a member. Let us say the case was taken against him. There are 289 investors; I would say that the other 288 cases are exactly the same and that there would be an appropriate case for saying, “These cases are all the same. This is what is called a cookie-cutter transaction in the legal profession; they should all fall over at the same time.” Would the hon. Lady agree that is the right principle?

Shabana Mahmood (Labour, Birmingham, Ladywood)

Yes. I have no different analysis of or principled objection to that. It will be helpful if the Minister can give us a feel for how many of the 65,000 will fall into this cookie-cutter type case. We would assume, for example, that the 289 cases within the Eclipse 35 scheme would all be exactly the same. We all know that there are always cases in the legal system where there are some differential elements and we need to ensure that our rules are robust enough to deal with the many and varied facts that are adjudicated upon by our tribunals day in, day out. In the normal run of things, we would think there would not be any issues, but, if we are going to change the law, we need to ensure that we allow for the odd cases that sit outside the cookie-cutter type or those where the cutter has gone wrong and the cookie has come out a slightly different shape. Those are the cases that we need to worry about and ensure that the rules are robust enough to deal with.

Another main concern is the lack of a right of appeal when a follower notice is issued. Many of the concerns expressed by stakeholders, as well as by members of the public, relate to the fact that they feel it represents an erosion of a taxpayer’s access to justice. Getting the balance right between ensuring that we are able to clear backlogs, thereby saving taxpayers lots of money, and collect tax that is due, and ensuring that the justice system is fair, is tricky. It is important and necessary that if we are going to make these changes—I have no objection in principle to the rules of appeals and follower notices—and take away rights of appeal, we must ensure that we have really stress-tested the case for doing so and ensured that the new arrangements are well understood and people know exactly what they are dealing with.

The Association of Taxation Technicians has raised deep concerns about the lack of any right of appeal against the follower notices. It says that the result is

“that a taxpayer who wishes to pursue negotiation or litigation with HMRC must accept the likelihood of the imposition of a substantial penalty even if they are prepared to pay on account the full amount of the disputed tax.”

It feels that that

“involves a unique and disturbing tipping of the scales in favour of the executive beyond the extent required to address the targeted mischief.”

Even if a person is prepared to pay up front the amount of tax that is in dispute, they are still liable for penalty and their rights of appeal are still affected. The legislation means that if a taxpayer is not prepared to abandon their entitlement, or negotiate or litigate with HMRC in respect of the effectiveness or otherwise of the adoptive arrangements, they are at risk of the penalty. All that the taxpayer can do is notify HMRC that they dispute its conclusion and wait for HMRC to either withdraw or confirm the notice.

While it may be possible in theory to pursue judicial review, which is fast becoming the first and last resort for many people under the changes to our justice system over the last few years and is, of course, an expensive procedure, there is no direct appeal to an independent court of tribunal in relation to either the follower notice or the accelerated payment notices scheme, which we will discuss later. The Law Society says

“this equates to the imposition of a substantial contingent cost for access to justice”

and that it

“should only be created if there is absolutely no credible alternative.”

Will the Minister establish that there was no credible alternative and the rules that we have ended up with in the Bill are the only formulation that could be adopted in order to relieve us of the severe problem of the backlog of the cases? Will he tell us what advice he took on the lack of a right of appeal and how the penalties will operate? What discussions did he have with colleagues? Was some of the thinking around bureaucracy and further delays to the system if appeal rights were put back into the legislation? Was any assessment made of what further delays might be caused if the follower notices legislation went forward but included some limited right of appeal? Were different types of appeal processes considered and rejected? It would be helpful to have more detail.

The last concern is around HMRC resourcing. It is clear that the new arrangements will place a significant burden on HMRC at a time when existing resources are being spread ever thinner. The Association of Revenue and Customs believes that HMRC is facing a demographic time bomb. More than half its work force is aged over 45, with 18% over 55. That proportion is higher at senior level where around 30% of grade 6 employees are over 55.

Will the Minister inform us at which grade the decisions about issuing follower notices will be taken, so that we can establish that they will taken by appropriately senior individuals with the requisite amount of experience, and get an idea of whether they are all people who are likely to retire soon?

The Minister and I have often discussed HMRC resourcing and retirement figures. I have often tabled parliamentary questions that the Minister has not been able to answer because there is no set retirement age in HMRC. I understand that, but in terms of how these measures are implemented, it would be helpful to know the numbers of staff who will make the decisions about the imposition of a follower notice and are also coming up to retirement. If it is likely that many of those staff will soon retire, it would be helpful to know the contingency planning in HMRC to ensure that they are replaced by people with appropriate experience, so that there is no gap in how the scheme is enacted.

Is the Minister confident that ensuring seniority of decision makers on follower notices will not mean that other aspects of HMRC work face a detrimental transfer of expertise? Are we in danger of seeing exceptional performance of the team that deals with follower notices but a decrease in performance in another team because people have been transferred? It would be helpful to have some detail about how that will work at HMRC in practice.

The operational detail on how HMRC will handle the new regime was highlighted by the Chartered Institute of Taxation in its response to the consultation. It said that the key point that needs to be addressed is that if there is a transfer of power from the legislature to the Executive, the efficient and fair function of the Executive becomes critical. Its concern, and that of the vast majority of respondents to the consultation, relates to the practical operation, including an understanding of seniority of staff. HMRC will effectively be operating a Chinese wall where the decision about issuing a follower notice will be taken by a senior official wholly removed from the team that was dealing with the case up to the point at which a decision had to be made about a follower notice.

Many barristers’ chambers and solicitors’ firms often have people in them acting for both sides; it is not unusual to see a Chinese wall in our legal system. However, if so much power is to be vested at Executive level, it is important that the arrangements have the confidence of the public who will be issued with the notices and of the stakeholders who will act for those parties. It would be good to get an understanding of how robust the procedures within HMRC will be.

Many stakeholders have asked for a clear official explanation of the internal governance processes. Will the Minister address that suggestion in his comments to the Committee and his work with stakeholder groups after the Bill passes? Will HMRC issue comprehensive guidance to outline which situations will be tackled by the new legislation? Has consideration been given to what might be included in such guidance? If guidance will be issued, will the Minister give us an idea of the time scale he has in mind for publishing it?

Finally, many people have asked for a formal review of the measures and how they will operate not only in HMRC but in the courts and the tribunal service. The Government response to the consultation used the usual formulation, and said that they keep taxation measures under regular review. However, I felt that it held out the possibility that HMRC recognises that the new rules are radical and remove substantial rights from taxpayers to deal with a real problem. I wonder whether that is a hint that the review will say something more than that they will keep everything under review, and that HMRC is looking at how the measures will be implemented. I want to get an idea from the Minister about whether that is wishful thinking on the part of those who want a review, or whether something is going on.

David Gauke (Conservative, South West Hertfordshire)

It is a great pleasure to serve under your chairmanship this morning, Mr Streeter. I thank the hon. Member for Birmingham, Ladywood for her questions. She is right that it is incumbent on her to ask testing questions about this significant policy. I welcome the tone in which she set out her questions. She said she is supportive in principle, but she wants to understand the detail. I shall endeavour to respond to her concerns.

Clauses 192 to 211 speed up the settlement of avoidance disputes by encouraging taxpayers whose avoidance scheme has been shown to fail in another party’s litigation to promptly settle their dispute with HMRC. Before I respond to the points that have been raised, I will set out the background. The Government have taken a firm line on tackling tax avoidance. It is not acceptable that a small but persistent minority try to find ways around our tax laws to avoid paying their fair share, especially at a time when the public finances are under considerable pressure. It is not right that would-be avoiders can frustrate efforts to resolve their cases, often spinning things out only to settle their case on the steps of the tribunal. These clauses introduce a follower notice that is designed to highlight the choice for taxpayers.

Many avoidance schemes are marketed widely, often with minor variations. When HMRC wins a case, the tribunal or court’s decision and reasoning will in all likelihood decide the related cases as well. However, some taxpayers and their advisers do not see it that way, and argue that tiny differences in the arrangements mean that the judgment does not apply to them. They will now have to make a choice. If they decide to proceed with their case in the face of the evidence and the court’s decision, they run the risk of a penalty when the case is closed. If they can show that the grounds of their case were different, there will be no penalty. The penalty will be a percentage of the tax advantage wrongly claimed by the scheme user, but it will be substantially reduced if those involved decide to co-operate with HMRC to settle their case.

I will now set out in more detail the changes made by the clauses and schedules. The first substantive clause—clause 197—sets out the circumstances in which a follower notice may be issued. Four criteria must apply, two of which I would like to emphasise. First, there has to be an open inquiry into a return or claim, or an appeal in progress. That is important, as the taxpayer involved will know that HMRC is challenging their tax return, so the process should not come to as a surprise to them. Secondly, the return, claim or appeal has to be made on the basis that a tax advantage is gained from a set of tax arrangements—in other words, that the taxpayer has used a scheme with the intention of avoiding tax. The policy is therefore about not routine inquiries, but taxpayers who have knowingly used schemes that they hope will reduce their tax bills, often by large amounts.

Clause 198 sets out when a legal ruling can trigger follower notices. If a taxpayer’s scheme failed merely because he did not apply it carefully, that cannot trigger follower notices for other users. The ruling needs to be relevant, finding that the scheme was defective regardless of how it was applied and explaining why. If the appeal process has been exhausted, that ruling may be used as a basis for follower notices to be issued.

Clause 199 sets out that a follower notice has to identify the judicial ruling on which it is based and to explain why HMRC believes that it is relevant. The notice must also set out the person’s right to object to the notice and the consequences of ignoring it.

Clause 200 deals with a taxpayer’s right to ask HMRC to reconsider a notice. The purpose of follower notices is to discourage certain taxpayers from spinning out their disputes unreasonably with HMRC. One professional body recently said that HMRC

“should be able to root out hopeless cases that clog up the system at the expense of the courts”.

It also called for a formal appeal right, but allowing taxpayers to appeal against follower notices would simply exchange one dispute for another, which would not speed up the process at all.

It is right, however, to provide a safeguard for taxpayers so that they can raise objections if they believe that a notice has been wrongly issued, so clause 200 allows a taxpayer to make representations about a notice within 90 days and requires HMRC to consider them. Having done so, if HMRC confirms the follower notice, the taxpayer is given a further 30 days to take corrective action. I reassure the Committee that HMRC will apply firm governance to such notices, which will be approved by senior officials in the organisation.

Clause 201 applies a penalty if a taxpayer is served with a follower notice, but does not take corrective action within the specified period. The penalty is charged on the amount of tax advantage denied: the extra tax that becomes due, or the reduction in tax repayable, when the scheme is counteracted. That is defined in schedule 26, and there are special rules to deal with denied loss relief and with tax arrangements that purport to delay a payment or bring forward a repayment of tax.

Clause 201 also sets out the steps that a taxpayer should take in response to a follower notice by making suitable amendments and contacting HMRC.

Ian Swales (Liberal Democrat, Redcar)

Some members of the Committee have received representations regarding retrospection. The Minister said earlier that none of the notices should come as a surprise to a taxpayer. Will he say more about retrospection and whether anyone who is about to be subject to a notice will not be expecting it?

David Gauke (Conservative, South West Hertfordshire)

As I said earlier, none of the notices should come as a surprise to taxpayers. We will no doubt turn to the issue of retrospection in greater detail when we discuss accelerated payments. We are presently debating situations in which there is a dispute between HMRC and a taxpayer when there has been a court or tribunal hearing against another taxpayer related to a similar scheme, and about HMRC being able to take action in respect of that so that the system is not clogged up.

Nicholas Dakin (Labour, Scunthorpe)

The Minister is explaining things well and comprehensively. Representations have also been made about appeals. He has spelled out clearly the actions that individuals can take on appeals, but will he pick up on whether independent appeal is appropriate?

David Gauke (Conservative, South West Hertfordshire)

I am grateful for that intervention. As the hon. Gentleman was kind enough to say, I am working through this in good order so, if I may, I will complete my run through of the various clauses before turning to various points, including rights to appeals, which he was right to raise because they are important.

Ian Swales (Liberal Democrat, Redcar)

Perhaps I may clarify my question. Is anyone likely to get a follower notice unexpectedly? Will they already know that they are part of a scheme that may be subject to a follower notice?

David Gauke (Conservative, South West Hertfordshire)

As I said a moment ago, we are talking about cases in which there is an open inquiry into a return or claim, or an appeal in progress. The taxpayer will be aware of that open inquiry and that HMRC is challenging their tax return, so a follower notice really should not come as a surprise. I hope that my hon. Friend finds that reassuring.

Charlie Elphicke (Conservative, Dover)

Just to be clear, is it not the case that generally those people who receive follower notices have engaged in tax avoidance schemes? They knew what they were doing—they were playing with fire—they have been caught out and they are having the book thrown at them, so they are not really in a position to complain.

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend puts it in characteristically punchy terms. I would say to him that taxpayers will be aware of a dispute. The purpose of these measures is to bring those disputes to a head and not permit those who have very similar arrangements to those found to have failed by a court or tribunal—we must remember that such schemes fail in the vast majority of cases when a court or tribunal looks at them—to drag proceedings out over a long period.

Let me turn to clause 202, which provides that the penalty under clause 201 is set at 50% of the denied tax advantage. That is in line with the scale of penalties for inaccurate returns, which range from 30% to 100%, depending on behaviour. To encourage taxpayers to co-operate with HMRC to resolve their case, clause 203 allows the penalty due to be reduced to as little as 10% to reflect any co-operation.

Clauses 204 to 206 are administrative provisions that detail the information that must be included in a penalty notice and the deadline for charging a penalty. They contain protections in relation to the amount of the penalty, including repayment by HMRC if the value of the tax advantage underpinning the penalty is changed. Clause 207 sets out the taxpayer’s right to appeal against a follower penalty. If a tribunal thinks that the basis of a follower notice is wrong, any penalty will be cancelled or reduced.

Richard Fuller (Conservative, Bedford)

I want to delve into the Minister’s mind on this issue. Are the Government proposing this complex range of measures because they are concerned about the backlog of cases and HMRC’s ability to deal with that, or because the Treasury believes that this is, in principle, a better way of managing such tax arrangements?

David Gauke (Conservative, South West Hertfordshire)

We think it is not fair to the general taxpayer that those who have entered into tax avoidance arrangements that are very similar to others that have been shown to fail can drag on proceedings over a long period while a matter is being disputed when, ultimately, it is very likely indeed that they will lose.

On the point about backlogs—I may return to this later—I would not want the Committee to be under the impression that this is simply a matter of HMRC not having the resources to deal with cases, meaning that a backlog is created. Such legal proceedings can be complex matters and the wheels of justice sometimes turn slowly. If a taxpayer is determined not to settle and looks for every opportunity to delay, the process can take a very long time. That enables the taxpayer to benefit, as they may hold the money for a considerable period. We will come to another aspect of that when we turn to accelerated payments, but it is right and proper that we deal with the specific problem of when people who have entered into arrangements similar to those that have failed even so continue to dispute the sum. At the end of the process, when we get to the tribunal, the taxpayer or the adviser often concedes at the very last minute. That involves a huge cost, including opportunity costs for HMRC, and gives that taxpayer an unfair advantage. I hope that I have been helpful in explaining the Government’s thinking.

Richard Fuller (Conservative, Bedford)

That is very helpful, so I hope that the Minister will forgive my coming back another time. For those of us of a conservative disposition, any extension of the Executive’s authority in areas of the judiciary warrants a little more inspection. As I understand it, after a ruling has been made, the executive branch of HMRC will be able to apply it to other cases. There may be other aspects of jurisprudence in this country where that takes place, but what are they? I know that in environmental law there is deeming—because something has been followed, other cases should therefore follow—but it would be helpful if the Treasury commented on the fact that this is an extension of an executive branch into what the judiciary would otherwise determine.

David Gauke (Conservative, South West Hertfordshire)

It is difficult to come up with precise parallels because of the nature of the tax system. My hon. Friend mentions environmental law, but it is difficult to find an area other than tax in which there is such complex behaviour and where structures of great complexity can be created to give an individual a particular advantage. Rather than attempting to persuade him on the basis of parallels elsewhere in the legal system, I come back to the first principle: is it right that somebody who has arrangements that are designed to reduce their tax bill should be able to continue their dispute with HMRC even when the precedent has been set that they will lose? In such circumstances, I do not think it is right to permit that situation to continue, and I hope the Committee agrees. It is right that HMRC’s powers are extended so that it is able to address such circumstances, because that is fair for the general taxpayer.

Clause 207 sets out the taxpayer’s right to appeal against a follower penalty. If a tribunal thinks that the basis of a follower notice is wrong, any penalty will be cancelled or reduced. Clause 208 introduces schedule 27, which provides rules to deal with the special nature of partnership returns. It specifies the penalty on partnerships and details how any penalty is divided between the partners. Clause 209 suspends the operation of follower notices if the taxpayer in the litigation on which the notice relies is given late leave to appeal, meaning that the case cannot, for the moment, be regarded as final.

Clause 210 and schedule 29 deal with transitional and consequential provisions. There have been comments about the measure being retrospective, but let me be clear that this is not retrospective legislation. It does not create any new tax liability; it simply creates an incentive to settle for those who are disputing their liability with HMRC, despite all the evidence showing that their case is unlikely to succeed.

Ian Mearns (Labour, Gateshead)

In my role as a member of the Committee, I have been contacted an awful lot about this matter, but I do not think that I have been contacted by a single one of my constituents. I suppose that all hon. Members would want HMRC to ensure that, in pursuing such claims, we are not in any way creating more problems than we are solving. If an individual’s assets are tied up with a business that employs people, we would not want the pursuit of the assets to make life worse for those employees. I have received correspondence citing the potential for bankruptcy. Can we ensure that we do not create more problems than we solve in pursuit of the aim?

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman raises an important point. Committee members have been lobbied hard about a number of the measures that we will debate this morning, especially regarding accelerated payments and, to some extent, follower notices.

As someone who believes in lower taxes and—when the public finances permit—allowing people to keep more of their own money, thus putting in place an environment that is likely to lead to greater wealth creation, more business investment and so on, I hear the arguments that are made, but there is also an obligation on people to pay the tax due under the law. People may well say, “I’d be able to invest more in my business if I didn’t have to pay as much tax,” and that might be true, but they still have to pay the tax. That is a matter for the House and the Government, and people should pay the tax due under the law. Some people say, “I avoided tax some years ago and pay very little tax now, but now you are asking me to pay a tax bill and that will have an impact.” That may be the case, but the fact is that people still have to pay the tax, and all Committee members would probably agree about that.

Ian Mearns (Labour, Gateshead)

To clarify the point, let me describe a scenario. If someone who avoided tax used the proceeds of that avoidance to invest in a business, meaning that the asset was entirely tied up in that investment—in capital equipment or the enlargement of a business premises—and the pursuit of that tax bill were harsh, the attempt to retrieve the debt in a short time could have a detrimental impact on the running of the business, and perhaps on the livelihoods of people who had no part in that avoidance.

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman makes a perfectly reasonable and practical point. I should not be surprised if we returned to this issue on the debate on accelerated payments, but let me make two points in response, about practical enforcement of the new powers.

First, in certain circumstances HMRC enters into and operates a time-to-pay arrangement with taxpayers, to allow them additional time in which to pay off a debt. That is a sensible, practical response to particular circumstances. There is no reason why the time-to-pay arrangements could not also apply in the circumstances that we are talking about.

People sometimes ask for a guarantee that HMRC will not bankrupt any taxpayer as a consequence of such powers. I simply cannot give that assurance; to do so would be dangerous and would undermine the effectiveness of the policy. I have no doubt that people would then make arrangements so that the only measure available to HMRC in pursuit of the debt would be to issue a bankruptcy order. If I said, “HMRC will not issue a bankruptcy order,” we can quickly guess that that will have a behavioural impact. We may return to this issue in the debate about accelerated payments, but I am happy to put that point on the record now. I hope that hon. Members can understand precisely why HMRC should not have its hands tied in these circumstances.

Ian Swales (Liberal Democrat, Redcar)

I thank the Minister for giving way again—this might be the wrong time to raise this point, but I think it follows on from what the hon. Member for Gateshead said. We are all getting representations, and the largest number concern one of the sins of our fathers: the Finance Act 2008. It effectively went retrospectively into arrangements that many contractors and others were using in the period up to 2008. The nub of many of the criticisms of what we are doing this morning concerns that retrospection. The 2008 Act effectively caught out a load of people from before then. Does the Minister agree with that analysis and does he believe that special arrangements should be made for those who were doing something in good faith that, at the time, did not appear to be against the law, even by HMRC’s own analysis?

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman leads me into another area, but it is perfectly reasonable for him to raise that point. There is no doubt that those who campaigned against section 58 of the 2008 Act have also taken the opportunity to highlight this issue. It has been a long-standing campaign in the context of the further powers contained in the Bill. The point I would make with regard to the 2008 Act is on the record. I raised significant concerns about the action taken by the previous Government at that time. We must also remember that, since then, those who used what was undoubtedly an aggressive tax avoidance scheme and clearly a contrived and artificial arrangement took their case for judicial review. They argued that HMRC and the previous Government had acted unreasonably. The courts took the view that that was not the case and that exceptional circumstances applied.

In the light of that decision, the Government have not abolished section 58. We believe it is reasonable for it to remain, in the light of where we currently are. Notwithstanding the sometimes impassioned lobbying we have received, it is right for us to put in place legislation that fundamentally ends the use of some of these aggressive and contrived tax avoidance schemes. The measures before us, along with those we will debate later this morning, clearly represent a comprehensive set of policies that will result in a lot fewer contrived and artificial avoidance schemes of the kind that so irritate, annoy and anger the vast majority of our constituents. We are already seeing a significant decline in the use of tax avoidance schemes compared with where we were six years ago, but these measures will continue to assist us.

Ian Mearns (Labour, Gateshead)

I am grateful to the Minister for giving way; he is showing his usual generosity. On the issue of bankruptcy, there will be cases where there is a fine balance. I am quite happy for HMRC to go down that route when there is no alternative; however, there can be a risk of forgoing other tax revenue. For instance, declaring an individual bankrupt means closing a business and losing income tax revenue from perhaps two or three employees, as well as the VAT generated by the business. There are some fine balances to be considered. One would hope that such circumstances would be closely looked at, to ensure that we are not robbing Peter to pay Paul.

David Gauke (Conservative, South West Hertfordshire)

I understand precisely where the hon. Gentleman is coming from. The points he raises are not unique to these powers—[ Interruption. ] He nods in assent. HMRC’s record over recent years in the judgment it has shown in granting taxpayers additional time to pay has, by and large, been extremely good. Large numbers of businesses have benefited from those arrangements. I suspect that many members of the Committee can think of examples in their constituencies where businesses have been granted time to pay.

However, there comes a point when if a business is viable only if it consistently pays tax late, it could be described as “not viable”. A fine judgment has to be made. The hon. Gentleman’s points are reasonable. There is no reason why time-to-pay arrangements in respect of this matter would not be available. I stress that I do not desire and I do not believe it would be sensible—in respect of these or other powers we will debate this morning—to tie HMRC’s hands, so that it does not have access to the full insolvency powers that it would in a normal case.

David Rutley (Conservative, Macclesfield)

I welcome the Minister’s important points. We have corresponded about a case in my constituency. Does he recognise that some companies have perhaps not been given the best advice on tax arrangements and are now in a difficult position? The hon. Member for Gateshead made the point that bankruptcy is not the optimum outcome in many of these situations. Will the Minister assure the Committee that he and HMRC will make every effort, if not to be sympathetic, then at least to ensure that appropriate arrangements are put in place for such payments?

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend makes an important point. I know he has been assiduous on behalf of his constituents who may be affected by some of these measures. He makes an interesting and valid point that in some circumstances the taxpayers have perhaps been guilt of naivety. However, a lot of the culpability for their difficulties may well lie with their advisers and promoters of these schemes, who consistently say, for example, “This has all been signed off by HMRC; there’s nothing to worry about,” “It’s all absolutely fine; there’ll be no problems with the scheme,” or, “You don’t need to worry about paying tax; HMRC won’t cause you any difficulties whatsoever,” when they know, or should know, that this will be a disputed and controversial matter that is likely to drag out for many years. I have had representations from people who deeply regret becoming involved in such schemes. In some cases they are angry with the Government for taking steps to address the matter, but they are also very angry with the promoters who led them into this area without giving them full information or explaining exactly what the risks were. That is why we are determined to deal with those promoters.

Chris Heaton-Harris (Conservative, Daventry)

Following on from that point, two of my constituents came to see me who were wary about a product they had been told about that was too good to be true, although the scheme was supposedly registered with HMRC. They therefore took out an insurance product in case it turned out to be too good to be true, which is common across a swathe of this industry. On thing they were concerned about is HMRC’s efficiency at notifying people if, at the end of the day, the scheme is not right and a certain amount of tax is liable, which would trigger their insurance policy. Does the Minister have any words for the Committee to reassure my constituents that, should that happen, HMRC will be effective in issuing notice?

David Gauke (Conservative, South West Hertfordshire)

I am grateful to my hon. Friend, who used an important phrase when he said that the schemes appear to be “too good to be true”. Often, that is exactly right. It might be more appropriate to discuss his important point about the administration of these matters in our debate on accelerated payments, but it is right that HMRC administers these powers effectively. I will say a little more about that in a moment.

As we have heard, this measure was subject to two consultations. The first was the policy consultation entitled “Raising the stakes on tax avoidance”, which ran for eight weeks in August to October last year and generated 31 responses. It was shorter than the standard length, to ensure time to digest the responses before the autumn statement. The second was the consultation on the draft legislation, which ran for four weeks in January and February this year, to which there were 22 responses. The response periods were shorter than normal because we were keen to ensure that we could progress this matter on a Budget timetable and make it part of the Finance Bill. HMRC made every effort to ensure that anyone who wanted to make a comment was able to, and it continued to accept responses and meet with concerned parties after the consultation formally closed.

The majority of those who responded agreed that delaying the settlement of cases involving failed schemes is a problem that needs to be solved. Some commentators felt the first draft of the Bill was not sufficiently focused on schemes shown to fail and would allow HMRC to issue follower notices after winning any litigation about avoidance. The Bill was amended to make it clear that that will not be possible and that notices can be issued only when a scheme has been shown by the courts not to work. However, avoidance disputes that get to the tribunals or courts are largely decided in HMRC’s favour, and taxpayers in that position must be encouraged to settle their cases and not drag them out in hope of a more lenient offer.

The hon. Member for Birmingham, Ladywood made a number of important points, which I will address. She probed the idea of using first-tier tribunals for creating a precedent. HMRC wins an overwhelming majority of avoidance cases at tribunal, and most taxpayers who lose accept the tribunal’s decision and do not take their case further. Therefore, in most cases the first-tier tribunal settles the matter. However, if a case is appealed further, follower notices cannot be issued until the litigation is finally settled in HMRC’s favour. Excluding first-tier cases would remove an important source of judicial decisions and might lead to taxpayers deliberately avoiding an appeal against and adverse judgment, so it could not be used to generate follower notices.

The hon. Lady asked why there is no right of appeal against a notice. The purpose of the measure is to release the logjam and speed up the resolution of slow cases. Creating a right of appeal against a notice would simply clog up the process and not deliver a saving. Taxpayers will be able to require HMRC to reconsider any notice that they receive. There will be a full right of appeal against any penalty issued and against any amendment made to the taxpayer’s return if the taxpayer does not amend it himself. HMRC will be ensuring strict governance over the issue of notices, which will have to be authorised by senior leaders.

That takes me to HMRC’s internal process. Taxpayers will still be able to continue their appeal against their tax liability if they disagree with a follower notice. Taxpayers who disagree with a notice can request HMRC to carry out a formal review, which will be carried out by an independent person within HMRC who did not take part in the decision to issue a notice. They will review the facts of the case and decide whether it was reasonable to issue the notice in those circumstances.

If the taxpayer does not ask for a review, or if HMRC upholds the notice, they can choose not to make the amendments to their return. They can then appeal in the normal way against any assessment or amendment to their return by HMRC to recover the tax. Taxpayers will be able to appeal against any penalty that they are charged.

Shabana Mahmood (Labour, Birmingham, Ladywood)

Will those independent individuals reviewing the decision about the follower notice be from within the same team of HMRC officials that look at these cases, or will they be from a different team?

David Gauke (Conservative, South West Hertfordshire)

HMRC recognises that powers must be applied consistently and fairly for all taxpayers, and clear governance will be established. A clear separation will be established so that reviews of follower notices will be carried out independently of the original issuing team. Clear internal guidance and training will be provided to HMRC senior officials to ensure complete understanding of how to apply the rules. I hope that provides the hon. Lady with a degree of reassurance.

I will return to first tier tribunal decisions and whether they are always clear, because a point was raised about the CIOT’s suggestion that it would be better if tribunal judges declared relevant points of law. HMRC will have to consider a wide range of factors, including the nature and clarity of the tribunal’s decision, before deciding whether the case should be treated as a relevant judicial ruling. HMRC will not do so if the follower notices issued were not soundly grounded in a good case. The purpose of the measure is to push cases through the system quickly and speed up their resolutions. Extra requirements at tribunal could blunt the measure and slow things down and, as I said, HMRC will issue notices only if a decision is clear.

A couple of hon. Members raised the scale of the issue. The published tax information and impact note sets out that 43,000 payment notices will be issued. It also provides detail about how much money relates to followers and how much to the general anti-abuse rule and disclosure of tax avoidance schemes measures. The number of taxpayers involved is 65,000; the vast majority of schemes are used by more than one person or business.

HMRC’s resources were also raised as an issue. In November 2013, HMRC created a new counter-avoidance directorate to bring together all marketed avoidance work in one place. The directorate is mainly made up of departmental resources that were already working in the marketed avoidance area rather than additional resource, but about 100 of its 850 people will be funded from new money announced by the Chancellor at the Budget to deliver accelerated payments. We do not believe there will be a detrimental impact on HMRC’s other operations. HMRC expects to issue guidance for comment shortly, and it will be finalised in time for Royal Assent.

I have already touched on whether the measure is retrospective. It is not; it does not create new liability to tax. HMRC will be able to issue follower notices to cases on hand only once the courts have shown the avoidance scheme to fail. In other words, the tax is already due and it is not right that a minority can delay payment even longer.

The clauses and schedules we are debating constitute a major new development in the Government’s continued fight against tax avoidance. If someone wants to string out a dispute with HMRC, even though a court has shown their scheme to fail, they are still at liberty to do so. However, if they cannot satisfy a tribunal or court that their case is really different, they will face a penalty for not settling promptly when given the chance. I believe that that approach is right and fair—fair to the millions of taxpayers who pay their tax on time and expect others to do so. The Committee has scrutinised the measure closely this morning, but I hope it will support these clauses and schedules and that they stand part of the Bill.

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

David Gauke (Conservative, South West Hertfordshire)

I beg to move amendment 32, in clause 212, page 141, line 3, leave out “tax”.

Gary Streeter (Conservative, South West Devon)

With this it will be convenient to discuss the following:

Government amendments 33 and 34.

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

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

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

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

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

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

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

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

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

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

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

Clause stand part.

Clauses 213 to 221 stand part.

Government amendments 36 to 38.

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

Government amendment 35.

Clause 222 to 226 stand part.

David Gauke (Conservative, South West Hertfordshire)

Before I address the amendments in detail, I think it would help the Committee if I set out what the legislation is about and why we are introducing it. Some of that is, of course, common to the debate we just had on follower notices. I suspect that a number of points that we have debated apply even more to this debate, and I may well make similar points during it.

Clauses 212 to 226 introduce the accelerated payment rules. They set out circumstances in which an accelerated payment notice may be issued, including where a follower notice, which we have just debated, has been issued, together with the consequences of a notice being issued.

As I have already said, this Government have taken a robust line on dealing with tax avoidance. It is not right that would-be avoiders can hold on to the disputed tax while their—often highly contrived—attempts to avoid tax are concluded.

The majority of taxpayers have all their tax taken at source under PAYE, and they do not see any reason why suspected avoiders should benefit from holding on to their money. There is no principle in our tax system that disputed sums should necessarily be held by the taxpayer rather than the Exchequer, and there are a number of examples to demonstrate that this is not always the case. Perhaps unsurprisingly, some of those affected by the measure—the taxpayers involved and those who advise them—have been vociferous in their opposition. I know that Committee members will have received many representations, not necessarily from their constituents but from those who might be affected by the measure. I will attempt to address their concerns, although I must say that some of the points that have been made are as contrived and artificial as the tax avoidance schemes that have been used. Let me be clear where the Government stand: the Government have closed many tax loopholes but have also made the tax system more competitive. They expect people to pay the tax due rather than search for increasingly obscure ways of avoiding their obligations.

I have certainly had a lively postbag and there has been some active commentary on social media. Indeed, I am struck by the number of people willing to admit openly that they are or have been involved in tax avoidance, and who then object—albeit anonymously on some occasions—to something being done about it. I have also had letters from businesses claiming that making these payments will harm their ability to maintain and invest in their business, a point made by the hon. Member for Gateshead. Let me repeat what I said earlier: as a Government, we have put in place a very attractive environment for business investment. We also expect people to pay their taxes. Of course, lower tax bills can increase business investment but that is a matter for this House, taking into account the state of the public finances. That does not in any way excuse aggressive tax avoidance.

Chris Williamson (Labour, Derby North)

Will the Minister reassure the individuals who have been lobbying me and, I am sure, other members of the Committee, and who have said—not all of them, but a number—that the retrospective nature of the APNs will result in them going bankrupt? Is that correct?

David Gauke (Conservative, South West Hertfordshire)

I am not sure whether the hon. Gentleman was here earlier for my exchange with the hon. Member for Gateshead, but it is a perfectly relevant point. HMRC operates a time to pay arrangement, allowing people who will ultimately be in a position to pay any tax debt additional time to pay it. There is no reason why time to pay arrangements should not apply to circumstances covered by the measures in front of us. However, it would be a grave mistake to tie HMRC’s hands and say that it will in no circumstance bankrupt someone as a consequence of the powers we are debating. What would happen quite quickly, I suspect, is that people would make arrangements so that the only enforcement action available to HMRC in respect of these measures would be bankruptcy. I will certainly not tie HMRC’s hands. It needs to have access to all the usual insolvency powers for these powers to be effective. However, I put on record the fact that HMRC has time to pay arrangements for those who are constructively engaged with it and who are looking to pay off their tax debts in a constructive way but are constrained by cash flow matters. That is a perfectly reasonable approach.

Ian Swales (Liberal Democrat, Redcar)

The Minister talked about the fairness of people who pay through PAYE as opposed to having these arrangements and the principle of there being no reason why HMRC should not have disputed money while it is being disputed. I am sure that you will not permit a long answer, Mr Streeter, but can the Minister say whether he intends to extend that principle into the world of corporate tax, because the same point could be made in that regard?

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend raises an interesting point. Although I am not privy to any confidential information, as I am sure he would expect, I understand that, as a matter of practice, often in a dispute HMRC does hold that money and that when such a matter is resolved, the large corporate does not necessarily have to make a payment. That does not happen in every case, by any means—I do not want to give the impression that it does—but sometimes that is so. My hon. Friend raises an interesting policy point.

There is clearly vociferous opposition to the measure. However, it is worth noting responses from professional bodies and larger firms, which I am encouraged by, which agree that this problem must be tackled. I am sure that the vast majority of the tax-paying public also agree, especially when they see reports of court decisions, setting out the elaborate contrivances that some people employ to avoid paying their fair share or to delay the inevitable for as long as possible.

Understandably, the public are shocked to see those who can afford to pay trying to dodge their tax, passing the burden on to the majority, and they expect us to put a stop to it. We have consulted on the measure and I acknowledge that some respondents have raised important concerns. As I said in an earlier debate, I want to make it clear that this is about tackling tax avoidance. We do not intend the measures to be any wider. We have carefully considered the comments received and I have asked HMRC to ensure that there is active consultation on the published guidance, to ensure that the important issues raised are dealt with in that process. Dialogue is important on such a measure and I want it to continue as the measures start to take effect. As I said before, we share the agenda with the business and professional bodies, which want to eradicate such behaviour, and I want that to continue.

The essence of our message is that the Exchequer has waited long enough for this money. The overwhelming evidence of the last few years is that disputes reaching the tribunals and courts decide against the taxpayer and many more taxpayers see the writing on the wall and concede the position before going to the expense of formal hearings. That sends a clear signal to those who may have thought they would never have to pay this money: they are likely to be wrong and should start making provision to pay their tax right now if they have not done so already. I make no apology for these tough measures; they are justified to tackle the behaviour of a persistent minority and I believe that the vast majority of taxpayers will support us for taking these steps.

Duncan Hames (Liberal Democrat, Chippenham)

No one likes to wait for money that is due to them. How long will the taxpayer expect to wait for their money to be returned to them, in the event that it has been collected through advance payment, but HMRC is unsuccessful in a tax tribunal?

David Gauke (Conservative, South West Hertfordshire)

My hon. Friend asks a good question. That will depend upon the progress of the tribunal case. The taxpayer will, of course, be in the driving seat and will be able to progress his or her case to the tribunal. It is right that HMRC properly engages and it is certainly right that it does not engage in any delaying processes. HMRC needs to see full documentation before a case is ready to go to court. However, where the taxpayer has paid as a consequence of the measures, but continues to dispute, as they are more than entitled to do, it is clearly in the interests of the taxpayer to progress the case to tribunal and right that HMRC also takes the steps necessary to get to a tribunal. I would hope and expect that, once a decision has been made at the tribunal that is adverse to HMRC, there would be a very short period from that decision being made to HMRC paying over the disputed sum to the taxpayer. I think that that is only right and proper and I hope that that reassures my hon. Friend.

Let me set out in more detail the changes made by these clauses and the schedule. The clauses require taxpayers involved in certain types of avoidance dispute to pay over the tax that is being disputed while the dispute continues. They will have held the money for long enough by that point. Clause 212 sets out the circumstances in which an accelerated payment notice can be issued. There has to be an open inquiry or appeal, and it has to concern a dispute involving one or more of: a follower notice, a scheme disclosed under the disclosure of tax avoidance schemes—DOTAS—rules or a scheme being challenged under the general anti-abuse rule, the GAAR.

We have already talked at length about the rationale behind the follower notices. Let me take the GAAR next. We introduced the GAAR last year and have recently expanded it to cover national insurance contributions. From what I hear, it is having the effect that we want, dampening the enthusiasm for abusive tax avoidance schemes. It seems entirely appropriate that where we are looking at the most abusive schemes, we should require the taxpayer to pay up front. Very few people disagreed with us on that point in the consultation, and I was happy to take on board the suggestion that taking account of the advisory panel’s opinion should be written into the legislation. I am grateful to those who made that very helpful suggestion.

The final criterion is DOTAS, and in this case there was a wider range of views. Let me set out our thinking. First, DOTAS is clear and objective: the scheme has been disclosed and allocated a reference number and the taxpayer has been told about the disclosure and number. That is clear and easy to apply. Secondly, DOTAS is about tax avoidance schemes. I know that there are concerns that some people disclose arrangements just in case they might fall into DOTAS. I am pleased that they do so, and they should carry on doing so. Where there is no extra tax to pay, HMRC will be able to agree that fairly quickly and there will be no accelerated payment. It will, of course, be in the interests of advisers and taxpayers to provide complete information to HMRC as soon as possible.

I have been very disappointed by the assertions made in a number of letters in my postbag. They claim that HMRC will have almost unfettered power to demand what they describe as arbitrary sums of tax. That objection is misconceived. Taxpayers and their advisers need to work with HMRC to get to the right figure of disputed tax, but where that co-operation is not forthcoming, HMRC will have to take the decision. I know that robust governance is being put in place by HMRC requiring scrutiny at senior levels. HMRC takes its responsibility very seriously in this regard. I am also aware that this measure may be seen as penalising those who disclose against those who do not. Let me be clear: we will take robust action against those who choose not to disclose when they should. Our new measures against high-risk promoters, which we will come to shortly, will be part of tackling that behaviour, and in the summer we will consult on further improvements to DOTAS.

Nicholas Dakin (Labour, Scunthorpe)

One of the representations that came across my desk argued that the changes to DOTAS will have the unintended effect of pushing people away from openly declared and transparent tax planning mechanisms towards the more secretive area that the Minister is about to speak about. I would be interested to hear his direct response to that point.

David Gauke (Conservative, South West Hertfordshire)

I take on board what the hon. Gentleman says. We have toughened up the DOTAS regime, and we are also looking to consult over the summer on a strengthened DOTAS and on what may be needed further to strengthen the regime’s effectiveness and compliance with it. The best response to the concern that the hon. Gentleman raises is to ensure that the consequences of failing to comply with DOTAS become ever more significant. I hear his argument, but I am not persuaded by it.

Christopher Pincher (Conservative, Tamworth)

Does the Minister recognise that since fines for non-disclosure were significantly increased from £5,000 to £1 million, a lot of people have over-disclosed on the advice of their tax advisers and erred on the side of caution? Is there not a danger that these arrangements will penalise people who try to be honest and drive them and others to be less than honest in future, as the arrangements are seen to be unfair?

David Gauke (Conservative, South West Hertfordshire)

I shall make two points in response to my hon. Friend. The first is one that I made a moment ago: disclosure under DOTAS does not necessarily mean that someone will be affected by the accelerated payments regime. HMRC will look at the particular scheme and assess whether it is effective. There may well be circumstances in which HMRC will look at a particular scheme and say, “A DOTAS disclosure has been made, but as far as we can see this scheme is entirely consistent with the law. It is effective and there is no tax under dispute, so no accelerated payment will need to be made.” If there is no tax under dispute, there is no accelerated payment.

The other point that is worth bearing in mind is that the trend for DOTAS disclosures is a significant fall, and all the evidence suggests that that trend has been driven not by concerns about accelerated payments, because it was in place before that policy was announced, but due to the fact that not as much aggressive tax avoidance is being undertaken as a few years ago. The measures that the Government have taken are successfully changing behaviour, and there are instances of the promoters of tax avoidance schemes declaring that they are ceasing their business because the environment is no longer favourable for them. Taxpayers are changing their attitudes as well, as there is much less appetite for aggressive tax avoidance, and I think that the whole Committee would welcome all that. I hear my hon. Friend’s concerns, but all the evidence suggests that we should not be over-concerned about precautionary disclosures under DOTAS. In truth, they are unlikely to result in any tax dispute.

Charlie Elphicke (Conservative, Dover)

Does the apparent reduction in tax avoidance indicate not only that the Government have changed the law to take the battle to the tax avoiders, but that they have already sent important behavioural and social messages about what is acceptable and unacceptable in the post-2008 world?

David Gauke (Conservative, South West Hertfordshire)

That is an important point. It has been clear since the Government’s first year in office that there was great focus on this area and a great determination to deal with the situation. There has also been a change to the general public mood, and my hon. Friend is right to highlight 2008 as a time when the public finances faced great challenges. Aggressive, contrived tax avoidance schemes are seen as much less socially acceptable than was once the case.

I return to how the measure will work and the criticisms that have been made of it. Many of those who wrote in claimed that it was retrospective, because it will apply in cases when there has already been disclosure under DOTAS. We are clear that the legislation is not retrospective. It does not change anybody’s tax liability, but it changes who holds the tax during an avoidance dispute. As I said earlier, the taxpaying public is entitled to ask why tax avoiders should hold on to their money for far longer than the majority who pay their tax through PAYE.

Chris Williamson (Labour, Derby North)

I appreciate that clarification, but will the Minister give us a little more information? If the dispute is found in favour of the person who was previously perceived to be avoiding tax, will they receive any compensatory additional payment from HMRC?

David Gauke (Conservative, South West Hertfordshire)

They will receive the original tax back, with interest, which is fair. It is absolutely right that interest is paid. The hon. Gentleman’s body language suggests that he assents to that approach. I have learned during our proceedings that it is always worth watching his body language.

Clause 213 explains how a notice is given during an open inquiry, while clause 214 does the same when there is an open appeal. Clause 215 sets out how the taxpayer can make representations. During our consideration of follower notices, we debated why there is no formal appeal to a tribunal. Such a process would involve simply contesting the substantive point at issue, which is not what the measures are about. The same is true for accelerated payments. As I have said, the key is for taxpayers and advisers to provide full and early information so that we can get to the right amount.

Clause 216 sets out what happens when a notice is given during an open inquiry. The accelerated payment is a new form of payment. It will be treated as a payment on account of the final liability, which means that interest will stop running on the amount paid from the date that the taxpayer pays it over. This is emphatically not any form of determination of the final tax liability, which will still be subject to all existing appeal rights. If the taxpayer is ultimately successful, they will get a repayment, with interest, just like the vast majority who have to reclaim any tax they think they are owed. Clause 217 does the same for an open appeal. In an appeal, the change we are making means that it will no longer be possible to postpone the tax in dispute in these types of case.

Clause 218 is a precautionary power in circumstances when HMRC has concerns that the tax in dispute might be lost following a tribunal or court decision in the taxpayer’s favour, but if it is appealing to a higher court. HMRC can therefore apply to the court to retain the tax in dispute.

Clause 219 introduces a late payment penalty in connection with an accelerated payment. The structure and rates are based on existing late payment penalties under tax legislation. If the tax is under appeal and no longer postponed, the position follows existing rules for the tax concerned. Clause 220 sets out what happens if circumstances change and HMRC reduces or withdraws a payment notice. Any amount overpaid will be repaid with interest, along with any penalty that was paid in respect of the repaid amount. There are special adaptations of the rules under clauses 223 and 224 to cover stamp duty land tax and the annual tax on enveloped dwellings, and in schedule 28 to deal with partnerships.

I know that the hon. Member for Erith and Thamesmead will speak to amendment 56, which she tabled, but I hope that she will forgive me if I make a few pre-emptive remarks about it. She is right to highlight the importance of the implementation of this measure to its success, and I can assure her that HMRC has been working extremely hard to ensure the policy is implemented as planned, and that the first payment notices are on track to be issued shortly after Royal Assent.

I do not agree that the hon. Lady’s amendment is necessary or would add anything to the success of accelerated payments, however. To begin with, six months would be a very short time in which to review the policy. Taxpayers will have 90 days to respond to the notices and it would be hard to produce a meaningful analysis of the impact on a taxpayer of receiving a notice in such a short time frame. It is unlikely that we would see any real impacts that quickly and I do not believe that we would gain any real insights from producing such a report.

Secondly, the assessment of the impacts has already been made public in the Budget documents, and the tax information and impact note and policy costings documents that were published alongside them, in March. Those documents set out that payment notices will be issued to 33,000 individuals and 10,000 corporates, which will cover about £7.1 billion of tax under dispute. They also set out that the mean gross income of those individuals who will receive notices is £262,000—more than nine times the average for the wider income tax paying population. The average gross profits of businesses that are set to receive notices is £545,000. We have also set out that the vast majority of notices are expected to be issued over the 18 months following Royal Assent. That information and much more is already in the public domain, so I do not think that reporting again so soon after the event would add any real value to the debate.

Thirdly, as for other areas of delivery, HMRC will publish information on the implementation of the policy. It is still determining exactly what figures will be published and at what intervals, but I assure the Committee that it will be transparent about how the measure has been implemented.

For all the reasons I have set out, I do not believe that producing a report that will distract HMRC from the key job of delivering the policy would be beneficial. I pre-emptively thank the hon. Member for Erith and Thamesmead for her contribution, but I hope that she will not press amendment 56 to a Division.

Government amendments 32 to 38 correct the unintended effect of using a definition contained in the follower notice provisions. That definition of “tax arrangements” requires that the main or a main purpose of the arrangements is to gain a tax advantage. That requirement has been taken through into the accelerated payments legislation and, in particular, the DOTAS criterion. However, the intention is that DOTAS should be an objective criterion. In order to be disclosed under DOTAS, arrangements will already have been through a number of tests and filters, including one to the effect that the main or a main benefit is to secure a tax advantage. Therefore, adding a further test is unnecessary and takes away from this being an objective test that is simple to apply and understand. The amendments deal with that and tidy up how the definitions sit together.

The Government recognise that the changes are significant. As I said earlier, we have consulted on the detail, receiving more than 800 responses. In our debate on the previous group, I explained the changes we were making through those provisions, and this aspect of the Bill makes a change so that the rules can apply only when the GAAR advisory panel has given its opinion that the arrangements are not reasonable.

Several further concerns have been raised, chief among which is the lack of a formal appeal right. As I explained earlier, that would simply involve arguing the substance of the case at a different stage and would significantly weaken the impact of what we are trying to do.

We estimate that accelerated payment notices relating to existing avoidance cases currently under dispute will be issued to approximately 33,000 individual taxpayers, concerning £5.1 billion of tax under dispute, and to around 10,000 corporates for £2.1 billion of tax under dispute. The vast majority of notices are expected to be issued over the course of 2014-15 and 2015-16 and, of course, notices relating to new avoidance schemes will be issued in future years as the need arises, although a key part of our drive to tackle avoidance is to stop such schemes from being promoted and used in the first place.

As I said, this is a major new development. If someone tries to avoid tax, the likelihood is that they will fail, but if they want to try, the Exchequer will hold the money while the matter is sorted out. That is the right and fair approach, and it is fair to the millions of taxpayers who pay their tax on time and expect others to do the same.

Teresa Pearce (Labour, Erith and Thamesmead)

It is a pleasure to serve under your chairmanship, Mr Streeter. I had six pages of questions to ask, but in the light of the Minister’s comments and responses to hon. Members’ interventions, I will pick through them to find those things on which I still need to press him.

In my previous life before my election to the House—sometimes it seems a long time ago—I worked for HMRC and then for the tax investigations department of one of the big four, so I have been poacher and gamekeeper and have seen this problem through 360°. I do not by any means defend aggressive tax avoidance, but certain aspects of this legislation concern me. I am worried that it might not work or be necessary, so I would like some reassurance from the Minister.

My first concern is about retrospection. Businesses need a level playing field and certainty, but retrospection is something that makes people in business very nervous. The Minister says—I understand him—that no one’s underlying tax liability is being changed, but the legislation changes the code of practice under which businesses thought they operated with HMRC. The definition of retrospection is to change the legal consequences of actions that were committed, or relationships that existed, before the enactment of a law, and that is exactly what this legislation does. I agree that it might not change an underlying tax liability, but it changes the consequences of actions.

I am especially worried about those who have submitted applications to postpone tax. Such postponement will have been agreed by HMRC some years ago, but now it will be withdrawn, which is clearly retrospective. The changes will apply to all tax arrangements registered under DOTAS since 2004. I worked for one of the big four when DOTAS came in, and I thought it was a marvellous idea. It has helped HMRC tremendously to investigate tax avoidance schemes. Previously HMRC would have to wait until a return was in before looking at a scheme and trying to work out what it meant, meaning that it would be years before it could be unravelled, but now it has advanced notice and can do things in a timely manner.

It is not only my interpretation that the legislation is retrospective, but that of the Treasury Committee. The Chartered Institute of Taxation, the Law Society and several well-respected chambers have said that they find the legislation’s retrospective element unacceptable. I agree with the legal profession that there is a retrospective element. If the Minister and the Government are trying to change behaviour, surely they cannot change behaviour in the past. They need to change it going forward, but the retrospective element will not do anything about that. People cannot change what they have already done, but they can change what they will do in the future.

I was interested in what the Minister said about the reduction in aggressive tax avoidance. One of the reasons for that might be adverse publicity and changes in public opinion. At one time, people thought, “Well, we would all pay less tax if we could,” but now people do not think that—I am glad they do not. People think that they should pay the right amount of tax at the right time. I agree with that, but dealing with that retrospectively is a dangerous path. I would like more reassurance from the Minister about why he feels that it is necessary, for particular cases, retrospectively to change an agreement that was reached with HMRC. HMRC already has powers to link a taxpayer’s arrangements to a lead case, so I am not sure why some elements of the legislation are needed.

I hope the proposal works—I want it to work—but I am not convinced that it is the right way forward. Has any research been carried out into behavioural changes that might push companies away from disclosed schemes towards much more risky undisclosed schemes? Has any view been taken of how many inspectors will be needed to issue accelerated payments and go after them, rather than looking into the wider tax gap and the black economy?

Time to pay arrangements can be restrictive. Normally, only a matter of months are allowed, not years. When a retrospective payment has to be made, will any guidance be given to the collector and HMRC about whether there will be more time to pay than is currently the case in most cases? Finally, has HMRC budgeted any money to contend with the number of judicial reviews that are expected to arise from this legislation? I hope that the Minister will be able to respond to my points and reassure me that, if the legislation proceeds, it will do what it is meant to do and close the tax gap.

Charlie Elphicke (Conservative, Dover)

I rise to oppose amendment 56, and start with a quote from the obituary of Lord Templeman, who passed away recently:

“He was promoted to the Court of Appeal in 1978, where he gained a reputation, among other things, for his implacable opposition to artificial tax avoidance schemes—although as a QC in the 1960s his practice had involved helping some of his clients to avoid estate duty. ‘Every tax avoidance scheme involves a trick and a pretence,’ he said later. ‘It is the task of the Revenue to unravel the trick and the duty of the court to ignore the pretence.’”

As a former tax lawyer, I humbly follow in the steps of Lord Templeman.

The hon. Member for Erith and Thamesmead talked about the important point of retrospection which, traditionally, we go back to seeing in the light of Adam Smith. The Treasury Committee has also raised criticisms on the grounds of retrospection. Adam Smith said that the principle is that every tax that

“each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought…to be clear and plain to the contributor and to every other person.”

That goes to the heart of whether money should be handed over to the Revenue pending determination.

The history of retrospection before this House was well elucidated by my predecessor, Lord Rees, who, as Peter Rees, was Member of Parliament for Dover and Deal. He said that there needed to be a precise warning to the House regarding retrospection because a mere suggestion was not enough. He said that provision needed to be clearly directed, legislatively appropriate and, in essence, to involve a level of certainty. My concern is that whenever we talk about retrospection, we talk about the avoidance of taxation, Parliament’s intention being undermined, and retrospection being needed to reaffirm Parliament’s intention.

Chris Williamson (Labour, Derby North)

Will the hon. Gentleman help me by explaining those aspects of amendment 56 to which he objects? He has not spoken to the amendment so far.

Charlie Elphicke (Conservative, Dover)

The hon. Gentleman knows that the debate is about the wider provisions that govern this entire subject, as well as the amendments. You will correct me if I am wrong, Mr Streeter, but I think I am in order by raising these particular points, although of course I stand to be corrected.

Chris Williamson (Labour, Derby North)

I apologise to the hon. Gentleman if he thought I was suggesting that he was being disorderly. I was not doing that, but when he rose to his feet, he said, “I rise to oppose amendment 56,” so I was merely asking which parts of it he objects to?

Charlie Elphicke (Conservative, Dover)

The hon. Gentleman, who has long entertained the Committee, understands that I was talking particularly about the comments on retrospection made by the hon. Member for Erith and Thamesmead. It is legitimate that I talk about retrospection, since it has been raised with so many of us on social media. Many of us have a timeline filled with great anger, angst and fury about the issue. It is right that the Committee honours those heartfelt opinions that have been expressed to us by debating them. I hope I am not alone in thinking that that is a right, proper, legitimate and—dare I say—orderly manner of approaching the matter.

When my predecessor for Dover and Deal discussed this issue and raised these rules, they seemed a touchstone. Retrospection was built on by the previous Labour Government with the help of the Second Deputy Chairman of Ways and Means, when she was a Treasury Minister, and indeed Jane Kennedy, no longer of this parish, through the Finance Act 2008. The issue has been much discussed down the years, but let me just pick up on what the Chair of the Treasury Committee, my hon. Friend the Member for Chichester (Mr Tyrie), says:

“We have deep reservations about any extension of retrospection in the tax system. Retrospection runs counter to the Committee’s principles of tax policy. In particular, it undermines certainty. Retrospection should be considered only in wholly exceptional circumstances. The latest measure would have to be justified on those grounds. Retrospection puts policy on a slippery path to arbitrary taxation, discouraging investment and innovation and creating the scope for great unfairness.”

In other words, the attack is made on the principle that retrospection creates uncertainty. That is not the case with these provisions, as they apply only in a DOTAS case when a filing has been made to the Revenue. If an adviser has been making a filing, they will say, “I have had to file this with the Revenue.” If they were a competent advisor, they would say, “Keep the money to one side; don’t go out and spend it.”

The argument that we hear being made is that if a person puts £100 on red or black in a roulette tournament, it is okay for them, while the ball is still spinning, to take 50 quid of that stake and buy a round of drinks on the grounds that they might win, but that is a poorly founded argument. If someone is going to put a bet down—that is what people are doing when they are gaming the tax system; it is no different from roulette, except that it is more disreputable—the stake should stay on the table. The principle that the Government are setting out is that the stake should remain on the table and in the hands of the house. In this particular case, the money should be held with the Revenue if it is making a challenge and has issued a follower notice.

Richard Fuller (Conservative, Bedford)

I want to validate my hon. Friend’s Conservative credentials because I think his position is calling some of them into question. Will he accept a couple of points: first, that the taxpayer’s money belongs to the taxpayer first, not to the state; and, secondly, that at the time that the quotes of Adam Smith were made, the complexity and breadth of the tax system were narrower, meaning that those conditions do not now pertain? We have an arcane, complex tax system that makes it difficult for the taxpayer to be sure where he or she should be paying tax. I want to see if my hon. Friend’s assumptions hold to Conservative principles or whether, when he talks about the house holding the money, he is rather referring to views that might come from the Opposition.

Charlie Elphicke (Conservative, Dover)

My hon. Friend is right to challenge me—I welcome it—but let us consider how this process works. If a person is advised to reduce their tax liability, they are often introduced to a promoter who explains the scheme to them. The person then signs documents to enter into the scheme and pays a fee. The promoter tells the taxpayer that the scheme is a disclosed tax avoidance scheme and gives them a reference number that needs to be included on their return in the tax avoidance section. They know what they are doing. They know that they are playing with fire and spinning the roulette wheel. They are not an innocent who has suddenly come to an impost—a big shovel in their stores—as has been said in legal cases regarding the philosophy behind the taxation system. They enter into the arrangement with their eyes open.

When the taxpayer submits their tax return with the scheme reference number, or their adviser submits it for them, HMRC considers the tax return and whether more tax is due than has been paid as a result of the avoidance scheme. If an inquiry notice is issued, the taxpayer can choose to co-operate or not, but even when taxpayers co-operate in full, the investigation and litigation process inevitably takes a considerable time, and some people take advantage of that by holding on to the tax. The principle is that, from now on, the tax in dispute in suspected avoidance cases will be held until the matter is resolved. The question is who should hold that money, given that the person has engaged in a disclosed tax avoidance scheme. The Government would argue that the measure ensures a consistency of approach.

Chris Leslie (Labour, Nottingham East)

Will the hon. Gentleman give way?

Charlie Elphicke (Conservative, Dover)

Let me make some progress first.

HMRC will be able to issue a notice only when it has sent the taxpayer an inquiry notice or issued a notice of assessment for the disputed tax. As a minimum, therefore, everyone who receives a notice will have been notified by HMRC that their tax affairs are under consideration. They will have filed a DOTAS notice and been notified that their tax affairs are under consideration. I would argue that they should have kept the money to one side and not gone off to the races, spent it on a round of drinks or whatever; they should have responsibly, prudentially and conservatively set the money aside against that risk.

Once an accelerated payment notice is issued, the taxpayer will have 90 days to pay. If they cannot pay, they can contact HMRC to agree arrangements for payment. The Government are demonstrating their understanding by engaging in discussions about hardship cases. If the taxpayer thinks that the tax due is incorrect, they can raise that with HMRC which, as I understand it, will review the facts. People can therefore ask it to look at the matter again. The taxpayer will then get a decision notice confirming the amount of tax due to be paid up front, at which point they will have 30 days to pay. It is fair to say that due warning will be given and that there is due understanding that the person concerned is playing with fire, as it were.

Chris Leslie (Labour, Nottingham East)

I am interested in how the hon. Gentleman’s logic might extend to other tax-paying scenarios. If, for example, the Chancellor of the Exchequer said that the banks should be paying a £2.5 billion bank levy, is the hon. Gentleman arguing that the banks should vest that money with the Treasury, and that if, as seems to be the case, they then claim that for some reason they need to pay only £1.6 billion, that is their lookout? Is that the logic that he is describing, and why would it not apply in other circumstances?

Charlie Elphicke (Conservative, Dover)

I always enjoy the hon. Gentleman’s interventions, but he makes a facile point—[ Laughter. ] As is in line with his character. What I am describing is more in line with what happened under the Finance Act 2008, about which Jane Kennedy, then of this House, said:

“the avoidance scheme that the clause closes down was designed to frustrate legislation passed by Parliament in 1987 to prevent this type of avoidance, also with retrospective effect”.––[Official Report, Finance Public Bill Committee, 22 May 2008; c. 372.]

This is about when due warning has been given. In this case, I would say that the taxpayer has been given due warning. They know that they ought to keep the money to one side. HMRC wins 80% of these cases, and I think that the case is well made.

Shabana Mahmood (Labour, Birmingham, Ladywood)

We have had an interesting debate. As we have been hearing, the legislation underpins the Government’s belief that during litigation and investigations into avoidance, disputed tax should sit with the Exchequer rather than, as is currently the case, with the taxpayer. Under existing rules, taxpayers are able to include the tax advantage in their initial self-assessment and thereby reduce their liability.

The measures have given rise to a lot of comment from stakeholders—members of the public—outside the House. We have heard references to the vigorous campaign being waged on social media. We have all been getting messages in our timelines even as the debate has continued, so many people are listening to what is being said today. I hope that they feel that the issues are being thoroughly ventilated.

(Except clauses 1, 5 to 7, 11, 72 to 74 and 112, schedule 1, and certain new clauses and new schedules)

Martin Caton (Labour, Gower)

Before we resume proceedings, I draw the Committee’s attention to a minor error in the selection list. Clause 284 appears in the list, but that clause was agreed by the Committee on 13 May.

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

Martin Caton (Labour, Gower)

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

Government amendments 33 and 34.

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

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

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

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

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

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

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

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

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

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

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

Clause stand part.

Clauses 213 to 221 stand part.

Government amendments 35 to 38.

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

Clauses 222 to 226 stand part.

Shabana Mahmood (Labour, Birmingham, Ladywood)

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

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

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

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

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

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

Ian Mearns (Labour, Gateshead)

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

Shabana Mahmood (Labour, Birmingham, Ladywood)

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

Charlie Elphicke (Conservative, Dover)

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

Shabana Mahmood (Labour, Birmingham, Ladywood)

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

Richard Fuller (Conservative, Bedford)

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

Shabana Mahmood (Labour, Birmingham, Ladywood)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

and that

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

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

David Gauke (Conservative, South West Hertfordshire)

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

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

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

Duncan Hames (Liberal Democrat, Chippenham)

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

David Gauke (Conservative, South West Hertfordshire)

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

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

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

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

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

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

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

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

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

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

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

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

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

Schedule 28 - Accelerated payments and partnerships

Clause 222 - Defined terms used in Chapter 3

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

Charlie Elphicke (Conservative, Dover)

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.’

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—

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.

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?

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.

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?

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—

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.

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.

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.

Chris Heaton-Harris (Conservative, Daventry)

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

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.

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?

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.

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?

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.

Ian Swales (Liberal Democrat, Redcar)

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.

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.

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.

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.

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.

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.

Charlie Elphicke (Conservative, Dover)

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.

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.

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?

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.

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?

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.

Shabana Mahmood (Labour, Birmingham, Ladywood)

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.

Ian Swales (Liberal Democrat, Redcar)

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.

Shabana Mahmood (Labour, Birmingham, Ladywood)

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.

David Gauke (Conservative, South West Hertfordshire)

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.

Charlie Elphicke (Conservative, Dover)

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?

David Gauke (Conservative, South West Hertfordshire)

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.

Charlie Elphicke (Conservative, Dover)

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.

Clause 242 - Publication by monitored promoter

Clause 244 - Duty of monitored promoter to notify clients of number

Clause 251 - Duty of person dealing with non-resident monitored promoter

Clause 266 - Confidentiality

Schedule 31 - Penalties

Clause 270 - Extended time limit for assessment

Clause 272 - Offence of concealing etc documents following informal notification

Schedule 32 - Promoters of tax avoidance schemes: partnerships

Clause 278 - The Code of Practice on Taxation for Banks: HMRC to publish reports

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I beg to move amendment 57, in clause 278, page 187, line 28, at end insert—

‘(1) Before bringing forward any further reform of The Code of Practice on Taxation of Banks, the Chancellor shall lay before Parliament a report considering the impact on the total receipts paid to the Exchequer since 2010 by—

(a) Uk banking groups;

(b) building society groups;

(c) foreign banking groups; and

(d) relevant non-banking groups.

(2) The report will pay particular attention to receipts from—

(a) corporation tax;

(b) the bank levy; and

(c) bank payroll tax.”

Martin Caton (Labour, Gower)

With this it will be convenient to discuss the following:

Clause stand part.

Clauses 279 to 281 stand part.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

We are getting there. I am sure people will be disappointed when these wondrous proceedings come to an end. Was that a cry for more? I suspect not. It is a pleasure to be here this afternoon to speak about these clauses. Of course, they arose following a consultation that was published back in May 2013 by HMRC on strengthening the code of practice on taxation for banks. That included draft legislation requiring HMRC to publish an annual report on the operation of the code.

The code is one element of the Government’s anti-avoidance strategy and is intended to change the attitudes and behaviours of banks towards tax avoidance. We have had a thorough debate on tax avoidance and are now looking at some of the specific issues around banks. Adoption of the code is voluntary, but the list of banks that have adopted it is published. So far, I understand that a total of 283 banks with UK operations have signed up to the code, including those defined as the so-called big banks.

The amendment would require the Government, prior to bringing forward any further reform of the code of practice, to lay before Parliament a report considering the impact on the total receipts paid to the Exchequer by UK and foreign banks, and building societies. We want specific attention paid to the receipts from corporation tax, the bank levy and the bank payroll tax.

It is important to recognise that clauses 278 to 281 require the tax commissioners for HMRC to publish a report on the operation of the code of practice on taxation for banks. The report must be published no later than the end of the calendar year in which a reporting period ends. The commissioners must determine breaches of the code and, where a breach has been established, may name the bank or entity in the report and must publish information relating to the breach, except in instances where that is not deemed to be reasonably practical. It also provides for the introduction of a governance protocol, delineating how the code will operate and setting out the rules for compliance. The protocol was published in December 2013 and is an updated version of a previous protocol from 2012. It covers all banks that notified the commissioners that they have unconditionally committed to complying with the code on or after 31 May 2013, and sets out four possible views that the HMRC may have regarding a bank’s compliance with the code.

I will not go into a great deal more detail about what the clauses do because I am sure the Minister will wish to say something about that, but I do want to make a couple of comments, raise some issues and ask some questions.

We support the underlying principle of the code of practice, which goes back to 2009, under the previous Government. It is important to ensure that banks and building societies meet their tax obligations and make every reasonable attempt to comply with the letter and spirit of the law. We support making the code more stringent, ensuring that banks that fail to comply are made to face the consequences. We welcome the distinction that has been drawn between the smaller and larger banks and building societies, with the former having to comply only with the first part of the code. However, we believe that the Government should take a more holistic approach to the bank taxation regime and that is why we have tabled the amendment.

It would be straying from the subject of the clause to move too much into discussion of how the bank levy has failed to generate anything like the revenues projected, so I will not succumb to the temptation to do that yet again at this point. However, it is important to understand the reasons for that, which is why we want the amendment to be passed so that the report would look at the taxation regime in the round.

A concern about the proposed changes to the code has been raised by the CIOT. The changes have been described as

“fundamentally flawed and potentially damaging to the UK’s reputation as a place for inward investment…The proposals need to be reconsidered to ensure that they are proportionate, fair, workable and do not damage the UK’s reputation.”

That highlights an uncertainty that may surround what could be described as the intentions of Parliament and the spirit of the law in determining whether a bank has breached the code. Some respondents to the consultation argued that a participating bank could, quite reasonably, have a different interpretation of the intentions of Parliament from that of HMRC. This would be a good opportunity for the Minister to address that point because it is suggested that HMRC is being established as “judge, jury” and, indeed, “executioner” and I am sure that Ministers would not wish to have that tag attached to it but, none the less, want to deal with the questions raised.

The Law Society felt that HMRC had been granted too much discretion, arguing:

“It is not appropriate for HMRC to set itself up as the only arbiter of parliamentary intention in relation to matters within the code. This is a matter ultimately for the courts to interpret on the basis of the legislation passed by Parliament and the surrounding circumstances.”

It also raised concerns about the supposed voluntary nature of the code, pointing out that it is hardly voluntary when banks that have not signed up can be publicly named and suffer adverse publicity as a result. It would be interesting to hear the Minister’s comments on that.

I understand that the Government have, to some extent, picked up on and revised the protocol in the light of the concerns of some of the respondents to the consultation. However, it is a concern that some issues have not yet been addressed by revisions and I would be interested to hear the Minister’s view on some of the points raised. I have a few questions. Can he provide any information on the impact of the code to date on the level of taxation paid by the banks? What does he have to say on the observations of the CIOT, the Law Society and others that responded to the consultation that the revised code grants HMRC disproportionate power with insufficient safeguards to ensure that it is fairly exercised? That is one of the themes that has run through today. Everyone wants to see as much as possible done to ensure that individuals and organisations pay the appropriate taxes but, at the same time, proper checks and balances have to be built in. I would like to hear from him on that.

Do the Government agree with the recommendation that HMRC should consult the Financial Conduct Authority and Prudential Regulation Authority before publicly naming a bank found to be in breach of the code? Does the Minister consider it fair that HMRC can supersede the conclusions of the independent reviewer in deciding whether a bank has breached the code? Does that not risk undermining the legitimacy of the review system?

We have not had the opportunity to discuss the shadow banking sector in detail in this debate, but during the past few days concerns have been raised about it. Will the Minister consider extending the code to encompass that sector to address those concerns? So that we can understand the Government’s thinking, does he have any comment on the assertion to which I referred that the code could damage inward investment? I would like to hear his response before deciding whether to press the amendment.

David Gauke (Conservative, South West Hertfordshire)

Clauses 278 to 281 require HMRC to produce annual reports from 2015 on how the code of practice on taxation for banks has operated. The reports will provide details of those banks and building societies that have signed up to the code as well as those that have not. It may also name any bank or building society that HMRC determines has not met its commitments under the code.

The voluntary code was introduced in 2009. Its purpose is to encourage banks to follow the spirit as well as the letter of the tax law. It is a key element of the Government’s anti-avoidance strategy and was designed to change the attitudes and behaviour of banks towards avoidance, given their unique position as potential users, promoters and funders of tax avoidance schemes. Since the code’s introduction, HMRC has seen a positive response from banks in their tax planning and transparency, which is in large part down to changing attitudes by banks towards avoidance. The code has been a significant factor in that change.

However, the code lacks public transparency. There are also no obvious downsides for banks in not adopting the code and no codified consequences for a bank’s non-compliance with its code commitments. To address that, at Budget 2013 the Government announced plans to strengthen the code by making its operation more transparent. Banks were then asked to re-adopt on that basis. At autumn statement 2013, following consultation with the sector, HMRC published a list of those banks and building societies that had adopted the strengthened code. An updated list including further banks was published at Budget 2014.

Clauses 278 to 281 introduce legislation requiring HMRC to produce an annual report on the operation of the code. The first report will be published next year and will cover the period ending 31 March 2015. Clause 278 sets out the groups and entities to which the code applies, which are those in the scope of the bank levy provisions. The clause also provides that, in the annual report, HMRC may name any bank or building society that it determines has breached the code.

Clause 279 provides that banks and building societies wishing to sign up to the code must write to HMRC confirming unconditional commitment to the code. To withdraw from the code, a bank or building society must write to HMRC confirming that it is no longer unconditionally committed to the code. Where a bank or building society is named in an annual report as having breached the code, it will be treated as having withdrawn from the code until such time as HMRC is satisfied that it has once again met its commitments under the code.

Clause 280 provides that a governance protocol will set out how the code will operate. The protocol was published alongside the draft legislation and the autumn statement and sets out a number of safeguards, including the requirement for HMRC to commission a report from an independent reviewer before naming a bank or building society as having breached the code. Clause 281 provides that HMRC must consult members of the bank and building society sector before it publishes or changes any future guidance on the code.

I am conscious that during last year’s consultation, concerns were raised by the banks and legal profession about HMRC rather than an independent third party having the ultimate decision on whether a bank should be publicly named for being non-compliant. The Government listened carefully to those concerns. Although we consider it is right that HMRC commissioners who are directly answerable to Parliament remain the final arbiter on whether a bank has breached its commitments to HMRC under the code, we have introduced additional robust safeguards. The independent reviewer is expected to be someone who is independent of both the banking sector and HMRC and is held in good standing by both, such as a retired High Court judge. HMRC may reach a different determination from the independent reviewer only in two limited and exceptional circumstances where, viewed objectively, the independent reviewer’s opinion is unreasonable based upon the Wednesbury test of reasonableness used in judicial review proceedings, or where, viewed objectively, there are other exceptional and compelling reasons for HMRC reaching a different conclusion.

Where, contrary to the opinion of the independent reviewer, HMRC determines that a bank or building society should be named as non-compliant, and the bank or building society commences judicial review proceedings against HMRC, the onus will be on HMRC to prove that it acted reasonably in reaching a different opinion from that of the independent reviewer. This reversal of the normal burden of proof is in recognition of the possible commercial and reputational damage that may result from a bank or building society being named in an annual report.

Turning to amendment 57, we already considered a similar amendment when we debated clause 113, and also during the Committee of the whole House. I do not know whether to be disappointed that Opposition Members are not showing more originality in their amendments or whether to be impressed by their consistency. Even when we have clauses setting out a requirement to produce reports, we still have an amendment requesting that different reports are produced, but there we go.

The amendment asks the Government to lay before Parliament a report that considers overall tax receipts from UK banks, foreign banks, building societies and relevant non-banking groups since 2010. As I have explained before, HMRC already publishes statistics on PAYE, the bank levy, corporation tax and bank payroll tax receipts from the banking sector each year, although not broken down by different groups of banks. The most recent publication, from August 2013, showed that the relevant tax receipts from the banking sector were £21.7 billion in 2012-13. This represented an increase of 6%—or £1.2 billion—on the previous year, despite corporation tax receipts continuing to be depressed by losses incurred during the financial crisis. The publication shows that 2012-13 receipts remain below the peak reached in 2010-11. However, the 2010-11 figure was inflated by receipts from the bank payroll tax, a one-off measure implemented on the day of the announcement, which the previous Chancellor said could not be introduced permanently. I am tempted to read the whole quote, but on this occasion I will not. However, hon. Members should be aware of it.

Bonuses in the banking sector have fallen markedly since the bank payroll tax applied, with the yield from a repeat tax likely to be much lower. The Government have also taken wider action since 2010-11 to tackle unacceptable remuneration and ensure that pay does not incentivise excessive risk-taking. Under the PRA’s remuneration code, large parts of bonuses must now be deferred and paid in shares. Firms are now required to have in place clawback policies to reduce or revoke pay where subsequent information on poor performance comes to light. That is why the Government chose instead to introduce a permanent tax on banks’ balance sheets, which helps to ensure a fair contribution from the banking sector while supporting the regulatory regime by encouraging banks to move towards safer funding profiles. I hope that will suffice to explain why we think the amendment tabled by Opposition Members is unnecessary.

The hon. Member for Kilmarnock and Loudoun asked whether HMRC was acting as judge, jury and executioner. As I said earlier, concerns were raised during the 11-week consultation exercise conducted over the summer. We have introduced the independent reviewer, as I mentioned. It is right that HMRC commissioners remain the final arbiter under the protocol of whether a bank has breached its commitments to HMRC under the code. Parliament, assisted by the National Audit Office, retains its oversight of HMRC’s decision-making processes.

Furthermore, as the code is about a bank’s behaviour, it follows that any decision on whether a bank should be named as not complying with its code obligations should be made close to the events. The inclusion of a formal appeals process could mean the decision was not published until years after the events, which would be counter to the code’s behavioural change objectives.

Could the provisions damage inward investment? There is no evidence so far to suggest that that will be the case. HMRC will clearly monitor the situation and keep it under review.

Do the Government intend to consult the PRA and the FCA before naming a bank? There are no proposals to do so, but we recognise that naming a bank is a potential source of reputational damage, which is why we have provided a number of significant safeguards to prevent banks from being incorrectly named.

I was asked how much additional tax has been brought in. It is not possible to determine how much has been paid as a result of the code, but the code increases transparency and HMRC’s ability to tackle avoidance in real time.

To conclude, now is the right time to strengthen the code. The changes made by clauses 278 to 281 help to provide full transparency on which banks have adopted the code and clear sanctions against those that breach it, while also providing robust safeguards for participating banks. That will help to reinforce the behavioural improvements already evident in the banking sector and support fairness in the tax system. I hope the clauses can stand part of the Bill.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank the Minister for his expansive answers, which took note of all my points, as well as laying out the Government’s views on a number of issues so that we have them on the record.

I do not know whether to be disappointed, although I am not surprised, that the Minister has once again failed to succumb to my pleas for a report, even though it is, on this occasion, just a different kind of report from the one he proposes to introduce. None the less, it is important to look at the wider issues around the taxation of the banking sector, so I will, on what is probably the last occasion I will have the opportunity to do so in this Committee, try one more time and press the amendment to a vote.

New Clause 1 - Lower rate of tax

New Clause 2 - Higher rate of tax

New Clause 3 - Personal allowance for those born after 5 April 1948

New Clause 4 - Capital gains tax and employee shareholders

New Clause 5 - Review of reform to the annual investment allowance

New Clause 7 - False self-employment in the construction sector

New Clause 8 - Pension flexibility: Treasury analysis

David Gauke (Conservative, South West Hertfordshire)

On a point of order, Mr Caton. Before you put that Question, I should be grateful if the Committee would indulge me with its attention for a few more minutes. I am sure that hon. Members have not yet heard enough from me today—

Martin Caton (Labour, Gower)

Order. I am sorry to interrupt you, Minister, but the programme order says that we must finish at 5 o’clock, so perhaps you would keep it brief. I am allowing a little leeway, but we are subject to a programme order to which we are supposed to be sticking.

David Gauke (Conservative, South West Hertfordshire)

Apologies, Mr Caton.

I am pleased that the Bill has received such scrutiny. Inevitably, we have focused on some aspects more than others, but our debate has been wide ranging. There have been many points on which Members have disagreed, but I am pleased that there has been consensus in some areas, including today on important matters of tax avoidance.

I am also pleased that the Committee’s scrutiny has been a model of efficiency. Last Thursday, we had the shortest sitting of the Finance Bill Committee in memory, when we got through 74 clauses and three schedules in 36 minutes. I was sad that we did not manage to keep up that rate all the way through our consideration.

I am grateful to Mr Streeter and to you, Mr Caton, for your valuable input. I thank the representative bodies and other interested parties who have played—

Martin Caton (Labour, Gower)

Order. I am sorry, Minister, but I must stop you there. Thank you for your kind words.

Shabana Mahmood (Labour, Birmingham, Ladywood)

Further to that point of order, Mr Caton. I am sure that the Minister was about to thank the officials, Clerks and Whips who have served the Committee so well. I put on record my thanks to all members of the Committee for how they have engaged with our debates on and scrutiny of the Bill. I thank the ministerial team for its courtesy and diligence in responding to our many points and questions, and my Front-Bench colleagues for their contributions.

I thank Mr Streeter and you, Mr Caton, for chairing the Committee and getting us through to the end. We are most grateful.