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Finance Bill

It is a pleasure to speak on the issue of penalties. As with so much in this year's Finance Bill, we have to go back to last year's Bill to gain a full understanding, although I suspect that we shall not see quite the same drama that we saw in last night's debate about income tax. Schedule 24 of the Finance Act 2007 introduced a single new penalty regime for incorrect returns in respect of income tax, self-assessment, pay-as-you-earn, corporation tax, capital gains tax and VAT, which involved a common structure of stepped penalties depending on taxpayer behaviour. The provisions of schedule 24 of the 2007 Act were broadly well received. Those who can recall last year's debate will remember the concern about the expression ““HMRC think””, which was contained in the first draft of that Bill, but which was thankfully amended by the Government following representations from all parts of the House. However, there was little dispute about the common structure of stepped penalties. Schedule 24 of the 2007 Act addressed only the main taxes, as they were described, and did not try to cover all taxes. Its provisions are only now coming into force, so that they will come into effect only for returns or documents due to be sent to HMRC on or after 1 April 2009. HMRC says that the new penalty regime is already having an effect. However, given the stage that we are at, it seems far too early to jump to any conclusions about the effectiveness of schedule 24 of the 2007 Act. None the less, the Government seek to extend the regime set out last year. We question the timing of that. Two logical positions could be taken on the matter. The first is that it is confusing to have two different penalty regimes for errors in tax returns and therefore right to move to one common structure as quickly as possible. That could be described as the big bang approach to penalties, if that is not overdoing it. The alternative is to take a more gradualist approach, by seeing how the new system works, extending the approach in stages by a process of trial and error, learning as we go along, identifying strengths and weaknesses, and imposing a new system of penalties for tax returns over a number of years. Both are acceptable positions and there are arguments for adopting either. However, in attempting to take two different approaches, the Government appear to be in an inconsistent position. In the 2007 Act, the Government did not seek to apply the new penalty regime comprehensively; instead, they just picked out the main taxes and left the rest. That would indicate the gradualist approach. However, long before the existing provisions come into force and it is possible to assess the effectiveness of schedule 24 of the 2007 Act, the Government are seeking to expand the regime to a new set of taxes, as we see in schedule 40 of the Bill. The taxes include inheritance tax, stamp duty, stamp duty land tax, petroleum revenue tax, insurance premium tax and a wide range of duties. Over the course of a year, the Treasury and HMRC have gone from a gradualist approach to one of trying to impose a single regime as soon as possible. However, clause 117(3) allows different days to be appointed for different provisions, so things might not work out like that and some taxes might be treated differently over time. If the Government had wanted to introduce all the measures as quickly as possible so that different regimes were not running simultaneously—I acknowledge that there is an argument for doing so—we must ask why they did not do that in 2007 by applying the new penalty regime more broadly. I hope that the Financial Secretary will address that point. It appears that the Government changed their mind during the past few months and I should be grateful for an explanation of why that happened. The Government also seemed to change their mind in a rush. ““Modernising Powers, Deterrents and Safeguards: Penalties Reform—The Next Stage””, HMRC's consultation paper, was published only on 10 January. It is rumoured that it would have been published earlier, but that it was delayed because of HMRC's difficulties due to the missing data discs. Perhaps it would have been too embarrassing for HMRC to consult on the penalties that it would impose on taxpayers for errors when HMRC itself had been guilty of the most horrendous errors. It is worth noting that annexe A of the document contains the consultation criteria in the Department for Business, Enterprise and Regulatory Reform code of practice. The first criterion states that a consultation should"““Consult widely throughout the process, allowing a minimum of 12 weeks for written consultation at least once during the development of the policy.””" The consultation closed on 6 March, just eight weeks after the document's publication on 10 January. Why was that the case? If it had closed any later, it would have finished after the date of the Budget—12 March—and, clearly, announcing the policy of extending the penalties regime while the consultation was still under way would have been too obvious. The credibility of the consultation was undermined because the consultation period ended on 6 March and, just six days later, HMRC published board notice 96, in which it announced the Government's plans to legislate. The consultation document stated:"““HMRC would welcome views on…extending the penalty regime…to incorrect returns for other taxes””." Six days after the date for submitting those views, it announced that legislation would be introduced in the Finance Bill 2008"““to create a single penalty regime for incorrect returns””" across all taxes, levies and duties administered by HMRC. HMRC might well have welcomed views on the subject, but it is difficult to believe that as much consideration was ever going to be given to views that conflicted with what the Government seemed determined to do in the first place. There are plenty of stories that Treasury officials were burning the midnight oil in the run-up to the Budget and that there were all sorts of last-minute changes, but I suspect it is unlikely that the intense review of submissions to the consultation on penalties was the reason. It has not been a good winter for HMRC consultations. Draft legislation on non-doms had to be corrected mid-review because it was already damaging the UK's reputation. The consultation on income shifting was so widely castigated that plans to introduce measures were withdrawn. The consultation on penalties might not have been in the same league for controversy, but its timing—eight weeks, not 12—and its completion six days before the Government announced their policy, gave every impression that HMRC was simply going through the motions. That concern is shared among various professional groups. That is not to say that there is no support for the proposals; indeed, the principle of a single system for penalties has many supporters. However, serious points of substance were raised during the consultation. I do not intend to get into a detailed debate about schedule 40—we will return to that in much greater detail upstairs—but it is worth briefly highlighting the concerns raised through the consultation process to show that there are issues to address, as I think that the Minister accepts. In such circumstances, a hurried consultation was far from ideal. I shall outline several of the concerns. The proposals involve penalties that are based on underlying behaviour. That is widely supported, but the Institute of Chartered Accountants, for example, believes that there is a problem with differentiating between prompted and unprompted disclosure for one-off taxes, such as inheritance tax and stamp duty, compared with the situation for taxes that are paid repeatedly, such as income tax or corporation tax. A third-party penalty for incorrect inheritance tax returns was raised during the consultation process by the ICA, which said that it was not convinced by the Government's proposals, and the Chartered Institute of Taxation, which had strong reservations about penalties on third parties generally. The Government have moved on that point, but worries still exist. The ICA raises an important concern that proposals on penalties for failure to notify might discourage persons operating in the shadow economy from regularising their position. Both the CIT and the ICA raised the issue of suspended penalties. There are substantial issues for us to debate, but I think I have demonstrated that important points were raised in the consultation process, so it is not good enough to steamroller through the measures. Given the limited time allowed for consultation, our assessment and evaluation upstairs will be all the more important. I welcome you to the Chair, Sir Nicholas. It is a pleasure to serve under your chairmanship.