Making Tax Digital for VAT (Economic Affairs Committee Report)
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Lord Young of Cookham (Con)
My Lords, I thank my noble friend Lord Forsyth for introducing this debate, and for agreeing to reschedule it from its previous slot, which would have been at a less civilised hour. I also thank the Economic Affairs Committee, for its two detailed reports, and all noble Lords who have taken part in this exceptionally well-informed debate.
I have read both the reports and the Government’s response with particular interest, as a former Financial Secretary to the Treasury with responsibility for HMRC 25 years ago—some 15 years after the noble Lord, Lord Lawson, who was referred to in our debate. Although we have debated these two reports together, they are very different. The one on powers is wide ranging, hard hitting and contains some radical proposals—particularly those which we have just heard from the noble and learned Lord, Lord Judge. The one on making tax digital is more narrowly focused, more consensual and concerned with the pace of travel—as mentioned by my noble friend, Lord Tugendhat—rather than its direction. The current Financial Secretary carefully considered both documents and gave a detailed written response. Although he did not agree with all the recommendations, he was happy to accept the majority of them, in whole or in part. We are still reflecting on the report.
I take very seriously the comments made by my right honourable friend, and the comments made by my noble friends Lady Noakes and Lord Forsyth, the noble Lord, Lord Kerr, and others, about his reluctance—his refusal—to give evidence before the committee. My understanding is that the sub-committee’s inquiry was focused on the Finance Bill, which is properly the preserve of the other place, and as such, no Treasury Minister has given evidence to the sub-committee in the nearly 20 years of its existence. However, I take on board the comments and undertake to convey them to my right honourable friend, to see whether, were a further invitation to be extended to him by the committee, he might reflect again on his decision not to appear.
Before addressing the issues raised in the debate, I join others, particularly the noble Lord, Lord Davies, in paying tribute to my colleague and noble friend Lord Bates, who earlier this month stood down from his position as a DfID Minister and Treasury spokesman. No one regrets his resignation more than I do, as part of his ministerial burden falls on my shoulders. He was an exceptional, dedicated and popular Minister, covering government business on a wide range of topics, from overseas aid to the Trade Bill, from financial services onshoring to the performance of our economy —to name but a few. For each, he brought intellectual clarity and a strong defence of the Government’s record, but also a listening ear. We all wish him well as he walks from Belfast to Brussels raising funds for a cause he is passionate about.
I apologise—58 years too late—for running into the noble Lord, Lord Kerr, on my bicycle in Oxford. Had I known that in 2019 he would make a trenchant attack on a government policy I was obliged to defend, I would have navigated with much more diligence. I thought I was in enough trouble when he sat down—but then the noble and learned Lord, Lord Judge, got up.
I turn to the question of HMRC’s powers, which dominated our debate. I am conscious that I will not answer all the questions raised but I will write to rectify that omission. The British people expect HMRC to take decisive action to tackle tax avoidance and evasion, and Parliament has voted to grant the department a variety of powers which allow it to carry out this essential function. It is of course also essential that there are safeguards in place for taxpayers, but the purpose of the powers is to allow HMRC to collect the tax that we need to fund vital public services, a point made by the noble and learned Lord, Lord Judge.
I note what the report says in paragraph 58 about scrutiny of the loan charge but, as someone who has taken a Finance Bill through the other place and sat in Committee on the Finance Bill in opposition, it is my experience that Members in the other place are extremely wary about giving HMRC new powers over their constituents. This legislation was taken through the parliamentary process, with scrutiny in the House of Commons, following a public consultation on the policy and on the draft legislation. As my noble friend knows, we have also set out in a report published last month the rationale for, and impact of, the charge on disguised remuneration loans.
Lord Forsyth of Drumlean
On the subject of the scrutiny in Committee on the Finance Bill in the other place, I think I am right in saying that there was a speech from a Minister, a speech from the Opposition and two other speeches. None of the issues about retrospection et cetera was raised. I think there has also been an Early Day Motion signed by many Members and several debates, including one in Westminster Hall, none of which has altered the Government’s response in any way.
Lord Young of Cookham
I am sure that if my noble friend and I had been on the Finance Bill at the time, we might have raised some of the issues that he has now raised. I make the point again that the legislation went through all its stages in the other place after its publication in draft.
I was grateful for what my noble friend Lord Tugendhat said about HMRC in some generous words, which I know will be well received by the hard-working public servants in that department. I believe all Governments, and both Houses, are committed to striking the right balance between helping the compliant majority to fulfil their obligations, and providing appropriate support to customers who need extra assistance to get things right, while taking robust action against those who seek to avoid paying their fair share of taxes. For this reason, the Government welcomed the committee’s detailed contribution to this important debate.
I say to my noble friend and to others who have taken part in this debate that my comments will reflect the Government’s response to the reports, including the updated response which we published in March. I will share with the Chancellor and other Ministers in the Treasury the tone of the debate and the deep concern expressed by Members on all sides about some of the actions that have been taken. Again, without any commitment, I will see whether within the confines, which I hope the House understands, there is any flexibility available to reflect the anxieties that so many Lords referred to.
Several noble Lords spoke more specifically about the charge on disguised remuneration loans. My noble friend Lady Noakes made this the focal point of her speech. As acknowledged by the report:
“Disguised remuneration schemes are an example of unacceptable tax avoidance that HMRC is right to pursue. All individuals using these schemes must accept some degree of culpability for placing an unfair burden on other taxpayers”.
It is the Government’s view, supported by a unanimous Supreme Court ruling, that these schemes are not and have never been effective, and that tax was always due. It is unfair to the vast majority of ordinary taxpayers who pay all their taxes to let anyone benefit from contrived tax avoidance of this sort. I am sorry to disappoint the noble Lord, Lord Kerr—
Baroness Kramer
The Minister is doing his best and because he referred to the Supreme Court, he will be aware that that ruling focused on the culpability of employers. There was no expectation in any of those Supreme Court discussions that action would be taken against the ordinary user. That has been a source of a great deal of the fury around this issue.
Lord Young of Cookham
With respect to the noble Baroness, the unanimous decision of the Supreme Court was that the tax was due and is payable by the employee and not the employer. I will come on to the employer in a moment. I was about to disappoint the noble Lord, Lord Kerr, on one of the questions he put to me. But if it was always the case that the tax was due, as I have just said, the loan charge is not retrospective, as he implied. I am not sure that he meant to imply this, but it does not have to be paid in the current tax year. It becomes liable, but I hope that people will engage with HMRC and agree terms that may cover a longer period.
Lord Forsyth of Drumlean
I apologise for interrupting my noble friend again, but there are two points here. The court proceeding he referred to was the Rangers case, which said that liability was with the employer. The point that my noble friend Lord Kerr was making was that this is treated as an emolument in one year, which means that the incidence of tax is higher because goes over the top rate. That is the point.
Lord Young of Cookham
My understanding is that the tax now due accrued over a period of time, and was payable in the year in which it was accrued. That has been consolidated and crystallised into the loan charge. If I am wrong, I will write to my noble friend.
The Government are committed to tackling the promotion of tax avoidance and that is why HMRC has been investigating more than 100 promoters and others involved in marketing tax avoidance, including many who sold disguised remuneration arrangements. HMRC recently won a legal case, mentioned by the noble Baroness, Lady Kramer, over a contractor loan avoidance scheme promoter, Hyrax Resourcing Ltd. This will help collect over £40 million in unpaid taxes.
The charge on disguised remuneration loans has been criticised by those who say that it ought to be the employer who has to pay the tax that is outstanding. I agree, so let me be clear that HMRC will seek to collect the loan charge from employers in the first instance, and will pursue individuals for the tax due only where it cannot reasonably do so from the employer; for example, if the employer is no longer in existence or is offshore. In those cases, HMRC seeks to collect the tax liability from the individual who benefited from the tax avoidance.
Baroness Kramer
Since most of the employers in these cases were local government, they would pay any bill that HMRC thought was appropriate. Central government departments would also pay. Collecting from HMRC itself ought to be quite simple, and there are various public bodies, such as the BBC. Is the Minister now giving a reassurance to all those who have received a loan charge demand but were working for those public entities that they, at least, will not be pursued, because their employer will be paying?
Lord Young of Cookham
The safest thing I can do is repeat what I just said: HMRC will seek to collect the loan charge from employers in the first instance, and will pursue individuals for the tax due only where it cannot reasonably do so from the employer; for example, if the employer is no longer in existence or is offshore. The BBC is still there and is not offshore, as are the other employers mentioned by the noble Baroness, so HMRC will indeed seek reimbursement from them first, before it seeks to collect the liability from the individual. By the end of 2018, about 85% of the yield in advance of the charge was from settlements with employers. Since the 2016 Budget announcement, around 6,000 have agreed settlement, raising £1 billion for the Exchequer. These numbers will continue to increase as more settlements are agreed.
The Government recognise the impact of this legislation on the individuals affected and the importance of them receiving appropriate support. Some individuals are facing large tax bills, often as a result of using these schemes over a number of years or receiving large sums through the schemes. That is why the best thing for anyone concerned about paying what they owe is to get in touch with HMRC, which is expanding its specialist service for customers with additional needs to help them meet their obligations. HMRC has a good track record of supporting customers to pay their tax debts and has made it clear that it will not force anyone to sell their main home to pay their disguised remuneration debts. It does not want to make anyone bankrupt; insolvency is considered only as a last resort and few cases ever reach that stage. HMRC is determined to work with individuals to reach manageable, sustainable payment plans wherever possible.
My noble friend Lord Forsyth spoke about suicides and my noble friend Lady Noakes about the Samaritans. HMRC has been informed that a customer who had used DR schemes has taken their own life. Out of respect, and given HMRC’s duty of taxpayer confidentiality, the Government are not in position to comment further, but we continue to improve support to vulnerable customers and will extend HMRC’s valued needs enhanced support service to customers undergoing compliance checks. HMRC works alongside the voluntary and community sector to improve its support and to ensure that vulnerable customers receive adequate support beyond getting their tax affairs right.
Baroness Kramer
I do not want to keep stressing the issue of suicides, but in the one case that I am personally aware of is the Minister aware that HMRC is now pursuing the heirs for the loan charge?
Lord Young of Cookham
I was not aware. Of course, I understand the sensitivities of the issue and will raise the matter with HMRC.
HMRC has introduced simplified payment arrangements for those who approached it to settle by 5 April this year so that individuals will not have to pay the loan charge. Regardless of whether the individual decided to settle their taxes or whether the loan charge applies, for those who need more time to pay there is no maximum period for payment.
Resources for HMRC were raised during the debate. The Government have always provided HMRC with the resources that it needs. At the 2015 spending review, they invested £1.3 billion to transform HMRC to make it quicker and easier to deal with. In addition, since 2010, the Government have invested £2 billion in HMRC to tackle avoidance and evasion.
My noble friend Lord Forsyth raised the right of appeal on accelerated payment notices and follower notices. As my noble friend knows, the rules do not affect a taxpayer’s right to appeal against an HMRC decision or assessment concerning their tax liability. If the taxpayer successfully appeals the actual liability, the follower notice penalties will no longer be due. Again, Parliament granted HMRC these powers to discourage tax avoidance.
My noble friend also asked about retrospection. I think that I have dealt with that, if not wholly to his satisfaction. It is a new charge on DR loan balances outstanding on 5 April. It does not change the tax position of any previous year or the outcome of any open compliance checks.
My noble friend asked what the position was on the powers review. We agree that HMRC has to balance tax collection with important taxpayer safeguards. The powers review was a major project coming alongside the merger of HMRC and Customs and Excise. There has not been a similar fundamental change to justify another such review, but I say in response to my noble friend that we keep the tax system under review and will consider options for reviewing and updating the tax administration framework to ensure that it is effective in modern tax administration.
A number of noble Lords spoke about low-paid employees and social workers being affected by the loan charge. HMRC’s analysis shows that around 3% of those individuals who used a disguised remuneration loan scheme worked in medical services and teaching.
My noble friend Lord Tugendhat raised the issue of naming. Again, Parliament has legislated to allow taxpayers to be named in limited circumstances. These are prescribed explicitly in legislation. HMRC places importance on taxpayer confidentiality, and no one can be named simply for disagreeing with it. I hope that HMRC never engages in what my noble friend called “innuendo”.
In view of the number of interventions, I may claim a bit of injury time on the question about HMRC inaction on loan charges. The Government’s view, as I think I have already said, is that these schemes never worked. Compliance activity has been taken ever since the schemes were first used, including the use of thousands of inquiries into scheme users, successful litigation and agreement of settlements. The loan charge was introduced to draw a line under all outstanding DR loans, but HMRC has always warned against the use of DR schemes, with the first spotlight being published in 2009. Many scheme users did not disclose details of their scheme use, or disclosed partial information which did not enable compliance—this is in response to an issue raised by the noble and learned Lord, Lord Judge. Where DOTAS numbers were provided, HMRC routinely opened inquiries, and it will look carefully at cases where individuals provided evidence that they fully and properly disclosed their use of a DOTAS at the time and where HMRC closed an inquiry with that evidence. However, it does not believe that there are many cases where that has happened.
I am conscious that I have not said anything about Making Tax Digital, so I will say a few final words about that report. We want every individual and business to develop the skills and confidence to seize the opportunities of digital technology. In a world where businesses are already banking, paying bills and shopping online, it is important that the tax system keeps pace. Making Tax Digital gives UK businesses more control over their finances and allows them to manage their tax more easily so that they can focus on what they do best—innovating, expanding and creating jobs. The Enterprise Research Centre found in 2018 that web-based accounting software delivered productivity increases for micro-businesses of 11.8%. One should set that against the costs mentioned by my noble friend Lord Forsyth and the noble Baroness, Lady Burt.
I was asked what the position was on small businesses unable to go digital because of the absence of broadband. Businesses that are unable to go digital will not be forced so to do. If it is not reasonably practical for a business to join MTD for reasons of age, disability or remoteness of location—which can affect broadband connection—it may qualify for an exemption.
I am deeply conscious that I have not done justice to the many serious questions that have been raised, and I am already over my time. In conclusion, I thank noble Lords for their contributions to this stimulating debate—
Lord Kerr of Kinlochard
I am quite sure that the House will be very willing to extend considerable injury time to the Minister if he would be prepared to tell us not just what the boilerplate says but what he actually thinks.
Lord Young of Cookham
At the risk of getting myself into further trouble, I said fairly early on in my remarks that I took very seriously the tone of the debate and the criticism of the implementation of the loan charge scheme. I said that within the constraints—I hope noble Lords understand that there is now legislation in place—I would see whether there is any flexibility which might address the very real concerns raised by noble Lords. That goes way beyond my negotiating position; it is without commitment to what anyone in the Treasury may do. I take this debate seriously; the points that have been made and the cases that have been raised were moving. The report has made some very strong points, and I propose to raise with the Chancellor and ministerial colleagues the nature and tone of this debate, and see—within the constraints that I am sure all noble Lords understand—whether we can go some way to meeting the issues that have been raised. I hope I have reassured your Lordships that we will continue to give careful consideration to these very important matters.