Making Tax Digital for VAT (Economic Affairs Committee Report)

Lord Kerr of Kinlochard Excerpts

Monday 29th April 2019 Lords Chamber

[Lord Kerr of Kinlochard (CB)]

My Lords, I gravely miss the noble Lord, Lord Bates, but I understand why someone might want to walk a very long way to avoid having to answer this debate. It is a pleasure to see the noble Lord, Lord Young of Cookham, in his place. I first bumped into the noble Lord 58 years ago in Oxford High Street—or rather, he bumped into me. He was on a bicycle, an enormously tall one, and he was of course moving very fast. I could have been seriously injured but I was not, and he was so nice about it that I think I ended up apologising to him.

I remind him of this incident particularly because, as I am sure many noble Lords will remember, of the way the noble Lord answered questions a couple of years ago at the Dispatch Box. He dutifully read out an appalling piece of unimaginative boilerplate defending an indefensibly insensitive misuse of Executive power, but I cannot remember what it was about. When the House objected and protested, was the noble Lord taken aback? Not at all. He said that he had been reflecting over the weekend on how, if he was still a constituency MP, he would have advised a constituent complaining about being subjected to the treatment he had just described. He concluded that there was a way around the bureaucratic intransigence exposed by the question. He then spelt out for us the way around that he would have advised his constituent to take. The officials in the Box could hardly complain because his first answer was the one that they had drafted for him. His second answer was his own: sympathetic and human. It is that side of him that I wish to appeal to today. He will by now have guessed that I want to talk about the loan charge.

I was not a member of the Finance Bill sub-committee but I am a member of the Select Committee, so I am one of those who have received numerous distressing and disturbing letters from the public about the way in which HMRC is handling some of these historical cases. Clearly, the few cases summarised in appendix 5 of the report are merely the tip of a considerable iceberg. In evidence, HMRC suggested that about 50,000 cases were being pursued. I have been shocked by the Government’s casual and peremptory dismissal in their response of some of the points made in the report. I do not believe that the noble Lord, Lord Young of Cookham, would have approved such a response, and I will put three questions to him.

Question one concerns retrospection and how to define it. Paragraph 76 of the report states:

“The loan charge is … retrospective in its effect”.


Some of the cases described in the appendix concern taxes now deemed due in respect of earnings in 2004-07, 2005-07, 2005-10 and 2010-14. As I understand it, in none of these cases was there any warning or challenge while the individuals in question were using the scheme in question. Years later, they face demands and talk of debt collectors and county court summonses.

I see in today’s Financial Times the rather disturbing news that HMRC spent £26 million last year on private debt collectors, up from £6 million in 2014. In this context, I find that a rather sinister number. The committee thought this was unfair and recommended against retrospective action in respect of years past where taxpayers had all along disclosed their participation in a scheme now found to have created a loan charge. Page 4 of the government response rejects this and maintains that the charge is “not retrospective” because:

“It does not change the tax position of any previous year”.


Surely that is, at best, disingenuous and casuistic. It is true only in the sense that the catastrophic cumulative charge resulting from retrospection accrues and must be paid 100% in the current year—but it has accrued because of actions in previous tax years, those that would otherwise have been said to be closed. Would the Minister have approved the definition of retrospection on page 4 of the government response? My strong hunch is that he would not. If he would not, will he ask his Treasury colleague, the Financial Secretary Mr Stride, to reconsider it?

My second question concerns the committee’s recommendation in paragraph 80 that,

“HMRC urgently reviews all loan charge cases where the only remaining consideration is the individual’s ability to pay”.

The government response, on page 5 this time, rejects this too, chillingly adding that HMRC considers bankrupting individuals only as a “last resort”. That is reassuring. I read in the response that only since 2009 have the promoters of the relevant schemes—some of which had been running for 10 years by then—been obliged to inform users of their schemes that HMRC approval is not certain. Only in November 2017—18 years in—did HMRC start writing systematically to the 50,000 individuals who might be affected by the loan charge. I understand the reason for that—the legal position will have become clear only when the Supreme Court reached its judgment in 2017—but surely HMRC should all along have been warning those who were signalling on their tax returns that they were using such schemes that HMRC clearance was not certain and that there was a legal uncertainty here.

I worry that we seem to be pursuing those least able to pay. As the noble Baroness, Lady Noakes, said, they are the little people—and it is a great and rare pleasure to be able to say I agree with everything the noble Baroness said. The Minister will recall Leona Helmsley, the New York hotelier who famously said, “We don’t pay taxes; taxes are for the little people”. It earned her the title, Queen of Mean—somehow, I do not see the noble Lord, Lord Young of Cookham, as the King of Mean. We are not talking about Amazon, Starbucks, Google or Facebook, or about rich people with tax advisers. We are talking about people like the social worker whose case the noble Lord, Lord Forsyth of Drumlean, mentioned.

We know that the Minister is humane. We know he went to a decent university. We know he will be familiar with act 4, scene 1 in the “Merchant of Venice”. My question is this. Does he agree that it is right to show “no mercy” to individuals like the social worker mentioned by the noble Lord, Lord Forsyth? Does he not agree with the noble Lord, Lord Robathan, the noble Baroness, Lady Noakes, and me that some blame must be ascribed to the Inland Revenue and HMRC for lying low and saying nothing for so long, not putting people on notice? Is the Minister with Portia or with Shylock?

My third question concerns the relationship between this Parliament and the Executive. The Minister responsible for HMRC is the Financial Secretary to the Treasury. In my Treasury days, he was a feisty, powerfully brilliant young individual who had absolutely no truck with Civil Service boilerplates and people like me, and who enjoyed nothing better than a good argument with a parliamentary committee. He is now the noble Lord, Lord Lawson of Blaby. Does the Minister believe that the current Financial Secretary, Mr Stride, is right to refuse to meet the Select Committee? Does he think that the then Nigel Lawson would have done so? Would he have done so?

I recall from my Treasury days the sensible rule that Ministers do not have access to any individual’s tax affairs. But I also recall that, when there is prima facie evidence that a class of taxpayers—maybe in this case 50,000 strong—is being unfairly treated and seriously disadvantaged, with very serious consequences in some cases, the responsible Minister surely needs to put that right or take responsibility for it. Hiding behind officials just will not do.

I look forward to the Minister’s answers to my three questions—and I hope they are indeed his answers.

--- Later in debate ---

[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.