Finance (No. 2) Bill (Fifth sitting)

Abena Oppong-Asare Excerpts

Committee stage
Tuesday 11th January 2022 Public Bill Committees

[Lucy Frazer]

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

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

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

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

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

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

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

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

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

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

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

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

[Abena Oppong-Asare (Erith and Thamesmead) (Lab)]

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

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

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

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

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

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

[Alison Thewliss (Glasgow Central) (SNP)]

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

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

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

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

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

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

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

--- Later in debate ---

[Lucy Frazer]

Clause 97 is the third of three clauses relating to HMRC’s tax administration provisions. The clause makes minor technical revisions to the provisions for the calculation of income tax in respect of certain pension charges.

Section 23 of the Income Tax Act 2007 sets out the steps to be followed when calculating income tax liability. At step 7, additional amounts of tax that have not been taken into account in the earlier steps are added to the calculation, and those are listed in section 30. The list in section 30 includes a number of freestanding tax charges relating to registered pension schemes.

The Committee will remember that clause 96 operated on those freestanding charges to provide certainty that taxpayers liable for them must notify their liability to HMRC. The Government have identified the fact that some of those freestanding charges—some of the unauthorised payment charges and surcharges, and the overseas transfer charge—have been omitted from the list in section 30, so we are taking this opportunity to correct that by adding them.

Clause 97 adds to the list in section 30 the overseas transfer charge and the missing unauthorised payments charge and surcharges. The charges ensure that the correct amount of tax due in respect of those charges is produced at the correct step of the tax calculation. The effect is to ensure that HMRC will be able consistently to calculate and assess tax liabilities in respect of those pension charges. In combination with clause 96, clause 97 requires taxpayers to notify HMRC of their liability for the charges, and HMRC will be able to charge penalties for failure to notify and will use discovery assessments to recover tax that has not been notified. Clause 97 is introduced with prospective effect only from the 2021-22 tax year.

Clause 97 makes minor technical revisions and, together with the changes in clauses 95 and 96, gives consistency and certainty of tax treatment in HMRC’s tax administration provisions relating to those freestanding tax charges. I commend the clause to the Committee.

[Abena Oppong-Asare]

I thank the Minister for her explanation. As she mentioned, clause 97 follows on from clauses 95 and 96, and is a chiefly technical clause to amend the list of other income tax charges in subsection 30(1) of the Income Tax Act 2007. The Labour party will not oppose the clause.

[Lucy Frazer]

I thank the hon. Lady.

Question put and agreed to.

Clause 97 accordingly ordered to stand part of the Bill.

Clause 98

Power to make temporary modifications of taxation of employment income

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

--- Later in debate ---

[The Exchequer Secretary to the Treasury (Helen Whately)]

I thank you, Sir Christopher—and the hon. Member for Gordon, who duly flagged the order of proceedings. Clause 99 and schedule 16 make technical amendments to capital allowances, company car tax and vehicle excise duty legislation so that the tax system continues to function as intended when vehicles are certified through the new domestic comprehensive vehicle type approval scheme due to be introduced this year.

A vehicle manufacturer is able to apply for a type approval to allow specific types of vehicles to be used on the road and can then certify that each vehicle manufactured within that type conforms with the specifications of the approval obtained. Since the end of the transition period on 31 December 2020 following the UK’s withdrawal from the European Union, European type approvals have no longer been automatically recognised for vehicles for use on roads in Great Britain.

Since 1 January 2021, a provisional domestic type approval scheme has been in operation. Manufacturers with an EU type approval have been required to apply for a provisional domestic type approval, which is valid for a maximum of two years. During 2022, the provisional domestic type approval scheme will be gradually replaced with a new comprehensive domestic type approval scheme, which will introduce new certificates of conformity. This will be implemented through separate legislation in 2022 by the Department for Transport.

Clause 99 and schedule 16 make technical amendments to relevant legislation to update the types of official vehicle approval certification recognised for determining the level of a vehicle’s carbon dioxide emissions for the purposes of capital allowances, company car tax and vehicle excise duty, including new certificates of conformity that will be introduced through the domestic type approval scheme, allowing manufactures to continue to report their CO₂ emissions. This will ensure that vehicle owners and keepers continue to pay the tax for their vehicles as intended from 2022 following the introduction of the new scheme.

For the purpose of capital allowances, the clause and schedule will also confirm in legislation that the applicable CO₂ emission figure from the official documentation will be that certified under the worldwide harmonised light vehicle test procedure. The technical changes in the clause and schedule will ensure that the tax system continues to function as intended when vehicles are certified through the new domestic comprehensive vehicle type approval scheme due to be introduced in 2022.

[Abena Oppong-Asare]

I thank the Minister for her explanation of clause 99, which introduces schedule 16, which concerns emissions certificates for vehicles. When purchasing a car, capital allowances are in part determined by the level of CO₂ emissions. A 100% first-year allowance is available for new cars that have zero CO₂ emissions, including electric cars. Otherwise, writing down allowances are available at the main rate of 18% per annum for electric cars and those with low CO₂ emissions—up to 50 grams per kilometre driven—or 6% per annum for those with emissions exceeding 50 grams per kilometre. The measures in the clause allow for greater CO₂ emissions figures to be used for purposes of capital allowances, taxable benefits arising from provisions of cars and vehicle excise duty. For that reason, we will not oppose the clause.

[Richard Thomson]

Thank you, Sir Christopher, for your opening comments on this group. My party does not get too many advances or victories in this place, so it is important to savour them when we can. I will certainly savour this one. I have a sense of clairvoyance about what the Minister will say in response.

We fully support the intention behind schedule 16. It is important to have the certification regime in place. However, as I argued when discussing the SNP’s new clause 5 in the previous group, it is important not only that consumers have confidence in the figures that are published, but to understand the impact that their publication has on behaviour. When we discussed new clause 5, we talked about the very incremental changes to vehicle excise duty, and my party proposed that we should look at the impact of those on consumer behaviour. Similarly, we feel we must understand how emissions certification changes consumer and manufacturer behaviour.

As a fundamental point, when we are as engaged in trying to achieve net zero as all Governments in these islands say that they are, it is important that Government have clear oversight of how spending and taxation influence behaviour in driving movement towards net zero. This measure should be no exception, and that is what our new clause seeks to achieve. In the fairly safe assumption that it will not be accepted by the Government, I would like to know how they intend to monitor how the changes drive behaviour.