Making Tax Digital for VAT (Economic Affairs Committee Report)

Lord Judge Excerpts

Monday 29th April 2019 Lords Chamber

[Lord Judge (CB)]

My Lords, I must declare an interest: for a time in the late 1970s, I was standing counsel to the Inland Revenue on my old circuit. I am sorry that I am going to be critical of those who once fed me. I declare a second interest, which we all have: I believe that tax liabilities should be paid. That is not merely a moral view. Every time somebody fails to pay his or her tax, the rest of us who do pay our tax have to pay more. Therefore, I have an interest in this discussion beyond merely having been counsel to the Inland Revenue.

I want to, if I may, grapple with some very simple propositions. The liability to pay tax depends on legislation. Hurrah! I am right. Unless legislation provides liability to pay tax, there is no liability to pay it. Hurrah! That is self-evident. Tax legislation has become intensely complicated. Indeed, it is not unfair to say that tax legislation over the past 10 to 15 years has made understanding tax liabilities virtually impossible. The legislation is virtually unintelligible—no hurrah for that. Sometimes no one—not Her Majesty’s Revenue and Customs, not the taxpayer, not good sensible accountants and not even wise judges—can be too certain about what the legislation actually provides.

We have to grasp those simple issues when considering this debate for this reason: where the law is uncertain, one or other side—it may be HMRC, it may be the taxpayer—is entitled to go to a court and to ask the court to glean what the legislation means and whether it establishes a tax liability. Of course, if it does, it must be paid; but if it does not, surely not. The principles are simple provided we remember one long and well-established rule at common law, easily forgotten: we have the right to unimpeded access to a court. It is one of the essential principles on which the rule of law is founded. Note that I emphasise “unimpeded”. This is not the time or the place to point that what has been done in the past few years to the provision of legal aid has damaged that principle. However, just because it has been damaged once we do not want to go on to damage it further.

I am speaking today in relation to The Powers of HMRC because it has identified a number of incursions into the right of unimpeded access. I strongly support the recommendation in paragraph 134,

“that all powers granted to HMRC since the conclusion of the Powers Review in 2012 should be evaluated and those evaluations published. All future powers should be evaluated after five years”.

I find the Government’s response to this paper alarmingly negative. The fact that the Minister has treated the committee with what I regard—I am being less courteous than the noble Lord, Lord Kerr—as a contemptuous disregard for serious issues has encouraged me to speak on my own behalf.

I wish to take one aspect of these various matters: the general anti-abuse rule. What does that define? Using that language presupposes that a scheme intended to reduce tax liability by reliance on litigation constitutes an abuse. The description “abuse” assumes that the scheme is unlawful or that, if not unlawful, it should be treated as though it is even if it is not. Since when has it constituted an abuse for a citizen, rich or poor, to seek to rely on law laid down annually by Parliament? It is a strange concept.

If where the legislation is uncertain, a case is litigated, the court may decide that the scheme is lawful and, if it does, no penalty can be imposed on the taxpayer for going to court. It would be an extraordinary proposition if it could. However, what that successful taxpayer risked in going to court was not only the costs of losing the litigation, which is fair enough, but the imposition of a huge financial penalty—not tax, not back tax, not unpaid tax, not interest on tax, but just a straight penalty.

That is precisely what is meant by the Government’s response on page 9 that this regime—I paraphrase—provides the taxpayer with an opportunity to settle the dispute without the application of penalties. That is a subtle threat, seemingly bedecked, as an inducement that, “It will be in your interests to do as we tell you”.

As the noble Lord, Lord Tugendhat, mentioned, all this applies equally to the provision for extending powers of naming and shaming. That is fair enough if you have done something shameful, unlawful or wrong, but unless you have, why should you be shamed?

HMRC may be a unique institution in our country but, unique as it is, it is not infallible. It is not always right. However, if HMRC tells you that if you challenge its analysis of a problem and you lose, and it can cost you, as your accountants will advise you, a huge penalty, what is your reaction likely to be? It turns HMRC into judge and jury in its own cause. You can describe it in a lot of different ways, but what I am driving at is that the threat—the risk—would undoubtedly deter you from going to court, from seeking the opinion and judgment of the court. That is its purpose and it is rather alarming. That is interference with access to justice. Can we imagine our reaction if any other government department or Minister tried to obtain the power to impose a financial penalty on anyone who had the temerity to take it or him or her to court? We would be horrified.

I understand—I know perfectly well as a matter of history—how many powers HMRC has been given over many years, but that does not justify any further extensions. I quite understand the need to address protracted delays in dealing with avoidance cases. I understand that the court processes can be misused. They are, sometimes. I understand that on occasions the system is simply being played with a totally unmeritorious misuse of the court processes to delay settlement of a clear tax liability. I understand all that. I was prosecuting counsel for the Inland Revenue for long enough to know that it happens, but provisions in the court processes themselves would address those problems and do so in a way that does not offend the principle of access to justice. For example, there could be a leave requirement. If a taxpayer wishes to take proceedings and the Revenue says it is hopeless, he would need leave.

There could be a conditional leave requirement, for example, “Okay, you can come to court if you like, but bring the tax and the costs into court. If you win you’ll get them back”. Further, and perhaps more importantly, if a court concluded that the scheme was without merit, was unarguable and was, indeed, no more than an abuse of the court, why on earth should the court not be given the power to declare that it is so? Then you can be named and shamed. There is a judgment that you have been abusing the court process.

There is a further power that could be considered: in such a case, if the court had come to such a conclusion, it would be open to the court to impose a penalty for such misconduct by the taxpayer, not only on the taxpayer but on the taxpayer’s advisers and on those who promoted what the court had found to be an abusive scheme. Such a declaration, such a power and such processes would obviously be matters for parliamentary counsel. I venture to suggest that this would provide a surer foundation, consistent with the rule of law and unimpeded access to justice, for the imposition of a penalty through a judicial process rather than through an administrative decision by a department that resented or objected to the citizen going to court. We really need an evaluative review of the wide accretion of powers to HMRC. I repeat that I strongly support the recommendation in paragraph 134.