Finance Bill

Lord Turnbull Excerpts

3rd reading (Hansard): House of Lords & Committee: 1st sitting (Hansard): House of Lords & Report stage (Hansard): House of Lords
Wednesday 15th November 2017 Lords Chamber

[Lord Turnbull (CB)]

My Lords, I am pleased to introduce the report of the Sub-Committee of the Economic Affairs Committee on the draft Finance Bill 2017. It was prepared under the excellent chairmanship of the noble Lord, Lord Hollick, before his term ended. I thank our two advisers, Elspeth Orcharton and Tony Orhnial. It is a funny old world in which we are debating this—only days before the next budget cycle starts—but then 2017 has been a funny old year anyway.

As tax policy and rates are outside its remit, the committee looks into issues of administration and simplification. One issue leapt out of the Bill. Making tax digital, as the Minister indicated, covers only nine pages out of 660 but we were extremely concerned by what we saw. In the original plans there were proposals to require all companies, large and small, plus unincorporated businesses and private landlords—about 5 million entities—to keep records digitally using not only spreadsheets but software compatible with HMRC systems; to submit a tax account quarterly; and to prepare an annual statement. This was to apply to all taxpayers with incomes of over £10,000 a year unless they secured an exemption as digitally excluded, which is not easily done. It was put to us that 80% of farms have broadband speeds below the Government’s minimum standards. Note that this is income over £10,000—not net income or profit—and that this level is below the personal allowance and the minimum wage.

We also found that the consultation process was inadequate and taxpayer awareness of the changes was low. HMRC was making the elementary error of moving to the next phase before the results of any pilots were available and analysed. Even on HMRC’s own figures, it will take businesses 10 years to recoup the start-up costs from the savings made; software development was lagging behind schedule; and inadequate provision was being made for businesses with irregular or seasonal incomes, such as farmers, performers and those working in the gig economy. We were told that 53% of independent retailers still had no electronic point of sale. So it has a lot of ground to cover.

When a major change is introduced, it is better practice to start with larger businesses, which are better equipped, moving down to smaller ones as experience is gained, as was done with pensions auto-enrolment. However, this time, HMRC was starting at the bottom. Why was it behaving in this way? The answer is that it believes that by making small businesses keep quarterly, rather than annual, accounts, it would collect more tax—around £1 billion per annum—by reducing errors and carelessness. Few people believe that this was plausible. It was pointed out that errors could go both ways and better advised taxpayers could end up paying less. The timetable was being driven not by what made sense for the project but by what had been agreed by the OBR and put into the Budget arithmetic.

The FBSC recommended: a slower timetable to allow more consultation and a better pilot study to be completed; no mandatory digital reporting below the VAT threshold, then £83,000; more attention to non-standard businesses; an updated impact assessment for taxpayers; and an updated business case for HMRC. I am pleased to report that HMRC, having for months shown little sign of movement, has brought forward some welcome changes, which were announced in June of this year and which the Minister has just repeated. These include: a slower timetable; no mandation below the VAT threshold, though businesses can opt in; and, above this threshold, initially only VAT submissions are to be digital, with other taxes not brought in until after 2020.

We do not know if this was the result of genuine conversion or just the expediency of jettisoning anything controversial in the post-election panic—but let us give the Government the benefit of the doubt.

So is it job done and a victory for parliamentary scrutiny in this House and the other place? Not quite. The most egregious flaws have been addressed but there are still concerns in the taxpayer community. Taxpayer awareness remains low and the pilots are still seen as too limited. It is far from clear that the principle set out by the noble Lord, Lord Carter of Coles, in his 2006 report on online taxation is being observed—that is, that capacity should be tested at least a year before implementation. There is no sign yet of the revised impact assessments and no clear road map for the proposal to widen the scope of making tax digital beyond VAT.

What are the general messages from this controversy? First, I should make it clear that the committee fully endorses the view that the adoption of digital technology for delivering public services will grow and grow, but the pace and sequencing require careful planning and efforts must be put in to helping all taxpayers to prepare. Businesses come in all shapes and sizes and have different capabilities. Secondly, departments must look at the totality of interventions on the sector. At one point it looked as though the self-employed could be hit by paying more tax, incurring higher costs, higher business rates and higher national insurance contributions while they saw corporation tax being cut and the IT giants getting off lightly. Fortunately that train wreck seems to have been avoided. Thirdly, it is dangerous to introduce major changes to meet an arbitrary timetable for increasing revenues.

There is another wider lesson for HMRC and DWP. They need to recognise just how complicated and chaotic are the lives of many in the poorer and less well-educated parts of society and just how financially precarious they are, as revealed by the recent report by the Financial Conduct Authority. Making tax digital is not the only scheme that has run into criticism for failing to recognise this. The noble Baroness, Lady Primarolo, will well remember the difficulties facing the introduction of tax credits. The same is happening right now with universal credit.

The history is that, for many decades, the Inland Revenue tried to reduce the frequency of its contact with individual taxpayers, through PAYE, MIRAS, interest and dividends deducted at source. The arrival of tax credits has put that into reverse. However, an organisation staffed by highly professional people—mostly graduates—in secure jobs, being paid regularly and with financial resources to fall back on, may find it difficult to empathise with families whose circumstances can change by the day and who are living on the breadline. My final recommendations are that those tax and benefit officials dealing directly with the public should spend time at a CAB office, a debt charity or an MP’s surgery. Then they should tune into “The Archers”—not for the love lives of teenagers or pensioners, which feature so prominently these days, but to follow the fortunes, or otherwise, of the Grundy family, who are scratching a living on all kinds of dodgy enterprises and are barely making ends meet. Officials should ask themselves before they press the button on something like MTD: do the Grundys understand what is being asked of them and can they cope?

In conclusion, there were many pressures on government to modify the original MTD proposals. What we have now is significantly better than it was a year ago and for that this House can claim some credit. I hope, however, that the Minister will convey the remaining concerns back to HMRC and the Treasury.