Making Tax Digital for VAT (Economic Affairs Committee Report)

HMRC has still not done enough to raise awareness. The Institute of Chartered Accountants in England and Wales found in a survey as recently as last summer that 42% of businesses which are now required to comply with Making Tax Digital for VAT were not aware of its existence. The Treasury announced triumphantly last month that, as of December, over 80% of businesses in scope had started to prepare; but the fact that nearly one in five had not started to prepare, just three months before the introduction of Making Tax Digital, should have been more worrying. In its own research, the Daily Telegraph reported on 30 March, in a survey of some 500 companies, that 23% of affected companies had not even heard of Making Tax Digital; an additional 28% had heard of it but did not know how it would affect their business.

It seems likely that these are the same small businesses that HMRC also forgot about in calculating the costs of its programme. Serious questions remain about the expected benefits of the wider Making Tax Digital programme. HMRC and the Treasury expect it to yield higher tax revenue as businesses make fewer errors filling in their tax returns. But this does not seem to account for the fact that mistakes can run in both directions: businesses could be paying too much as well as too little. There is no convincing explanation of how businesses are meant to cope in rural and other areas where broadband connections are insufficiently good for this purpose.

We recommended that Making Tax Digital for VAT be delayed for a further year to address these problems. Clearly, that ship has now sailed. In the Spring Statement, the Chancellor reiterated that there would be no further mandation until after 2020. Our report recommended that no further mandation takes place until April 2022, to allow the Government to properly analyse and learn lessons from the implementation of Making Tax Digital for VAT.

Delaying until 2022 would also allow a reassessment of the benefits of the programme and its costs to the smallest businesses. We also recommended that the Government publish a revised long-term strategy for Making Tax Digital, accounting for the recommendations in our reports and the experiences of the programme so far. I ask my noble friend Lord Young whether he can give any further updates on these recommendations when he responds to the debate on behalf of the Government.

Our inquiry also sought to ask whether, after a plethora of new HMRC powers to address tax evasion and avoidance in recent years, there remains a fair balance of power between HMRC and the taxpayer. We concluded that HMRC’s powers have outpaced taxpayer safeguards and tipped the scales in HMRC’s direction. Before I begin, I must emphasise that the sub-committee wholly supports efforts to tackle tax evasion and avoidance but those efforts should enhance, not diminish, fairness in the tax system.

We found that several powers had been introduced with insufficient safeguards attached for taxpayers, particularly those on lower incomes or without agent representation. For example, accelerated payment notices require taxpayers to pay up front an amount of tax that HMRC thinks the taxpayer has avoided, before any dispute about whether the taxpayer is actually liable to pay tax to HMRC is settled by the courts; follower notices require taxpayers to pay tax that HMRC says the taxpayer has avoided by using a scheme that HMRC thinks is similar to one that has been challenged successfully in the courts. Taxpayers cannot appeal these notices, only the underlying tax liability. Taxpayers who continue to appeal a tax liability after receiving a follower notice and lose can face penalties of up to 50% of the tax liability added to their final bill. Both notices prioritise the fast recovery of tax revenue over fairness for taxpayers and, in my view, are attacks on access to justice. The sub-committee was very grateful to the noble and learned Lord, Lord Judge, who was able to advise the sub-committee on its draft conclusions. He criticised these powers for making HMRC judge in its own cause and fettering access to justice. I look forward to his contribution later in this debate.

To consider the overall balance of HMRC’s powers and taxpayer safeguards, we recommended a new collaborative review of powers between government and the tax profession, repeating an exercise so successfully conducted between 2005 and 2012 when Customs and Excise merged with the Inland Revenue. The Government noted this recommendation in their response, and I hope my noble friend can offer more clarity in his response to this debate on whether the Government will consider a new powers review.

In addition to legislative imbalance, we heard evidence of an aggressive and uncompromising culture of enforcement at HMRC. For example, witnesses told us that HMRC had presented voluntary requests for information as statutory requirements, made inappropriately harsh decisions on penalties, and alleged more serious conduct against taxpayers in order to access longer times for assessing tax. There is a sense, one witness told us, that HMRC is aiming to collect the maximum amount of tax rather than the right amount of tax. It may be that HMRC’s declining resources have made it impossible for it to satisfy demands to recoup higher amounts of tax revenue and treat taxpayers fairly. This is one area of government expenditure where increased expenditure actually produces increased revenue.

We recommended that consideration be given to the role of HMRC’s adjudicator, who currently considers taxpayers’ complaints about HMRC. She should, for example, proactively investigate the conduct of HMRC investigators in the manner of an inspectorate, or simply expand the types of taxpayers’ complaints that she can hear and strengthen her power to settle them. We also recommended a review of the case for an independent body to scrutinise the operations of HMRC.

The loan charge was the most distressing part of our committee’s evidence-taking. The new HMRC anti-avoidance measures, which came into force on 5 April 2019, introduced the measure known colloquially as the loan charge. This is an example of both the phenomena I have mentioned: disproportionate powers and an overtly aggressive culture. We received, and continue to receive, a huge amount of evidence on the impact this is having on individuals, which is often very difficult to read. There are already reports in the media of at least six suicides as a result of the implementation of the loan charge.

The loan charge seeks to tackle a tax avoidance scheme called disguised remuneration in which individuals, usually contractors, are paid in loans rather than income, to avoid income tax and national insurance contributions, on the understanding that those loans would never need to be repaid. The loan charge will classify any outstanding loans from these schemes, from 6 April 1999, as taxable under income tax. For those who have been using these schemes for many years, this requires them to pay many years of income tax in one go in one tax year.

In going back to 1999, the loan charge is retrospective. There is a long-established principle in the tax system that taxpayers are entitled to certainty in their tax affairs. As such, HMRC cannot go back further than six years, except in cases of fraud, but this charge goes back 20 years. HMRC says this is because the loans received in 1999 are still outstanding. The tax therefore applies to the present loan balance, not the past loan income. However, the problem with disguised remuneration schemes is that these are not really loans; they are income under another name. HMRC’s treatment of the loans as income in the loan charge is evidence that it agrees. We therefore recommended that the charge be disapplied to any disguised remuneration which occurred in years which would otherwise have been closed to HMRC inquiry.

Retrospection notwithstanding, we support HMRC in its attempts to address present and future disguised remuneration—it is clearly tax avoidance. However, we have pleaded with it, with limited success, to consider the different types of individuals embroiled in these schemes. Unlike some tax avoidance schemes, this affected middle- to lower-income individuals, rather than high-income individuals with easy access to professional advice. They believed the promoters of these schemes—often their employers—when they told them that the schemes were legitimate and approved by QCs and even by HMRC itself. They were perhaps naive, but they were not malicious.

One witness told us about a social worker affected by the charge. Before I continue, I note that we cannot independently verify the facts of this case, but it is illustrative of many examples received. The social worker was made redundant by her local council, which then offered to re-employ her as a contractor, as long as she used a particular scheme. Unknown to her, this was a disguised remuneration scheme. She was made aware of this fact only when she was presented with a bill by HMRC many years later. Some might say she should have investigated further, but as the witness said, she is a social worker, not a tax expert. The loan charge unfairly assigns the same culpability to lower-income individuals without easy access to professional tax advice as to better-advised individuals who should have known better. What is surprising about all this is that many of the schemes were promoted by employers with deep pockets, but we have found no evidence that HMRC is showing the same enthusiasm in pursuing either the employers or the promoters of the schemes.

I will finish by reflecting on the Treasury’s engagement with our inquiry. We invited the Financial Secretary to the Treasury, Mel Stride, to give evidence. At first, he said he was busy with the Budget, so we delayed our inquiry to accommodate him. He declined to attend on two occasions and he has since declined two further invitations to attend the Economic Affairs Committee itself. As rationale, the Treasury asserts a convention we do not recognise, claiming that the fact that no Treasury Minister has attended a sub-committee before represents a precedent. The Financial Secretary repeated this argument in the Financial Times on 31 March.

This is a matter of coincidence, not convention. No such agreement was in place when the sub-committee was created in 2003. In the past its inquiries have often been technical, uncontroversial and answerable entirely by HMRC officials, but the gravity of the evidence we received in this inquiry required a ministerial response. When HMRC and Treasury officials gave evidence, they could not answer several of our questions—quite understandably, because they were matters for Ministers. Furthermore, two of these invitations were from the Economic Affairs Committee, which has a long history of hearing from Treasury Ministers. The Chancellor gives evidence every year, and the Chief Secretary to the Treasury is likely to give evidence to us just next month. The Governor of the Bank of England attends every year.

In future years, when the finance sub-committee considers issues it believes merit a ministerial response, it will continue to invite Ministers from the Treasury. I hope that we will be able to co-operate more constructively for the good of this House and the Government. I would be glad of any reassurance to that effect from my noble friend Lord Young when he responds on the Treasury’s behalf. I beg to move.

MTD has the potential to improve the experience of tax compliance for small businesses, as well as facilitating the provision of business support, access to finance and tax credits. However, introducing it with the deadline of 1 April, which has already gone, is disastrous because small businesses are simply not ready. So I welcome the Economic Affairs Committee report. Its recommendations seem highly sensible. The first is deferring the mandatory introduction of Making Tax Digital for VAT by at least a year, while encouraging businesses to join voluntarily. This would have enabled HMRC to ensure a smooth transition, as well as helping business. Given the state of readiness of small business to achieve compliance, I am sorry that the Government have not seen fit to accept this recommendation.

The second recommendation was staging the transition to ensure that small businesses and HMRC are ready. I welcome the Government rowing back somewhat on their original intentions by requiring compulsory implementation only on VAT, and for companies above the VAT threshold. I also welcome the acceptance that sanctions will not be levied where companies can show that they have been doing their best to comply. The third recommendation was waiting until at least April 2022 to implement the next stage. This will allow time for lessons to be learned, and seems to have been accepted.

The Government may be rubbing their metaphorical hands in anticipation of increased tax revenue, but only one in 10 small firms responding to the FSB believes that MTD will have a positive impact on tax reporting and financial management processes, with more than a third believing that it will have a negative effect. However, I believe that, despite these considerations, the key problem is that small businesses are just not ready for this. Many small firms are still heavily reliant on offline accountancy methods and are not confident in their digital skills. Many live in areas without access to reliable broadband speeds. How does the Minister expect small businesses to overcome this problem, which is of the Government’s making because they have insufficiently improved the digital infrastructure? Nearly a third of small businesses use paper receipts and bank statements to keep track of their finances, and 37% use paper invoices. I can envisage the chaos that may at this moment be ensuing, as paper-based small businesses attempt compliance.

The fourth recommendation is to publish a plan for the long-term development of MTD, getting business to see the benefits rather than seeing it as just tax compliance. I totally accept that productivity, efficiency and modernisation are great benefits, and I am sure that many small businesses already realise this—but these are not the companies that I worry about. These incentives, and the long-term plan to promote them, should have been sold to them before, to persuade reluctant bosses to adopt the measures with a vestige of enthusiasm and not bury their heads in the sand, as they are now. Have the Government put the cart before the horse somewhat?

The FSB is calling for a full review of the rollout, and a guarantee that it will not be forced on those below the VAT threshold until at least the end of this Parliament—although they may need to be careful what they wish for. That date may not be too far in the future.

Many years ago now, I was chairman of the Civil Aviation Authority, which is a very fine body. We dealt a great deal with small airlines, as well as with large ones. I remember being struck by how difficult some of the officials at the CAA found it to put themselves in the position of people running small businesses and understanding the pressures on them. In the case of Making Tax Digital, we have another example of that. Having said that, however, the Government have a responsibility to encourage the digitalisation of the economy. The process of introducing taxes is one way they may do that, so I recognise that fact.

So far as the other proposals are concerned, on treating taxpayers fairly I applaud the Government’s acceptance of our view that HMRC should do more to publicise action against promoters of tax avoidance schemes. These schemes are of course promoted to boost the profits of the advisers, sometimes to the very great disadvantage of the clients of those firms, who get into trouble later. The important thing here is to change the risk-to-reward ratio to make it clear to the promoters that they are running great reputational risks by plugging schemes at the outer limits of what is permissible, or go beyond what is permissible.

By contrast, I greatly regret the Government’s rejection of our proposal that naming and shaming should be restricted to those who have actually broken the law, as distinct from those engaged in legal activities of which HMRC disapproves. I realise that that naming and shaming is not done casually, and that various steps must be gone through before HMRC goes public in these matters. But the practice of naming and shaming people who have not done something that is, or has been demonstrated to be, illegal seems contrary to the basic principle of natural justice. It is also in line with the deeply objectionable current practice of using innuendo and denigration to generate accusations and change behaviour. This is not something a government department should participate in. It is dangerously close to the way the police and others have behaved in the case of sexual allegations, the most extreme example of which is that of Wiltshire Police and Ted Heath.

I also regret the out-of-hand rejection of the proposal to give the First-tier Tribunal the power to conduct judicial review. I accept that, as HMRC says in its response, the Ministry of Justice and the judiciary would need to be involved in reviewing the need and mechanism for such a change, but the terms in which the rejection are couched show no recognition of the reasons for the recommendation. They are to try to even out the balance between the small taxpayer on one hand and the large government department on the other. It would have been helpful if rather more detail or meat could have been given in explaining why this is such a bad idea.

In general, we must recognise that we are dealing with a government department that has a good record. We are putting forward proposals to improve it and to try to ensure that those who work for large government departments, with all the expertise at their disposal, show a greater understanding of the position of small businesses and individuals who lack those advantages.

We also cover substantive fairness, in particular in relation to the loan charge legislation, which my noble friend Lord Forsyth explained. Substantive fairness is about how particular taxpayers or groups of taxpayers are treated in practice. The loan charge is a way of tackling tax avoidance and I certainly acknowledge that the Government are right to target that, including disguised remuneration schemes. What is much harder to accept is how the Government have tackled it. They have used retroactive legislation, taxing up to 20 years of income as if it were received in one lump sum on 5 April this year and with scant regard for the impact on individual taxpayers. The loan charge can catch taxpayers in a wide variety of circumstances. As we have heard, many were on low incomes and were put into umbrella schemes which they almost certainly did not fully understand. They just wanted to earn an income to support their families—an aspiration that our party normally applauds. Others were more aware that they were involved in a tax scheme, made appropriate disclosures in their tax returns and took comfort from the lack of challenge from HMRC over the years.

It was strongly represented to the committee that many individuals had no idea that further tax could be due. They spent the money that they received. They were not holding in reserve sums just in case a bill for 10 or 20 years of tax turned up; they believed that they did not need to. They are now overwhelmed by the debts that they are told they owe. It might well have been fair for HMRC to target the promoters of the schemes who profited from these unfortunate taxpayers, but many are out of reach and overseas. HMRC has instead targeted the little people.

I first raised whether this was fair for taxpayers last November, when we debated the Budget. I specifically asked my noble friend Lord Bates, who was then the Minister before he went walkabout, to go back to the Treasury after the debate and determine for himself whether it was fair. My noble friend duly wrote to me after the debate. The only time that fairness was mentioned in my noble friend’s two-page letter was when he said that,

“the Government believes it is unfair to the ordinary taxpayer to let anybody continue to benefit from contrived tax avoidance of this sort”.

A question whether something is fair was answered by saying what is unfair. This is a common HMRC and government tactic. In the Government’s March report to the other place on the loan charge, they avoided saying what was fair for some taxpayers by inverting the argument into what might be unfair for the totality of other taxpayers. That misses the point that fairness has a dimension which is taxpayer-centric.

The Government’s view seems to be that individual taxpayers can have no excuses for getting involved in schemes which avoid tax. My noble friend Lord Bates’s letter to me stated:

“It is an individual taxpayer’s responsibility to ensure the accuracy of their tax return and to understand the consequences of their decisions”.

That sounds like a simple proposition, but it is not realistic. There have been many studies of financial literacy in the UK, and all of them point to shocking levels of lack of financial knowledge. Over one-third cannot work out the impact of inflation; 16% do not know what the balance is on their bank statement; 40% cannot apply a discount to a price. Let us not kid ourselves about the competence of taxpayers.

I will bring this back to whether taxpayers are customers. Regulators are increasingly concerned about how businesses treat vulnerable customers. The Financial Conduct Authority claims that nearly half of the population is vulnerable in one or more ways at any one time. The FCA places responsibility on financial institutions to ensure that vulnerable customers are identified and then dealt with in a way which reflects the vulnerability. The onus is not on the customer to be able to make the right decisions. In their March loan charge report, the Government said:

“The government and HMRC takes the wellbeing of customers extremely seriously … HMRC’s teams are trained to identify and help vulnerable customers and, where appropriate, refer them to organisations such as Samaritans and Mind”.

Let that sink in. The Government’s solution is to refer people to the Samaritans. I am clear that if a bank said that that was its policy towards vulnerable customers, the FCA’s response would be immediate enforcement action.

The Government’s approach is particularly shocking against the background of a number of reported suicides, as referred to by my noble friend Lord Forsyth. These are people who are said to have been unable to cope with the consequences of the loan charge legislation. HMRC has referred itself to the Independent Office for Police Conduct in respect of one such case, which is a start, but neither the Government nor HMRC are facing up to the fact that the basic policy is not fair to some taxpayers and no amount of procedure such as helplines or extended payment terms will counter the harm that is being done.

I have spent a long time on the loan charge because I feel strongly that its lack of fairness is a blot on our tax system, but I also want to say a few words about Making Tax Digital. We all know that the future is digital and that digitisation has benefits for businesses and for government, but it is wrong for the Government to mandate digital solutions until it is clear that the vast majority of taxpayers can comply with ease and with minimal additional cost. That clarity simply does not exist, for all of the reasons that we set out in our report. We found that:

“HMRC is alone in its confidence that all one million businesses will be ready for Making Tax Digital for VAT in April 2019”.

I looked at last month’s edition of Economia—I do not expect noble Lords to know what Economia is, as it is the house magazine of the Institute of Chartered Accountants, of which I am a member. The latest survey it reported by the tax faculty of the institute found that only 28% of chartered accountants—this is only last month—believe that SMEs have a good awareness of Making Tax Digital and that only 22% think that they are well prepared. That is far too many businesses to put at risk. The top two concerns were the cost and administrative burden of implementation, followed by a lack of guidance from HMRC. This exactly mirrors the evidence that the sub-committee received. The next concern, at nearly 20%, was fear of software and technological change. Our evidence was that small and simple businesses did not need digital records for their own purposes. They are being forced on them by a dogmatic approach in the Treasury and HMRC. So far, Making Tax Digital has benefited only the software industry and professional accountants. We will find out over the next few months how much harm it does to the small businesses on which our economy depends.

I look forward to my noble friend’s reply to this debate. I hope that he does not merely repeat the Treasury’s refusal to face the difficult issues in our reports.

Concerning the proposed new powers for HMRC, it is surprising that the Government have proposed to treble the time limit for assessing income tax and capital gains tax from four years to 12 years. Victoria Todd of the Low Incomes Tax Reform Group is right in saying that the current timescales—four years normally and six years where a taxpayer has failed to take reasonable care—are reasonable. Where there is deliberate non-compliant behaviour amounting to fraud, there is already a 20-year limit. For inheritance tax, the limit is four years.

It is clear that significant extensions of the time limits, as proposed, will be very bad for the ordinary, honest taxpayer, for several reasons. First, the present limits make it incumbent on HMRC to look into all disputed cases relatively quickly. This means that taxpayers can more reasonably be expected to remember, or at least to discover, the facts relating to any tax-related queries.

Secondly, if HMRC does not have to raise any queries with taxpayers for 12 years, it will significantly reduce the incentive for HMRC staff to do so. HMRC’s staff resources and systems mean that it is better able to discover facts in an efficient and timely manner several years down the road than the average small business owner or individual taxpayer. Therefore, the balance of power is stacked in HMRC’s favour in the case of an inquiry into a tax event that took place 10 years ago more than in an inquiry into one that happened two years ago.

Thirdly, the case for longer time limits for offshore matters, compared with onshore matters, is becoming weaker rather than stronger. The adoption of the common reporting standard by more than 100 countries has led to the current situation where HMRC is receiving an unprecedented amount of information from many overseas tax authorities, as Keith Gordon of Temple Tax Chambers informed the committee. The Government’s response to the committee’s recommendation that they should start a fresh dialogue with representatives of tax professionals is disappointing. HMRC has dialogue with such representatives, of course, but it does not need to listen to their concerns. Regrettably, it seems not to have done so in this instance. I would like the Minister to explain the rationale for the removal of the safeguard provided by the tax tribunal’s oversight of HMRC’s attempts to obtain information from third parties, especially when the Government have not yet completed their consideration of the responses to their public consultation on this subject last year.

The committee considers the loan charge and disguised remuneration schemes, such as those involving the use of employee benefit trusts, an example of unacceptable tax avoidance. I would prefer them to be considered tax evasion because of the difficulty in drawing a line between acceptable and unacceptable tax avoidance. A loan that is not intended to be paid back and where the recipient of the loan is told that he or she will never have to do so, is, quite simply, not a loan at all. Furthermore, I do not think that all individuals using these schemes must accept any significant degree of culpability for placing an unfair burden on other taxpayers. Whether the employee was a care worker or an investment banker, the responsibility for a part of their remuneration to be made through such a scheme rested entirely with the employer; in most cases, the employee had absolutely no influence over this matter. It is especially regrettable that the Government rejected the committee’s recommendation to exempt from the loan charge those loans made in years when taxpayers disclosed their participation in these schemes to HMRC or which would otherwise have been closed. I look forward to the Minister’s comment on that point.

The committee rightly focused on HMRC’s changing culture. In common with my noble friend Lady Noakes, I agree with the committee’s policy to refer to individuals as “taxpayers”, not “customers”. HMRC’s recent decision to start referring to taxpayers as customers is very irritating—even more so than the fact that the London Underground and train operating companies no longer refer to “passengers”. I find HMRC referring to a taxpayer as a customer condescending. The taxpayer does not have a choice between offering his custom to HMRC or not. The Government’s partial acceptance of the committee’s recommendations in this area seems a bit reluctant and grudging, although it is encouraging that they accept the need to balance clamping down on tax avoidance and evasion with taxpayer protections.

Turning briefly to the committee’s report, Making Tax Digital for VAT, I agree entirely with the committee’s recommendation that the date for introducing a mandatory digital VAT system for small businesses should have been deferred for at least one year. It is correct that most small businesses are not prepared for it, and that many are still unaware of it or of how to respond. Many firms of accountants only contacted their clients about the changing requirements immediately before, or even after, 1 April.

It is true that HMRC invited small businesses to participate in webinars held in February, but many recipients of this invitation may not have understood the urgency or even how to participate in a webinar. The Institute of Chartered Accountants in England and Wales and the Chartered Institute of Taxation are among those industry bodies that have supported the committee’s recommendation that the mandatory date for digital VAT be deferred by at least one year. Many small businesses thought that VAT was already digital because for some time they have had to file it online anyway. It is disappointing that the Government have not accepted this recommendation although they have agreed not to pursue filing or recordkeeping penalties where businesses are “doing their best” to comply with the law. But, again, do we really believe that HMRC is in a position objectively to decide which businesses are doing their best and which are not?

It is to be welcomed that the Government have undertaken not to introduce the compulsory digitalisation of other taxes until HMRC has had time to assess the evidence from the income tax pilots and from VAT. However, can the Minister explain why the Government have rejected the recommendation to make no other taxes subject to compulsory digitalisation until 2020 at the earliest? Surely it is not realistic to continue to maintain that compulsory digitalisation will have been sufficiently tested and shown to work as early as next year; it will not even be enforced until September of this year, which means for the quarter ending 31 December. It is also disappointing that the Government have rejected the committee’s sensible recommendation to update the impact assessment to reflect the evidence gathered in recent months. Will the Minister consider carefully whether it is wise to adopt such a cavalier approach to this question?

Again, I congratulate the committee on two excellent reports and I look forward to the contributions of other noble Lords and the Minister’s winding-up speech.

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.

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.

Regarding the cost, I would far rather go with the estimates from the Federation of Small Businesses than with the, frankly, rather silly numbers that we heard from HMRC, which seem to suggest that it is completely out of touch with the real world of software costs in the marketplace. I point out that HMRC has allowed a delay for what it considers to be large and complex organisations—big businesses with a swathe of staff and several departments to take them through this process—while small firms are being told that they now have to report their tax through this new digital process. We understand that there will be some sort of leeway for those who attempt but fail—but, frankly, given HMRC’s lack of ability to relate to or communicate with small businesses, I am not sure that many have a great deal of faith in it.

Communication with that particular group is unbelievably weak. There really is no excuse, because HMRC knows every small business that is liable to pay VAT, so, if it chose, it could communicate with them directly. The answer that we frequently get is that information was put on the website on the “Spotlight” page, as I think it is called. That is considered to be communication, but it makes absolutely no sense. We heard from many people who were represented by accountants and specialists. My great fear—and, I think, that of the committee—is for the many people who do not have that representation and who are completely in the dark. As I said, this ought to be a good programme. It should be on a voluntary basis and have all the time that it needs, but poor implementation undermines what could be a long-term programme of significance.

However, I want to focus much more on the tax powers report. I agree with all those who have raised the extraordinary issue of the denial of rights to appeal accelerated payments notices and follower notices to tax tribunals, and who totally object to the disproportionate penalties for appealing follower notices and GAAR decisions. Justice is fundamental, and I wish that HMRC would understand that and take it on board. I cannot understand the argument for extending the time limit for assessing offshore tax to 12 years. Who in their right mind keeps records for 12 years, particularly on a small property or a few shares? This is nonsensical. HMRC is merely making up for the fact that it has been lax in pursuing cases where it believes that there is something to investigate. It should not be throwing the burden of its own incompetence, I might say, on to the taxpayer.

But I want to talk mostly about the loan charge. I agree with all those who have said that it is the little people who get no understanding from HMRC. In a sense, HMRC has not recognised that this is the pool of people it is dealing with when it comes to the loan charge. Many of the people who ended up becoming self-employed did so because of outsourcing. The majority worked once for local or central government, or for bodies such as the BBC, or even for HMRC. They did not seek to become self-employed. They were told that the only way to do this particular line of work was to become self-employed. Indeed, they were told, “If you want to be recruited, this is the agency we are using. Go to them, they will provide you with the advice and mechanisms to allow you to become self-employed and continue with your job”. This goes all the way from social workers to IT contractors.

HMRC denies engagement in this process but is totally culpable. On the All-Party Parliamentary Group we heard from people who were consultants to HMRC and are now being faced with a loan charge. This is perhaps a very good example, because the individual from whom we got the most detail was told that, to work as a contractor for HMRC, they would have to go to a particular recruitment agency—which had been retained, and was presumably being supervised, by HMRC—that would provide them with various options to enable them to structure themselves as self-employed.