§ Mr. Mitchison
I beg to move, in page 37, line 32, to leave out "fifty" and to insert "one hundred".
§ The Deputy-Chairman
It would be convenient to discuss at the same time the following Amendments:
In Clause 44, page 39, line 25, to leave out "fifty" and to insert "one hundred".
In page 39, line 26, to leave out "twice" and to insert "three times".
In Clause 45, page 40, line 3, at the beginning to insert "twice".
In Clause 47, page 40, line 44, to leave out "five hundred "and to insert "one thousand".
In Schedule 6, page 73, line 23, to leave out "fifty" and to insert "one hundred".
In page 73, line 24, to leave out "twice" and to insert "three times".
In page 73, line 32, at the beginning to insert "twice".
If the hon. and learned Member wishes, there could be a Division on more than one of them.
§ Mr. Mitchison
I will move the Amendment more or less formally. All these Amendments are on the subject of penalties. There appears to be a systematic change in the law upon which the Attorney-General was prevented only by considerations of time from addressing us on Second Reading. I hope that we shall have his views now and then perhaps have time to consider them afterwards.
§ The Attorney-General
I think that it was about the same time in the evening that I started dealing with penalties on Second Reading, but I will gladly accede to the request of the hon. and learned Member for Kettering (Mr. Mitchison), in the hope that it will assist the whole Committee to see the scheme against its background. I should first explain, I think without any controversy, that the effect of all the Amendments is to enlarge the maximum penalties prescribed in the Bill.
I want to start with what is common ground. Everyone who knows anything about this subject will agree that the penalties prescribed under existing legislation are both confused and wholly illogical. Nearly all those will go. All the illogical and confused ones will go. Perhaps one or two minor ones, which we need not bother about, will be left unchanged. It was, and I think is, the general view that the maximum penalties prescribed under existing legislation are often grossly excessive in amount, and many people take the view that the penalty ought to be related to the tax lost to the Exchequer as a result of the taxpayer's misconduct, instead of being related, as it often is nowadays, to the tax on his total income.
We have adopted throughout the penalty provisions, where the yardstick is in relation to the taxpayer's liability, the yardstick of the difference between the tax he ought to have paid if he had made a proper return and the tax that he would be liable to pay on the return that he has made. We have accepted the view that the standard should relate to the tax omitted.
The third subject which was much criticised at the time of the Hinchy case was the fact that where proceedings are taken in the High Court the court has no power to mitigate the penalties. The 832 Treasury and the Inland Revenue have under our existing law power to mitigate, both before and after judgment. Under our proposals, where proceedings are taken before the courts the courts will have power to fix within the ceiling prescribed by the Bill the penalty which they think appropriate in relation to the taxpayer's conduct.
Finally, the view has been expressed in a number of quarters that penalties ought not to be used as a means of recovering tax over six years old which is out of date for assessment. For many years the penalty provisions have been used for that purpose, and it has been common knowledge. The use by the Revenue of the penalty provisions up to date had a twofold objective. The first objective has been the recovery by the Revenue of the tax which the taxpayer ought to have paid, even though it was a liability more than six years old in relation to which an assessment could not be made. The second objective has been the imposition of a penalty upon him for his misconduct.
That was all under the one process, and it worked fairly well, because the Revenue did not seek to levy, although it had power to do so under the Statute, wholly extortionate penalties. It proceeded in the case of neglect to use the penalty machinery for recovering all back duty, plus interest, sometimes with something else on top. Although the sum for which Mr. Hinchy sued was very large in relation to the amount of tax omitted on the one return, it was not omitted only from that particular return. In the Hinchy case, it was common knowledge that Mr. Hinchy would never have been called upon to pay the full amount of the liability, but that high ceiling was useful to achieve that end, namely, the collection of back tax.
We thought it right, in making this entirely new approach, to scrap a tremendous amount of dead wood, as the Committee will see if it looks at the Schedule, and to separate the two functions, the function of collecting the back tax and the function of punishment, the penalties. They are two distinct elements. For back tax collection, we propose this new system. The Revenue can, of course, make any assessment going back any number of years in relation to fraud and penalties 833 can be imposed in relation to fraud over a number of years beyond the six. In relation to neglect, where it appears from the course of conduct in the last six years for which the assessments can be made that there has been conduct before those six years leading to tax not being paid, then the Revenue can reopen assessments and make fresh assessments for the earlier period of six years.
This has the corollary, not unrelated to what my hon. Friend the Member for Carlton (Sir K. Pickthorn) and my hon. and gallant Friend the Member for Cheltenham (Major Hicks Beach) said a little time ago, that, where that six-year period is lifted, where the fence is lifted and the Revenue can go back and make fresh assessments for more than six years because of a course of conduct, the taxpayer will for the years in question in relation to which such assessments have been made be entitled to put forward any claim which he, for his part, inadvertently omitted, the object being to ensure that we collect only the back tax which the taxpayer ought to have paid and not a penny more in tax.
Let us suppose that a course of conduct has gone on for more than twelve years and there is ground for thinking that it started before the twelve years. Here again we say that the Revenue ought to be entitled to collect the back tax, but we have proposed in the Bill the additional fetter that the Revenue will not be able to do that and reopen for an earlier period without satisfying the courts that there really is a case which warrants it being done. The Revenue can go on with that process until it reaches a stage when it can say, "This is the duty which ought to have been paid, and we have collected it".
I am sure that both sides of the Committee will agree that taxpayers who are guilty of neglect or default in the making of returns for Income Tax purposes should not, no matter how long the neglect or default has continued, benefit thereby in avoiding tax. I hope that in whatever discussions we have on the penalty Clauses we shall have agreement and approval for that part of the scheme proposed by my right hon. Friend.
On top of that, we have thought it right to make a provision for the payment of interest by the taxpayer on the money of which he has had the use 834 during the period since his default, simple interest at 3 per cent. In that part of the machinery contained in this Part, we believe we have devised a way by which all back duty and interest on it can be recovered.
The question raised by the Amendments is really this. Bearing in mind that all the back duty can be collected, what should be the proper maximum limits for the penalties relating to the conduct of the taxpayer? I am sure—I hope I have made myself clear—that there is now no need whatever for high maximum penalties of the kind that the Statutes contain, because the recovery of the back duty element is completely taken out.
We have considered carefully what should be the proper scales. One does not get much help by contrasting the penalties which we propose with the penalties of the existing legislation, bearing in mind that the maximum penalties we propose are super-imposed on the liability to pay the back duty plus interest.
I ought to have made it clear that one penalty year was used to cover a whole number of years in which there had been default. I need not take up time with that. The maximum penalty for negligence which we have fixed has been determined on the basis that it ought not to be much greater than the penalty which will be sought by the Revenue in the worst cases in which fraud cannot be proved. That is the yardstick that we have taken. It should be a little bit greater, but not much greater, than the worst cases. There should be a certain amount of flexibility. In the past, it has not in general been necessary for penalty purposes to make any distinction between fraud and negligence because of the vast maxima which there have been for both.
In general, the penalty part which has been imposed in practice has been between 50 and 75 per cent. of the tax underpaid. What we propose is a penalty of £50 plus the amount of the tax omitted through negligence, and for fraud a penalty of £50 and twice the amount. I am taking it as shortly as I can and I (hope that I am being strictly accurate. The tax is recovered under a separate provision; the interest is recovered under a separate provision. On 835 top of that, there is the amount of tax which can be recovered as a maximum for the penalty. In cases of fraud, it is £50 and double the amount.
Bearing in mind the current practice of the Revenue, which has existed for many years, the Revenue is satisfied that these penalty maxima are right and that no more is required. My intention was that we could discuss in Committee whether there was any advantage in putting up a higher penalty or a greater range of penalties than has been imposed by the Revenue in the past. I do not think that there is any advantage in doing so. It is right to have regard to the current practice and to fix the maximum limits in accordance with that. We can discuss that in detail, but I hope that it is helpful to the occupants of the Opposition Front Bench for me to indicate the basis on which we have worked and why we have fixed these limits.
I do not know that there is very much more that I can say at this stage to help the Committee. I thought that it would be helpful to the Committee to show the approach that we have made. We can discuss—we probably will—on these various Amendments whether a particular limit is right or wrong, but the case I will make for the limits which have been fixed is that they are limits which take into account and have regard to the existing practice of the Revenue. We think, bearing in mind in relation to fraud that we can have several penalty proceedings if the fraud has gone on for more than one year, that the maximum is sufficient to act as a deterrent and to give full power to the Revenue and the courts to impose penalties which should meet and deal with the misconduct of the individual taxpayer.
§ Mr. Mitchison
May I ask the right hon. and learned Gentleman two questions? It is late at night, and I hope that they will not take him long to answer. The first is this. He mentioned that there were outstanding penalties in other parts of the Income Tax Acts than those referred to in the Schedule which have not been included. Was that deliberately done? He sees no advantage in getting all the penalties together in one part of a single Act? That is the 836 first question. The second one is, I hope, capable of easy answer. Apart from penalties under the Income Tax Acts, there is an obvious channel for prosecutions for perjury against people who make fraudulent returns. Is there any other under the ordinary criminal law?
§ The Attorney-General
Yes, I think there are. I will say a word about it if the Committee will bear with me. I can give details when we resume on the penalties which remain untouched. They are all for minor offences and are small penalties, and they do not really fit in very well with this new code. I can give the details. I think the hon. and learned Gentleman will see that really it is best to leave them just as they are. I believe there are only about two of them.
What I ought to have mentioned is that on top of this liability for penalty under these proceedings there will be liability for prosecution. There is prosecution under the Perjury Act, and there is also power to prosecute under—I think I am right in saying—one or two other Acts. I have not got them actually in mind. Perhaps I could give them to the hon. and learned Gentleman later and not take up time with that now. But there are other provisions.
There is one point with which I think I might deal. It may be helpful to the Committee. It is sometimes said, "You prosecute the small men, but you do not prosecute the big ones." I should like to say a word on that. Of course, the hon. and learned Gentleman will remember cases where we get false claims for allowances for a non-existent wife or child, and they do lead to prosecutions. The figures are very small. In the last three years to the end of March they are 41, 54 and 31 for false claims for personal allowances, and 16, 9, 26 for Schedule D offences.
§ The Attorney-General
I cannot give details at the moment. I am not sure about that. They are all criminal prosecutions.
I think the Committee will agree that the imposition of a penalty is an obvious way of dealing with an Income Tax offence, and until forty or fifty years ago all Income Tax offences were dealt with 837 by means of penalties, but that does not mean that where we get a blatant, deliberate fraud there should not be prosecution, and, of course, there have been these personal allowance claims which are false and clearly are of a deliberate and blatant sort, and the facts rarely admit of dispute.
I am certainly not one of those who think that the big cases should not be the subject of prosecution, but there are difficulties, as the hon. and learned Gentleman will know, about prosecutions in such cases. For one thing, it is very difficult indeed to recover the full extent of back duty without some degree of co-operation on the part of the taxpayer. That would not be forthcoming if he thought that in any event he would inevitably be prosecuted, but he gets very heavily punished under existing procedure, and will be under this procedure, by having to pay all the back duty, interest, and a penalty on top. I can deal with this more fully at a later stage.
There is no ground whatsoever for thinking that the Revenue is seeking to treat the smaller taxpayer more harshly than it does the big taxpayer who does not comply with the law. The big cases present difficulties which are not so apparent in the small cases. Perhaps we can deal with that more fully when we resume.
§ Mr. Houghton
I am sure that the Committee is very grateful to the Attorney-General for his very careful and clear explanation of the Chancellor's approach to this difficult problem and of the pattern which has been adopted to make the structure of the penalty Clauses more coherent, more logical and on the whole probably fairer.
I dissociate myself completely from much that was said about the practice of the Inland Revenue in the matter of penalties at the time the Hinchy case was on its way to the House of Lords. Some of it was malicious but a good deal of it sprang from a misunderstanding of the actual use of the powers for imposing penalties which the Inland Revenue possessed. The Attorney-General has described to the Committee the use to which the Inland Revenue put its wide powers to impose heavy penalties in order to overcome the weaknesses in the Act, first as regards time and secondly as re- 838 gards interest. It used the wide margin in hand within the existing penalties to remedy some of the deficiencies elsewhere in the law. That may not have been strictly appropriate to the use of the powers which it was given but it seemed to be right in the interest of the public.
§ Mr. Houghton
Yes, it had judicial approval. There is a good deal else in connection with the use of powers for imposing penalties which received not only judicial but Parliamentary approval. A one-time chairman of the Board, giving evidence before the Committee of Public Accounts, said that he conceived the job of the Inland Revenue to be to collect tax and not to make criminals. There is a good deal in that because, as the Attorney-General has said, it is not easy to recover tax and send people to prison at the same time.
Some penalties here have no relationship to the amount of duty lost. The Attorney-General did not say much about them. There is, first, the penalty for failure to give notice of liability and secondly there is the penalty for failure to comply with the notice served by the tax authorities. Then there is in Clause 47, for example, a penalty not exceeding a certain sum for aiding and abetting. In none of those cases is the penalty related to the amount of tax lost.
The first thing we have to ask ourselves is whether those penalties are adequate to the failure of the taxpayer. For example, in Clause 42 (3) the amount of the penalty for failing to give a notice which is required is £50. In Clause 43, failure to comply with a notice served can insure a penalty of £50 and a further penalty… not exceeding ten pounds for each day on which the failure so continues.It is interesting to observe in this connection that the penalty I have referred to under Clause 43 is exactly the one which the Codification Committee recommended twenty-five years ago. Should it be increased in 1960 over the sort of figure which was thought of by the Codification Committee of 1936? The Codification Committee was proposing to substitute that lighter penalty for a much heavier one under the Act as it stands at present. In Clause 47—
§ The Attorney-General
Might I just point out that under Clause 43 (1) the penalty is £50 and a continuing penalty not exceeding £10 a day where the return does not relate to the taxpayer's own income; but under subsection (2), where there is a failure in relation to his own income, the penalty is not to exceed— the aggregate of fifty pounds and the total amount of the tax with which the said person is charged (whether for one or for more than one year of assessment) —.so I do not think it can quite relate to the Codification Committee because it is split up here.
§ Mr. Houghton
I had not lost sight of that. In Clause 43 there is provision for failure to comply with two different sets of notices: first, a notice which does not relate to the taxpayer's own tax liability, and secondly a notice which does. I agree that there is one penalty for the return which does not relate to the taxpayer's own liability, and a higher penalty for failure to comply with a notice that does relate to it.
There is running throughout this pattern of penalties a failure to pay regard to the change in the value of money. I was referring, when the right hon. and learned Attorney-General intervened, to the penalty not exceeding £500 provided in Clause 47 for aiding and abetting. That, in fact, is exactly the same figure that the Codification Committee recommended in 1936. As the Attorney-General says, the adequacy of these penalties can be looked at when we come to them in detail, but it seems to me that they were lenient having regard to the two factors: first, the change in the value of money, and, secondly, that in these outright money penalties the taxpayer's liability is not involved and therefore there can be no additional penalty on account of loss of tax.
I think that the major Clauses which the Committee will want to consider carefully are Clauses 44 and 45, which deal with fraud and negligence respectively.
The Amendments to Clause 44, page 39, lines 25 and 26 propose to stiffen the penalties for fraud; to increase £50 to £100, and to increase the penalty as regards the loss of tax from twice to three times the amount of tax lost. As regards negligence, we think that the penalty of 840 £50 could well remain, but the amount of the penalty related to tax undercharged should be twice the amount and not the single amount of the tax undercharged. In that context the Codification Committee recommended a penalty of £20 and three times the difference between the tax charged and the tax that ought to have been charged.
I agree with the right hon. and learned Gentleman the Attorney-General that what we have to do in approaching this difficult question of penalties is, first, to recover the tax, and to go right back to do so; secondly, to charge interest; and, finally, to decide on the penalties which will be imposed over and above the other two. It is the total of the interest and the penalties on top which we really have to regard as the penalties imposed on the taxpayer, because recovery of the tax which should have been charged is no more than he was due to pay and, although it may be inconvenient for a taxpayer to have to pay a considerable sum at one time which he ought to have paid over a period of years, we cannot be unduly sympathetic with the taxpayer who puts himself in that position.
The grand total of recovery of the tax lost, the interest on the tax lost, and the penalties on top may well be a serious one for the taxpayer, but we have to look at the penalties by themselves as being the real deterrent factor which the penalty Clauses are intended to provide.
The new pattern of penalties still leaves behind a good deal of miscellaneous stuff in the Income Tax Act. Some of it is probably obsolete and some of it is of such minor importance that it is not worth bothering about. I do not suppose, for example, that we need trouble ourselves with the £10 penalty which can be imposed on a rating officer who refuses to allow the tax authorities to copy the rate book. I do not really suppose that we need bother with the penalty of £100 and dismissal which may be meted out to an inspector found guilty of certain misdemeanours. I have not heard of a single case in forty years. Usually it is enough either to sack him or to take proceedings against him, when he usually goes to prison.
There is a miscellany of cases in the Act which relate to penalties of one kind or another, though I do not think that we need be unduly concerned about them in relation to the penalties which 841 are intended to deal with fraud, negligence, and other malpractices in connection with a taxpayer's liability and obligations on other persons in connection therewith.
There is another fallacy that many people entertain about our present taxation system and the relationship of penalties to the present level of taxation. I do not believe that the present level of taxation necessarily contributes very much to the extent to which taxpayers fail to make returns, or forget things, or deliberately make false statements in their returns. I have been doing a little research into past reports on this subject. Here is the Report of the Select Committee of 1905 on this very question when Income Tax was Is, in the pound. The terms used and the concern expressed then about these matters were in much graver language than we would employ today.
Then there was the Royal Commission on Income Tax of 1920 which had a good deal to say and was very concerned about the amount of tax lost. Each of those Commissions and the Codification Committee and the Radcliffe Commission had things to say about what taxpayers were doing and the penalties which should be imposed on them for failing in their legal obligations to the Revenue. This has been going on for a long time and there are probably many other checks and curbs against these malpractices which are, or could be, employed by the Inland Revenue and which would save the taxpayers from themselves. One of them is Pay-As-You-Earn, and another the obligation on persons paying interest, fees, wages or salaries to make returns to the tax authorities. The taxpayer is thus spared the dilemma of whether to disclose that source of income or not. Some of them fail to disclose all their income and are very surprised when they get a tactful letter from the Inland Revenue asking them if they have forgotten something.
Those are also part of the apparatus for the prevention of fraud and evasion. The penalties are there for those who escape the other safeguards which are erected for the protection of the Revenue.
Generally, the whole Committee will welcome the new pattern of penalties as being better than the old, certainly 842 better to look at than the old. If one took the old penalties literally, one was frightened by the Inland Revenue's powers. Although when talking to my legal friends I explained that the Revenue authorities never used those powers in their full rigour, my friends were unconvinced. The fact that theoretically the Revenue was able to impose such penalties and that not even the courts could mitigate them seemed to shock their ideas of constitutional principle.
The rationalisation of the penalty Clauses is to be welcomed. All we shall have to discuss in detail will be whether certain penalties are adequate in the circumstances of today after taking into account the Revenue's power to go further back now than it has been able to do before, and also the matter of interest, but having regard also to ideas which have been thrown up by reports of committees in the past.
§ The Attorney-General
I am grateful to the hon. Member for Sowerby (Mr. Houghton) for giving us notice of his approach to the penalty provisions and I can say that I hope to satisfy him, when we get to the various detailed proposals, that the limits which we have put in the Bill are about right. I am grateful to him for giving us notice and we will certainly consider what he has said when we resume our discussion.
Mr. H. Wilson
I beg to move, That the Chairman do report Progress and ask leave to sit again.
I think that it will be for the convenience of the Committee to adjourn our debate now. I join with my hon. Friend the Member for Sowerby (Mr. Houghton) in expressing thanks to the Attorney-General for his very helpful and lucid account of the position which. I am sure, will greatly benefit the Committee when we resume our consideration of these questions on Tuesday. By spending a little extra time this evening doing that, the Attorney-General has enabled the Committee greatly to shorten the debates on Tuesday. Obviously, we will have to keep a free hand on how we shall handle the Amendments. My hon. Friend, in an equally clear and lucid speech, expressed his first reaction to what the Attorney-General had said and his general approach, but, fortunately, we 843 shall have a day or two to think out the implications of what has been said and I think that it would only waste time if we went on with the debate now.
I am sure that what the right hon. Member for Huyton (Mr. H. Wilson) said is right. Personally, I think that there is nothing like an hour's discussion on Income Tax penalties and assessments to induce a profound desire for slumber. I think it right that we should adjourn now and turn our steps towards home and indulge in the sleep of the just.
§ Question put and agreed to.
§ Committee report Progress; to sit again upon Monday next.