§ Amendment proposed: In page 37, line 32, leave out "fifty" and insert "one hundred".—[ Mr. Mitchison.]
§ Question again proposed, That "fifty" stand part of the Clause.
§ 4.20 p.m.
§ Mr. Douglas Houghton (Sowerby)
Late on Thursday night, the Attorney-General made a comprehensive statement on the new penalties in Part III of the Bill. After I made a brief comment on some aspects of the new proposals, we left the matter over until today, each of us, no doubt, reflecting on the points that had been raised.
It is a pity that the Chancellor of the Exchequer did not appoint a Committee to review the penalties as was suggested by the Royal Commission on Income Tax. That would have given us the opportunity of studying not only new proposals, whatever they might have been, but the reasons for them and, possibly, reading evidence in connection with them. As it is, we knew nothing of the new proposals until the Second Reading of the Bill and we have had to plough our way through some complicated Clauses to find out, not only what they mean, but also the general approach to the proposed new scale of penalties.
Secondly, we are grateful to the Chancellor of the Exchequer for having provided the Opposition with a schedule of the penalties in the Income Tax Acts and what is to happen to them under the new proposals. If we could have more of that kind of assistance in our debates, it would make for speed and remove misunderstanding.
We are discussing, together with the Amendment in page 37, line 32, the following Amendments: in Clause 44, page 39, line 25, leave out "fifty" and insert "one hundred"; in page 39, line 26, leave out "twice" and insert "three times"; in Clause 45, page 40, line 3, 1197 at the beginning insert "twice"; in Clause 47, page 40, line 44, leave out "five hundred" and insert "one thousand"; in Schedule 6, page 73, line 23, leave out "fifty" and insert "one hundred"; in page 73, line 24, leave out "twice" and insert "three times"; in page 73, line 32, at the beginning, insert "twice".
These Amendments fall into four classes: the penalty for failure to notify liability to tax—Clause 42; the Clause dealing with penalties for fraud—Clause 44; the Clause dealing with penalties for negligence—Clause 45; and for aiding and abetting fraudulent practices—Clause 47.
The keynote of the Attorney-General's speech was that the new scale of penalties had been fixed in keeping with customary practice over many years. In other words, although the Inland Revenue had very high maximum penalties in its hands, in practice they were very much lower. In general they were so comparatively lenient that the new penalties are about their equivalent. It seems to me that that cannot apply to the penalty in Clause 42, because when I asked on 17th May how many penalties have been imposed in the last ten years in cases of failure to notify liability to tax, the Chancellor of the Exchequer said that there was no record, which I found rather surprising, because Clause 42 substitutes Section 18 of the Income Tax Act, 1952.
The existing penalty for failure to notify liability to tax is £20 plus three times the tax that ought to have been charged. The penalty now proposed is £50. The question is whether that is enough. In general this Clause applies to people in business, private traders and individual trading activities of one kind or another, where the persons concerned fail to notify the Inland Revenue that they are liable to tax. For the most part, those in employment have been caged in by P.A.Y.E. In these days it is very difficult for anyone to take a job and escape tax His employer is under obligation to tax at source under P.A.Y.E. He wants to know the employee's code number. There is a form which the employee takes from one employer to another, so the network of taxation is complete in the movements of the worker himself, 1198 There is another very salutary provision which was introduced by my right hon. Friend the Leader of the Opposition when he was Chancellor of the Exchequer. This gives the Inland Revenue power to call on banks and other persons paying interest without deduction of tax over the amount of £15. The Committee must know that several hundreds of thousands of taxpayers were caught by the check that was put upon them by the Finance Act, 1951. In those two respects, therefore, the Inland Revenue has adequate sources of information, and on the whole to have adequate sources of information is to be chosen rather than the opportunity of catching out the taxpayer and imposing heavy penalties upon him.
I am not at all sure, however, that the information services of the Inland Revenue are as good as they ought to be in this aspect of trading activity. It seems possible for people to go on for quite a long time before the Inland Revenue gets to hear of them. Apparently, under Clause 42, when they are discovered the maximum penalty for them will be that the tax which they have not paid will be recovered, plus interest, because it will be due to their own fault if the tax has remained unpaid, plus an overall penalty not exceeding £50. That penalty seems pretty low for going five, six, seven or eight years without discovery.
I had a surprising experience the other day. I received a printed paper from the inspector of taxes, addressed to me at the block of flats where I live, asking me whether I had made a tax return and, if so, where I had sent it. I was a little upset, because I had lived in this block of flats for ten years and it seemed to me strange that the Inland Revenue had not heard of me. I was almost on the point of ringing on the house telephone to ask the Chancellor of the Exchequer, who lives in the same block of flats, whether he had been asked where he had made his last return.
§ Mr. Houghton
The right hon. Gentleman has something coming to him, then, in a few years' time.
1199 It is clear that what was happening was that the Inland Revenue was going through the list of residents in that block of flats to see whether they were making their returns and whether they were being properly cared for. But I might have been a pensions consultant or an ice-cream vendor or a newsvendor. There were numerous occupations which I might have been following in the last ten years which the Inland Revenue would probably never have heard of until it found where I lived and asked what I was doing. After that experience, can one be certain that taxpayers who are negligent in this respect will be caught by the Inland Revenue? I suggest that something more salutary than a penalty not exceeding £50 is justified in these cases.
The next significant penalty is in Clause 44 for fraudulent returns, followed in Clause 45 by penalties for negligently making incorrect returns. The Attorney-General said on Thursday night that the maximum penalties in the hands of the Inland Revenue up to now have been so high that it had not been necessary hitherto to distinguish in the definition of penalties between negligence and fraud, but under the new scale it is now necessary to do so. The question is whether the difference between fraud and negligence is enough.
I find the Attorney-General's speech in this respect a little difficult to follow. If the right hon. and learned Gentleman will look at the third complete paragraph from the beginning of col. 834 of the OFFICIAL REPORT for 26th May, he will see the words:I ought to have made it clear …"— [OFFICIAL REPORT, 26th May, 1960; Vol. 624, c. 834.]But he will find it a little involved. I have not yet sorted it out, but whatever the right hon. and learned Gentleman said there, I think that what he meant was that the penalty for fraud must be higher but not perhaps very much higher than the penalty for negligence because of the difficulty of distinguishing between the two. Some negligence borders on fraud and some fraud is very hard to prove. Indeed, if it were not hard to prove, probably proceedings would be taken, but the difference between the two 1200 is not very great, and I think that the difference should be wider than it is.
I quote the example of a taxpayer who returns his Post Office Savings Bank interest at £10 when he actually receives £50. We will say that he did that not with intent to defraud the Revenue, but just carelessly—he had not looked it up, or had forgotten a deposit account which he had inherited from a relative, or something like that. He was not in the frame of mind when he was out to deceive and defraud the Revenue. We will say that that was negligence.
Then let us assume that the Inland Revenue discovers that the interest was £50. The taxpayer is usually asked to confirm or comment upon the amount which he has already returned in these circumstances. If the taxpayer confirms that the interest is £10, I am not very clear about whether that confirmation of a negligent statement amounts to wilful neglect or to fraud. Perhaps those are degrees of evil intent, but the two are getting very close together.
I sometimes wonder whether it is desirable to continue the present practice of not disclosing to the taxpayer the source of the information. If the Inland Revenue has information through the exercise of a statutory provision—and a bank is required by law to tell the Inland Revenue of the name and address of a person who has received or been credited with more than £15 interest—I do not see why the Inland Revenue should not say that it has received information from such-and-such a bank, or some other source, to the effect that a taxpayer has received a certain amount of interest and that his return does not show it, or shows it as being so much less.
Would not that be a straightforward way of tackling the taxpayer? I know that it is said that perhaps the taxpayer will have concealed some other things and might disclose, not the information that the Inland Revenue has, but something which it does not have, so getting himself further into difficulty. I do not approve of that. There should be a straight disclosure to the taxpayer when information is received in proper form under the statutory requirement.
However, to continue our little story; let us suppose that the taxpayer returns 1201 £10 when it should have been £50. The Inland Revenue asks the taxpayer to refresh his memory, or make some other suitable and tactful approach, just to unsettle him, and he replies that he confirms the figure of £10. The Inland Revenue, obviouly, then gets a little more forthright and the taxpayer is asked to explain himself. In those circumstances, if the Inland Revenue thinks that he is guilty of negligence, but not of fraud, the total penalties which can be exacted would be £65 10s. and would be £81 in the case of fraud, in both cases plus the amount of tax lost, which, at the Standard Rate would be £15 10s.
Is the Attorney-General satisfied with the difference between those two sets of penalties, for negligence and fraud, having regard to the possible difference in the degree of negligence or fraudulent intent or the part of the taxpayer? That is one of the things which the Chancellor should consider. Our proposal is that the penalty in the case of fraud should be £100, instead of £50, and three times the amount of tax lost, instead of twice the amount. Our proposal in the case of negligence is to increase the amount of penalty from the single amount of the tax lost to twice the amount of the tax lost. That would stiffen the penalties in both respects and make them sharper than they are now.
In this connection, the Chancellor should consider the difference in treatment between the person against whom fraud can be proved and the person against whom fraud cannot be proved, even though the circumstantial evidence is very strong. On the whole, the taxpayer who claims for a child he has not got, or a wife he has not got, finds himself in prison. There is no escape for him. He cannot pretend that he had forgotten, or that he could not remember, or that he was in such a fuddle with his affairs that he did not know what he was doing. No such plea would be accepted by the court.
But where the taxpayer has understated his income very substantially and has probably persisted in doing so for some time and there is considerable evidence to suggest that he was out to diddle the Inland Revenue, he could plead that he was busy, or distraught with anxiety, that his affairs were in a mess, that he had not had time to make up his books, that he had put down the 1202 best figure he could. I have a case in mind in which evidence of confusion of affairs and confusion of mind got the taxpayer off in the end, whereas another taxpayer of the kind I have mentioned would find himself in the dock.
It is no good the Inland Revenue mounting prosecutions which will fail. It must obviously consider these cases very carefully before taking proceedings, but I am sure that there are many cases in which proceedings would be justified if there were a little more evidence to secure conviction. Most fraud cases of that type are dealt with by money penalties and these are the money penalties which will apply to them. We think that they are on the low side.
In the group of Amendments which we are discussing, there is an Amendment to Clause 47 dealing with aiding and abetting. This covers a penalty for a person who knowingly aids, abets, assists, and so on, another person to deliver incorrect accounts, or declarations, in connection with Income Tax. The penalty of £500 is the sum recommended by the Codification Committee in 1936. We think that it should he £1,000. After all, it is a very serious crime for a person to assist someone else to diddle the Inland Revenue. It is usually someone who ought to know better. It is usually someone who knows what he is doing and who is prepared to take certain risks, probably in the interest of his client if he is a professional man, or for some purpose which should be sharply punished when cases of this kind are discovered.
On the whole, while we agree with the general pattern of the new penalties, we think that in those respects they are on the lenient side. To summarise, we think that the penalties for failure to notify, in Clause 42, for fraud, in Clause 44, for negligence, in Clause 45, and for aiding and abetting, in Clause 47, should be increased.
§ The Attorney-General (Sir Reginald Manningham-Buller)
The hon. Member for Sowerby (Mr. Houghton) began his speech by regretting that my right hon. Friend the Chancellor of the Exchequer had not appointed a committee which would have reported on these proposals and whose report would have been considered by the House of Commons before 1203 our debate. I quite appreciate the difficulties which there may have been in understanding the basis of the penalty provisions, but if we had had such a committee it would not have been possible to make the changes, which the hon. Member regards as generally desirable, in this Finance Bill. I have endeavoured, now on two occasions, to give a broad review of the basis from which we have approached the subject.
On Thursday night, the hon. Gentleman very kindly gave us notice of his reasons for the Amendments, reasons which he has amplified today. Last Thursday, I endeavoured to help the Committee by giving a general outline of the penalty provisions, without dealing in detail with the Amendments. I would like now to deal with the Amendments in detail in the same order as the hon. Gentleman dealt with them.
There came first his criticism of the £50 penalty imposed by Clause 42 for failure to give notice of liability to tax. The hon. Gentleman proposed that that penalty should be increased to £100. Under the present law, as the hon. Gentleman said, the penalty under Section 18 of the Income Tax Act, 1952, for failure to give notice of liability, is £20 and treble the tax which should be charged. That is the same penalty as is fixed by Section 25 (3) for failure, among other things, to make a return. At first sight, it seems not unreasonable that one should keep the same relation between the penalties for the two offences.
The basic penalty in Clause 43 for failure to make a return is £50, plus a continuing penalty. Here I would like to correct something which I said on Thursday night. I apologise for saying it. By condensing what I had to say I slipped into error in suggesting that Clause 43 (1) did not apply to returns of one's own income. It does, and Clause 43 (2) provides for a much increased penalty of £50 and the total amount of unassessed tax if the failure continues after the end of the year of assessment following that during which the notice was served and is in relation to one's own income.
The figure of £50 in Clause 42 was thought, to be right because the basic penalty in Clause 43, for failure to render a return, is also fixed at £50 initially. I 1204 can justify that When we get to it if any questions are raised about it.
In the light of what the hon. Gentleman said last Thursday, we have given very serious consideration to this matter and we feel that, for the reasons which he has eloquently expressed today and others, there is a case for a somewhat higher penalty in Clause 42 than that now proposed and than the basic penalty for failure to make a return when called upon. In the latter case, the Revenue knows of the failure and can pursue the taxpayer, but in the former case the Revenue may be wholly unaware of the taxpayer's liability to tax. It could be argued that the maximum penalty in that case should be sufficiently large to form an adequate deterrent, and we are, on reflection, consequently prepared to accept the hon. Gentleman's Amendment to Clause 42 to increase the present penalty of £50 to £100 for failure to give notice of liability to tax.
The penalty for failure, whether in relation to liability to Income Tax or Surtax, will be a maximum penalty. On reflection, we think that it is a desirable improvement to give this greater scope to the courts when fixing penalties and also to provide a more powerful deterrent to prevent people from failing to give notice of liability to tax.
Having said that, I am sorry to have to disappoint right hon. and hon. Gentlemen opposite about the other Amendments. However, we do not consider that a case has been made out for them. I am sorry if one sentence which I used last Thursday has proved difficult to understand. I was alarmed when I read it the first time myself in case I had put it wrong, but, having read it a second time, I do not not think that I did. We started our approach to this matter, bearing in mind that the Revenue would get back the tax plus interest, by considering what would be the right yardstick for the maximum penalty for negligence.
We took into account the scale of penalties imposed by the Revenue under the present practice, in addition to the collection of back duty. We found that under the proposals of the Bill the ceiling would be a little higher than under present practice. We therefore see no ground for suggesting that the penalty 1205 for negligence as proposed by the Bill is likely to be inadequate. That is the considered view of the Revenue authorities, and I should be reluctant to dissent from them in that view, in the light of their experience over many years.
What I said last Thursday was that we worked on the basis that the ceiling in respect of negligence ought not to be much greater than the penalty which would be sought by the Revenue in the worst cases in which fraud could not be proved. We could get a case where we could not establish fraud but which was akin to fraud and was, therefore, a bad case, and we have fixed the ceiling at a figure which will enable the present practice to be continued in relation to that type of case.
In the case of fraud we have doubled the penalty that can be imposed, to £50 and twice the amount of the difference. There again, it is the view of the Revenue that that is adequate. The hon. Member proposes that it should be increased from £50 to £100 and from twice to three times the amount of tax omitted, but bearing in mind the fact that if there is fraud the taxpayer will have to pay the tax lost together with the interest on it, and be liable to pay £50 and twice the amount of tax omitted, and also that if there is fraud in more than one return proceedings may be brought in relation to each return—since there is no time limit for assessment—and penalty proceedings can be taken within three years of the assessment becoming final, we feel that ample margin is provided, where there has been a long course of fraud, for the institution of sufficient penalty proceedings to enable proper punishment to be imposed. That is the basis upon which we have arrived at our conclusion.
§ Mr. Hector Hughes (Aberdeen, North)
I am reluctant to interrupt the right hon. and learned Gentleman's flow of eloquent and pursuasive argument, but he is missing one point. These are enabling Clauses, dealing with penalties not exceeding a certain amount. The right hon. and learned Gentleman asked, "What is the right penalty?" Surely these Clauses do not deal with that question; they deal with penalties not exceeding a certain amount. What is the objection to giving the Crown more power to impose higher penalties?
§ The Attorney-General
I am glad the hon. and learned Member has appreciated that under the Bill all the penalties proposed by these Clauses are maxima. That is one of the great improvements which have been made. If the appeal is taken to the courts it is for the courts to determine. Discretion is given to the courts in the matter. Further, where proceedings are taken before the Commissioners it is open to the taxpayer to go before the courts and appeal against the penalty imposed. We are concerned here only with maxima, and I am sure that the hon. and learned Member will welcome that as a great improvement.
The question arises: what are the right maxima? We do not wish to fix unnecessarily high maxima, and for the reasons that I have given, subject to the Amendment that we are prepared to accept, we agree with the Revenue that in the case of fraud, under Clause 44, and negligence under Clause 45, higher maxima will not be required than those which are now prescribed.
With regard to Clause 47, which deals with aiding and abetting in the making of incorrect returns, the hon. Member for Sowerby proposes that the penalty should be increased from £500 to £1,000. We agree with the Revenue that that is not necessary. The existing penalty is seldom invoked. Those who assist taxpayers to make returns are usually accountants, and where accountants knowingly assist in making fraudulent returns the right course is not to proceed under Clause 47 but to prosecute. I find it difficult to envisage a case in which accountants knowingly assist in making an incorrect return which does not amount to fraud, but if such a case did arise, in our view the present penalty of £500 would suffice.
I hope that I have dealt with the points raised by the hon. Member. I am grateful to him for the way in which he has helped me to perform my task of explaining our reasons for these provisions and for the maxima fixed in the Bill. For the reasons that I have given we feel that the difference between fraud and negligence is already given sufficient weight under the Bill.
The hon. Member touched upon the desirability of what he called a straight disclosure to the taxpayer where information is obtained as a result of 1207 the exercise of the Revenue's statutory power. It has certain attractions, but it would have the disadvantage that if other information was being used by the Revenue it would reveal that that other information came from informants whose names were not disclosed. But it is an interesting suggestion.
The hon. Member went a little wrong in his lanaguage at one point. He said that if the Revenue authorities think a person is guilty of fraud they can impose one penalty and if they think that he is guilty of negligence they can impose another penalty. It is easy to express the situation in that way, but it is not for the Revenue to decide whether fraud is established, and the same consideration apples in respect of negligence. One of the major improvements made in the penalty provisions is the right now conferred upon the courts to decide what is the right penalty, and another is the right given to the taxpayer, after proceedings before the Commissioners, to appeal to the courts if he feels disposed to do so.
We have spent some time in discussing these provisions. I have done the best I can to assist the Committee, and it would help a great deal if we now proceeded without much further discussion to other matters.
§ Mr. G. R. Mitchison (Kettering)
I share the right hon. and learned Gentleman's hope that we may be able to proceed, and I shall not take up much time. We are grateful for his acceptance of the first Amendment and welcome the substitution of maximum penalties for fixed penalties in certain cases. Nevertheless, we cannot regard the difference between cases of negligence and cases of fraud as being sufficiently marked in the Bill at present. I agree that as a subject for discussion penalties are illogical and usually inconsistent. None the less, the Clauses dealing with them are tolerably simple.
I need hardly tell the right hon. and learned Gentleman that fraud is a very serious matter. Moreover, its consequences are recognised in the law of the land, in other Statutes than this, to be different in kind and certainly more grave in character than this of negligence, however extensive it may be. For that reason we shall adhere to our view 1208 that the difference between the penalties in the two Clauses ought to be larger, and we hope to be allowed to divide the Committee when the time comes.
As to Clause 47, I would point out that it provides maximum penalties, but that if there was ever a case for varying penalties, this type of case is one. I would call the attention of the right hon. and learned Gentleman to the fact that the Perjury Act, which in some ways has a resemblance to what we are now discussing and would cover some Income Tax offences, lays down maximum penalties with regard to people who make false declarations. But in respect of those who aid, abet or suborn them there is no limit to the amount of imprisonment or the fine which may be imposed. I believe that the relevant Sections in the Perjury Act are Sections 5 and 7.
We should be very slow to put anything like a low limit on cases of this kind, which may be very serious and, in the language of Clause 47, in practice may amount to fraud. There is no distinction between the language.
§ The Attorney-General
If it does amount to fraud and is a case which comes within Clause 47, the view of the Revenue is that there should be a prosecution, so Clause 47 really has little application. I find it difficult to visualise a case where someone knowingly assists in the preparation of an inaccurate return and does not do so fraudulently. In those circumstances we believe that £500 is a sufficient maximum. If it is a minor fraud, £500 may be a sufficient maximum, but if it is in the nature of a serious fraud the right thing to do is to prosecute.
§ Mr. Mitchison
I accept without hesitation what the right hon. and learned Gentleman says is the view of the Revenue, but I cannot envisage any case in which what is required in respect of Clause 47 falls short of fraud.
§ Mr. Mitchison
The right hon. and learned Gentleman finds it very difficult; I, being made of feebler stuff, find it impossible to draw any distinction between the two. We shall, therefore, press the other Amendments to a Division when the time comes.
§ Mr. Geoffrey Stevens (Portsmouth, Langstone)
I have no wish to detain the Committee for long, but I have two points to make. First, those who have seen the jungle of which the previous penalty provisions consisted, and to which the hon. Member for Sowerby (Mr. Houghton) referred, cannot but be lost in wonder at the good job which those responsible for Part III have made of it.
Secondly, when I saw the Bill for the first time I, too, wondered if the differences between the penalties for negligence and fraud, respectively, were sufficient. I listened with great interest to the debate, and I am still not satisfied on one point. The hon. Member for Sowerby and my right hon. and learned Friend concentrated upon the borderline case between negligence and fraud—the case which the Revenue thought was fraudulent but believed it might not succeed in if it took the case to court, and therefore proceeded on the ground of negligence rather than fraud.
I have in mind a different type of case. I am thinking of the young fellow, or the young girl, starting out in life in a profession or career having forgotten the £20 interest, or whatever it might be, from the savings bank account, or having forgotten a few shares or something of that kind. I am thinking too of the elderly widow who did not know that her husband had a deposit account or held a few shares. Are the penalties in those cases not rather too severe? That kind of case will be far more common than the case in which there is deliberate fraud.
In that context I am thinking of the provisions of Clause 48 which, in certain circumstances does away with the six-year limit, and often in cases of negligence there can be a period of 12 years in accordance with the Clause, and, under certain circumstances, more than that. I am aware, as my right hon. and learned Friend said, that the penalties in the Bill are maxima and not the normal penalties. I heard what he said, but I should like a further reassurance that they are, in fact, maxima and that in the cases of negligence of the kind that I have in mind the Inland Revenue will not depart from its previous practice, to which the hon. Member for Sowerby 1210 referred, of exercising the powers in a reasonable fashion. I am sure that the hon. Member for Sowerby was right about past practice, but I should like my right hon. and learned Friend to give the Committee an assurance that that practice will not change.
§ The Attorney-General
I can give the assurance asked for by my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens), that the Revenue will adhere broadly to the present practice of reasonableness which it has adopted heretofore. If it had not adopted a reasonable practice there would have been great public disquiet and public complaint many years ago. We are now reviewing very old provisions.
I was asked about the person who was slightly negligent, and whether the penalties were not too high. I do not think that they are. After all, if the negligence is slight, the penalty can be adjusted to some smaller penalty, and even if the penalty is thought to be too high recourse can be had to the courts.
The hon. Gentleman is wrong in one respect. The effect of opening up the earlier years in Clause 48 for the collection of back duty in relation to negligence does not enlarge the period in respect of which the penalty can be imposed. That is fixed there for six years.
§ Mr. Houghton
I stressed that these were maxima penalties, and our purpose was to arm the Inland Revenue with an effective deterrent of penalties which would be really salutary in the worst cases. It does not mean that the case of an oversight need be penalised, and thousands upon thousands of cases are not. It depends on the degree of culpability and the degree of negligence, whether it is slight or excessive, or something which seems to be a little more sinister.
I am sure that the Committee does not want to go out as being vindictive in its treatment of taxpayers, even delinquent taxpayers, and certainly we on these benches do not. Our sole purpose is to arm the Inland Revenue with something effective when the need arises to use its power.
§ The Attorney-General
I think that the hon. Member for Sowerby (Mr. Houghton) has made it quite clear that it 1211 is his intention to arm the Revenue with powers much in excess of the powers which the Revenue desires.
§ Amendment agreed to.
§ Clause, as amended, ordered to stand part of the Bill.