HC Deb 31 May 1960 vol 624 cc1211-22
Mr. Geoffrey Hirst (Shipley)

I beg to move, in page 38, line 21, at the end to insert: deducting any tax paid in respect of the income charged in these assessments before the end of the year next following that in which the said notice was served. The point at issue can be put shortly, but I hope that my hon. and learned Friend the Solicitor-General—as I feel sure will be the case—will realise that, however shortly it may be put, it is an important point and one on which we need clarification.

For convenience, may I draw the attention of the Committee to subsection (2), which says: …the first of the penalties mentioned in subsection (1) of this section shall be an amount not exceeding 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) in assessments … The Amendment is made in that context.

As I have been given to understand, the position is that a taxpayer who, having received a notice but not having made a return, may nevertheless have paid all, or at any rate part, of the tax on which he should be assessed, by deductions under P.A.Y.E. The question is whether provision is made for that eventuality, and whether the penalty he may suffer could be more than was intended, by not taking cognisance of that fact. People to whom I have spoken appear confused about the position. I put it frankly to the Committee that one authority seems to be of the opinion that this is safeguarded by subsection (3). I hope my hon. and learned Friend will make that clear, because I am not a lawyer or a tax expert. I cannot see it, but I hope that my hon. and learned Friend will be able to make that point abundantly clear. It is an important matter, and it could be serious for the range of taxpayer who, far from wishing to do anything fraudulent in the way that we have been discussing, may have slipped up by not having sufficient knowledge of tax matters and thus be caught unreasonably and unfairly for a failure to make a return after notice.

Having said that, I apologise to the Committee for having put my name to a mass of Amendments to one or two of the earlier Clauses and then not been present when they were discussed. My absence was due to sickness during the latter part of last week. It is discourteous to put one's name to an Amendment and be absent when it is discussed, but there was an unfortunate reason for my absence last week.

The Solicitor-General (Sir Jocelyn Simon)

I am sure that the Committee would wish me to welcome back my hon. Friend the Member for Shipley (Mr. Hirst) and to express our pleasure that he has obviously recovered his full vigour.

As my hon. Friend said, this is an important matter. The Clause is very concisely drawn, and it is not altogether easy to see how it works. I do not think that it falls into the injustice indicated by my hon. Friend. Subsection (1) is intended as a lever to extract the return, and it is for that reason that under subsection (5) there is no liability if the return is rendered before the proceedings commence, subsection (1) applying both to the return of one's own income and to the return of other people's income.

Subsection (2) increases the penalty in relation to returns of the taxpayer's own income if the return is not made before the end of the year following that in which it is served. In other words, it imposes an additional penalty for continued default. The penalty is £50 plus the total amount charged in delayed assessment.

The Clause really turns on lines 25 and 26, where in referring to assessments it says: made after the end of the year next following the year of assessment in which the said notice was served We are concerned with three different years. First, the year of assessment which is referred to, for example, in line 27, which perhaps one could call year 1. Next there is the year during which the notice of assessment is served which is referred to in lines 16 and 17. That is year 2. Finally, there is year 3, the year of assessment following that during which the notice was served, which is referred to in lines 15 and 16, and lines 25 and 26 to which I have just referred.

Apart from P.A.Y.E., which is dealt with in subsection (3), taxpayers do not pay tax before they are assessed, and assessments are normally made during the year following the year in which the income arose—in other words, during year 2. Such an assessment would not come into account at all in computing the penalty under subsection (2), because it is not an assessment made after the year next following the year of assessment in which the said notice was served.

The way in which it works is this. Failure to declare income may result in under-assessment during the year in which the notice was served, year 2—that is, the year following the year in which the income arose, year 1. The rectification of such under-assessment can only appear in an assessment made after that year, in other words, during year 3 or later, and that is, as I said before, the year referred, to in lines 25 and 26. It is only an assessment made after the end of year 3 which can affect the penalty.

Perhaps it would assist the Committee if I gave an example. If we take a taxpayer who earns income during year 1 on which tax of £1,000 is payable and if he fails to make a declaration of income and notice is served on him early in year 2 he is then liable under subsection (1). If he still fails to make any declaration after the end of year 3 he is liable under subsection (2). In the meantime, if an assessment has been made on him during year 2 for £800 tax, the full amount of his liability not being known, so that there is an underassessment of £200 tax, and if that is corrected after the end of year 3, it is that £200 correction and not the £1,000 which is the measure of the penalty.

Mr. Hirst rose—

The Solicitor-General

Perhaps my hon. Friend will allow me to go on because I dealt with a simple case. I have not dealt with the case which I know he has in mind, and which I have to lead up to in this way. I dealt with the ordinary case where the taxpayer does not pay tax before assessment. I know that the case which my hon. Friend has in mind is that where, for example, under P.A.Y.E. a man pays tax before assessment. That is dealt with in subsection (3).

If it were practical to deal with the matter in the way in which my hon. Friend seeks to deal with it, and, indeed, in the way which is suggested in the Amendment in the name of my hon. Friend the Member for Wolverhampton, South-West (Mr. Powell), that would be a fair and correct way of dealing with it. But it falls down on the practical difficulty that under P.A.Y.E. it is impossible to calculate the tax paid in a later year in respect of an earlier year. My hon. Friend's Amendment states: …tax paid in respect of the income charged in these assessments… For example, if we have a director paid salary, and in the following year a bonus in respect of the business that has been ascertained in respect of the previous year, under the P.A.Y.E. system one cannot tell whether the tax that is deducted is being deducted in respect of the current salary or of the bonus in respect of the previous year.

It is because of that purely practical difficulty that we have undertaken the rather more cumbrous approach in subsection (3). What it does is to give credit for the tax deducted in the year for which the assessment is made, that is, year 1 in the way indicated earlier. I do not know whether the Committee would like me to spell out the way in which it would work. [HON. MEMBERS: "No"] There seems to be a general consensus of opinion that that is not desired. I can assure my hon. Friend that his approach only breaks down in the practical way that P.A.Y.E. is collected and what it is referred to. What we do under subsection (3) is to give credit for the tax deducted in the year for which the assessment is made.

5.15 p.m.

Mr. J. Enoch Powell (Wolverhampton, South-West)

It is no disparagement of my hon. and learned Friend's lucid explanation of these two subsections—and there is no irony in that adjective—if I ask him to direct his attention to a further possible point which may be involved. I adopt his convenient notation of years 1, 2 and 3.

I appreciate that where an assessment which will be a provisional assessment has been made before the end of year 3, then the amount collected against that assessment is deducted from the amount which enters into the penalty under subsection (2). The case about which I want to ask my hon. and learned Friend is where, for any reason, no assessment at all in respect of the year of income, year 1, has been made before the end of year 3. It then appears that Income Tax might have been paid on the whole or part of the income of year 1 by P.A.Y.E., but because no assessment at all, for one reason or another, has been raised in respect of that year before the end of year 3 it might not benefit from the terms of these two subsections and might still be included in the amount of the penalty, because it would be covered by an assessment—and now I am reading from paragraph (b) of subsection (2)— made after the end of the year next following the year of assessment in which the said notice was served. I hope that I have directed my hon. and learned Friend to the point which is causing me and other hon. Members some difficulty.

The Solicitor-General

I should like, if I may, to consider at greater leisure the case which my hon. Friend has put to me. As I said, what subsection (3) does is to allow for tax which was deducted in the year for which the assessment was made, whether or not it was actually assessed to tax at the time. It is true that in a case where, for example, we do not have a continuing bonus but where a bonus was paid in year 2 in respect of year 1 and where no bonus was paid in year 1 in respect of a previous year, the penalty is fortuitously inflated. It may be that case which my hon. Friend has in mind.

I think that the answer to the point that these are maximum penalties, is that undoubtedly the Inland Revenue would discount any fortuitous inflation of the penalty. If necessary, of course, there is appeal to the Commissioners and to the court who both have power to mitigate. But, as I said, I should like to consider at greater leisure the point which my hon. Friend has put to me.

I hope that, with that explanation, my hon. Friend the Member for Shipley (Mr. Hirst) will feel that he can withdraw his Amendment.

Mr. Hirst

I am extremely grateful to my hon. and learned Friend for that explanation. It is an extremely difficult matter, and I am anxious to hold him as firmly as I am able to his consideration of the matter later in the proceedings because I do not think that it is sufficient to say only that these are maximum penalties and that the Inland Revenue would not take advantage of them.

The Inland Revenue or the courts have to interpret the law as we pass it, and there is always the danger that a taxpayer might be put to a great amount of trouble, and possibly expense, just because we cannot, or I cannot, find a form of words which are suitable to this occasion and which are sufficiently clear for insertion in the Bill. There is no quarrel in intention between my hon. and learned Friend and myself, and, indeed, my hon. Friend the Member for Wolverhampton, South-West (Mr. Powell). I hope that we do not have to leave it in some airy-fairy way throughout the whole proceedings, and provided that I am assured, and I think I can be assured, that my hon. and learned Friend will give it serious consideration, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Motion made, and Question proposed, That the Clause stand part of the Bill.

Mr. Powell

There is one further point on this Clause to which I should be grateful if my hon. and learned Friend the Solicitor-General could give some consideration. As I apprehend it, this Clause replaces the effect, amongst others, of Section 55 of the Income Tax Act, 1952. There appear to be certain provisions in that Section which are useful and which, perhaps, are not fully picked up in the Clause now before the Committee.

I have in mind particularly subsection (3) of that Section, which provides that when proceedings have been commenced in such a case as we are here dealing with, if the General Commissioners are satisfied that no fraud or evasion was intended, they can stay the proceedings, and if proceedings have been commenced in a court, if they certify that in their opinion there was no fraud or evasion, the court may, on their application, stay the proceedings. It seems possible that the benefit of that provision in the 1952 Act, which one would have thought was clearly a convenient one to have, is not fully covered in the Clause before the Committee.

I note the words "without reasonable excuse" in subsection (1, b), but I would doubt whether they alone are sufficient to have the effect of Section 55 (3) of the 1952 Act. I do not want to trouble my hon. and learned Friend necesarily to answer now, but I hope he will feel that this is worth while his careful consideration before the next stage of the Bill.

Mr. James Dempsey (Coatbridge and Airdrie)

I wonder whether the Minister will also clarify some of the principles in this Clause, which seeks to penalise people for failure to make certain returns. I am very anxious to know what type of return is made and what is expected in a declaration in this matter, because I have discovered, during my short stay in London, that there are many methods of paying expenses, and I am wondering whether these methods are recorded in returns made to the Inland Revenue Department.

I have in mind a very well-known club, which operates on the basis that one pays by actually signing a card, and once one has signed that card and handed it to the hotel proprietor it is sent down to the firm of which the trader is a member or representative and the firm pays. I should like to know whether these expenses returns are itemised so as to indicate the details or whether they are produced showing one lump sum.

I know of an instance when a certain hon. Member of this House had a little party in an hotel. The cost of his party, which ended at half-past two o'clock in the morning, was £179. That was paid by the firm under this card system of the club, and I understand that it was returned as a business expense or an entertainments expense. I wonder whether it was an itemised or otherwise form of expense account, sent in to the Inland Revenue and simply accepted. I wonder whether that comes within the meaning of the words in subsection (1, a) of this Clause, because this can lead to many abuses. I happened to have this membership card in my hand only yesterday, and it indicates that, in addition to having a very good time in hotels in London, there is even an affiliation system whereby one can go to New York.

I am curious, and believe that this is part of the business expenses of the firm or company. If we study this kind of transaction, we find that one can even visit certain shops and can have all kinds of things, including a new suit, or take one's good lady to a hairdresser's and to the beauty parlour and see that she is very well looked after, and all this is being paid for through club-membership out of business expenses. Incidentally, is not the Inland Revenue—

The Temporary Chairman (Sir Norman Hulbert)

I am not quite clear how the hon. Gentleman relates these adventures to the penalty Clauses in the Bill.

Mr. Dempsey

I am relating them to the words in subsection (1, a), which concerns the nature of the return to be sent to the Inland Revenue, and provides for certain penalties to be imposed for failure to make accurate returns and to furnish particulars. Therefore, I am concerned whether in this Clause we are taking care of the opportunity of abuse which might easily happen.

The reason why I raised this is very simple. It is because it has very wide implications. If one analyses this system of incorporating expenses and the way provided in this Clause for the recovery of these expenses in accordance with the provisions of subsection (1, a), we find that under this system one can have fishing tackle, fishing material and an abundance of things. Indeed, according to the booklet, I think one could live in hotels from Aberdeen to New York. I will be quite frank about it. The name of the club is well-known. It is called the Finders' Services Club. I am wondering whether this club is a fiddlers' services club. I should like to know from the Minister for my own guidance and clarification whether business expenses are itemised, or whether the provisions of this subsection deal with such possible abuses. I should be delighted if the Minister could guide me in that respect. I have the ordinary Inland Revenue Income Tax form which is sent to every taxpayer, which tells us, in Section 35, the penalties for failing to make accurate returns, and if a worker sends in an inaccurate return we know that the Department will deal with him pretty severely. My concern is whether the Department is effectively dealing with this type of abuse. Is it aware of this particular abuse? Will the Minister give me an assurance that in dealing with this problem, these business expenses will be itemised in order to ensure that the Inland Revenue Department is receiving accurate returns, so that they can locate the defaulters with a view to taking effective action against them.

It is with that end in view that I have raised this matter on the Clause standing part, and I would appreciate it very much if the Minister could give me some guidance or some clarification on this important problem. I would like to know whether, when these companies and their directors or representatives are recording their expenses, they appear as one total of business expenses, thus tax-free, or whether they are itemised to facilitate taxation so that the Department can ensure that all sections of the community are paying their legitimate taxes.

5.30 p.m.

The Solicitor-General

Clause 43 (1) refers to a notice or precept served under or for the purposes of any of the provisions specified in the first or second column of the Fifth Schedule to this Act.… The Fifth Schedule has three columns, of which the first relates to returns of one's own income, the second to other people's income and the third to various miscellaneous provisions which do not require a notice at all.

In addition, under these provisions the Inspector of Taxes can require further information, and this is the kind of case which the hon. Member for Coatbridge and Airdrie (Mr. Dempsey) has in mind. The way it works is this: if a person claims to set off certain expenses against his trading profits or the profits of his occupation, the inspector can either at that stage disallow them and make him prove them or he can require him to particularise them. If there is a failure to furnish particulars which the inspector is entitled to require under the provisions of the Fifth Schedule, then a default takes place such as the Clause envisages. It is for the taxpayer claiming relief to make out his case, and unless the inspector is satisfied he will, if necessary, require the taxpayer to make his case on appeal.

Mr. John Diamond (Gloucester)

The Solicitor-General has missed 90 per cent. of the point. He is dealing with a case in which a claim is made for expenses deducted against income. The whole point of the club mentioned by my hon. Friend the Member for Coatbridge and Airdrie (Mr. Dempsey) is that this is a method whereby no claim is ever made. The expenses are provided by a third party. The cost of living is provided by a third party. No expenses are claimed by the taxpayer. My hon. Friend is right in asking whether the Clause covers this case.

The Solicitor-General

If no claim is made, then the Clause does not arise. No issue arises. I cannot discuss an individual case on the Floor of the House, but if the hon. Member sends me any particulars about which he is disturbed or, better still, sends them to one of my hon. Friends at the Treasury, we will look into them.

In reply to my hon. Friend the Member for Wolverhampton, South-West (Mr. Powell), as he indicated, Section 55 is repealed in the Schedule. Section 55 (2) is replaced by the first part of Clause 43 (5). Section 55 (1) is repealed and not replaced, because it does not fit in with the general structure of the new penalty provisions, although Clause 45 (3) replaces certain of its provisions. Section 55 (3) and (4) are repealed and not replaced, because they are not appropriate to the new structure of the penalties.

Mr. Dempsey

I am grateful to the Solicitor-General for the information which he has imparted, but I should like to make it clear that it is possible for a person using this club to entertain himself and his family in England, to have a trip to New York and to have his lady visit a beauty parlour. This is not impossible. It is quite a practical proposition. If that expense appears in the form of a single general expense by a company and is not itemised, how will the Inland Revenue be able even to suspect that there has been an abuse of the legislation? I believe that this happens in the United Kingdom. We have not been concerned in public life without seeing all the shortcomings throughout the country.

The Temporary Chairman (Mr. F. Blackburn)

Order. The hon. Member is going a little wide of the Clause. Before the Clause can be applied to the point which he is making, a notice or precept will have to be served.

Mr. Dempsey

I am asking the Solicitor-General whether they require, by notice, these business expenses to be itemised in order to determine the rate of tax.

The Temporary Chairman

I think that what the hon. Member is saying is very important, but I doubt very much whether it arises under the Clause.

Mr. E. G. Willis (Edinburgh, East)

My hon. Friend is referring to the words in line 4 of paragraph (a) to deliver any return, statement, declaration, list or other document… He wishes to know whether that would include the type of expenditure to which he is referring. Surely that is relevant to the words in the Clause.

The Temporary Chairman

Yes, but the hon. Member for Coatbridge and Airdrie (Mr. Dempsey) has already made that point, and he seems to be repeating it.

The Solicitor-General

I think that I can deal with the point shortly. I thought that I had dealt with it in my previous intervention. The Clause operates when a person has been required, by a notice or precept…to deliver any return, statement, declaration…to furnish any particulars… It all depends on the facts of the case whether the inspector will require further particulars or require a return such as is referred to in that subsection.

Obviously, where no return of income has been made by somebody whom they know to be within the tax net, a notice will be served. In addition to that, further particulars may be required. In the case which the hon. Member put to me, it might well be required of a company further to particularise, but it will all depend on the facts of the case. As far as this Clause is concerned, once the notice has been served and there is a failure to comply with it within the general terms of the Clause, then the penalties become considerable, as laid down later in the Clause.

Question put and agreed to.

Clause ordered to stand part of the Bill.