At the end of section 5(3) of the Income Tax Management Act 1964 there shall be added the following proviso:—
'Provided that where a person has made in his return of income a full and true disclosure of all the material facts necessary to is make an assessment and an assessment is made after that disclosure no amendment of the assessment increasing the liability of that person shall be made except to correct an error in calculation or a mistake of fact'.—[Mrs. Thatcher.]
§ Brought up, and read the First time.
§ 9.15 p.m.
§ Mrs. Thatcher
I beg to move, That the Clause be read a Second time.
We notice that the Government's majority is rapidly dwindling. At the end of this debate it will no doubt dwindle even further.
The heading of this Clause sounds dull, but this is one of the procedural new Clauses which affect every single person who pays tax. The Chief Secretary will be aware that subsection (3) of Section 5 of the Income Tax Management Act, 1964, deals with the power of an inspector of taxes to make additional assessments. For most of us, the original assessments are enough, but in fact the subsection gives the inspector very extensive power to make further assessments.
It could, of course, be argued that a good deal of what is in the subsection was contained in any event in Section 41 of the old Income Tax Act, 1952, which preceded the 1964 Act. A number of the powers were in the old Section 41, but Section 5 of the Income Tax Management Act, 1964, goes further than the old Section 41 because the old Section 41 was limited by reference to first assessments, whereas, under Section 5, this power is not limited in that way at all. So Section 5 gives the inspector rather wider power than he had before.
896 Bearing that in mind, perhaps we can examine a little more closely subsection (3) of Section 5 of the 1964 Act. All lawyers and chartered accountants are familiar with some of the phraseology in it, because it gives an inspector—formerly it gave it to the Commissioners of Inland Revenue—power to make a further assessment if he discovers—and "discover" is the crucial word—either that a relief has been given in excess or that in-insufficient tax has been charged. There have been a number of cases about the meaning of the word "discover", from which it has emerged that that, too, has a very wide meaning.
It can, for example, mean that the inspector himself discovers that he has wrongly interpreted the law. It can mean that a new inspector discovers that his predecessor wrongly interpreted the law. So one can have a case where the poor taxpayer, having made a full disclosure of every relevant factor to enable the Inland Revenue to make the correct assessment in accordance with the law at the time, has paid his tax and then gets a new, further assessment—and not only one but perhaps two—because a new inspector has gone back over the case and has made a different interpretation of the law.
On this side of the Committee, we have now concluded that this is wrong and that the subsection is taking the powers a little too far. I know what the answer will be—that the inspector could, of course, discover that a relief has not been given. He could discover a relieving provision for the taxpayer. How often this has happened, I am not sure, but the right hon. Gentleman could argue that if the taxpayer is entitled to a relief, the inspector should also, as some kind of quid pro quo, on the Revenue side be entitled to impose a further penalty.
I do not necessarily accept that argument. I think that when an assessment has been made after full disclosure and the taxpayer is happy in the knowledge 897 that he has paid all his liabilities and has disclosed all relevant factors, he should then be able to allocate the rest of his income accordingly. So far the cases I have mentioned have not been on my side. They have all been on the side of the Inland Revenue. The inspector cannot just act on a hunch. He must have some information brought to his knowledge which is a question of fact to enable him to raise an additional assessment. Nevertheless, he can still look at everything with a different interpretation of the law.
What we propose in the new Clause is that there shall be added a proviso to Section 5 to say that where a person has in fact made full disclosure he shall not be liable to an additional assessment, except where the arithmetic has been wrong or in certain cases where there has been a mistake of fact. This would cut out those cases where an inspector looked at the case and remembered a statutory provision of the kind put in last year's Finance Act and which only operated for one year, and applied that. In other words, where he has discovered that previously he had forgotten the law, he can make an additional assessment. We want to cut out that circumstance altogether and provide that where there has been a full disclosure and assessment has been made there shall be no power to make a further assessment on this kind of discovery.
There is one other line of cases which I would put to the Chief Secretary. The right hon. Gentleman ought not—I should not refer to him in that way, for I do not yet entirely regard the Chief Secretary as the arch-ogre of the Inland Revenue, although perhaps by the end of the Finance Bill I shall. If the taxpayer raises an appeal or queries the assessment and the appeal is decided in the usual appeal way or, in the absence of an appeal, there is a settlement which both the inspector and the taxpayer regard as binding, then a further assessment should not be made. That I think is right. However, it would seem by analogy that one ought to say that an assessment following full disclosure is tantamount to a settlement by the inspector of that claim, and once that settlement has been made he shall not have power to go back on it. This would be of great advantage to the taxpayer and I do not think it is asking a great deal.
898 Many of us are disturbed that relations between the Revenue and the public are not as good as they might be and not as good as they have been. This would help to put them on a very good footing again. It may mean that the Revenue has to forgo a little tax, but if any tax has been forgone it has not been the fault of the taxpayer in the kind of case which the new Clause is intended to cover.
I hope that the Chief Secretary, who must have suffered from many a discovery on the part of his clients—I am sure they streamed to him for advice in bygone days—will know the difficulties and problems that it can cause and that he will help to give some relief of the kind suggested in the new Clause.
§ Mr. Diamond
It may be convenient for me to reply to the hon. Lady at once and I shall do so in the tones in which she spoke. I share her view that almost as important as the law itself is the practice of assessing and collecting revenue. If we did not have a good relationship on the difficult matter of a taxpayer paying his taxes to the State we should be in considerable difficulty. I think that the country can pride itself not only on the attitude that the public takes in the matter by and large, but also on the understanding of the Inland Revenue in the way it carries out its difficult duties. We are on common ground in our desire that no unnecessary irritation should be caused concerning the machinery of tax assessment and collection.
The hon. Lady touched a tender spot when she referred to the question of a practitioner and this wretched problem of discovery. Every practitioner feels somehow or other that the dice are unfairly loaded against his or her client and in favour of the Revenue. Therefore, I think it would be helpful if I were to say a word or two on how this power is interpreted and whether it should exist and then come more closely to the proposal.
It may sound a little unacceptable, but we are bound to start on the basis that Parliament puts on the Revenue responsibility for collecting this tax. To begin with, the taxpayer knows all the facts and the Revenue knows none and never knows as much about the taxpayer's affairs as the taxpayer does. The taxpayer acts as he thinks fit whereas the 899 officers of the Inland Revenue are in a general way susceptible to the views of the House, the Revenue being a Department of the Treasury and I a Minister very susceptible to the views of the House, in spite of what is sometimes suggested to the contrary.
It is, therefore, not unfair or likely to breed a sense of injustice for the Revenue to have a slight edge, but only a slight edge, over the taxpayer in terms of corresponding powers and rights. The taxpayer has the right to have an assessment varied and the Revenue has a right to have an assessment varied. A fair reading of the law and the practice would be that there is a slight advantage in favour of the Revenue which is appropriate so long as it is slight and exercised with care and moderation.
Discovery is a very wide power. An inspector can almost wake up one morning and say that he has discovered something. It is not quite that and it has to be some substantial rethinking, but if he finds that, in practice, in fact, or in law, he was wrong in the way in which he made the assessment in the first place, he can make an additional assessment to put the matter right, or, as the appropriate Section describes it, he can give any necessary relief which has not been given.
I mentioned those three—practice, fact and law. There is no dispute between us about fact, because the new Clause includes the right to vary if an error has been made by either the taxpayer or the Revenue. There is no reference to a mistake of law.
As for the practice, if the circumstances are such that an assessment was made in accordance with the practice of the time, although it is subsequently discovered—for example, by a case going to the House of Lords—that, although it was thought to be, it was not the right practice and that what was thought to he the law, was not the law—no additional assessment will be raised because it is then known that the practice was wrong at the time and that the inspector should have raised an additional assessment and would have done so had he known what the House of Lords would decide in a particular case affecting similar cases.
900 Therefore, when the Revenue discovers as the result of subsequent information of that kind, it does not raise an additional assessment. The only difference between what is being suggested and what is the practice concerns the question of discovery based on an error of law.
§ Mr. Barnett
What happens when there is a mixture of law and fact? For instance, if one inspector decides to settle a case on the basis that it is a trading company and another inspector later decides that it is not a trading company and reopens the assessment, would that be a matter of fact, or of law, or a mixture of both?
§ 9.30 p.m.
§ Mr. Diamond
The hon. Member has described this as a matter of fact, plain fact, and these two do not mix. They both arise, often in the same case, but they do not mix. My hon. Friend has asked what happens when they mix, but it is fair to say that this does not happen.
I now return to the question of what happens if there is a mistake of law, where there is a slight difference of opinion between the two sides, where there is a mistake in the law. The hon. Lady says that if a taxpayer has made an accurate return in good faith, and an inspector makes a mistake and under-assesses, then that taxpayer should, on paying that tax, be finally cleared of any further liability arising out of that return. What we want to happen is that everyone should pay his tax according to the correct facts and the correct interpretation of the law.
If, because of a human error of a civil servant, this has not happened, I should have thought that we would want it to happen nevertheless. I would not have thought that it was sufficient to say that the inconvenience and irritation, and certainly disappointment, to the individual taxpayer is sufficient to outweigh our desire, and the general desire of the majority of taxpayers, that each one of us should pay his tax according to his correct rates and the correct interpretation of the law. I would have thought it difficult to put forward a proposition that, just because an individual has made a human error, an inspector of taxes has made a mistake, there should be no opportunity for him to put that right.
That is the only difference between us. I do not want to be heavy-handed 901 about this, because I accept what the hon. Lady has said, that it is worth going a long way to achieve improvements in the relationship between the Revenue and the taxpayer, and the professions acting on both sides. I think that she would share with me the view that what she is arguing for is not so very different from the practice. It is different in one respect, that of a mistake in law. As to that, it is likely that the majority of taxpayers would wish to see, not necessarily for themselves, but for the other person involved, that he is called upon to pay his correct amount of tax, according to the facts and to law.
I hope, therefore, that the hon. Lady will not press this new Clause unduly.
§ Mrs. Thatcher
I differ from the Chief Secretary in his interpretation of this matter. The dice are heavily loaded in favour of the Inland Revenue. He says that the taxpayer knows the facts, but one has to select the relevant facts. What he did not say was that the Revenue knows the law, or is deemed to know the law. Once the Revenue has all the facts it is deemed to be capable of applying the law to those facts. What he is saying is that when the Revenue is incapable of applying the law to these facts, it should have a second, third, fourth, fifth, sixth and so on, ad infinitum, chance. I disagree, because the dice are already far too heavily loaded in favour of the Revenue. We are asking that the balance be redressed to some extent.
May I take up the Chief Secretary on one other thing? If his argument is correct, that even if the Revenue discover a mistake of law it should be able to go back and open an assessment or raise further assessments, that argument would follow where there had already been a settlement on one aspect which had settled the entire assessment. His argument would read that he would still want powers to reopen that assessment on another matter.
This is so, because if there has been a wrong application of law on one thing, it would follow that one would want an additional assessment. He and I both know that where there is a dispute on one matter with reference to an assessment, and the whole assessment has been settled as a result of that, the matter does not go any further. That is the only case in 902 which an additional assessment could be raised.
A full disclosure should be tantamount to a settlement, bearing in mind that the Revenue then has all the facts as known to the taxpayer and the Revenue has all the law. In this case, any mistake of law should operate in favour of the particular subject, who has great trust in the Inland Revenue. The ordinary, average person still has—those of us who know a bit more, perhaps, have not got so much trust. Basically, the average person has great trust in the Revenue. This proposal would help them tremendously. They are entitled to assume that the assessment is correct. Perhaps this would not go the whole way, but it would cut out an abuse against the taxpayer.
§ Mr. Diamond
I am not a lawyer. The hon. Lady knows far more about these things than I do, but in the case of a settlement a different situation arises. New considerations come in, in a sense, compared with the situation in which there is no question of a settlement but a return is sent in and the inspector says, "I think that the taxpayer owes so much and I make it up as follows."
In the case of a settlement, there are considerations moving from both sides. Each side may take a different view about the correct figure, but there is an agreed settlement with one side saying, "In consideration of your saying so-and-so we will leave the position which I thought was right and we will say so-and-so". That is a sufficient additional factor distinct from the situation which I am otherwise describing.
It would not be right to suggest that the general body of taxpayers should be called upon to bear an additional amount of tax because one individual or a series of individuals who are the beneficiaries of the mistake in law have had a lower assessment than is due in law. In these circumstances, I hope that the hon. Lady will not think it necessary to press the new Clause.
§ Mrs. Thatcher
The Chief Secretary [...] saying that if there is a deuce of a lot of mistakes by the Inland Revenue and a lot of extra assessments raised, the body of taxpayers would be called upon to bear the consequences if the new Clause were passed. But I am assuming that there are not many errors. In that case, the 903 body of taxpayers will not be called upon to bear any consequences.
This is something which the Chief Secretary should look into. When the United States internal revenue had a close look at the matter with the aid of modern machinery and computers, it found that about one-third of the people were over-paying tax because they trusted the Revenue to make the correct assessment. I hope that the right hon. Gentle-
§ man will go further into this matter. Over-payment of tax does not happen very often, but when it does the taxpayer should have the benefit of the doubt, which would not affect the general body of taxpayers very much. I hope that we shall proceed to a Division.
§ Question put, That the Clause be read a Second time:—
§ The Committee divided: Ayes 109, Noes 146.905
|Division No. 371.]||AYES||[9.38 p.m.|
|Alison, Michael (Barkston Ash)||Hall, John (Wycombe)||Murton, Oscar|
|Allason, James (Hemel Hempstead)||Hamilton, Marquess of (Fermanagh)||Noble, Rt. Hn. Michael|
|Atkins, Humphrey (M't'n & M'd'n)||Harrison, Brian (Maldon)||Orr-Ewing, Sir Ian|
|Bell, Ronald||Harvie, Anderson, Miss||Osborne, Sir Cyril (Louth)|
|Bennett, Sir Frederic (Torquay)||Hawkins, Paul||Page, Graham (Crosby)|
|Bessell, Peter||Heald, Rt. Hn. Sir Lionel||Pike, Miss Mervyn|
|Birch, Rt. Hn. Nigel||Higgins, Terence L.||Prior, J. M. L.|
|Boyd-Carpenter, Rt. Hn. John||Hiley, Joseph||Pym, Francis|
|Braine, Bernard||Hirst, Geoffrey||Ramsden, Rt. Hn. James|
|Bromley-Davenport, Lt.-Col. Sir Walter||Hogg, Rt. Hn. Quintin||Rees-Davies, W. R.|
|Brown, Sir Edward (Bath)||Holland, Philip||Ridsdale, Julian|
|Bruce-Gardyne, J.||Hooson, Emlyn||Russell, Sir Ronald|
|Buchanan-Smith, Alick (Angus, N & M)||Hutchison, Michael Clark||Scott, Nicholas|
|Buck, Antony (Colchester)||Iremonger, T. L.||Sharples, Richard|
|Campbell, Gordon||Jenkin, Patrick (Woodford)||Shaw, Michael (Sc'b'gh & Whitby)|
|Carlisle, Mark||Johnson Smith, G. (E. Grinstead)||Smith, John|
|Clegg, Walter||Johnston, Russell (Inverness)||Taylor, Sir Charles (Eastbourne)|
|Cooper-Key, Sir Neill||Jopling, Michael||Taylor, Frank (Moss Side)|
|Costain, A. P.||Kimball, Marcus||Teeling, Sir William|
|Crosthwaite-Eyre, Sir Oliver||King, Evelyn (Dorset, S.)||Thatcher, Mrs. Margaret|
|Crouch, David||Kitson, Timothy||Turton, Rt. Hn. R. H.|
|Cunningham, Sir Knox||Knight, Mrs. Jill||Vaughan-Morgan, Rt. Hn. Sir John|
|Dalkeith, Earl of||Legge-Bourke, Sir Harry||Wainwright, Richard (Colne Valley)|
|Dance, James||Lewis, Kenneth (Rutland)||Walker, Peter (Worcester)|
|Davidson, James (Aberdeenshire, W.)||Lubbock, Eric||Ward, Dame Irene|
|Dean, Paul (Somerset, N.)||MacArthur, Ian||Weatherill, Bernard|
|Deedes, Rt. Hn. W. P. (Ashford)||Macleod, Rt. Hn. Iain||Webster, David|
|Doughty, Charles||Macmillan, Maurice (Farnham)||Wells, John (Maidstone)|
|Drayson, G. B.||Maddan, Martin||Whitelaw, Rt. Hn. William|
|Eden, Sir John||Mawby, Ray||Wills, Sir Gerald (Bridgwater)|
|Elliott, R.W.(N'c'tle-upon Tyne, N.)||Maydon, Lt.-Cmdr. S. L. C.||Wilson, Geoffrey (Truro)|
|Farr, John||Mills, Stratton (Belfast, N.)||Winstanley, Dr. M. P.|
|Glover, Sir Douglas||Mitchell, David (Basingstoke)||Wood, Rt. Hn. Richard|
|Grant, Anthony||Monro, Hector|
|Gresham Cooke, R.||Montgomery, Fergus||TELLERS FOR THE AYES:|
|Grieve, Percy||More, Jasper||Mr. Reginald Eyre and|
|Grimond, Rt. Hn. J.||Morrison, Charles (Devizes)||Mr. Anthony Royle.|
|Gurden, Harold||Mott-Radclyffe, Sir Charles|
|Albu, Austen||Davidson, Arthur (Accrington)||Freeson, Reginald|
|Anderson, Donald||Davies, Dr. Ernest (Stretford)||Gardner, Tony|
|Archer, Peter||Davies, Harold (Leek)||Gourlay, Harry|
|Armstrong, Ernest||Davies, Ifor (Gower)||Gray, Dr. Hugh (Yarmouth)|
|Ashley, Jack||Dell, Edmund||Gregory, Arnold|
|Bacon, Rt. Hn. Alice||Diamond, Rt. Hn. John||Grey, Charles (Durham)|
|Barnes, Michael||Dobson, Ray||Griffiths, David (Rother Valley)|
|Barnett, Joel||Driberg, Tom||Griffiths, Rt. Hn. James (Llanelly)|
|Beaney, Alan||Dunnett, Jack||Hamling, William|
|Bidwell, Sydney||Dunwoody, Mrs. Gwyneth (Exeter)||Harper, Joseph|
|Bishop, E. S.||Dunwoody, Dr. John (F'th & C'b'e)||Harrison, Walter (Wakefield)|
|Booth, Albert||Ellis, John||Haseldine, Norman|
|Boston, Terence||English, Michael||Hattersley, Roy|
|Bray, Dr. Jeremy|
|Brooks, Edwin||Ennals David||Hazell, Bert|
|Broughton, Dr. A. D. D.||Ensor, David||Herbison, Rt. Hn. Margaret|
|Cant, R. B.||Faulds, Andrew||Hilton, W. S.|
|Chapman, Donald||Fernyhough, E.||Hobden, Dennis (Brighton, K'town)|
|Coleman, Donald||Fletcher, Ted (Darlington)||Horner, John|
|Concannon, J. D.||Forrester, John||Houghton, Rt. Hn. Douglas|
|Corbet, Mrs. Freda||Fraser, John (Norwood)||Howie, W.|
|Dalyell, Tam||Fraser, Rt. Hn. Tom (Hamilton)||Hoy, James|
|Huckfield, L.||Marquand, David||Richard, Ivor|
|Hughes, Hector (Aberdeen, N.)||Mayhew, Christopher||Robinson, W. O. J. (Walth'stow, E.)|
|Hughes, Roy (Newport)||Mikardo, Ian||Roebuck, Roy|
|Hynd, John||Millan, Bruce||Rose, Paul|
|Janner, Sir Barnett||Miller, Dr. M. S.||Ross, Rt. Hn. William|
|Jenkins, Hugh (Putney)||Milne, Edward (Blyth)||Rowland, Christopher (Meriden)|
|Jones, T. Alec (Rhondda, West)||Molloy, William||Ryan, John|
|Kelley, Richard||Morris, Alfred (Wythenshawe)||Shaw, Arnold (Ilford, S.)|
|Kerr, Dr. David (W'worth, Central)||Morris, John (Aberavon)||Sheldon, Robert|
|Kerr, Russell (Feltham)||Moyle, Roland||Silkin, Rt. Hn. John (Deptford)|
|Ledger, Ron||Murray, Albert||Silverman, Julius (Aston)|
|Lee, Rt. Hn. Frederick (Newton)||Norwood, Christopher||Swain, Thomas|
|Lestor, Miss Joan||O'Malley, Brian||Swingler, Stephen|
|Lipton, Marcus||Oram, Albert E.||Taverne, Dick|
|Luard, Evan||Orbach, Maurice||Tinn, James|
|Lyon, Alexander W. (York)||Orme, Stanley||Urwin, T. W.|
|Lyons, Edward (Bradford, E.)||Owen, Will (Morpeth)||Walker, Harold (Doncaster)|
|Mabon, Dr. J. Dickson||Page, Derek (King's Lynn)||Weitzman, David|
|McCann, John||Park, Trevor||Wellbeloved, James|
|MacColl, James||Parker, John (Dagenham)||Whitaker, Ben|
|MacDermot, Niall||Parkyn, Brian (Bedford)||Whitlock, William|
|Macdonald, A. H.||Williams, Alan Lee (Hornchurch)|
|McKay, Mrs. Margaret||Pearson, Arthur (Pontypridd)||Williams, Mrs. Shirley (Hitchin)|
|Mackenzie, Gregor (Rutherglen)||Pentland, Norman||Willis, George (Edinburgh, E.)|
|Mackintosh, John P.||Perry, Ernest G. (Battersea, S.)||Wilson, William (Coventry, S.)|
|McMillan, Tom (Glasgow, C.)||Price, William (Rugby)|
|McNamara, J. Kevin||Probert, Arthur||TELLERS FOR THE NOES:|
|Mahon, Peter (Preston, S.)||Rankin, John||Mr. Neil McBride and|
|Mallalieu, E. L. (Brigg)||Reynolds, G. W.||Mr. Ioan L. Evans.|