INCOME TAX (MR. A. W. FARROW) (Hansard, 10 May 1971)

§ Mr. David Stoddart (Swindon)

The subject of this debate as it appears on the Order Paper is the tax affairs of my constituent Mr. Farrow and the report of the Parliamentary Commissioner thereon, but I say at the outset that the implications of this case go rather wider than my constituent's affairs.

On 13th February, 1970, Mr. Farrow was shocked to receive a notice from Her Majesty's inspector of taxes telling him that he owed £194 18s. 9d., this sum including an amount of about £89 brought forward from 1967–68. Mr. Farrow was then 67, and the shock of receiving the news made both him and his wife very ill. On 20th February he wrote to the Inspector of Taxes pointing out that he had given the Inland Revenue Department all relevant information about his tax affairs, and that the arrears must be the Department's fault. Receiving no response, he wrote to the People free advice service. That newspaper assisted him as far as it could, and ultimately, quite correctly, advised him to take the matter to his Member of Parliament.

This the Farrows did, and my immediate predecessor took the matter up with the Treasury Ministers. As a result, the Farrows received a reply, but it was quite unsatisfactory. At this point the case was referred to me. After reading the details, I felt that something had gone seriously wrong in the tax office with the affairs of Mr. Farrow, but that it was fair that Treasury Ministers should be given another opportunity to take action. Accordingly, I wrote to the Financial Secretary 169 to the Treasury on 21st July, 1970, saying that I felt that the letter sent to Mr. Farrow on 2nd July was unhelpful, and asking the hon. Gentleman to reconsider the case with a view to waiving all or part of the arrears. On 5th August, I received a reply from the Minister of State, Treasury, saying that the waiving or reducing of the tax arrears could not be justified, but that their collection would be spread over four years.

Since I was not satisfied with that reply, I referred the matter to the Parliamentary Commissioner on 24th August, after obtaining a signed statement from Mr. Farrow. I later heard from the Financial Secretary that he, too, was rather perturbed about the case, and had discussed it with senior Treasury officials. I received the report of the Parliamentary Commissioner on 22nd April. However, in the meantime the Farrows had received a further demand from the Inland Revenue Department for a further £26 for underpayment of tax in 1969–70, making total arrears of £220. This meant that at £1 a week over four years Mr. Farrow would be 72 before the arrears finished being paid off.

After dealing with the background of the case, the Parliamentary Commissioner came to the conclusion in his report that Mr. Farrow's income tax affairs had been badly mishandled by the Inland Revenue Department, and that the complaint was fully justified. The report is long, and I cannot quote from it at great length. It said: In addition to making a number of errors affecting Mr. Farrow's P.A.Y.E. codings and leading to underdeductions of tax, the tax offices concerned did not follow departmental standing instructions when they reviewed his case after each of the tax years 1967/68 and 1968/69. These instructions require an Inspector, in circumstances such as those of this case, to write to the taxpayer before taking any steps to raise an assessment… and to explain certain things to him. On receipt of a reply the Inspector is then required to consider whether payment of the arrears would involve serious hardship and, if satisfied that this is so, he should take no further steps to recover the underpayment. In Mr. Farrow's case no explanatory letter whatever was issued in connection with the 1967/68 underpayment, and when Mr. Farrow complained of the way his affairs had been dealt with the Inspector decided not to reply, on the grounds that (as he noted on the file) 'It will only stir up more trouble than it is worth.' We certainly have bureaucrats in this country, but at least they are honest 170 bureaucrats when they record something like that on an income tax file.

In the case of the 1968–69 liability, the inspector sent a letter to Mr. Farrow, but it did not give an adequate explanation of the cause of the under-payment, as distinct from how it was calculated. The Parliamentary Commissioner finds that Mr. and Mrs. Farrow—he includes her because, although she is not legally liable for any part of the under-payment, she is closely affected and has been considerably distressed by this matter—have suffered an injustice as a result of maladministration by the Inland Revenue.

He says: By way of remedying this, the Department have expressed their apologies for the manner in which they have dealt with Mr. Farrow's affairs, but have told me that they did not think they would be justified in the light of his present circumstances in waiving collection of any of the arrears. In his conclusion, the Parliamentary Commissioner says: I have considered whether the Department's proposals as stated above can constitute an adequate remedy for the consequences of their maladministration. I am not satisfied that they do. I have no reason to doubt Mr. and Mrs. Farrow's statement about the effect on their health of the worry caused by the Department's actions or Mr. Farrow's statement that, at his age, he would by now have considered giving up his part-time job, but for the additional amount he has to pay. In its First Report for the Session 1970–71, the Select Committee on the Parliamentary Commissioner for Administration expressed the view that it would be appropriate for the Inland Revenue to review their practice for remedying cases where, owing to departmental error, the taxpayer has sustained injustice; and to consider providing a financial remedy on an ex-gratia or compensatory basis in those cases where an extra-statutory concession is not considered appropriate, without sole regard to the degree of hardship caused to the taxpayer. In my view, this case should be considered on this basis. After receiving the report, I also received a letter from the Financial Secretary. I sought an interview with him, but I think that it is true to say that we got no further forward at that interview. Since I was not satisfied with that, I decided that this sad and sorry case should be taken as far as I could take it possibly, and I therefore applied for this Adjournment debate. I feel that the House will agree that this case has shown up serious defects in the Inland Revenue Department and has highlighted injustice that occurs to individuals every day.

171 Indeed, judging by correspondence I have received, as a result of the publicity which has surrounded this case, from many parts of the country, the Farrow case represents the tip of an ugly and treacherous iceberg upon which unsuspecting taxpayers can quickly founder. I will quote one or two cases which have come to my notice, because they are important.

The first concerns an 83-year-old man living in Brough, Yorkshire, who is in hospital. He is still being pursued by the tax authorities for arrears which were no fault of his. This is worrying him stiff, and his family, too. Another case concerns a retired civil servant living in Somerset. He is 86 years old and has an ailing wife of 85, and he owes £107 to the Inland Revenue Department, which is pursuing him for that amount. Then there is the case of a man of 69 living in Romsey, who has had to find a job and borrow money because of arrears and the refusal of the tax authorities to extend the period of payment. These are heartrending cases and the public at large and hon. Members will feel the utmost sympathy for the people concerned.

Nobody, least of all myself, underestimates the difficulties faced by tax officials throughout the country. It is not being suggested that the cruel heartless treatment of the Farrows and others like them stems from some sadistic desire on the part of tax officials to cause the maximum pain to the taxpayer. It is rather the system which is cruel and heartless, and the complexity of our tax laws, coupled with the extreme shortage of staff of the Inland Revenue Department, causes a situation in which mistakes are made and perpetuated.

Clearly, the system has to be modified to take account of the serious situation which has been revealed not only by Mr. Farrow's case and others which have come to light but by the Report of the Select Committee on the Parliamentary Commissioner for Administration.

I believe that the recommendation contained in House of Commons Paper 240 is reasonable. I have no time to quote it. I should have thought that this was the least that Treasury Ministers could do. Indeed, I fail to understand why Treasury Ministers have not done something about the matter to date. For myself, I believe 172 that the present rules for hardship are far too restrictive and, so far as I can gather, they can be applied only to those virtually on the bread line. Certainly the rules ought to be more widely drawn to give the tax authorities more scope for assisting taxpayers in difficulties and not necessarily only when the tax authorities have been at fault. Surely it must be right to allow the Inland Revenue Department to make ex-gratia or compensatory payments without sole regard to the degree of hardship where the tax authorities have made serious errors as they have in the case of Mr. Farrow.

If justice is to be done and seen to be done, these measures must not only be adopted in future but must be made retrospective for a reasonable time in order that those like my constituents who are existing sufferers may be beneficiaries. Although there are many cases like the Farrow case, the cost to the Treasury would be relatively small. As the Select Committee noted in paragraph 31 of its Report, only some £82,000 was remitted by the Inland Revenue Department for the year 1969–70 out of a total of £5,000 million collected in taxes.

Treasury Ministers should act quickly. I and other hon. Members will be satisfied only if in his reply tonight the Financial Secretary announces that he intends to come forward shortly with the necessary measures, including retrospection, to remedy what is a disgraceful and cruel situation.

§ The Financial Secretary to the Treasury (Mr. Patrick Jenkin)

I should like to express my appreciation of the moderate and reasonable way in which the hon. Member for Swindon (Mr. David Stoddart) has dealt with what he rightly described as a sad and sorry case affecting his constituent. This is a case in which, fortunately, we have the advantage that all the facts are set out in a clear and undisputed form in the Report of the Parliamentary Commissioner for Administration.

I say at once that I am certainly not here tonight to dispute the finding that Mr. Farrow's tax affairs were badly mishandled by the Inland Revenue over a period of years. Mr. Farrow all along gave prompt and accurate returns of his income, both of his pensions and his part-time earnings, and the various tax offices 173 which should have ensured that proper codings were made failed to do so, so that over a period of two years much too little tax was deducted. Added to these errors, there was the failure to give him an adequate explanation of how the arrears arose and, subsequently, in the instance described by the hon. Member, to reply to one of Mr. Farrow's letters.

All this is fully conceded, and in once again tendering the apologies of Treasury ministers and the Inland Revenue I would emphasise that this case must not be regarded as in any way typical of the standard of work in the Inland Revenue as a whole or in the Swindon office in particular. The hon. Member said that he thought that this was the tip of an ugly and treacherous iceberg. Of course, mistakes occur from time to time affecting taxpayers of limited means. It would be quite wrong to deduce from that that unfortunate episodes of this sort are widespread. They do happen, but they are very much the exception.

Some of the Press comment to which this case has given rise in recent days has had very harsh things indeed to say about the Inland Revenue officials, happily not echoed by the hon. Member tonight. This is ironic because Mr. Farrow, as I am sure the hon. Member knows, was at one time working as a temporary clerk in the Swindon office. He must know some of the difficulties there. We should all remember that the staff in the Inland Revenue are in one sense the agents of this House, collecting from people the taxation which enables the policies demanded and approved by this House to be implemented.

We have in the past saddled them with an over-complicated system and in recent years this has, as the hon. Member recognised, strained the Department's resources to the limit. In these circumstances mistakes, even bad mistakes, are inevitable but it is quite wrong and unfair, as some have sought to do, to condemn the whole service on that account. Nevertheless, as I have conceded, this was a bad case and the real question is that raised by the hon. Member at the end of his speech—whether and in what circumstances, after mistakes of this nature have come to light, the Inland Revenue should waive the underpaid tax or otherwise relieve the taxpayer of the full obligation which in law undoubtedly lies upon him.

174 As the House knows, the Taxes Acts make express provision to allow both the Inland Revenue and the taxpayers to go back six years to correct mistakes which may subsequently have come to light. In the case of the Inland Revenue if a mistake comes to light it has a legal duty to do this. There would be no point whatever, the House having conferred this power and imposed this duty, if the tax were not then to toe recoverable.

The issue here is whether, in all the circumstances, it is right to enforce payment of the arrears. The Parliamentary Commissioner has, in effect, urged that the Inland Revenue should waive part or all of the arrears, and it would be utterly wrong for Treasury Ministers to treat lightly a recommendation of that sort. As the hon. Member has acknowledged, at the time that he put the matter to the Parliamentary Commissioner I said that the case was one which was giving me cause for some concern.

Yet in replying to the hon. Member I must make it clear that the decision of the Inland Revenue not to waive any part of the arrears in this case was fully in accord with its practice as it has stood over recent years. On the test of hardship which is set out in the Select Committee's Report to which the hon. Member referred, which has been applied in such circumstances, Mr. Farrow did not qualify for relief. His income and means were above the level which would entitle him to claim to have his tax waived. It would be quite wrong for the Inland Revenue to make a special exception in one case simply because the case has been pursued, as this one has been, with energy and vigour.

To be fair to the hon. Gentleman, he has not sought special treatment for his constituent. The case made is that if this is the result of the existing practice it is high time the practice was changed. The hon. Gentleman is in good company in urging that, for earlier this year the Select Committee on the Parliamentary Commissioner for Administration recommended precisely in this sense. The hon. Member has already read the relevant part of the Committee's Report and I need not therefore repeat it. The Committee made its recommendation because in a number of cases which were drawn to its attention no relief had been offered as the Inland Revenue did not consider 175 that the circumstances amounted to hardship.

The core of the proposal put forward by the Select Committee is that a remedy should be considered without sole regard to hardship". This is an important recommendation with some very far-reaching implications. I regret that I can do no more than tell the House that the Select Committee's Report is at present under active consideration by the Government. I am not yet in a position to say what the Government's decision will be, although I can indicate—and perhaps this will be some comfort to the hon. Gentleman—that the Chancellor of the Exchequer hopes to table the Government's comments on the Select Committee's Report fairly soon.

The hon. Gentleman specifically asked me whether any recommendation would have retrospective effect. I can give no indication about that. The House must await my right hon. Friend's comments on the Report.

In the meantime—and I fully realise that this will be a very severe disappointment to Mr. and Mrs. Farrow—there is no alternative open to the Inland Revenue 176 but to continue to operate on its present rules which have been in force for some time. Mr. Farrow's means are such that if the payment of the arrears of tax is spread over the four years mentioned by the hon. Gentleman the extra liability will not involve him in that degree of hardship which, according to current practice, would be necessary to allow the Revenue to remit any of the tax due. If Mr. Farrow's circumstances change—for instance, if he gives up work—the Revenue will of course reconsider the position.

I can assure the hon. Gentleman that Mr. and Mrs. Farrow's position has been looked at very carefully, but their resources are such that they do not, as things stand today, come within the hardship category. Any right-minded person will feel a lot of sympathy for the Farrows who find themselves saddled late in life with an unexpected and unwelcome burden. The hon. Member has pursued their case with tenacity, and it is with real regret that I cannot offer either him or his constituents more tangible comfort.