HC Deb 31 January 1972 vol 830 cc199-210

11.41 p.m.

Mr. Brynmor John (Pontypridd)

I am grateful for the opportunity to raise the question of Mr. David Ewart Evans, who is a 74-year-old man, and to indicate the rather unfortunate circumstances in which he comes to be faced with having to pay to the Inland Revenue £543.35 in interest upon back income tax liabilities.

In 1947, Mr. Evans retired through ill-health from his position as a furniture salesman. In order to have a living, he became a stall holder in the local market, selling wool and some clothing. Shortly after the commencement of this business, he was approached by an officer of the local income tax office, a man who had been in the employment of the Inland Revenue for about 30 years. This man is now deceased and, since the Financial Secretary is aware of his identity, I do not propose to mention his name, in order to save his family from some pain, at any rate.

Suffice it to say that this man stated that he was soon to retire from his Revenue post and wanted to set up as an accountant. He asked Mr. Evans whether he could handle his tax affairs. Mr. Evans agreed. From then until 1966 the man ostensibly acted for him. Mr. Evans sent him year by year his accounts showing income and expenditure, and thereafter Mr. Evans would have a note from his so-called accountant stating that he was not liable for tax in any year, quoting a file number which purported to be the file number allocated by the Inland Revenue authorities to his case, and a bill for professional services which averaged in the case of Mr. Evans the sum of £10 a year.

Mr. Evans' business was not a huge one. Consequently he found nothing remarkable in the fact that he had to pay no tax. Therefore he accepted the so-called accountant's notes in good faith.

In 1966, the so-called accountant died, and Mr. Evans subsequently wrote to his widow asking her about the fate of papers which he had sent to the deceased. The widow replied that she could not trace any, whereupon Mr. Evans went to the income tax authorities. It is accepted by the Treasury, I think, that in so doing he acted promptly. Then the income tax inspector staggered him by saying that Mr. Evans' call was the first intimation that the Revenue had that Mr. Evans was in business as a stall holder at the market or of his being engaged in any trade.

Apparently the deceased had never submitted any returns or performed any of the services that he pretended to have done. He had been engaged in obtaining money from Mr. Evans which would, if detected during his life, surely have led to a criminal prosecution.

I think that it will be helpful if I interpose here some facts which I know will also be accepted by the Financial Secretary. This was not the only case in which the Revenue had reason to be dissatisfied with the activities of the deceased.

Prior to 1960 the Inland Revenue was aware that there were a number of cases in which the deceased had acted as agent on behalf of taxpayers. He was seen by the District Inspector of the Pontypridd second district in 1962 and asked to give an undertaking not to act as agent for taxpayers. Later the same year a special investigator from the Inland Revenue also found that the deceased or his wife had acted as agent in a number of cases, and it was suspected that one of the two had forged taxpayers' signatures and presented wholly fictitious accounts. The deceased was again asked by the special investigator to give a written undertaking not to act for taxpayers in future. I was told in subsequent correspondence, which I had with the Financial Secretary, that these undertakings were of no efficacy since the Revenue had no control over him at that time.

When the matter came to light Mr. Evans was referred to the services of a reputable accountant and subsequently, after an assessment of 20 years back tax, there was an appeal to the general commissioners sitting at Pontypridd regarding this assessment. The relevant findings of the general commissioners were as follows: first, that wilful default was committed under the Act, not personally by Mr. Evans, but by the deceased on his behalf; secondly, that Mr. Evans had supplied the deceased with the information necessary to prepare income tax returns, but that this had been deliberately withheld by the deceased; and, thirdly, that Mr. Evans had neither expressly nor impliedly authorised the deceased to commit fraud or wilful default on his behalf.

Mr. Evans was therefore charged with £1,250 arrears of tax. I understand that, save for a few pounds, this has been paid. It is also fair to say that the Inland Revenue has waived any penalties which might have been imposed but has charged interest on the money which was owed from the initial date to date; hence, the sum of £543.35. It is this charge which aggrieves Mr. Evans, and it is one which I believe could be mitigated in whole or in part in this case.

I know that under Section 88(4) of the Taxes Management Act, 1970, The Board may at their discretion mitigate (whether before or after judgment) any interest due under this section". Mr. Evans has been charged under this Section.

I am also told by the Financial Secretary that the practice of the Revenue is to mitigate these interest payments only where the full charge would cause hardship. This practice is not enshrined in any statutory provision, and I believe that it is much too restrictive an application of the discretion given to the Revenue in cases such as this.

In this case Mr. Evans is virtually morally blameless of having failed to submit his tax returns, and so on. He was wickedly misled and cheated. Where then are these comparatively rare facts in taxation cases, I believe that consideration of the taxpayer's conduct should be one of the factors which could lead to mitigation. If hardship is the only criterion, then a man whose conduct is much more culpable may be excused the interest payments, whereas a man who is virtually blameless, may have to pay because he can afford to do so.

Second, may I request the Financial Secretary to look again at the definition of hardship. It may be considered as being a hardship that a man who is morally blameless should be called upon to pay so vast a sum at so late a stage. In addition to that, I ask the hon. Gentleman to bear in mind the financial considerations. It is true that the man can, in fact, pay the interest due, but the fact is that to do so would eat up between one-quarter and one-third of his savings, and I remind the hon. Gentleman that he is a 74-year-old man who owns no house of his own and who therefore has these small, modest savings as his only accumulation from life.

I believe that the hon. Gentleman could easily regard that as hardship and therefore consider a whole or partial remission on that ground. I believe that a partial remission could be justified by the fact that it was not until 1967 that the taxpayer became aware of the non-payment, and it may be just to limit the interest in this case, if the Financial Secretary is so minded, to the last five years, to the time when the taxpayer himself became aware of the non-disclosure of his tax records, and not charge it over the last 20 years.

The Revenue authorities themselves have not been as diligent in this case on behalf of the taxpayer as they ought to have been. I think it is accepted that there was dissatisfaction on the part of Inland Revenue with the activities of the deceased. Indeed, there were suspicions that he or his wife had committed serious criminal offences. Yet all the Revenue did was on two occasions to interview the deceased and to obtain from him undertakings which they must have known were of no efficacy at all. The Financial Secretary has told me in a letter than the Revenue authorities could not enforce those undertakings against the deceased, and therefore I believe that whoever interviewed him at that time—that is, in about 1960 to 1962—must also have known that the undertakings were of no efficacy.

If they had initiated or considered legal proceedings, even an unsuccessful prosecution of this man would have alerted ordinary, trustful men like Mr. Evans to irregularities at least six years earlier than they came to light. The Revenue chose to rely upon meaningless declarations, upon scraps of paper which they knew were worthless. In those circumstances, the least that can be done by the Revenue authorities is to recognise that fact, albeit tacitly, by mitigating the interest.

Even within the framework of our tax laws as they stand, there are men who, through no fault of their own, in the commonly accepted sense of the word "fault", become involved in words like "wilful default". Such men are bound to be puzzled and aggrieved where their own rôles are honourable. Such a man is Mr. Evans, the subject of this debate. The Minister would be doing both an honourable and a just thing if he were to announce a remission of the whole or part of the interest in this case, and I appeal to him to do so.

11.54 p.m.

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

The hon. Member for Pontypridd (Mr. John) has put the case on behalf of his constituent, Mr. Evans, with great force and with great persuasiveness. It is a case which he has pursued with great diligence over recent months.

Very briefly, the case may be summed up in the question whether the Inland Revenue is right to demand interest on the arrears of taxes in the rather special circumstances of the case. The hon. Gentleman has stated the facts of the case so fully and so accurately that it spares me the duty of rehearsing them again. Perhaps I might add one gloss to one or two of the facts stated by the hon. Gentleman.

The hon. Gentleman said that the deceased—whose name I shall not mention, either—referred to a file number and thereby added what one might say verisimilitude to the deceit that he was practising on Mr. Evans. In fact, he relied on his experience in the Inland Revenue to choose a file number sufficiently far ahead of the current lists, so that it was never likely to conflict with that of any other taxpayer.

There are three general points I should state by way of background. I am referring not to the particular case of Mr. Evans but to the general position. First, where a taxpayer is found to have committed wilful default within the meaning of the Taxes Acts, the Revenue is entitled to ask not only for the tax which should have been paid and for the interest on that tax down to the date of payment, but also for penalties. Had Mr. Evans' case fallen within that description, not £1,800 but over £4.000 would have been payable.

Second, there was never any question of penalties becoming due—although the General Commissioners did not regard Mr. Evans as being entirely blameless—because there was nothing in the nature of fraud or deliberate intention to conceal. I accept that, when laymen become involved with phrases like "wilful default", which are used in the Taxes Acts, obviously in a special sense, they become a little confused. No one has ever suggested that Mr. Evans has been guilty of any form of dishonesty.

Third, interest is quite different from penalties, which are intended to deter taxpayers from deliberately concealing or mis-stating their income or otherwise fiddling their taxes. But interest is simply intended as a commercial restitution for the late payment of taxes.

Sections 88 and 89 of the Taxes Management Act, 1970, the consolidating Act, provide for interest to be paid where there has been, within the meaning of the Act, wilful default. The logic of this is that the taxpayer has had the use of the money which, if his taxes had been paid at the due date, would have been available to the Revenue and the general body of taxpayers.

Mr. John

Surely it cannot be a purely commercial consideration precisely because of the statutory power of the Revenue to mitigate interest, which is not confined to any class of case.

Mr. Jenkin

That is obviously right, but Section 88 is activated only if there has been a finding of fraud, wilful default or neglect The power to mitigate interest is designed to take account of hardship, where, in the extreme case, one cannot get blood from a stone, where it is not possible to expect a taxpayer to pay interest by way of commercial restitution.

I was saying that the logic of this is that the taxpayer has had the money and the Exchequer has not. If the taxpayer had paid his taxes at the due date, he would not have had the money during the period of some 20 years. The Exchequer would have had it. The value of that money in the hands, as it has been, of the taxpayer is expressed by reference to the interest that it might have earned. I know theft the hon. Gentleman has studied the Section. The rates of interest are not by current standards extravagant, being 3 per cent. up to 1967 and 4 per cent. thereafter. This sum of interest is taken as the measure of the Exchequer's loss and a taxpayer's gain by reason of the taxpayer's failure, for whatever reason, within the meaning of "wilful default", to pay the taxes at the due date. Therefore, it is right that when payment of tax is delayed through the fault of the taxpayer—and this is what activates the Section—the payments when made should carry interest. As a general proposition this is one which cannot seriously be challenged.

Applying it to the facts of this case, the hon. Gentleman's main argument has been that, because of the activities of the deceased, Mr. Evans himself was not personally guilty of wilful default. It is right that there was a finding by the general commissioners that Mr. Evans did not personally commit wilful default. One must go on to say that these words are to be construed in accordance with the law. The law may be found in cases as well as in the Statute.

The general commissioners were referred to a case which made it clear that, if the agent is guilty of wilful default, that wilful default must be imputed to the principal. As the hon. Gentleman intimated, an appeal was contemplated at one stage from the finding of the general commissioners and a draft case stated was requested from the commissioners. In the draft case stated, the following paragraph appears: It would be unfortunate if a taxpayer could escape liability by saying, 'I have employed an agent who has failed to submit my accounts. You do not know of my existence until after my agent's death and although he may have been guilty of fraud and wilful default I am not liable for his actions'. The short answer to this argument is that the Revenue is by law automatically interested and is a party in any transaction relating to tax matters between Principal and Agent. To hold otherwise would defeat the very basis of the system of taxation. It is the Revenue's view that this is a perfectly accurate statement of the law as supported by the cases and that it clearly applies in the present case. Technically, therefore, the commissioners' finding that although Mr. Evans had not personally committed wilful default he is to be taken in the eyes of the law as having been guilty of wilful default, committed through his agent the deceased, is correct.

The hon. Gentleman says that, even though that may be so and the Section is activated, the fact of the matter is that his constituent is "virtually morally blameless". I do not want to put too much on the qualification which the hon. Gentleman himself put when he said "virtually morally blameless", because he knows that the commissioners did not wholly exonerate Mr. Evans. I again quote from the draft case stated: … we consider that the appellant"— that is Mr. Evans— is not entirely blameless for there is no evidence that he ever saw or asked to see prepared accounts or signed returns. It is highly strange that for 20 years an ordinary man of the world, let alone a man who had served in a commercial capacity as a salesman and who subsequently was in business on his own account, albeit in a small way, could feel that he had done all that was necessary by simply submitting documents and figures and paying an accountant's bill without ever seeing a tax return which he signed or any of the official documents.

That was the finding of the commissioners, and I think that the Revenue is entitled to take note of it. I may add that, although a case stated was asked for by Mr. Evans, in fact it was not proceeded with, no doubt on wise advice.

The hon. Gentleman goes on to say: "In spite of that, the Revenue's interpretation of the power to mitigate interest is much too restrictive, being confined by practice to the concept of hardship". One can make a general point here, that the Revenue, when operating these Sections which give the discretion, has to do something more formal than what one might call palm-tree justice. It has to have a practice. It is part of the philosophy of the Inland Revenue—which I should warmly support—that it attempts to treat in the same way taxpayers who find themselves in the same case. The Revenue does not seek to distinguish between taxpayers who are indistinguishable on the facts. It must, therefore, have a practice.

The practice here is that, if wilful default is established, and if interest is therefore payable, the only circumstance in which it would be right to mitigate interest is if the payment of interest would cause hardship to the taxpayer. The hon. Gentleman said that this then lands one in an inconsistency: if a taxpayer who may be very culpable—who may have committed fraud—has little or no means, he may be excused the payment of interest, whereas another taxpayer in the position of Mr. Evans, who is virtually morally blameless but who has had wilful default imputed to him by law, will have to pay interest simply because he has the resources to pay.

I think that I must accept that criticism. If a taxpayer has not got the resources to pay his dues, there is not much that the Inland Revenue can do about it. Of course, if he has been guilty of a crime, he can be sent to gaol; but that does not necessarily get any money out of him from the point of view of the Exchequer. If there had been grounds for a prosecution, the Inland Revenue would have prosecuted; but it would not have been Mr. Evans, it would have been the deceased. The Inland Revenue did what it could in the circumstances as they were known to it at the time.

I argue, therefore, that there is no substance in the hon. Gentleman's argument on the distinction between a man who has been very culpable, as he put it, and a man to whom wilful default has been imputed.

Then, says the hon. Gentleman, it must be hardship in this case if it will mean eating up half or a third of Mr. Evans' savings to pay the interest due on the tax. Here, one is engaged only in hypothesis, but it may well be that these savings could be built up, and interest on them accrue, because Mr. Evans was not paying the tax which he later conceded was due over 20 years but which he allowed, as it were, to fructify in his savings account.

It is difficult in these circumstances to argue that he should be entitled to keep the fruits of that because he is 74, because his savings do not in fact amount to very much, and that he should keep the interest in face of the general body of taxpayers, the vast majority of whom pay their taxes in due time and have not the same opportunity to build up their savings out of taxes which they ought to have paid.

I would answer the hon. Gentleman by saying that he made a moving and powerful plea on behalf of Mr. Evans, but in the circumstances of this case I cannot agree that the Revenue has been wrong in its interpretation of the Section. As the hon. Gentleman knows, Treasury Ministers cannot in the last resort tell the Revenue how to interpret the law.

Perhaps I might add this, though without holding out any hopes at all. If the interest cannot be agreed between the taxpayer and the Revenue, the inspector must go once again before the commissioners to ask them to make the order for interest. It is open to the taxpayer there to argue that interest should not be paid. I am bound to say that, in the circumstances, I think that it would not be wise for Mr. Evans to spend a lot of his resources, perhaps employing professional help, to fight the case at that stage; but that must be up to him.

At this stage, I cannot see that the Revenue has interpreted the law wrongly.

Interest has accrued on the tax which Mr. Evans ought to have paid over the 20 years in which he was in trade and earning profits. He has the savings out of which to pay it. I think that it is right, in fairness to the general body of taxpayers who pay their taxes on the due date, that interest on this unpaid tax should be paid.

Question put and agreed to.

Adjourned accordingly at eleven minutes past Twelve o'clock.