INLAND REVENUE (OFFICIAL ERROR RULE) (Hansard, 22 July 1980)

§ Mr. Teddy Taylor (Southend, East)
I am grateful to my hon. and learned Friend the Minister of State, Treasury for staying up to this late hour to listen to my case and to answer the debate. This is a time of the year when Treasury Ministers carry an intolerable load, with proceedings on the Finance Bill, and I am therefore all the more grateful for my hon. and learned Friend's presence.
The issue that I wish to raise is the operation of Treasury policy in so far as it limits what is referred to as the official error rule and, in particular, as it affects my constituent, Mr. Wilson, of 440 Woodgrange Drive, Southend.
In the first report of the Select Committee on the Parliamentary Commissioner concern was expressed that the Inland Revenue had no power to waive arrears of tax. The Committee took the view that that was wrong in cases when taxpayers were presented with a substantial bill that arose purely because the Inland Revenue had made a mistake.
In response to that report, the Government issued a White Paper in July 1971 and accepted the need for something to be done, but proposed that the injustices that had been referred to by the Select Committee and the Parliamentary Commissioner should be resolved only where there was hardship. A scale was drawn up providing that if the taxpayer's income was £ 1,500 or less and a mistake by the Inland Revenue resulted in the individual being presented with a substantial tax bill, all the liability should be carried by the Revenue. It was further proposed that if the income was between £ 1,500 and £ 3,000 one-half of the bill should be borne by the Inland Revenue, but that if the income of the person concerned was more than £ 3,000, no remission should be allowed.
462 It is interesting—and it gives an idea of the extent of the problem—that between 1970 and 1977 a total of £ 7.4 million of taxation was remitted, involving 55,000 taxpayers. The average remission was more than £ 100 per affected taxpayer.
The scale has, of course, been revised several times. The latest revision provides that if the income of the taxpayer is below £ 4,000 a year, full remission is made in cases of official error. If the income is below £ 6,000, the remission is 75 per cent., at between £ 6,000 and £ 8,000, remission totals 50 per cent. and on an income of £ 8,000- £ 10,000, remission is 25 per cent., but if an individual's total income is more than £ 10,000, no remission is allowed, irrespective of the nature of the official error.
The latest report of the Select Committee, issued as recently as 21 February 1980, thoroughly reviewed the whole procedure. In evidence before the Committee the Parliamentary Commissioner expressed the view that the rigid cut-off points were unjust and created rough justice. In page 10 the Commissioner stated that: In my view anyone who has blamelessly conducted his affairs on the assumption that his tax account is in order must inevitably suffer on being informed that it is not; and it is no answer, in my view, to tell him that he is so wealthy that no injustice has been done to him or that he has anyway had the benefit of the unpaid tax. For, almost certainly, he would not have taken the benefit if he had realised that the money was not his to keep and, if he had spent it, he would not have done so—sometimes irrevocably—had he known it was repayable. That was a strong view, basically saying that the rigid cut-off points were unfair.
It is unfair to have arbitrary limits of that sort. The total income of a person is no true guide to his wealth or his available resources. It does not take account of a taxpayer's obligations, his debts, his family obligations, his children or of the elderly relatives that he might support. My hon. and learned Friend the Minister is a fair man. I think that he will agree that the total income is not a true and fair guide to a person's available resources or wealth.
In considering the matter the Committee made two specific recommendations. First, it felt that the lower limit was unfair and should be raised; secondly, it recommended that in cases 463 above £ 10,000 a year at least a token remission of 10 per cent. should be made. That was a limited proposal, but it was fair and reasonable. There is no doubt that if a taxpayer is suddenly presented with a bill, through no fault of his, it involves at least inconvenience, and possibly hardship.
How does that affect my constituent? Mr. Wilson is a responsible and meticulous person. I have no wish, and it would be wrong, to parade his private affairs—or the private affairs of any constituent—in public. Suffice it to say that through an unfortunate error in the issuing of coding notices he was presented with a bill for £ 977 in respect of the year 1978-79, and was advised that it was likely that a bill for a similar amount would fall to be paid in respect of 1979-80. At no time was there any suggestion that the liability arose from a mistake on his part. I have a letter from Mr. Williams, the Inspector of Taxes, London Provincial 5 district, dated 16 April, in which he states: I am afraid that I can find no proper explanation as to the issue of the incorrect code … this would appear to be a bona fide coding error…. Naturally, I appreciate that it was a very costly mistake from your constitutent's point of view and I would ask you to extend my sincere apologies to Mr. Wilson for the error on the part of the Revenue. There is no doubt about the facts. The Revenue made an unfortunate error, and admitted it courteously. In fairness to Mr. Williams, I should point out that it was not his office that made the mistake. His office gave me a courteous and speedy reply to my inquiry.
In dealing with the complex affairs of taxpayers in Britain, with so many people involved, inevitably mistakes will arise. In those circumstances it is only reasonable that some provision should be made to compensate those presented with substantial bills, through no fault of their own. In my constituent's case the amount involved is about £ 2,000. If his income had been £ 4,000 or under, this total liability would have been carried by the Revenue. If his income had been £ 7,500, he would have had to find only half the money. But because his total income was above £ 10,000, he is entitled to nothing except a sincere apology. I believe that this is not fair and that my constituent is entitled to some remission for the inconvenience which has been caused 464 to him as a direct result of an unfortunate error by the Inland Revenue.
In cases such as this I do not think that it is fair to say that a person can afford it. At the end of every tax year every taxpayer, irrespective of his income, faces the same questions, the same opportunities and the same problems. A taxpayer may decide, because there has been a surplus in the year, to buy a larger house, or perhaps a British Leyland car, following the advice of some of my right hon. Friends, or perhaps a flat for an elderly relative.
If, having made the purchase, for example, of a British Leyland car, he suddenly finds himself faced with an unexpected demand from the Inland Revenue for £ 1,000 or £ 2,000, he cannot suddenly sell the car at no loss to himself; he cannot suddenly undo the good that he might have done with the cash; he cannot suddenly take the money out of a business in which he may have invested it.
In these circumstances, I suggest that there is an obligation on the Treasury and on the Inland Revenue to make some gesture towards a taxpayer who is suddenly and unexpectedly presented with a very substantial tax demand of this sort. I hope that the Minister will do something to remedy the injustice done to my constituent and will at least give some indication that the Government are prepared to make some small move towards a fairer solution to problems of this sort.

§ The Minister of State, Treasury (Mr. Peter Rees)
My hon. Friend the Member for Southend, East (Mr. Taylor) has deployed a formidable case with his customary eloquence, courtesy and lucidity. He has drawn a general moral from the case of his constituent, Mr. Wilson. Although I judged from his speech that he does not wish me to go in great detail into Mr. Wilson's case, it is right that I should perhaps deal very briefly with the facts.
Mr. Wilson, as I am informed, for the year 1978-79 had a salary from employment which was over £ 10,000 a year and a pension from his previous employer which was somewhat less. Due to a mistake—my hon. Friend is absolutely right in saying that it was a mistake on the part of the Inland Revenue and not on 465 the part of Mr. Wilson—all his allowances were given against his pension but a single person's allowance was also given against his salary.
The error was discovered towards the end of the next finacial year. There is a certain significance that should be attached to that, and we must draw a general moral from that at a later stage. The Inland Revenue felt it necessary to raise an additional assessment on Mr. Wilson to recover the sum of somewhat over £ 900. Since the error was perpetuated, it is, I regret to say, true that a further sum may have to be collected for the current tax year.
I should like to associate myself with the apologies that the inspector rendered to Mr. Wilson. As I said, no blame whatever attaches to Mr. Wilson. There is no hint of suspicion that he improperly concealed the facts or anything of that kind. But, of course, my hon. Friend presses me and he suggests—I understand the vigour with which he defends his constituent's case—that apologies in this kind of case are not adequate.
My hon. Friend has taken the House back over the history of these matters. The Revenue has always recognised that it has a power to waive or remit tax where there is absolute hardship. This is a power that it has under its general responsibility for the management and control of the tax system. But, as my hon. Friend has pointed out, in 1971, as a consequence of the first report of the Select Committee on the Parliamentary Commissioner for Administration, a White Paper was laid in which the then Administration—the Chancellor of the Exchequer was my noble Friend Lord Barber—proposed a series of remissions related to an income scale which my hon. Friend has set out.
That scale has been improved or increased over the years. As recently as November last year this Adminstration considered it proper, bearing in mind the changed circumstances over the previous eight years, to alter the scale. However, as my hon. Friend has correctly pointed out, there is a cut-off point at £ 10,000. Sadly, Mr. Wilson lies uncomfortably on the wrong side of that point. Under the existing practice Mr. Wilson would not be considered for a remission.
466 The error in Mr. Wilson's case was discovered within one year of the year to which it related. My hon. Friend has studied these matters and, if I may reciprocate the compliment, is a fair-minded person. He will appreciate that the Inland Revenue machine is dealing with over 20 million taxpayers. The situation is particularly difficult in the case of PAYE, which is, as it were, a provisional collection of tax under schedule E during the course of the year. It is inevitable that some reconsideration of the facts may be necessary at the conclusion of the tax year. The Revenue has always adhered to the principle that if the error on its part has been discovered in the year subsequent to the year to which it relates, regrettably, no remission is due. I am sure that my hon. Friend will recognise the administrative difficulties of quantifying the liability with absolute precision in or very shortly after the end of the year of asssesment. On that ground, too, I regret that Mr. Wilson would not, under existing practice, be entitled to remission.
My hon. Friend makes the valid point that in any event those scales are a little unyielding. That very point was made in the recent report of the Select Committee on the Parliamentary Commissioner for Adminstration. The Committee made one or two recommendations to which we shall pay the closest possible attention. I am not in a position tonight to say what conclusions we have reached. The Committee again operates by reference to a scale. It suggests that, although there should be a token remission of 10 per cent. for taxpayers whose income is in excess of £ 10,000 it should apply only up to a limit of £ 15,000. I do not want to go into the details of Mr. Wilson's case, which may be indelicate, but I suggest that had we adopted in whole that recommendation, it would still, regrettably, not have afforded Mr. Wilson relief.
At the end of the day the Select Committee recognised the limitations of the existing system of relief. In paragraph 25 it concluded: We accept Sir William Pile's views"— Sir William Pile was then the chairman of the Board of Inland Revenue, who gave evidence— that any system of this kind involves an element of rough justice, and that smooth justice would be more complicated and therefore more expensive to administer. We have 467 accordingly limited our recommendations to changes which we believe could be implemented without undue difficulty, which will make more satisfactory remedies available to the taxpayer and which will reduce unavoidable unfairness to a minimum. Although the Committee recognised the limitations of the existing system of relief and proposed certain relaxations, to which consideration is being given, it did not suggest fundamental alteration, which is what my hon. Friend, with his usual pertinacity, is advocating. He is suggesting that we should consider the matter from a different principle. He suggests that if there is an error, without qualification, there should be a remission. I accept that there can be relative hardship for people with considerable income. My hon. Friend has instanced practical cases. I do not dissent from that at all. Equally, my hon. Friend, who has had considerable experience in administration, will recognise that in the interests of practical administration, because we are dealing with many cases, we must try to reduce the system of remission to fairly easily applicable rules. The Inland Revenue has proceeded on that basis up to this time.
I cannot tell my hon. Friend that I have the perfect solution, which has so far eluded not only the Inland Revenue and previous Treasury Ministers but the Select Committee which considered these matters. However, we shall certainly see how far we can respond to the specific recommendations of the Select Committee. I should like to see—without any commitment—whether we can approach the matter on a broader basis altogether, but that would open up a very wide area.
I hope that my hon. Friend will feel that, though regrettably under the existing rules we are unable to do anything 468 for Mr. Wilson—however we respond, it will be practically impossible to make it retrospectively effective, because it would probably mean reopening an enormous range of cases—he has generated a debate of some importance in which a real problem has received sympathetic consideration. There is a possibility—I put it no higher—that we shall be able to respond in the same spirit as that in which he has developed the debate.

§ Mr. Teddy Taylor
My hon. and learned Friend has explained why he cannot help my constituent. To ensure that some good comes out of my constituent's unfortunate experience, in the review which he is to hold will my hon. and learned Friend consider the possibility of some percentage remission, however small, being made to all levels of income, bearing in mind that everyone suffers inconvenience and hardship from such situations, no matter what their income may be? I appreciate that he cannot give any commitment on specific matters, but I hope that he will look at this matter of principle which is involved.

§ Mr. Rees
Certainly. I appreciate the understanding and moderate way in which my hon. Friend has pressed his case. I shall certainly take account of that point. I hope that at the end of the day my hon. Friend will feel that he has generated a small but important debate on a problem which deserves close consideration. Regrettably, we have felt unable to do anything for Mr. Wilson in this instance, but I hope that he will have the satisfaction of feeling that he has stimulated the reconsideration of an important matter.