FAILURE TO MAKE RETURN FOR CORPORATION TAX (Hansard, 16 July 1987)

§ Mr. Blair
It may be helpful if I say one or two words about this part of the Bill, which will introduce a system of automatic penalties in relation to corporation tax and the pay-and-file system in an attempt to introduce sonic of the recommendations of the Keith committee. In essence, we support the structure of the scheme and have no objection to it. It will mean that the payment of corporation tax is speeded up and, therefore, that the tax system will work more efficiently.
I want to return to something that we raised on several occasions when we were debating value added tax and the proposals of the Keith committee in relation to that, the absence of any power of mitigation in relation to the fines that will be imposed. There may be amendments to clause 84 that raise a similar point, so perhaps I can speak about that later.
One of the great dangers of introducing a system of automatic penalties without mitigation is that the justice that we are introducing is a little rough. We have had the experience of the value added tax system of automatic penalties being applied without any process of mitigation being allowed. It is fair to say that that has caused widespread concern. The Opposition have made several 1327 attempts to secure some provision for mitigation of those penalties. Our pleas have fallen on deaf ears so far. I should be grateful if the Minister can tell us whether similar representations have been made in relation to the penalties to be introduced for corporation tax. Will he explain exactly why we cannot allow some system of mitigation when, especially with corporation tax, we could be dealing with large sums of money? There is a basic principle that if penalties are to be imposed there should be some attempt to allow a board of commissioners to consider mitigation in circumstances where it is clear that the offence was the result of inadvertence. The difficulty now is that businesses may be subject to considerable fines without mitigation being available. That cannot be in the interests of anybody. I would be grateful if the Minister would respond to that.
As I said, we are generally in favour of the structure of the implementation of the proposals, but the absence of a power of mitigation is a grave drawback to the corporation tax proposals in the same way as it was for value added tax.

§ Mr. Bruce Millan (Glasgow, Govan)
I support my hon. Friend the Member for Sedgefield (Mr. Blair) in all that he said. It is convenient for the Revenue or, in the case of VAT the Customs and Excise, to have these standard penalties inserted into the legislation. However, as my hon. Friend has said, they can sometimes operate unfairly where there is no demonstrable offence or negligence on the part of the taxpayer but where there may simply be inadvertent neglect, if one can use that expression.
The absence of mitigation is a fault in the legislation. What my hon. Friend the Member for Sedgefield said about VAT is true. The fixed penalties have given rise to considerable concern. I hope that we shall have some indication from the Minister this evening that the question will be looked at again and not only in relation to this clause.

§ Mr. Lilley
I welcome the support from the hon. Member for Sedgefield (Mr. Blair) for the general structure of pay and file which will be a considerable advance for taxpayers when it is introduced, although that will not be until April 1992. It is intended to overcome the incredibly complex problems in the existing system where there is no direct obligation on companies to file their accounts. About two thirds of companies go to appeal before accounts are extracted from them by the Inland Revenue. It is possible to make an assessment only then.
We have decided to simplify that by introducing pay and file, the essential principles of which are that companies will have an obligation to file their accounts within 12 months of the end of the accounting period. After nine months they will have an obligation to pay their self-assessment of tax due. Interest will be earned if they overpay when the final assessment is made and interest will be incurred if they have underpaid in their original assessment.
It is important that we move to automatic filing of accounts so that the Revenue can reach an agreed assessment of the tax due. To achieve that, it is necessary to have fixed penalties. A phased system of penalties is proposed. After a delay of between 12 and 15 months the penalty will be £100 flat rate. After a delay of between 15 and 18 months the penalty will be £200, after 18 months 1328 and up to two years it will be £200, plus 10 per cent. of the underpayment of tax when eventually worked out, and after two years it is 20 per cent. of the underpayment of tax.
We have avoided mitigation for three reasons.

§ Mr. Blair
Is it not the case that there can be automatic filing and automatic penalties and that that can still lie easily with a system of mitigation? Is it not the case that, if a small company were to make a tax return incorrectly, it could still be subject to stringent and draconian penalties?

§ Mr. Lilley
These clauses deal solely with the filing, not the payment. Any penalties that arise out of the clauses are due to late filing. The system of penalties relates to that. There is not so much of a problem with over and under assessment because that is dealt with by the automatic interest payments. In any case, that is dealt with in later clauses of the Bill. Therefore, we are dealing with penalties for late filing of accounts to the Revenue.
Powers of mitigation have been avoided for three reasons. First, companies have the right to plead a reasonable excuse for not filing their accounts. If that is proved, there will be no penalty, assuming that they eventually get round to filing accounts. Secondly, we have set the maximum penalty below that suggested by the Keith committee. Thirdly, the penalty is lower than that which is theoretically available under the present system, which could be as high as 100 per cent. of the tax underpaid.
6.30 pm
Because we wish to avoid a situation in which everyone goes to appeal, we cannot have a system of mitigation. If it were open to the special commissioners to mitigate the penalty, there would be nothing to stop everyone lodging an appeal on the offchance and we should be back in the present situation in which 430,000 appeals are lodged every year.

§ Mr. Blair
The argument that if mitigation is allowed everyone will wish to mitigate is the classic argument of bureaucracy, and we should be extremely cautious about accepting it without challenge. The same could be applied to the "reasonable excuse" get-out. On the whole, people do not seek to use such provisions if they have no argument to put. It is argued that the way to deter appeals is to have a system of automatic penalties without the power of mitigation, but one must balance the interests of the Exchequer in getting the tax in properly with those of the taxpayer.
In relation to VAT, there have undoubtedly been cases of real and substantial injustice, to the extent that the president of the VAT tribunal has said that the law should be changed to allow for a power of mitigation. That tribunal does not expect to be flooded with unnecessary appeals as a result. I wish to put down a marker about this as we have raised the matter many times before and will doubtless do so many times again. We must be careful of moving to a situation in which bodies have power to levy substantial penalties but in which there is no power to graduate the amount of penalty according to the turpitude to the offence.

§ Mr. Lilley
As I said, the penalty is automatically graduated in terms of the delay in filing the accounts. As delay is the essence of the offence, there is an element of automatic graduation.
1329 The experience with VAT has given rise to the hon. Gentleman's concern. He will know that a review of that system has been promised in advance of the 1988 Finance Bill. Doubtless any lessons which come out of that review will be taken into account in a wider context.

Mr. Milan
The Minister says that the taxpayer could plead reasonable excuse, but I do not see that in the clause. Could the Minister say where it appears?

§ Mr. Lilley
It is a feature of the Taxes Management Act and is automatically incorporated in this.

§ Mr. Blair
The Minister referred to the review in relation to VAT. Was he implying that the lessons of that review would be applied to automatic penalties in relation to corporation tax?

§ Mr. Lilley
They would not be applied unless there were a logical relationship leading us to do so, but clearly we take all reasonable matters into account all the time.

§ Sir William Clark
The taxpayer may plead reasonable excuse, but the Inland Revenue will be judge and jury in deciding whether the excuse is reasonable. I shall deal with mitigation on a subsequent amendment. Under this clause the penalty is imposed for failure to file accounts, but there is no pressure on the Inland Revenue to agree the computation within a certain period. Given the current backlog of work, is my hon. Friend satisfied that when these provisions become operative the Inland Revenue will be able to deal expeditiously with the accounts?

§ Mr. Lilley
My hon. Friend is correct. In the first instance, the Inland Revenue will decide whether an excuse is reasonable. However, if a company objects to that ruling, it can appeal to the commissioners. It can take the matter to appeal on the question of reasonable excuse.
Under the pay-and-file system, there will be an incentive for the Inland Revenue to deal with matters expeditiously because if a company has overpaid the Inland Revenue will have to pay interest on the money that turns out to have been paid in excess of the due assessment.