§ 5.35 p.m.
§ Lord Houghton of Sowerby rose to call attention to the report of the Committee on Enforcement Powers of the Revenue Department: and to move for Papers.1195
§ The noble Lord said: My Lords, I beg to move the Motion standing in my name on the Order Paper. There are several reasons why I am raising this matter this evening, more by lottery than by design I may say, although I certainly wished to raise this important report for attention by your Lordship's House if I got the opportunity. One reason is that this report deals with the administration of our tax system which bears very closely indeed upon the rights, duties and liberties of the subject, and these I regard as the especial responsibility of your Lordships' House. Without a constitution, without a Bill of Rights, with an elective dictatorship, your Lordships do have, I think, the responsibility for the especial care of the liberty of the subject.
§ May I say in this connection that I hope that if and when the Government come forward with proposals to implement recommendations of this committee they will bring them together in one Bill—a sort of taxers' management Bill, similar to the one of 1970, which is not certified by Mr. Speaker as a Money Bill—and not tuck them away in bits and pieces in successive Finance Bills which are so certified. Much has gone through in Finance Bills which relates to administration and the liberty of the subject which should have been discussed by your Lordships' House, but which were outwith our jurisdiction under the Parliament Act.
§ I think that another reason for raising this issue is that reports of this importance and substance after the lapse of a reasonable time should be drawn to the attention of at any rate one House of Parliament. I have suffered bitter disappointment personally from having served as chairman or a member of several committees and commissions, reports of which have subsequently received very little attention from Parliament solely because they were appointed either to meet a political difficulty or at the peak of some public interest, but when we reported it had all gone; the crisis had passed, the interest had evaporated and nobody cared very much what we had to say. I hope that will not be the fate of this report.
§ This report was published last March and it was an ideal committee in size and, I think, in composition: small, only five members, two of them distinguished Members of this House; one, the chairman, the noble and learned Lord, Lord Keith of Kinkel, who has courteously come to the House to listen to this debate, and my noble friend Lord Allen of Fallowfield; and there was another distinguished member of the committee well known to me, the last holder of the office of Chief Inspector of Taxes in the Inland Revenue, Mr Ernest Simons.
§ The first thing I would like to do is to congratulate the Keith Committee on the outcome of nearly three years of work and 42 meetings. Just think of it, 42 meetings, on a complex, largely controversial topic, sensitive even where it was not contentious; and I think, if I may respectfully say so, that they have done a highly professional job, undertaken with clarity and skill, and one can only be full of admiration for such a thorough investigation. Not only were facts to be ascertained and considered but judgments upon them had to be made and they are frequently to be found 1196 everywhere in the report. The Revenue departments, and eventually Ministers, will have to look at the report. They will have a major task before them, because the politics of this report will be by no means unimportant. I shall have something to say about the politics of this report later.
§ I have a third reason for raising this matter. It is a lighthearted, even frivolous reason. It is, that income tax and your Lordships' House have something in common; both have been threatened with abolition. Gladstone threatened to abolish income tax in 1874, on the ground that it makes for a nation of liars. And Mr. Michael Foot threatened to abolish the House of Lords in 1983—not on the same ground, but for other reasons uncomplimentary to your Lordships. In neither case did the threat materialise, and here we still are. It could be said that such is the kingdom of Heaven.
§ Even when the committee makes no recommendation and says so, they do so for interesting reasons. Sometimes, it is as important to make no recommendation as it is to make a recommendation. To leave matters alone is a very important decision to take, especially when it is taken by a committee of this kind, who have fingers tingling to change as much as possible.
§ I ought to confess to your Lordships the fact that I am a former general secretary of the Inland Revenue Staff Federation. I suppose that I should have read this report with more relish than I did. Officials of the federation are well represented in both Houses of Parliament. My noble friend Lord Plant was my successor, and Mr. James Callaghan was my assistant secretary. In fact, both served as my assistant secretary for a time; both rose to the top; one succeeded me and the other became the Chancellor of the Exchequer—one cannot do better than that!
§ My noble friend Lord Plant might take a more favourable view of some of the recommendations in this report than I do, because he was clammering for these additional powers during his term of office. For myself, I have a humble apology to make: now, I am more on the side of the taxpayer than I used to be. Yet I know from long experience that tax gatherers dislike people who get the better of them. They present a mournful picture of themselves as hapless tax gatherers, constantly following their astute quarry through a revolving door and never coming out in front. This is of course a frustrating experience; they grow impatient at not having all the tools they would like for the job.
§ Earlier committees and commissions have gone over much of the ground covered by the Keith Committee—not in relation to the more modern taxes administered by Customs and Excise but certainly in regard to income tax. They have covered this ground with varying degrees of pomposity and moral indignation. It has always been the same. Even in 1905, when the rate of income tax was about 10d. in the pound, a committee was deploring the substantial amount of fraud obtaining in the field of self-assessment. The Royal Commission of 1920 waxed very indignant; they mounted the steps of the pulpit and let us have it. The commission made many recommendations which, although drastic, they thought would achieve largely what they set out to accomplish: a clean, efficient and effective taxation system.1197
The surprise that I had when I read the Keith Report was to find that the committee had produced a recommendation originally made as long ago as 1905. What happened to it all this time? The recommendation, which appears in paragraph 1.7.9, is that:
The names of the defaulters in the civil fraud category should be published unless they make a full spontaneous voluntary disclosure".
The committee add that the civil fraud category is one in which they recommend that criminal proceedings need not be taken, but a financial settlement reached instead.
§ The 1905 committee made this very same recommendation in somewhat different terms, because they did not like to see the non-criminal types escape what they described as "public exposure". What is wrong with the stocks, I want to know? Why not revive the stocks and put these rogues and vagabonds in the stocks and throw refuse at them? That is "public exposure" if you please. Why worry about the media, when you have these people in the stocks? Well, I leave that suggestion there, because I cannot see it happening. There are all sorts of reasons why one should not publish matters which are not open to public view and exposure. No, I am sorry—but that is not among the wisest recommendations of the Keith Committee. I only picked it out because I could make fun of it.
§ Seriously, a point upon which I want to dwell for a minute or two is the distinction between those who collect taxes and those who pay them. This distinction is one that is frequently lost sight of. The collection of taxes on behalf of Revenue departments is widespread throughout the community. To an ever-increasing extent, the state now conscripts unpaid tax gatherers into the system of tax administration. When these conscripts fail, they do not fail as taxpayers but fail as agents for the Inland Revenue; as agents for Customs and Excise; as collectors of other people's taxes. They are traders who collect VAT; employers who collect PAYE; companies who collect tax deducted from dividends. The building societies collect an enormous amount of tax through the composite rate which they pay on behalf of recipients of building society interest. This is to mention just a few of the principal agents the Inland Revenue use for the purpose of this process of collection.
§ When we listen to pontifical accounts of the weaknesses of the system (which we have done since I entered the Inland Revenue in 1915) I wonder whether we realise that every new tax—purchase tax, VAT, the ill-fated selective employment tax, and every extension of existing methods of taxation in war or peace—has entailed this conscription of more recruits into the army of unpaid tax gatherers.
§ Purchase tax—introduced during the war—was, unusually, a tax on commodities other than excise on dutiable goods. It added 70,000 pay points for purchase tax. When purchase tax was replaced by VAT, 70,000 pay points became 1,300,000 pay points—and I am sure that many more than that are in existence today.
§ Thousands of millions of pounds are collected in this way—voluntarily but under duress, so to speak—by people who do so without receiving commission, agency fees, or any discount for prompt 1198 remittance. When one gets money on those terms, it is enough to make the Prudential green with envy. Where are the inducements to undertake this vast and unpalatable task on behalf of the nation? What do these people get? There is no kudos, little appreciation and no financial consideration. If they fail in the task imposed upon them by law, and not by consent, they are threatened with penalties if they neglect and prosecution if they fiddle. This is the seamy side of this vast undertaking of the collection of revenue, both direct and indirect, under this system.
§ This army of unpaid tax gatherers is entitled to much more consideration than Lord Keith and his friends have been able to give it. I am sure they are not lacking in appreciation; but I want to say this. If the unpaid tax gatherers had behaved like the paid tax gatherers in 1981 and had gone on strike and called it industrial action, the whole system would have collapsed like a pack of cards, so important and, indeed, vital are their services to the community. They remained loyal throughout that dispute, though they found great difficulty in paying the money into the bank.
My verdict on the report is that it is mildly minatory in tone, disciplinarian in approach and gently coercive in content. That is my verdict on the report. In its introductory paragraphs it puts the Board of Inland Revenue among the "wets". The committee thought that the department was not firmly enough in the saddle, and although it had its feet in the stirrups it did not use the spurs. They said:
Long experience of the familiar system appeared to make the Department resistant to ideas for more extensive change and modernisation".
I am always a bit suspicious of the use of the word "modern". What is a modern system of taxation? I am left with the impression that, in the minds of the Keith Committee, "modern" meant harder; that modern systems of taxation required or justified a somewhat harder approach.
The attitude of the Board of Inland Revenue appeared to the committee to be too soft. That is what I think they thought. Yet the committee put their finger on the nub of the problem in pararaph 1.9.1., where they say:
The human element is of paramount importance, and no pains should be spared to secure that the outlook and conduct of individual tax officials is up to the proper standard in their dealings with the public.
§ My Lords, they have said it, and I want to ask: what are these pains that are not to be spared? Is it a lot more money for the officials in order to improve the standard of recruitment? Is it more training? Is it more discipline for delinquency inside the department? Is it to pay more attention to those who are rude to the taxpayers? There are 70,000 of them scattered throughout the length and breadth of the land. The attempt to get uniformity of administration is difficult enough, but to get uniformity of human attitudes is virtually impossible. This is the biggest problem; and it must not be lost sight of when proposals are being made to apply tighter controls over taxpayers and over the procedures of the Inland Revenue. Almost everything the corn mittee recommends involves officials in further sensitive contact with the public: and if you cannot be sure of that then you have not got 1199 a system that you can use, because the human factor is the ultimate right throughout the piece and there is no substitute for it. No computers will deal with taxpayers who require consideration and attention, and to whom some measure of discretion or of consideration may be due.
§ Another thing is for the Government to avoid speaking with two voices. At the present time I think a lot of people feel that the Government apply the carrot of the Department of Trade and Industry in front and the stick of the Inland Revenue at the back. For example. I think the Government ought to study very carefully indeed whether there is some inconsistency between their encouragement to small businesses, on the one hand, and the Inland Revenue's congenital mistrust of the small businessman as a taxpayer, on the other. I saw in The Times on Monday last that a survey done by Shell UK Limited found that, in spite of the emphasis placed by the Government on the role and contribution of small firms, the vast majority feel that relations between the Government and small firms have worsened. It is no good having a big reorganisation of the Small Business Advisory Service if the Inland Revenue are going to spoil it all at the other end. So these are important considerations. You are either going to use the tax system and its administration to help, or you are going to regard it as a cashier's job in order to get the money into the Treasury by any reasonable means possible.
§ Before I finish I want to consider two of the rather important matters which the Keith Committee was asked to look at. The first is the use of powers granted to the revenue departments, one a long time ago in the case of Customs and Excise the other more recently in the case of the Inland Revenue Department—the right of enforced entry into the premises and the homes and apartments of the taxpayer, the right to interrogate members of his family, the right to take away documents and material belonging to members of his family, and so on—where there is good reason to suspect that fraud may have been committed and the necessary warrant has been granted by the proper authority. In the case of the Customs and Excise they have been at this for a very long time. They were boarding ships many centuries ago; they were in the business of contraband and smuggling—these important and exciting jobs which, in my day, any civil servant coveted when he entered the service. They told me, "You go into the Customs and Excise; they all get drunk in the bonded stores or they get drowned trying to get on ships in the Thames estuary, and the rate of promotion will be much higher than in the Inland Revenue, where they live for ever". I did not get into the Customs and Excise; I went to the war instead.
§ I myself raised some doubts about these powers a little earlier. In the case of the Customs and Excise they can get a warrant from a magistrate; but in another place they jibbed at a magistrate and said it should be a circuit judge for the purposes of this kind of warrant for the Inland Revenue. The committee rightly recommend that the warrants in both cases should be from a circuit judge so far as England and Wales are concerned. I am glad to see that the committee recommended better rules for the conduct of this unpleasant exercise. They are rare occasions, but very 1200 difficult and grievous occasions indeed when they occur.
§ I have always felt that civilian officers ought not to be allowed to do the work normally undertaken by the police without very careful consideration of what they are up to. They are not police officers. They have not been trained as police officers. But they have to be subjected to the Judges' rules. They must have a code of conduct and of behaviour, but they are not acting frequently enough to become used to their responsibilities. Therefore, they ought to be under very strict discipline and control.
§ For one thing, in the past when a raid has taken place all one could see was the warrant, which said little or nothing about the underlying purposes of the raid. Another aspect was that one had no control over the numbers of people involved. It was possible for the Inland Revenue to have people in columns of four, march them onto one's premises and in they went like animals into the Ark. Then, when they got busy inside one did not know who they were. One had no idea of who was the real raider and who was a gatecrasher. It was difficult to fix any responsibility on any individual. Those who suffered from this experience were bewildered, angry, annoyed and, naturally, greatly distressed.
§ I raised this matter in your Lordships' House when one or two cases were occurring. I sent a copy of my speech to the committee in the hope that it might see what I felt were some of the points it ought to watch. I think the committee watched them all. However, I dissent from the Committee's recommendation that the identification of the individual officers need not be continued. I think it should. No individual police officer or civilian should have the right to forcibly enter premises without an identification that can be seen and enable one to see what is his authority to be there. It is not enough to go to the leader, who is probably decorated with authority, and ask, "Is that bloke over there your man or is he a cleaner?" Surely that is an elementary right so that if someone does overstep the mark, as has been done in some cases, the aggrieved taxpayer can lodge a complaint.
§ I agree that civilian officers should be trained, but I have already referred to the difficulty of doing that. A unified code for Customs and Excise and the Inland Revenue might be all right up to a point, but let me add with full respect to Customs and Excise men that they are a tougher breed than the Inland Revenue men. They have been doing their work for so long and have had to do such rough work in the course of their experiences that they are not quite the gentry that one finds in the Inland Revenue. Therefore, I believe a unified code needs to be looked at with great care lest the Inland Revenue try to live up to the reputation of Customs and Excise, and that might be a pity.
§ I concede that the Committee has dealt with this most difficult problem with perception and understanding. One must acknowledge that the raiders have come out of it without serious criticism. Nevertheless, the need to use every alternative to this ultimate step should be uppermost in the minds of the Revenue authorities, even though they need additional powers to enable them to achieve what they want not by forcible entry but by more peaceful means. That is 1201 how I sum that up. The committee makes recommendations which it hopes will achieve that purpose.
§ I come now to casuals—moonlighters; the black economy. Do we have to go on calling it a "black" economy? We have to be a bit careful about "black". Is it a black economy? Who says it is a black economy? Why should it be black? I will not suggest what it should be. But this is a big social problem which cannot be considered solely in the context of tax enforcement. We all know something of the measure of this problem and why so many workers want tax-free income from jobs that they do after working hours and over weekends. We all know also that life would become a great deal more difficult for many people if the supply of this help dried up.
The committee lays down the principle in paragraph 6.3.4:
The only individuals who should be entitled to receive payments gross should … be the genuinely self-employed providers of services.
So here we go again; more conscripts to the vast army of unpaid tax gatherers. What the committee suggests is that all who use this casual work should identify those whom they employ, deduct tax from their pay, notify the tax people and account for the tax deducted. The casuals exposed to tax deductions would have to claim a refund from the tax office if they happened to be tax exempt in order to get their money back. The department reckon that there are between 500,000 and 1 million—one cannot say how many there might be—who would be brought into the net of tax administration by this suggestion, and many of them would be exempt.
Unless I am very much mistaken I reckon the Keith Committee had a lot of cold water poured on this idea by the Inland Revenue. If they did not the Inland Revenue must have been asleep. The committee proposes that
a universal scheme for casual workers involving information reporting and deduction at source … be introduced as soon as practicable.
This just shows that the tax threshold is so low that the trawl for the small fish can become either impractical or ridiculous. The present system of the almost universal coverage of direct personal taxation is an inheritance from the war when the restrictive conditions of the wartime economy and the disciplines of civilian work, military or national service, were accepted. We are in a vastly different situation today. The range of this tax, its refinements, and its relationship to the new earnings related national insurance contributions puts the whole mammoth exercise into an entirely different perspective. No amount of manpower, no new set of rules for enforcement with its checks and penalties, can be marshalled against the tide of feeling, engendered politically I have no doubt, which is now rising against bureaucracy. More police powers and more Revenue powers would be strong medicine for any Government to introduce in the year 1984.
§ I believe that the Keith recommendations, believed by the committee to make our tax system workable, effective and to satisfy minimum standards of efficiency, will depend upon whether it is practical or not. The politics of the matter are whether this array of greater discipline and coercion will be tolerable and 1202 acceptable. Otherwise it becomes almost impractical. I do not think that this is by any means a question of whether the taxpayer will take it. It is more a matter of whether the additional multitude of unpaid tax gatherers that will be required will agree to act. I doubt whether they will.
§ I have a concluding peroration to make. Taxation is now a part of the delicate fabric of popular government. It may reflect the attitudes and aims of the kind of society it has to serve. It may help to promote social contentment and industrial peace and bring about a fairer and happier life for some sections of the community, or it may do the opposite. It may unite, or it may divide, the nation. The art of government includes the art of administration, and that is why bureaucracy must sometimes be denied all the sharp-edged tools it wants to do the job. That is my verdict on the report of the Keith Committee. My Lords, I beg to move for Papers.
§ 6.10 p.m.
§ Lord Diamond
My Lords, I am indebted to the noble Lord, Lord Houghton of Sowerby, in two ways. First, because he has enabled your Lordships' House to discuss this report and, secondly, because he has made me read it much more thoroughly than I should otherwise have done. I am bound to say to the noble Lord that I find it a much more acceptable report than he does. I am impressed by and agree with the general thrust of the report. There is one underlying principle which I know that the noble Lord shares but which he did not express: namely, that the whole of our tax paying and collecting system depends on public goodwill. The public goodwill will not be there if an increasingly large proportion of the public (particularly those who pay tax at source under pay-as-you-earn) feel that they are bearing a disproportionate share of the tax burden that we all need to share because so many others are getting away with it in other respects and in other fields. The noble Lord referred to small businesses; there may be others.
I share the view of this eminent committee that, in order to make, as the noble Lord terms it, the system practicable—to make it work and to enable it to continue to have the general support of the public: albeit nobody pays tax with a song in his heart, it still has to have that large measure of support—Parliament must give the Inland Revenue the appropriate powers to discharge the responsibilities which Parliament places upon it. I agree with the report that criminal proceedings should be kept for only the worst and most obvious cases of deliberate fraud. They should not be the appropriate remedy in cases of negligence, and even of gross negligence, where a far more appropriate remedy is penalties and action over commercial interests.
I agree with all that and particularly with the extract that the noble Lord, Lord Houghton of Sowerby, quoted (which saves me quoting it yet again) about the importance of the human element. I must say that I do not think that the noble Lord did the report justice. That sentence was worded in such a way as to make it clear that those unanimously signing the report thought that this was the most important issue of all—and so do I. I think they were right in coming to this conclusion. My view is that that human element, 1203 as the report calls it—the human relationship between the tax gatherer and the taxpayer—can be improved. I say that notwithstanding that we start not from a low but from a very high level. We start with a very efficient tax gathering machine, which succeeds in raising taxes at very small cost and, I imagine, more successfully than in any other European country. Notwithstanding that it is a great achievement so far, I think that the human element can be improved. It can be improved in three ways which I shall illustrate.
First—and the noble Lord underlined this—the Revenue has a tendency to take for granted that it is the duty of the taxpayer to pay tax and the duty of many to collect tax and pass it to the Inland Revenue. I think the Inland Revenue tends to take that duty for granted, but though it is a clear duty placed upon the citizen, a little appreciation goes a long way. For example, I see on my tax form, "If you want to bother the Revenue to send you a receipt, please put the letter "R" in the square bracket". When the receipt comes, it is a jumble of figures and references. Without the taxpayer having to ask, a collector could occasionally write to say, "I am asked by the Chairman of the Board of Inland Revenue to thank you for your prompt payment of your tax liability". It is almost unimaginable. but why? We do that in ordinary commerce. If somebody pays a bill you say. "Thank you very much". Every practising professional man, when a bill is paid, says, "Thank you". He has given a service, but he has also been paid.
In appropriate cases, a note could be written to say, "The Chancellor of the Exchequer will be interested, helped and assisted by your payment, which will enable him to undertake more readily the onerous task of managing the country's finances". It would make the large taxpayer feel that he had done something, as indeed he has. Rather than relying implicitly on the subject's responsibility to disclose himself and to declare and pay his tax under statute, occasionally, and in appropriate cases, a more human view could be taken by saying. "Thank you" and showing appreciation.
Secondly, the Revenue could more often—it does it only very occasionally indeed—volunteer information which would be of assistance to the taxpayer. I heard of one case the other day which is very relevant. A taxpayer sends in his return. The Inspector of Taxes sees that it would be beneficial to the taxpayer to ask for the application of a certain section of the Finance Act and knows that there is a short time limit of only three months and that it has nearly expired. He rings up the taxpayer and says, "You will be wanting to do so and so. I am ringing you to let you know that you will have to do so in the course of next week or you will lose the benefit of the section". That is courteous, helpful and well within the duty of the Inland Revenue. Such an action would be remembered always by the taxpayer in question. As accountants know full well, there are many occasions where the Revenue can, in discharge of its duty to collect the right, and not an excessive, amount of tax, be helpful to the taxpayer and take the initiative in doing so. That again would substantially improve the human element to which the report refers.
1204 The third example that I wanted to give concerns something to which the report does not refer. I take it that in tax evasion, as in other forms of criminality, the evader—the criminal—relies on not being caught. I assume that in tax evasion the greatest deterrent would be the knowledge that he is likely to be caught. I think it is the duty of the Inland Revenue to make much clearer than it has done so far that in most substantial cases the tax evader is caught. The general view that the tax evader gets off for all time is quite wrong.
The position is that a taxpayer has income that he does not disclose. He deliberately wants to evade paying tax on it. He has this cash. What is he to do with it? He can either spend it or keep it. If he spends it, his lifestyle is seen to be out of context with the income that he declares. The Revenue has powers which it exercises of deep investigation in cases which arouse its suspicion for the kind of reason that I have just described, and the taxpayer is unable to explain how he can live so comfortably on the income that he discloses. One thing leads to another, and the result is that the individual has to pay more in tax and penalties than had the income been declared in the first place.
The alternative is not to spend the income, but to keep it. So what is he to do with it if he keeps it? Is he to invest it? He cannot do that because the investment will produce income, and the probability—not the certainty—is that the income will come to the notice of the Inland Revenue through one of the many ways in which it gathers information. He might make a mistake, as those who evade paying tax generally do over the course of years, because their memories are not good enough to enable them to keep on what they would call the right course, which is really the wrong course.
If the individual in question seeks to evade tax completely, he is not able to put the cash in income-producing investment. So he has to put it into something which does not show any income and does not indicate anything to the Inland Revenue; and he must remember that. He can do that for year after year, and he thinks, "Right, I got away with it". All he has done is to pass on to his widow a legacy of trouble and liability for penalties and interest.
What happens mostly—and I am talking about substantial cases—is that in the typical scenario a widow finds that she is left lots of money by a caring husband, and all is declared for estate duty purposes, or the modern equivalent. The Revenue examines the returns and finds one or two things which cannot be explained in relation to the tax returns which have been made by the individual over a vast number of years. Inquiries start. It is a case where there has been some non-disclosure of income; some cash has been received in some way or other but not disclosed over a period of years. There are many such examples. The widow is faced with a double penalty. She is faced with not only the penalty that arises from the nondisclosure, which clearly was an attempt at tax evasion, but also the penalty which arises from questions which cannot be answered satisfactorily because the man who could have answered them satisfactorily is no longer there to do so.
So the typical situation is that the widow is not as badly off as would have been the taxpayer had he been 1205 found out at that stage; she is worse off. She has all the anxiety, the trouble and the heartache. In addition to all that, she, or the estate, has to pay the tax, the penalties, the interest which need not have been paid had the tax been declared and paid in the first place.
I am not describing an unusual circumstance. I am describing a series of circumstances that are likely to arise in the case of serious attempts at substantial tax evasion. You do not succeed in evading. You succeed in postponing payment, and leaving to your widow at best an enormous problem.
So I say that that is a third example of the way in which the Revenue, by publicising the position, by making clear to everybody that it has enormous sources of information and investigatory powers to carry out the duties imposed upon it by Parliament, could improve the relationship between the taxpayer and the tax gatherer. It could do that by making it clear that it simply does not pay to evade tax. I am sorry to put it at that level, but it is a relevant level when one is discussing the pure payment of taxes by an individual to the Inland Revenue. In the long run it simply does not pay to evade tax. That point is in line with both the many suggestions made in the report as to greater publicity of the Revenue's powers and the report's general thrust, and so I welcome the report very much indeed.
§ Lord Polwarth
My Lords, I do not suppose that when this Motion first appeared on the Order Paper many of your Lordships imagined that such an apparently dry subject could have been opened up in such a down-to-earth and entertaining manner as it has been by the noble Lord, Lord Houghton of Sowerby. I am not sure whether or not it is fair to say that we have with us a gamekeeper turned poacher. I thought that the noble Lord himself said that more or less, if not quite. But whatever that position may be, he gave us the benefit of his very great experience of the practical problems in this thorny subject.
I do not intend to wander into this jungle—always obscure, sometimes sinister—of which we have been given a glimpse by the two noble Lords who have already spoken. My sole interest is as a member of the accountancy profession, albeit no longer in practice—in fact, very definitely out of practice—and I cannot claim to have read through the 804 pages, the product of the labours of my noble and learned friend and his committee. However, I would say that, though I have not read through the report, no matter what other views may be expressed I am perhaps heartened by the first reaction of one leading tax practitioner: that the report is very tough, but fair. I think that that is only to be expected from a committee guided by my distinguished fellow countryman, the noble and learned Lord, Lord Keith of Kinkel. At one stage of the speech of the noble Lord, Lord Houghton, in particular when I heard the word "minatory", I thought that he was leading up to his depicting a hanging judge at work directing this committee. That, I can assure your Lordships from personal experience, is very far from being the truth.
The one question that I should like to ask the Government is concerned with what happens next. Of the many bodies which gave evidence to the committee, probably the one most intimately 1206 concerned with the subject-matter of the report—with the obvious exception of the Inland Revenue—is the accountancy profession, represented by the Consultative Committee of Accountancy Bodies. This body gave its evidence to the committee, and it has set up a working party on the subject, which is still in existence. I simply wish to ask the Government to assure us that before legislation is introduced there will be further consultation with this body, as indeed doubtless there will be with other bodies. This is a body which is uniquely placed to represent the position of the taxpayer and, I believe, to give a fair view of the public interest.
Secondly, following from that, how soon may we expect such discussion and consultation to begin? The Government might reply that we should wait until the publication of Volume 3. I think the main ground has been covered in the two volumes so far published. The taxes remaining to be dealt with are (shall we say?) the more esoteric ones. I do not believe there is a need to delay further, and it will expedite the final legislation if the consultation can begin as soon as possible and while those who have been so concerned with the subject still have it in their minds.
I would further support the noble Lord, Lord Houghton in his plea that, in the interests of proper discussion and of ease of interpretation, any legislation should be completely distinct and separate from the normal Finance Bill. I would even hope that perhaps the Government would consider circulating in advance some draft clauses at the time of the consultative process. In any case, I would sincerely hope that in approaching legislation on this apparently somewhat tiresome and tedious subject the Government will pay full heed to the sensible and practical words of the noble Lord who introduced the debate.
§ 6.30 p.m.
§ Lord Grantchester
My Lords, after some two and a half years of investigation, the noble and learned Lord, Lord Keith of Kinkel, and his committee have produced two volumes of their report on the enforcement powers of the Revenue departments. Clearly, much thought and effort have gone into this production. I understand that a further volume is yet to come in relation to Customs and Excise duty. However, this is a suitable time to discuss the recommendations made in relation to the taxes dealt with in the report administered by the Inland Revenue, and value added tax. The noble Lord, Lord Houghton of Sowerby, is to be thanked for focusing our attention thereon in such a witty manner.
Although the first two volumes of the report run to more than 790 pages, the text concentrates on the enforcement powers of the Revenue and does not trespass on matters of chargeability. If so much paper has to be devoted to what is only a section of our tax law, is there perhaps something fundamentally wrong with the whole system? The enforcement powers of the Revenue are little more than an untidy array of powers that have accumulated over recent years, partly as taxes have extended their catchment area and partly due to the fact that, unlike most other countries, we have two Revenue departments with separate boards of management. That fact alone tends to result in an untidy system with separate enforcement agencies 1207 using differing procedures. The sheer weight of the report, dealing with one section only of the subject raises in my mind the question whether we should start by simplifying the tax system rather than modernising purely the enforcement power.
Let me start developing this thesis by drawing attention to the committee's terms of reference. The basic thinking is contained in the last sentence. This, amended for clarity, reads:To consider whether the enforcement powers of the Board of Inland Revenue and the Board of Customs and Excise are suited to their purposes having regard both to the need to ensure compliance with the law and to avoid excessive burdens on the taxpayer".What, to my mind, this envisages is that it is both necessary and desirable to establish and maintain a fair balance between the powers of the Revenue Departments on the one hand and the burdens placed upon the taxpayer on the other. One must not give to the Revenue departments sledgehammer powers to crack nuts just because nuts can most effectively and efficiently be cracked by a sledgehammer. Alternatively, if there are nuts which require to be cracked, one must give the Revenue Departments a nut cracker which can do the job whatever type of nut may be in season. So there is at all times the necessity and desirability of establishing and maintaining a fair balance—a balance that the taxpayer will acknowledge to be fair and that will not allow a Revenue Department to use its powers by oppressing taxpayers unduly or unfairly.
In considering whether or not the existing tax laws or any proposed amendments thereto, in relation to enforcement powers, exhibit a fair balance, one must always bear in mind that, when a Revenue Department issues a demand—that is to say, an assessment—the burden of establishing that no tax is payable or that the assessment is excessive lies upon the taxpayer. I see this daily. The Revenue department, having inspected the books of a taxpayer, will allege that the books cannot be correct, that he must have done more business or taken more money than he has stated. Faced with such an allegation, it is for the taxpayer to establish that he did not do the additional alleged business—to establish the negative. He starts at a disadvantage.
Next, taxpayers are not computerised machines carrying on a business according to the latest manuals. They can carry on a business competently or sometimes incompetently. They can keep their books and records competently or sometimes not so competently. They can suffer accident, illness or other misfortune. But we have not yet imposed a tax on incompetence, such as failure of the small shopkeeper to limit shoplifting in his small store or to record detailed transactions by way of sale after a hard day's work. The introduction of value added tax has itself imposed burdens on the small shopkeeper. One has to consider the difficulties of running a newsagent's, tobacconist's and confectionery business making £50,000 to £100,000 a year for three months and producing, at the end of that period, an accurate tax return, taking account of the different types of liability for the goods sold and the differing choice of special schemes available for retailers. In these circumstances, 1208 taxpayers—except those who are clearly fraudulent—should not be threatened.
If one gives excessive powers to a Revenue Department, it will tend to use them. As an example, I shall read out the standard form of wording of a letter from one of the Revenue Departments to a small trader who has made supplies for the first time in excess of £6,000 in a three-month period during his year's trading but has not notified the department of that fact within 10 days. The standard form of letter reads:Although failure to notify your liability to be registered within the prescribed time limit is an offence under the Finance Act, section so and so"—I may say that the penalty there is £1,000—the Commissioners have decided to take no further action".That is the standard form of letter. Faced with this consideration of a need for a balance of power, I put forward two questions. First, before we impose penalties and charges for interest on taxpayers and attack moonlighting and the black economy, should we not simplify the tax laws so that they can be understood by the ordinary man in the street so far as those tax laws directly affect him? Secondly, before we impose any further duty or obligation on a taxpayer or threaten him with additional penalties and interest, should we not satisfy ourselves that we are not thereby imposing an excessive burden on him?
As to the first question, I throw out the suggestion that what we should replace our existing income and corporation tax laws with are two basic new taxes. The first should be a personal tax, charging simply salaries, casual earnings, dividends and other distribution of profits, with allowances, in terms of tax, so as to enable a negative income tax to be introduced, incorporating eventually social security payments; and this personal tax should be a liability of men and women on an equal basis—a simple tax just on that basis. Secondly, there shold be a business tax charging both supplies made in the course of a business and profits resulting therefrom. It is at this stage and in relation to this tax that the more complicated provisions can be introduced, as one will expect that such a tax will be administered by knowledgeable tax officials working on friendly terms with members of the accountancy profession. Then, when members of the public, individuals, can easily deal with their own personal tax liabilities, the problems of moonlighting and the black economy can be tackled effectively. Is this not better than imposing penalties and interest in an attempt to enable the Revenue to threaten and coerce taxpayers who plainly cannot be expected to understand the present complicated system?
The report recommends that the revenue departments, especially the Board of Customs and Excise, should have powers to impose default penalties and interest. It will then be left for the taxpayer to establish, if penalties are imposed upon him, that the penalties are unjustified and should be mitigated or removed. Are we satisfied that this will not cause an excessive burden of liability on the small shopkeeper, the small trader, the small business struggling to keep going, required to maintain elaborate records and faced with visits from the Revenue officers, whose duties are to find fault with the books and the returns?
1209 While on this aspect I should like to pose a subsidiary question in relation to the report. As regards the balance between the Revenue departments and the taxpayers, what recommendations are there in the report to alleviate the duties and obligations imposed upon the taxpayer? Are the recommendations as a whole not causing an undue and excessive burden upon him? Perhaps this appears clearly in one sentence from the report which I should like to cite. It says:enforcement powers are therefore necessary not only to coerce the dishonest and the neglectful, but to encourage the honest and conscientious".Do the recommendations sufficiently encourage the honest and conscientious?
I hope that the report will be looked at in the way in which I have suggested—not merely from the point of view of easing the duties and obligations upon the Revenue departments so as to maximise the collection of money, but also from the point of view of the taxpayer and the burden cast upon him. I conclude by asking: do the Government regard the recommendations as maintaining the fair balance to which I have referred?
§ 6.45 p.m.
§ Lord Kagan
My Lords, I shall as usual try to be as brief as possible. My noble friend Lord Houghton mentioned that the Government speak in two voices. The Department of Trade and Industry encourages small businesses to start and to build up, and once they are doing that the tax authorities and the Revenue, under the rules under which they have to operate, act as a brake and very often not only intervene, but slow the process down.
It has been accepted that the taxing of earnings, basically, is counter-productive to wealth creation, and that taxing spending has always increased incentive. Yet this country has for a long, long time moved in the area of increasing the taxing of earnings instead of the taxing of spending. Of course the authorities can only operate a system as laid down by Parliament, and so the concept of taxing earnings rather than taxing spending is really the fault of Parliament. It is a strange situation.
I am told that it has been done in the cause of fairness, yet in the socialist countries, in the Soviet Union, there is only one tax—not an increasing tax. It is 8 per cent. on income irrespective of whether you are a cleaner on a factory floor or a general serving out in the Far East. Is the reason for that that the Soviet Union is not left wing enough or concerned with fairness enough, or is it that it realised that the creation of wealth—and the purpose of taxation is to create revenue for the Government—can only be achieved by increasing incentive? That is one of the points that I want to make.
Secondly, listening to the previous speakers and their comments on enforcement, it should be remembered that those countries where there is most enforcement have many more problems in enforcing obedience to the law. The amount of taxation collected depends on the co-operation of the taxpayer and the wealth creators and on their acceptance of its fairness.
Lord Bruce of Donington
My Lords, the House will be grateful to my noble friend Lord Houghton of Sowerby for having afforded it the opportunity to discuss this very comprehensive report. It is to be hoped that the Government will take very careful note of the views that have been expressed this afternoon. We think it is important that this report and the voluminous information that is contained within it should not be lost. Therefore, what we would suggest is that the Government themselves should give the report very careful consideration indeed and should then publish their own views upon it, because it is not only the views of the Members of your Lordships' House and those of another place that are important it is the Government's attitude towards it. Then we can all know the reasoned arguments, from the Government's standpoint, that can be put forward either in support of or in contention with the main recommendations of the report.
I find my attitude towards taxation somewhat ambivalent. On the one hand, when I endeavour to take account of the public services from which I derive some benefit—public expenditure on the environment in which I live, and public expenditure on the preservation of law and order and on the provision of the various other amenities, including the National Health Service, whether these services are provided by the Government or by local authorities—part of me is immediately convinced that I am getting very good value for money in everything that I enjoy and possibly take for granted in comparison with the taxation that I pay. That is one side of me. But the other side exhibits a curious reluctance and a disinclination to pay the tax when I am presented with an assessment and the demands arising from the assessment. Possibly we all feel a little like that.
Indeed, in our relationship with the Inland Revenue many of us may to some extent sympathise with the sentiments expressed in a letter which was published in the Standard not so long ago. It was a letter sent to the Zimbabwe equivalent of the Inland Revenue, the Zimbabwe Inland Revenue Service, in which the recipient of an income tax return from the Zimbabwe taxation authority replied as follows:I regret so grave I am unable to complete the form, as I do not know what is meant by filling this form. However, I am not interested in this income service. Could you please cancel my name in your books, as this system has upset my mind and I do not know who registered me as one of your customers.Many of us may, indeed, sympathise with those sentiments.
Some critical comments have been made about the Inland Revenue service this afternoon, and I do not think that personnel in the Inland Revenue service would take them amiss, particularly as they come from my noble friend Lord Houghton of Sowerby, who has been described as a gamekeeper turned poacher. However, there has been serious criticism of the Keith Report itself, and I hope that the noble Lord who is to reply will accept my assurance that I seek to make no party political capital out of this at all.
However, I should like to quote an observation on the Keith Report which was made by Conservative Central Office, because it contains criticisms that we 1211 ought to consider. This is what the small business section of Tory Central Office issued in June:What the tax Inspectors and their colleagues in Customs and Excise need to learn is a different attitude. Instead of being superior in their understanding of taxation and accounting systems and sure that those who make mistakes are doing so deliberately, they might remember that every penny that is available to tax gatherers, is earned by people with different skills from their own and that it would certainly be much better to assume an honest mistake and make it easy for the taxpayer to discuss it with them than to elaborate the sanctions and penalties hanging over the businessman. In this light the Keith Report should be read. From this angle it should be fought.".That is a formidable critique, and in some ways one aspect or another of that criticism has been dealt with by successive noble Lords who have participated in this debate.
Therefore, it ought to be borne in mind that the Inland Revenue is not responsible for the injustices in the taxation legislation; neither is the Inland Revenue—nor, for that matter, the Customs and Excise—responsible for its complexity. As many noble Lords have pointed out, the system of taxation in this country is extremely complex, and even within the ordinary ambit of income tax and corporation tax there are very considerable differences not only in the law itself but in the administration of different parts of it.
My noble friend Lord Houghton of Sowerby referred to the unpaid tax gatherers. In connection, for example, with Schedule E—taxes on employment and income—the taxpayer himself has very little control over the manner in which the tax is collected from him. It is deducted weekly from his wage or from his salary on the basis of a code notified to the employer by the Inland Revenue. Two things have to be borne in mind about that. First, in comparison with other taxpayers, businessmen or companies, the tax is paid month by month, thereby contributing enormously to the liquidity of the Inland Revenue and presumably the reduction of the sacred public sector borrowing requirement. On the other hand, the tax of those who are assessed under Schedule D in connection with their businesses or professions falls due some months after the end of the year in which their final profits are determined. So the Schedule E taxpayer pays promptly and the Schedule D taxpayer delays payment of his tax. The latter is indeed very privileged thereby, and, likewise, apart from the consideration of advance corporation tax, so is the company.
The Schedule E taxpayer has very little control over the total amount of tax that he pays. As I have said, the notice of coding goes from the Revenue to the employer, and it has been admitted that one in every 10 notices of coding is wrong. This is a matter which is a cause of some irritation to the ordinary wage-earning taxpayer in this country. In the first place, he cannot always understand the complexities of the form itself. The notice of coding is very simple to anybody who knows anything about tax, but it is not always so very simple either to the wage-earner, who is provided with a copy of it, or to the person dealing with it in the firm concerned.
To get it corrected is a very long process. Some wage-earners do not even know that they have the right to have it corrected if it is wrong. So there are 1212 inequities in the administration of tax which are inherent in the taxation laws themselves. It is those to which I think the Government ought to direct their attention.
In connection with the Inland Revenue, the taxation burden is not spread quite as equitably as it is sometimes thought. Large public companies have a notional rate of tax of 52 per cent. and smaller companies, within certain profit limitations, have a rate of 42 per cent. In fact, the actual rates that are suffered vary quite considerably from those figures.
The Government themselves have admitted on more than one occasion that precisely owing to the granting of first year allowances, where 100 per cent. of all capital expenditure on plant and machinery is offset against profits, the average rate in certain areas of the country paid by the larger companies is not 52 per cent. but somewhere nearer 16 per cent. to 17 per cent. Whereas companies, whether they are large or small, which have very little capital expenditure but which may be just as large tend, exactly because they are not entitled to the 100 per cent. first year allowances in respect of a decreased capital expenditure, to pay probably nearer the actual rate. These are all inequities within the system.
The Schedule E taxpayer too tends to suffer certain disabilities in addition to those which are suffered by small businessmen or the self-employed. The rules for the admissibility of expense are a continued source of friction between the Inland Revenue and the taxpayer. I am bound to say that the Inland Revenue themselves can do a lot to eliminate that friction by not pursuing, or not opening up, avenues of further disallowance or avenues of further taxation by working on the margin.
Perhaps I may illustrate the point by saying this: brewery workers, for example, allowed 12 free cans of beer each per week, are likely to have to pay tax on the monies' worth because the beer can be taken away and sold. No tax charge will be made if the beer is consumed on the premises. This is one irritating and completely unnecessary imposition on taxpayers who fall into that category.
Then again the Revenue at the moment is keen to find out how much top anglers take home from competitions. A highly successful angler may be considered to be fishing on a professional basis and his winnings would be assessed. It is a question of extent, according to the Inland Revenue. These are irritations in the enforcement of the tax laws that can easily be avoided.
There are other cases too. As, for example, a teacher who did some spare time teaching work was called back to her job and had to incur extra travelling expense in order to perform the job. That was disallowed by the Revenue. Subsequently, owing to a case brought in the courts, the decision was reversed and she was allowed the expenditure for tax purposes. But for a long time thereafter, and still in some districts, the Inland Revenue endeavoured to enforce that rule, because of course under Schedule E, unlike Schedule D, every bit of expenditure incurred by an employee has to be wholly, necessarily, and exclusively incurred in the performance of their duties. The revenue tend to interpret that very rigorously indeed.
1213 This is not the fault entirely of the Revenue. It is the fault of the way in which the legislation is drawn. It would be a good thing if some effort were made to simplify tax legislation. When I was an articled clerk, the taxation text book, which was largely founded on the provisions of the Income Tax Act 1918, was about half-an-inch thick. The case law in the years between the wars arising from the Income Tax Act 1918 was minimal. Since that time, and particularly since the war, tax legislation has become very complicated indeed. So much so that instead of having half an inch the textbooks now are anything between a foot-and-a-half to two feet wide, and they are becoming of ever-increasing complexity, and the ordinary taxpayer cannot possibly be expected to understand them.
These things are not the fault of the Inland Revenue. They are not the fault of the Inland Revenue at all. But there has been a tendency in recent months, particularly since the Ramsay case passed through the Judicial Committee of your Lordships' House—the Appellate Tribunal of which your Lordships' House is from time to time—there has been a tendency on the Inland Revenue's part to take Ramsay to practically every extreme. Your Lordships will recall that the main essence of the Ramsay judgment was that although every transaction in a whole series of transactions was quite unexceptionable from the taxation standpoint, if the collection of the transactions taken as a whole was seen to be for the avoidance of income tax then the particular scheme which was devised for the precise purpose of tax avoidance could, in fact, be ruled void for tax purposes and the normal taxation liabilities would follow. I am paraphrasing the judgment very much, but there still is a tendency to open up the area which was revealed by the Ramsay decision and to apply it into spheres for which it was not specifically designed.
The other way in which Inland Revenue enforcement perhaps oversteps the mark is the endeavour to reopen past cases. There have been cases which have been negotiated out over the years between accountants representing their clients and the Inland Revenue, and a settlement has been arrived at. In more recent months there was one such case, the case of R. v. IRC ex parte Preston in which it was sought to reopen a whole series of tax settlements which had been arrived at some years before on the grounds that in a subsequent Act the arrangement arrived at four years before could not have been entered into. The judge very properly decided in that case that the Revenue were bound by the earlier decisions which they had reached in agreement with the accountants concerned.
The whole of the taxation system in this country, whether it involves the Inland Revenue or the Customs and Excise, depends on a certain degree of mutual trust and mutual goodwill. It is to be hoped that settlements, once arrived at, are not thereafter reopened on any grounds whatsoever.
One other word should be said, and it is this: unlike the popular impression that possibly could be derived of Inspectors of Taxes, they are probably the best tax administrators and the fairest tax administrators in the world. One can say with confidence that if there is a person with a small income, or whose affairs are comparatively minor, and they find themselves in tax difficulties, they can with confidence go themselves to 1214 their local inspector. He will, in most cases, bend over backwards to be as helpful as he can to the problems of the taxpayer, and may indeed—and he frequently does—open up avenues of claim which the taxpayers themselves had not thought of. These things should always be borne in mind.
I hope—and I think your Lordships will hope—that although we may look forward to taxation simplification, we shall not greatly disturb the method of administration of our taxation system as it exists now and certainly not without the Government coming out with a detailed White Paper as to their attitude and the Keith report; and, as the noble Lord, Lord Polwarth, has said, by due consultation with the consultative committee of accountancy bodies. This I think would be of great advantage but I feel—as many of your Lordships may feel—that we should not tamper with the system for the sake of change. We should change it only if we are convinced, after full consideration of all the factors, that it continues to preserve the fair balance between the taxpayer on the one hand and the Revenue or the Customs and Excise on the other. I hope that the debate which my noble friend Lord Houghton has initiated this afternoon, and the contributions that they were made to it by your Lordships, may enable the Government to approach the whole subject on those lines.
§ 7.12 p.m.
§ The Parliamentary Under-Secretary of State, Department of Health and Social Security (Lord Glenarthur)
My Lords, I have listened with great interest to the contributions to this short debate from all sides of the House. The noble Lord, Lord Houghton, has done your Lordships a service by calling attention to this significant report, and in doing so in what I think we all agree was an entertaining way. I am a little conscious that my contribution may be rather dryer but not very long. I am also afraid that what I have to say is a little constrained, but not so constrained, I think, that I cannot start by quoting the obvious, with which everyone would agree, in the preamble to the noble and learned Lord's report, in which he says:Tax gatherers have been unpopular everywhere throughout the whole course of history".He goes on:The payment of taxes is accompanied by a degreee of reluctance, greater in some persons that in others".All the issues raised by the report are matters to which Ministers are giving considerable attention and study, so that I associate myself with the welcome given to the report in another place by my honourable friend the Financial Secretary, who said:We are grateful to the Committee for its work. The Report is a very substantial document. It deserves careful study and full consultation. This will inevitably be a long process"—[Official Report. Commons, 24/2/83; col. 1047]Before I deal with specific matters raised in the debate, perhaps I may briefly remind your Lordships of the scale of the ground covered by the Report of the Committee on the Enforcement Powers of the Revenue Departments. Volumes 1 and 2 alone, which were pulished on 23rd March 1983, run to over 550 pages of closely argued text, together with a further 250 pages of summary and background notes. The 1215 scope includes, for Inland Revenue, the enforcement powers applying to income tax, corporation tax and capital gains tax. For Customs and Excise, the VAT powers are covered.
The committee have not yet finished their deliberations. A further volume (Volume 3) expected later in the year will be concerned with (for Inland Revenue) development land tax, capital transfer tax, petroleum revenue tax and stamp duty. For Customs and Excise, the topics to be included are customs, excise, betting and gaming duties and car tax.
It follows that, in one sense, our debate today might be thought a shade premature, in that we have not yet had the committee's last word on the totality of tax enforcement powers which they were set to study. That view is not shared by the Government. We are always ready to listen to views and we welcome authoritative comment. The contributions made by those of your Lordships who have taken part in this evening's debate will be carefully considered by the Government.
We recognise that the powers in respect of the taxes which were covered in Volumes 1 and 2 of the report are those which have attracted the most public interest and debate in the past. Indeed, my Lords, I cite as illustration the fact that, as he said, the noble Lord, Lord Houghton, himself has taken a prominent part in previous discussions of the Inland Revenue's power to enter premises under warrant and search for evidence of tax fraud under Section 20C of the Taxes Management Act 1970, which was enacted in the 1976 Finance Act. That power, together with the equivalent search power under the VAT code embodied in Section 37(3) of the Finance Act 1972, was examined in great depth by the committee, which devoted some 50 pages to it: Chapter 9 is concerned with criminal investigation of trading taxpayers.
The search powers to which I have referred represent one particularly sensitive area of both Revenue departments' enforcement activity, Other areas that have given rise to a measure of public disquiet include control and investigation techniques which can involve "in depth" examinations of trading taxpayers' affairs, and the application of such tests as rate of gross profit to purchases. On the other side, anxiety has been expressed in your Lordships' House and elsewhere about the loss of revenue in the black economy.
We now have the considered views of the committee, which sat for some two and a half years before producing Volumes 1 and 2 and took evidence from 64 organisations, including all those representative bodies which are particularly interested in taxation issues. The committee have helpfully signposted in their introductory chapter their broad impressions upon the topics which have excited some controversy. Here, it might be helpful if I quote from relevant extracts from the report. First, in respect of the Inland Revenue, I am quoting from Chapter 1, Paragraph 4.2, which reads:Our conclusion [on in depth accounts investigations] is that the broad approach of Inspectors is reasonable and appropriate, although we consider that much more should be done to describe to taxpayers the nature of the procedure and the reasons that underlie and justify putting questions to them both about their business and their private life styles".1216As regards the use made by the Department of the power to search under warrant for evidence of tax fraud, the few occasions upon which it has been invoked since 1976 [16 cases in total] do not, in our view, amount to an oppressive exercise of power against the business community in general or small businesses in particular".My Lords, on matters concerning Customs and Excise, the report says at Chapter 1, Paragraph 4.4:As regards the aspects of VAT enforcement that have given rise to most controversy, we have concluded that control visiting should continue to be the principal means of checking compliance. We are satisfied with Departmental instructions about, and the overall conduct of control visiting. We are however recommending modifications to the relevant powers and enhanced safeguards. We have also satisfied ourselves that the general practice on making assessments 'to best judgement', including mark-up assessments, is satisfactory in the great bulk of cases and that the avenues for review and redress are appropriate, with effective and modern independent appeal machinery. We have noted that the Departmental guidelines for exercise of powers by the VAT specialist investigators have been developed and strengthened over the years since the start of VAT in the light of experience. It is our impression that the current incidence of justified complaints is low and not such as to justify a recommendation to change the present arrangements. As regards search under warrant, we have noted that the use of the power is turning up evidence of substantial frauds in more than nine cases out of ten, and we have concluded that its use by Customs and Excise is responsible and not indiscriminate and that the execution of the warrants is generally well conducted".The Government have taken note of the findings of the committee in these sensitive areas. It is right that debate should now be joined in a wider forum, both inside and outside your Lordships' House. With a report of the scale and depth of this one, well-informed debate would not be best served by rushing in with first impressions. The report has now been in the public domain for just four months. The Institute for Fiscal Studies mounted a half-day seminar in June, and the report forms a major part of a two-day conference planned by them for September. The College of Law devoted a morning seminar to the report as recently as 10th July. The Government welcome the expression of considered views on the report now that some reasonable time has been available to read it and think about the issues it explores. The views of those professions and interest groups affected, such as accountants and small businesses—accountants being what my noble friend Lord Polwarth, in particular, referred to—will be especially welcome.
Finally, I am grateful to have this opportunity to express the Government's appreciation of the considerable efforts that the noble and learned Lord. Lord Keith of Kinkel, and his colleagues have put into their report. The report is an impressive document which reflects the noble and learned Lord's personal qualities of clarity and incisiveness. It is right that such a lengthy and thorough piece of work should be considered in its entirety, and your Lordships will understand that it is still early days for the Government to form a considered view. However, the comments expressed this evening have been extremely useful and, as I said earlier, will greatly assist us in coming to our conclusions. May I therefore end by saying that we are all indebted to the noble Lord, Lord Houghton of Sowerby, for giving us the opportunity to consider the matter this evening.
§ 7.22 p.m.
§ Lord Houghton of Sowerby
My Lords, I am very grateful indeed to noble Lords who have taken part in this debate. I think it has been worth while to have this 1217 preliminary discussion on the report and to give some first reactions to it. I count myself very fortunate in being a kind of "curtain-raiser" to the debate on this report, and I very gladly gave way to more temperate counsel when I had finished my speech.
Four professional accountants have taken part in this debate. Not always is the close alliance between the professional accountants and the Inland Revenue to be welcomed, but at least it is instructive. The noble Lord, Lord Grantchester, speaks from great experience as chairman of VAT appeals tribunals. He made some comments which I am sure will receive careful consideration. The noble Lord, Lord Diamond, told a moving story of how the follies of husbands can be visited upon their widows. I would respectfully suggest that the duties of the Inland Revenue, vast and extensive as they are, hardly go so far as saving widows from the follies of their husbands. Their job is to look after the revenue and not to look after the financial tribulations of widowhood. Husbands are supposed to have a sense of responsibility towards their widows, and if they go on fiddling and put themselves in a real jam at the time of their death, then if there is any way they can listen to what happens afterwards they must surely be full of remorse for what they did!
My noble friend Lord Bruce made the familiar plea for simplification. Winston Churchill appointed a simplification committee many years ago. It lasted nine years; it killed three chairmen; and it produced a brand-new income tax Act which flabbergasted everybody, including the Inland Revenue. In the end people allowed it to be known that they preferred the devil they knew to the one they did not know, and no more was heard of it. Then, of course, we had a Chancellor of the Exchequer, the late Sir Kingsley Wood, who badly wanted to make income tax understood by the people; but he, tragically enough, died on the very day in 1943 on which he was due to introduce, in another place, the Second Reading of the Finance Bill which started Pay-as-you-Earn. So history is full of interesting events on the question of simplification.
The answer is that taxpayers are so obsessed with the refinements of "fairness" that their demands make for complexity in taxation; and when we say that the general public are not responsible for the complexities of the taxation systems imposed upon them, the answer is that to a very large extent they are. They want differentials and they want refinements. "Fairness" is the plague of the British people. Life itself is unfair, but they do not believe it. The various forms of bureaucracy and public administration are believed to bring fairness into our lives, and people grumble if they do not. The realism of life should really be clearer to many members of the public than is the case today.
I have had my say. I am grateful to the noble Lord, Lord Glenarthur, and I welcome him as a kind of new financial Minister. Those who are on the Front Bench opposite become jacks of all trades and masters of quite a few. We look forward to his further contributions to the debates when the time comes. Allow me to say to him that he has done all that could be expected of him today, because obviously we understand the position of the Government. Prematurely to have made declarations about their 1218 own attitude would have been quite unsuitable, and that is why I personally refrained from asking him any questions. I thought I would leave it to the noble Lord's own discretion as to whether or not he commented on my speech. He did so quite generously. That is all I could expect of him, and I am very grateful to him and to all other noble Lords. If we found a debate on the enforcement of the powers of the taxation authorities entertaining in some degree, then I am sure we can look forward to further debates with anticipation, and these debates might be even more exciting than those on the Data Protection Bill or the other responsibilities that are currently before us. I beg leave to withdraw my Motion for Papers.
§ Motion for Papers, by leave, withdrawn.