Skip to main content

Clause 13

Volume 82: debated on Wednesday 10 July 1985

The text on this page has been created from Hansard archive content, it may contain typographical errors.

Tax Evasion: Conduct Involving Dishonesty

8.30 pm

I beg to move amendment No. 141, in page 9, line 33, leave out from 'conduct' to end of line 34 and insert 'is dishonest'.

It will be convenient also to take Government amendment No. 3.

The amendment would result in clause 13 reading:

"(1) In any case where,—
  • (a) for the purpose of evading tax, a person does any act or omits to take any action, and
  • (b) his conduct is dishonest
  • he shall be liable, subject to subsections (4) and (5) below, to a penalty equal to the amount of tax evaded or, as the case may be, sought to be evaded, by his conduct."
    As will be clear to those hon. Members who served on the Committee, clause 13 introduces a general anti-dishonesty offence which is punishable by a civil penalty equal to the tax evaded, although that can be reduced by half at the discretion of the Customs and Excise if the taxpayer cooperates. To commit the new civil offence of tax evasion, the taxpayer's conduct must be shown to involve an element of dishonesty as clause 13(1)(b) stands. In Committee it was recognised that the phrase "element of dishonesty" could be interpreted differently and that that could give rise to uncertainty.

    The phrase "element of dishonesty" taken with the words
    "(whether or not it is such as to give rise to criminal liability)"
    seems designed to produce an offence which is wider in scope than the existing criminal offence under section 38 of the Value Added Tax Act 1983 and wider than the offence recommended by the Keith committee which envisaged that the new offence of civil fraud which is created in the Finance Bill would be defined as
    "an act or omission with dishonest intent"
    and that the decriminalising of the offence of fraud should mark a difference in investigatory techniques rather than a difference in the essential nature of the conduct. That provoked the Law Society, amongst others, to say:
    "We recommend that, in view of the importance and objectives of this new civil offence, uncertainty over the scope of it should be removed by deleting the present wording of subclause (1)(b) and replacing it by: 'his conduct is dishonest'."
    We fully recognise the need to expedite timeous VAT payments. We also recognise that the Government have made the improvements that were carefully worked out by the Keith committee. Those improvements which make a distinction between civil and criminal penalties are largely welcome.

    The hon. Member for Beaconsfield (Mr. Smith) tabled a similar amendment in Committee which was not selected for debate. The Government seek to amend the clause in response to the discussions that took place in Committee, but I feel that amendment No. 141 is to be preferred because it is clearer and avoids any element of doubt. Amendment No. 141 which seeks to add the words "is dishonest" is different from the Government's proposal which suggests inserting the words "involves dishonesty". That may seem a small distinction, although amendment No. 141 seeks in addition to remove the words in the brackets, but I hope to be able to explain that there is a considerable difference.

    The criminal test is whether the act, or omission, was done with the intention of evading tax. To a simple Scots criminal lawyer like myself, the test is an easy one. In Scots law terminology it involves an element of mens rea. If there is a wilful intention to avoid tax, there is a criminal offence. Using the Scots criminal law test, the act or omission is either dishonest or it is not. Before the Committee stage I could not for the life of me understand what an "element of dishonesty" could be. The Minister was asked by the hon. Member for Stretford (Mr. Lloyd) whether he would expand on that. I agree that some of these matters are complicated but on 16 May the Minister gave the definition as:
    "a dishonest act involving a £1,000 evasion might be part of a £5,000 fraud for which the whole fraud of £5,000 was supported by documentary evidence or a general admission. In those circumstances, it would be reasonable on the civil standard"—
    the new standard that has been adopted by the Government—
    "of probability to accept that the offence was the evasion of £5,000, even though the precise evidence attached the dishonesty only to one part of that amount. Those involved might have left the country, and it might be impossible to gain the evidence from elsewhere."—[Official Report, Standing Committee B, 16 May 1985; c. 130.]
    I have given that matter a great deal of thought, and I do not think that the Government's amendment is good enough. An element of doubt remains if the Bill talks about "involving dishonesty". That is ambiguous. If the Minister's explanation is right and in future the Customs and Excise will be able to catch much larger sums of money, although it can prove only a small part of the amount, and impose a civil penalty on the global amount, however big, that gives an unacceptable power to the commissioners.

    That would create a bad precedent. We must bear in mind that we are not dealing with the criminal courts. We are dealing with an administrative branch of the law. The Government already have the additional benefit of the civil test of the burden of proof — on a balance of probabilities—as opposed to the criminal test—beyond reasonable doubt. That should be more than enough to enable the Government to catch those people guilty of this new civil offence.

    The changes are too draconian. They give far too much power to the commissioners. The clause will cause a great deal of uncertainty. There will be misinterpretation and problems will be caused.

    I support the view taken by the Law Society and many other people in Committee and outside the House that the Government's amendment does not go far enough. I hope that the Minister will consider, even at this late stage, adopting the amendment in my name rather than the one he is proposing to move later on.

    Mr. Deputy Speaker, may I speak to the following two amendments which you have been kind enough to say may be discussed with this one?

    I remind the hon. Gentleman that with amendment No. 141 we are discussing only Government amendment No. 3.

    We had a long debate on this matter in Committee. The words found to be objectionable were "an element of". The Government are proposing to remove those words and I therefore welcome the Government amendment.

    It is difficult to see how far this debate is a semantic one and how far it is a real one and I appreciate the Government's difficulties. It is fair to say that most of the debate in the Standing Committee was about the words "an element of dishonesty". It was felt that the words "an element" brought a degree of confusion into the proceedings which was regrettable. The Minister said that he would look at it and he has done so and deleted those words. The difficulty, on reflection, and reading what he said in Standing Committee, is that there is some confusion in the mind of the Government as to exactly what they want the nature of this new civil fraud to be. The difficulty arises not just from the words "an element" but from the use of the word "involves".

    The question is, does the conduct have to be dishonest or is it necessary only for a part of the conduct to be dishonest, even if the rest of the conduct in the particular circumstances of an offence is all right? That is a distinction which is almost impossible to draw. Further ambiguity is engendered by a misuse of the distinction between the test in criminal and civil law for the burden of proof. In criminal law, in order to prove a particular offence, it has to be shown beyond a reasonable doubt that someone acted with a dishonest intent. In civil law it is merely that on the balance of probabilities fraud or dishonesty is established. If that burden of proof is the problem and if the Government wish to say that the civil test applies and not the criminal test, which seems to follow from the nature of the offence that is being legislated, and they are attempting to distinguish between gradations of dishonesty within this clause, it confuses more than it elucidates.

    The hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) asked whether the Government were saying that an evasion of VAT, say, of £5,000 should be caught in its entirety by clause 13, even though there was only dishonest conduct in relation to a fraction of that amount. That would be highly unsatisfactory, because either someone has behaved dishonestly in respect of an evasion of VAT or he has not. If there is any sum of money for which they are liable but they have not behaved dishonestly in relation to it, they should not be caught by clause 13. That is an unjustifiable distinction.

    The Minister has very fairly thought about it and it would be wrong, given that we concentrated so much attention on the words "an element of dishonesty", to criticise him. If he wants to make it clear that a lesser burden of proof is being applied, then it could be done in a much less ambiguous way. The danger of leaving in the word "involves" is that it has the same connotation as an "element" because it may involve a certain amount of dishonesty, but one is not sure whether the entirety of the conduct needs to be dishonest. So the amendment does not really deal with the essential point made in Standing Committee. When introducing a new offence, it is right that people should know exactly where they stand. I ask the Minister to think again because there is a general view among lawyers, certainly outside the House, that there is a lack of clarity in clause 13 that could pose problems. It is much better that we deal with them as legislators rather than leave them to be dealt with by the courts.

    8.45 pm

    I am grateful for the manner in which the amendment has been moved and the way in which the hon. Member for Sedgefield (Mr. Blair), speaking for the Opposition, has responded to it. There are real difficulties here because, as I understand it, not being a lawyer, we are moving into somewhat new ground on which there is much precedent in legislation. We are decriminalising a large number of offences concerning VAT and the whole House has welcomed that. We are replacing those criminal offences by a civil offence and the arguments and problems of changing from the burden of proof—which, as I understand it, for a criminal offence is that it is beyond reasonable doubt — towards that for a civil offence, which is the balance of probabilities, has caused problems for the draftsman and certainly also caused problems for those of us who are looking at this more as laymen.

    I responded to points made in Committee about an element of dishonesty, saying that could imply that there was a very considerable amount of conduct in which there was just a tiny element of dishonesty and it would be unfair to roll up the whole thing together. I believe that the words "involves dishonesty" imply that it is running through the whole of these transactions and that the level of proof would be the balance of probability level rather than the beyond a reasonable doubt level. One of the reasons why this formulation of words appealed to me was that it was recommended by the VAT practitioners group. I do not wholly accept the arguments that it was putting forward but it, too, was attempting to find a formulation of words which would reflect what was in Keith's mind. Alas, he did not give us the benefit of a formulation of words to give legislative effect to what he was recommending.

    This is a problem between a layman's way of looking at things and a lawyer's way of looking at them. The notion of civil fraud is a common law offence and the burden of proof will necessarily apply when it is deemed as a civil offence and not a criminal offence. Can I suggest that if the word "involves" is present simply to make it clear that there is a civil burden of proof that is what is needed? It probably is not needed but, if the Minister wants to make it clear beyond any doubt, it is best to state it expressly rather than leave it as it is at present. This might go not to the burden of proof but to the actual quality of dishonesty, in other words, not proving the dishonesty but the actual quality of the dishonest act. That distinction is probably the correct one to make.

    I am in the position in which people sometimes find themselves when they take legal advice and where that advice is not wholly unanimous and there are differences of graduation. I suspect that what is happening to me tonight is that I am receiving from distinguished Opposition lawyers advice which is not entirely in accord with that which I have taken. I can assure the House that, having given the undertaking in Committee, I have tried to discharge it to the best of my ability.

    The change proposed in amendment No. 3 will reflect the Government's intention that there should be a demonstration of sufficient dishonesty to satisfy a tribunal on the balance of probabilities that the whole conduct merited a civil penalty and that the Customs and Excise should apply that standard. I hope that the courts will not find any ambiguity in the approach that I am commending to the House. It would be necessary to have another look at this legislation if the results worked out that way in practice, and it is only right that one should do so.

    I advise the House not to adopt the form of words proposed by the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) in his amendment No. 141. I hope that the House will agree to the change, which I suspect will be welcome even if it does not go as far as some would wish, set out in amendment No. 3.

    It is obvious that the Minister will look again at this wording, but I hope that he will not wait until there is a case that obliges him or his successor to do so. I put a purely linguistic and not a legal point to him in that context. I suggest that the word "involves" was chosen in the original drafting because it fits with the words "an element". "Involves an element of was a whole phrase and, by removing the words "an element of in discharge of his undertaking to the Committee the Minister has not removed the essential difficulty to which all the argument was directed. I hope that he will take that into account when he looks at this.

    I accept what the Minister says. We are on difficult ground, and I hope that the hon. Gentleman can assure me that he will keep a careful and close watch and, if the courts get into a fankle about this, he will take quick and urgent action to remedy the distress that it will cause. I fear that there is a real prospect that there will be difficulties. However, if the Minister can give me that assurance, I shall be happy to withdraw my amendment.

    I am glad to give that assurance. This is difficult ground, and I am grateful to the right hon. Member for South Down (Mr. Powell) for his comments. I should like to consider with my advisers what has been said. I somehow suspect that this is not entirely the end of the matter, but I hope that at least the House will think that I have sought to be helpful and to move in the direction that the Committee wished.

    Amendment, by leave, withdrawn.

    Amendments made, No. 3, in page 9, line 33, leave out 'an element of.'

    No. 4, in page 9, line 35, leave out '(5)' and insert '(7)'.— [Mr. Hayhoe.]

    I beg to move amendment No. 142, in page 10, line 20, leave out from 'amount' to 'and' in line 21 and insert 'as appears appropriate'.

    With this it will be convenient to consider amendment No. 143, in page 10, line 20, leave out 'not less than half' and insert 'less than'.

    Amendment No. 144, in clause 14, page 12, line 28, leave out 'if' and insert
    'in the circumstances outlined in (a) and (b) of this subsection but shall in other circumstances give rise to liability to such a penalty not exceeding the penalty under subsection (1) above as the Commissioners or on appeal by the person concerned a value-added tax tribunal having regard to all the circumstances of the case think fit'.
    Amendment No. 145, in clause 15, page 14, line 11, at end insert
    'but shall if he does not so satisfy either of them give rise to such penalty not exceeding the amount of the penalty specified in subsection (1) above as the Commissioners or on appeal by the person concerned a value-added tax tribunal having regard to all the circumstances of the case think fit'.
    Amendment No. 146, in clause 16, page 15, line 19, at end insert
    'but shall if he does not so satisfy either of them be liable to such penalty not exceeding the amount of the penalty specified under subsection (3) above as the Commissioners or on appeal by the person concerned a value-added tax tribunal having regard to all the circumstances of the case think fit'.
    Amendment No. 147, in clause 17, page 17, line 27, at end insert
    'but shall if he does not so satisfy either of them give rise to such penalty not exceeding the amount of the penalty specified under subsection (1) or (2) above as the Commissioners or on appeal by the person concerned a value-added tax tribunal having regard to all the circumstances of the case think fit'.

    Clause 15, which deals with VAT criminal penalties, was rehearsed at some length in Committee. The burden of the representations that we received both before the Committee stage and since convinced me, as it did the Association of Certified Accountants, the Law Society, the Institute of Directors and many others, that it was a mistake to take away the power of mitigation that the Bill proposes.

    Clause 13 reduces, although it does not take away, the discretion to mitigate the penalty. Therefore, we should have more confidence in the tribunals. I should be happy to leave them to make judgments about individual cases in a better way than we can, as legislators, dealing with a matter in principle. On that basis, the words "as appear appropriate" would allow for much more flexibility. I would be happier if we adopted that approach rather than the approach of the Bill as it stands.

    Mr. Speaker has selected amendments Nos. 143 to 147 in this group. They are similar to the amendment tabled by the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood). The one fear outside the House is that it looked as if the VAT tribunal powers would be treated differently from those of the special and general commissioners of the Inland Revenue. I know that the Government have gone some way to mitigating the penalties that at one time were fixed. However, I should have thought that there is a case for saying that, now that there is the right of appeal to a tribunal, a tribunal could, in its wisdom and judgment, have the power to mitigate the penalty from zero to the maximum. This is what my hon. Friend the Member for Tatton (Mr. Hamilton) and I are trying to deal with in the amendments.

    I hope that my hon. Friend the Minister will look at this. If he is not prepared to accept any of the amendments in this group, will he give an undertaking that he will look at the matter by the next Budget, with the experience that we have had from now until then? If it is found that mitigation from zero to maximum should be allowed and that there should be some change in the appeal procedure, I trust that he will make these changes.

    When we debated these matters in Committee I made it clear that I thought that the Government were mistaken in withdrawing clause 23, which gave the power to the commissioners to mitigate penalties and interest. I thought that the Government took the wrong line. Rather than taking away the right to mitigate altogether, they should have accepted Conservative amendments to extend that power to the tribunals.

    At the moment, we have an all-or-nothing solution. One is either subject to no penalty or the maximum penalties. This has never been the case for income tax and many people are clearly worried, as my hon. Friend the Member for Croydon, South (Sir W. Clark) has said, that next year, when the Keith committee's proposals on the enforcement powers of the Inland Revenue are put into legislative form, the power of mitigation will be taken away from it as well. That would be wholly unacceptable and would meet with the united opposition of all the business representative organisations. It would be unacceptable to the taxpayer as well, whether an individual or in the corporate or business sector.

    I warn my right hon. and hon. Friends in the Treasury that if the Government are thinking of extending this line of thinking into the Inland Revenue sector they will be in for a great deal of opposition. Many people will feel a great sense of injustice that they will not be able to place themselves in between the two extremes of no penalty or maximum penalty as a result of the Bill. VAT is not a popular tax, particularly with small trades, because it imposes an enormous administrative burden. Whether justified or not, there is a widespread feeling that the Customs and Excise, because of its long history of involvement in smuggling and offences of that kind, has far too heavy a hand in dealing with those who have to administer the tax. Here is another imposition on them.

    I regret that the Government have not seen fit to take the middle way of giving power to the commissioners and the tribunal to mitigate penalties. This will make the tax much more unpopular and the Government will forfeit a great deal of good will that needs to be fostered. I hope my right hon. Friend will heed the words that have been spoken not only by the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) but by many Conservative Members both upstairs in Committee and on the Floor of the House. I hope the Government will think again about this matter.

    9 pm

    In the Standing Committee, the Opposition tabled a new clause specifically giving such a power of mitigation. It was a pity, when Conservative Members feel so strongly about it now, that they did not support us. That clause introduced a specific power of mitigation and would have tidied up the detritus of clause 23.

    The hon. Gentleman says rubbish, but a specific clause was introduced providing a power of partial mitigation and he did not support it.

    The amendment by the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) deals specifically with clause 13(4). Subsection (4) is not, strictly speaking, a mitigation clause. It allows the commissioners or, on appeal, a VAT tribunal, to reduce the penalty by up to 50 per cent. as a reward for co-operation. It applies only in circumstances of co-operation and is a direct incentive to people to co-operate. The arguments that apply in relation to that special incentive do not necessarily apply to the general case for mitigation. I have read the proceedings of the Standing Committee because I was not present for that part of the discussion. The penalty should not be reduced to nothing in circumstances where someone has merely co-operated with the commissioners. If what was being given was a real power of mitigation under which any circumstance could be taken into account, there would be more reason for allowing that general power.

    Amendments were moved in the names of the hon. Member for Croydon, South (Sir W. Clark) and the hon. Member for Tatton (Mr. Hamilton). We had a very full debate upstairs in Committee as to whether or not there should be a power of mitigation. I made clear at that time that there should be a power of mitigation because there are graduations of offences. When legislation of a fairly tough nature is being introduced, it is wrong for no leeway to mitigate to be given to the commissioners or the VAT tribunal, not just when someone is co-operating, but in cases of great hardship. Without repeating them fully, I reiterate the arguments made In the Committee. I hope the Minister will look at the matter after some months of experience of these provisions so that we can see whether or not the injustice some of us fear has come about.

    The matters being debated in this series of amendments were given a good airing in our proceedings upstairs in Committee. As has just been said, we have had a re-run of the arguments during the short debate on new clause 32. I could re-state the arguments I then deployed, but that would not be helpful. I suspect that most hon. Members in the Chamber heard me say them in the first instance and might not be pleased if I were to repeat them at length.

    To make the changes proposed would strike at the heart of the Keith philosophy. My hon. Friend the Member for Tatton (Mr. Hamilton) was less than fair in his comments, though I accept that, right from the start on one of his earliest interventions in the Committee, he was arguing in favour of a power to lie both with the commissioners and the VAT tribunal to vary the amounts of penalties imposed. The philosophy of Keith was the certainty of fixed penalties. The Government have introduced—and this was not recommended by Keith—the whole concept of a reasonable excuse. I note the comment made in Committee, that to say the taxpayer had to exercise due diligence and have a reasonable excuse might be too stringent a test. Therefore, I propose that "due diligence" should be dropped.

    Having a resonable excuse is a very marked change in favour of the taxpayer compared with the Keith recommendations on which, as the House knows, there were wide consultations in the many months following publication of his report. Equally, there is a reserve power, which I have explained, still resting with the commissioners to exercise if there are grounds of compassion or something similar that would not be covered by "reasonable excuse". The commissioners will have that power to remit on an intermittent basis penalties that might be imposed.

    The change that has been made of introducing the reasonable excuse defence to be argued both to the commissioners—who I hope in the main will deal with the matter so that it does not need to go any further—and if necessary to the tribunal, the raising of the trigger points quite significantly compared with those recommended by Keith, the residual mitigation powers which Customs and Excise has and which have been endorsed by the Public Accounts Committee quite recently, and the way in which they are exercised, all add up to a significant change in favour of the rights of the taxpayer and safeguard him against the original proposals made by Keith. In those circumstances, I commend the provisions to the House, and I hope that the House will not seek to introduce the amendment.

    I was asked to keep the matter under review. Of course, we shall do so. However, the next Budget is too soon for us to have had much experience. The default surcharge in clause 19 does not come into effect until October 1986. The serious misdeclaration provision in clause 14 does not come into effect until 1988. We shall need a little longer to get some feel and experience of this change, but I gladly undertake that matters will be kept under review. It is important to remember that, even if a Minister did not give such an undertaking, individual Members of the House would keep the matter under review and find ways of raising it if they saw elements of injustice occurring.

    I hope that the amendment will not be pressed to a Division. Let us see how we get on with the new regime being introduced in these clauses.

    Amendment, by leave, withdrawn.