12
Examination of witnesses
Joanne Green and Sarah Wulff-Cochrane.
Q52 The Chair: Welcome to this second session of the Finance Bill Sub-Committee. This meeting is being broadcast live via the parliamentary website. Let me welcome our witnesses. A transcript of the meeting will be taken and published on the Committee website. You will have the opportunity to make corrections to that transcript where necessary.
Thank you very much for joining us this afternoon. Perhaps you would like to introduce yourselves to the Committee and say what role you have and at which organisation.
Joanne Green: Good afternoon, everyone. I am a tax manager for operational taxes at Nationwide Building Society. I am here today representing the Building Societies Association.
Sarah Wulff-Cochrane: Good afternoon. I am a principal at UK Finance and I am responsible for tax policy there.
Q53 The Chair: Thank you for joining us and for waiting while the other session concluded. We will focus in this session on the civil information powers.
I will kick off by asking a broad catch-all question. What view do you take of the removal of the requirement to obtain tax tribunal approval before seeking third party information from financial institutions? I do not know how much of the previous session you caught, but we are very interested in whether this power is necessary and what safeguards there are.
Joanne Green: First, I recognise that the process currently is quite long and arduous for HMRC, especially where it has to go to tribunal. My concern is that the tribunal is there as a safeguard for these customers, and removing a safeguard seems like an extreme length to go to. I also worry about the proportionality of that change. The last OECD global forum peer review in 2018 stated that only 76 cases went to tribunal, so I wonder if the removal of such a safeguard is proportionate to the aim of the removal, given that not so many cases went there.
Sarah Wulff-Cochrane: We fully appreciate the responsibility that HMRC and other tax authorities have to collect taxes that pay for vital public services and that third-party information notices have a role to play in facilitating tax collection.
Our preference would have been for the retention of independent oversight and appeal rights. We believe that those safeguards would ensure public confidence and trust in the security of their confidential financial information and in the fairness of the tax system. We would have preferred HMRC to have spent more time exploring alternative solutions before landing on this particular course of action.
We are not convinced that removing safeguards for taxpayers and third parties is a proportionate response to the timing issues with the current Schedule 36 process, particularly the issues identified by the global forum. If read in isolation, it is easy to construe the global forum peer review of the United Kingdom as singling the UK out for criticism.
However, if you read some of the other reports, you can appreciate that others also struggle with various aspects of information exchange. Whereas the UK received over 5,000 exchange-of-information requests, as Joanne has already alluded to, it sought tribunal approval in 76 cases, which delayed the exchange of information. In contrast, the US received fewer requests in the same period—something like 2,600—and, despite having a more streamlined process for obtaining the information, the forum also expressed concerns about the timeliness of the IRS’s provision of the requested information.
The Chair: That is very useful. Could you send us those figures, so that we have them, and any other figures that you feel are relevant to make those international comparisons? I have lots of other question myself, but I think we will come on to them.
Lord Butler of Brockwell: May I come in on the point that we have just had? Joanne Green said she recognised that going to the tribunal was onerous, yet our previous witnesses said in effective that it would only go to a single judge, and anyway it was being speeded up. Which of these accounts is correct?
Joanne Green: You would have to check that with HMRC, but the messaging that we have received is that the tribunal process, which perhaps is more onerous now or there is more of a delay now given the Covid restrictions and so on, is an extra step. That is where, I believe, HMRC has found that the time limit is being pushed to the max, but it would be a question for HMRC to answer.
Sarah Wulff-Cochrane: I think that some of the process around the regime is still somewhat antiquated; notices are sent out by second-class post, for example. Covid has shown that there are possibilities for efficiencies in the process, which is something to look at.
Q54 Viscount Chandos: If the concern is about the speed of response to international requests, whether or not that concern is justifiable, from the comparisons you have drawn, what else could have been done to try to speed things up?
Joanne Green: Sarah touched on one of them. Currently, notices are sent via post, which is quite a long process, especially for bigger organisations because they also have their internal post to deal with. From the building societies’ point of view, our main concern is the safeguarding of our members and protecting their confidentiality and rights.
It would seem that the whole end-to-end process could have been streamlined and improved before looking at safeguards, and especially the implementation of removing the safeguard. There is the communication mechanism. If we move that to electronic, it would speed it up. Currently, HMRC sends informal information requests to taxpayers, and there is no time limit for that. Perhaps it could introduce and streamline that section of the process rather than moving straight to tribunal removal.
Viscount Chandos: My understanding is that the average length of time was nearly a year—nine months, or whatever. We are blessed with quite a good postal system, so while I agree that it feels a bit archaic to do it by physical mail, it would be a token improvement on that sort of length of time. I accept that it is an example of the end to end, but are you therefore saying that there is no silver bullet-type of alternative way of addressing it?
Joanne Green: Sarah might want to add to this, but, as you said, it was just an example of the overall end-to-end process. Every element could be looked at. With regard to what information is being requested, for example, we do not have a standardised information request for FIs, so each one is individual and different. It takes time to look at it, whereas, as we know with most things, if something is done over and over again in the same way—that might not always be the case—if we had standardisation, we can speed up the process.
I take your point that moving electronically from post will not take months off the process, but every individual element of the process should be looked at.
Sarah Wulff-Cochrane: I suppose we are also coming from the perspective of what is within the power of financial institutions to effect change. Perhaps misguidedly, a previous panellist said that perhaps an issue lay with financial institutions taking too long to respond. There is a 30-day period in which financial institutions are required to respond to these notices, and unless they separately agree with HMRC for an extension of that time, that is limited.
We can only control the parts that are within our gift and that are already specified, such as the time taken to respond to a notice. There were opportunities for HMRC to look at the process outside that, whether it is communication or the tribunal’s processing of cases. The experience of Covid-19 has shown that tribunals are looking to enhance their use of technology and introduce streamlined processes to speed up and fast-track certain cases, so there was perhaps some possibility for that to be explored in greater detail.
The Chair: You are saying that financial institutions have 30 days to comply or they have to ask for an extension. Is that right?
Sarah Wulff-Cochrane: They have 30 days to comply with a tribunal notice, unless there are specific reasons—for example, it is a complicated matter, which they can discuss with HMRC and obtain an extension.
The Chair: Very good.
Q55 Lord Forsyth of Drumlean: Given that there is no right of appeal against a financial notice, either for the taxpayer or the financial institution concerned, and that the Government’s response to the consultation process proposes an annual report to Parliament on HMRC’s operation of these powers, how effective do you think that will be as a monitoring tool, and what information should it contain?
Sarah Wulff-Cochrane: We think it is entirely appropriate for Parliament to review the operation of these new powers and welcome the introduction of an annual report. However, a report is not a substitute for real-time safeguards that operate on a request-by-request basis. We had experience in the past with the direct recovery of debts regime that a requirement to report to Parliament does not necessarily mean that HMRC will consult with relevant stakeholders and ensure that their experience is reflected in the report. We would like to see a firmer requirement for HMRC to consult with stakeholders, to ensure that experience is reflected in that.
As to the safeguards and ensuring that the right information is supplied to HMRC, I am afraid that I do not think that the report to Parliament will be an equivalent safeguard to tribunal oversight.
Lord Forsyth of Drumlean: When I was in the House of Commons, if you were stuck for an amendment to put down for legislation, an annual report to Parliament was a sort of hardy annual that you could use to talk about whatever you wanted to talk about. When I was in government, if pressed and in difficulty you would say that there would be an annual report to Parliament, knowing full well that it would be buried in some glossy document that no one would read and it would be completely ineffective. Am I being unfair, Joanne Green?
Joanne Green: I do not think I am in a position to say whether you are being unfair. As Sarah said, I do not think an annual report has the same controls or real-time effect as a tribunal. I would echo the concerns about the DRD report, which we have experienced. There is no requirement for the HMRC to consult with stakeholders before it produces that report, so it will not necessarily reflect the position of the financial institutions or the impact it has had on them through the year. Whether it will be looked at is another question, but as regards its effectiveness as a replacement, almost, for a tribunal, it does not seem fit for purpose.
Lord Forsyth of Drumlean: Sarah Wulff-Cochrane, you did not answer the second part of my question, which is what information you think this annual report should contain, which everyone will be waiting for with bated breath.
Sarah Wulff-Cochrane: It could start with providing some metrics on the use of these information powers and some comparators before the introduction of the new financial institution notice and the current regime. That would helpfully address concerns or perceptions that this will perhaps open the floodgates.
As regards other measures, I suppose in a system where there is only one real appeal right, and that is an appeal against penalties for financial institutions, it will be hard for the report to reflect where there have been issues with HMRC’s powers not being as tightly circumscribed as perhaps we might require in law.
Lord Forsyth of Drumlean: Thank you.
Q56 Baroness Kramer: I will ask questions on the issue of proportionality. Do you have a sense of what information you will be asked to provide and whether now you will be expected to provide information that would previously have been challenged as being onerous, since you no longer have that defence? If you do not provide what is being asked for within the timeframe, I am slightly unclear what the penalties are and whether those are also proportionate.
Sarah Wulff-Cochrane: In an ideal world, the information that can be requested through this new financial institution notice would be detailed in legislation, thereby removing subjectivity. As that is not the case, we are currently in discussions with HMRC about what information should be included. We feel that it should be restricted to basic banking information such as statements of account, know-your-customer information, identity and verification information, and some transaction information.
Where perhaps the notice lacks clarity is the extent to which HMRC can request email retrievals or access information which the bank holds about the taxpayer that the taxpayer has not been party to, or even a broader spectrum of information that could reveal details not only about the taxpayer but about third persons such as associates.
All this needs to be carefully considered. At the moment, we are talking about it with HMRC to gain clarity, but we have no clear understanding of what, ultimately, the financial institution notices might be able to request.
Baroness Kramer: Just to check, this does intrude into areas where you would have challenged historically, or would challenge under the current regime.
Sarah Wulff-Cochrane: Currently, it is possible for a challenge on the basis that the information is not reasonably required, or is not justified, or is not relevant to help ascertain the taxpayer’s position. There is also an appeal right on the basis that the information would be unduly onerous for the third party to gather.
Currently, there are avenues that may determine whether a tribunal would confirm, vary or set aside the notice, but in this circumstance HMRC is saying that it will undertake that due diligence itself, so to speak. The HMRC-authorised officer will ensure that the information is reasonably required, justified, relevant for ascertaining the taxpayer’s position and, to an extent, whether it is onerous for the financial institution.
We have to be clear that HMRC is saying that it will still be open to talking with financial institutions, it still wants to have some discussions up front, but that is a commitment in guidance. It will be at HMRC’s discretion. The assurances that we are given in 2020 may not live in the corporate memory, so we would rather have statutory appeal rights and the safeguard of independent oversight.
Baroness Kramer: Are the penalties for non-compliance proportionate and reasonable?
Sarah Wulff-Cochrane: I think they are reasonable and proportionate. I think the penalty is £300; Joanne can correct me. The issue will be that that does not sound like a lot, but the flip side is the potential legal consequences on the financial institution for getting it wrong. While the HMRC penalties may not be great, the reputational damage for providing information to HMRC to which it is not entitled would cause greater concern than HMRC’s own penalties. Financial institutions would need to balance and juggle their legal obligations under the common law for confidentiality and under things like GDPR with their obligations under this new legislation.
Baroness Kramer: Does Joanne Green have anything to add? Do not feel compelled.
Joanne Green: Before I mention penalties, could I go back a bit? You mentioned proportionality and whether we are clear on what information is requested at the moment and what we will have to provide. I would say that our short answer at the minute is no, we are not sure what we will be asked and what we will need to provide.
That feeds into the question about onerousness and the fact that it is down to the HMRC officer to decide whether it is onerous to a financial institution. What is onerous to one financial institution might be very different from what is onerous to others, especially some of the smaller building societies, which may not have the in-house legal expertise, for instance, that Sarah just mentioned, in that we would want to look over a notice to ensure that we had the right to disclose all the information. That will be a lot more onerous than going to someone who gets a lot of these notices and it goes through.
In the current regime, HMRC issues a precursor notice, and it gives the financial institutions the opportunity to talk to the officer, express any concerns, and, before the decision is made, to have that dialogue: “On the surface, this might not be seem onerous, but for X, Y and Z reasons … ”. It could be legacy systems, a complex customer or anything.
However, that has been removed as well. Ultimately, the decision as to whether or not it is onerous is down to the officer who has decided that they want the information, and we have no right of appeal until we incur a penalty.
As Sarah said, although the penalty is not a lot, I believe it is a daily penalty until you get it in. No financial institution will be late with these on purpose; it will be because there is an issue. A penalty every day until you get it in, and then you have the right to appeal it, again is much harder for smaller organisations to swallow than it is for the larger banks and building societies.
Q57 Lord Monks: I would like to follow up in the same general area. In your recent replies to my colleagues on the Committee, you have voiced concerns about the way this might work out and the absence of rights of appeal and so on. In the absence of a right of appeal, are you not concerned that HMRC might use its powers more widely, perhaps even on flimsier grounds, now that it no longer has to make a case to the tribunal? I suppose I am asking whether you trust HMRC generally, or whether you are worried, and, if so, how worried you are about this new approach?
Sarah Wulff-Cochrane: We believe and hope that HMRC officials do not intend to make mistakes or overreach their powers. However, at the present time, with the current system, the tribunal process acts as its own check and safeguard. HMRC has to prepare the case for the tribunal and ensure that it will meet that high bar. It is also the case that not all information requests will be approved by the tribunal. As already stated, in some instances, the tribunal can confirm, vary or set aside the notice.
Even under the present system, HMRC will not always get it right. There is a danger that, as time goes by, perhaps some of the knowledge and the experience that HMRC had going through the tribunal process may not affect how rigorously it applies these checks and balances as it currently does.
I think the real danger is that the perception of HMRC doing this is there. There is a perception, whether among taxpayers or the customers of financial institutions, that perhaps their information is being shared on a flimsier basis or that HMRC’s powers are not sufficiently checked. The real concern here is perception. As financial institutions, my members will be worried about being perceived to have supplied information to which HMRC is not entitled.
Lord Monks: Thank you very much.
Joanne Green: I would completely echo what Sarah just said. It is not necessarily a concern or that we think it is likely. It is just that it is now a possibility where it was not before, without any independent oversight at all. I believe one of the other witnesses said that it is like they are checking their own homework now. As the question said, if it is flimsier, no one external will pick up on it. It is a possibility.
Sarah Wulff-Cochrane: The expression “checking their own homework” is unfortunate, but there is a real issue that that checking now gets displaced from the tribunal on to the financial institution. As I stated earlier, when you have 30 days to satisfy the notice, eating into that time, having to obtain your own internal or external legal resource to check whether the information you are being requested to provide is within HMRC’s legal powers to request, that will be a challenge for financial institutions, and one that currently it does not have because the tax tribunal does that for them, in effect, and frees them from the responsibility of having to ensure that HMRC is entitled to the information.
Q58 Lord Rowe-Beddoe: Sarah, may I go back to your last answer and lead on from there? How well have financial institutions been properly advised, forewarned and consulted about introducing financial notices? What more could HMRC do?
Sarah Wulff-Cochrane: UK Finance and its members responded to HMRC’s 2018 consultation. We met with HMRC officials at that time and had what we thought were constructive discussions.
No further information or discussion occurred until 21 July 2020, at which point the summary of consultation responses to the 2018 consultation was published at the same time as the draft legislation. That proved challenging for us.
We resumed our conversation with HMRC fairly quickly after the publication of the draft legislation and we have been having good conversations with HMRC since, but there are issues with the draft legislation, for instance the date of commencement of the legislation, which does not allow any great time for financial institutions to prepare and to institute new processes and procedures for dealing with these new notices.
That is a challenge and one that we wish had been otherwise. But we are where we are, and we are working well with HMRC now to try to address some of those issues. Some are somewhat difficult to address, because the date of commencement is fixed in the legislation.
Lord Rowe-Beddoe: Why was there such a delay to starting the meetings with financial institutions? It has been on the statute book for a couple of years. You implied that there was a delay in opening the conversations after the publication. Why was that?
Sarah Wulff-Cochrane: There was a delay between HMRC closing its consultation and proceeding to release draft legislation and to resume discussions. There was a two-year hiatus between the end of the consultation period and the draft legislation coming out.
Lord Rowe-Beddoe: That is two years. What is the time-setting now?
Sarah Wulff-Cochrane: Now we are working with HMRC. We have had a few conversations. We have provided it with written feedback to try to ensure that some of the purely practical and operational concerns are addressed. We understand that HMRC is trying to reflect some of those in guidance. We generally find guidance not to be as satisfactory as statutory safeguards, so that is problematic. But, again, we are where we are, and we recognise that HMRC has these information powers for very good reason—to gather in taxes—so we are trying to be as constructive and supportive as possible.
Lord Rowe-Beddoe: Of course, I am sure you are. But has it properly made a case, in your opinion, for these changes?
Sarah Wulff-Cochrane: It made a case in relation to responding to the global forum’s criticism of the time taken in relation to the 76 cases that went to the tax tribunal. Of course, the changes go further than that and relate to UK and domestic cases. On the one hand, it made a case in relation to addressing criticisms of the global forum, but that was specifically in relation to requests from foreign tax authorities. We are not entirely clear that the case was made in relation to domestic cases.
Joanne Green: May I add to that point about making a case? As Sarah said, its case is to speed up the process in relation to international information requests. This is a lot wider. It has removed safeguards to speed up the process, but it has an extension of powers to debt, it has removed the right to appeal and it has introduced the penalty. It has made its case overall for what it is doing, but that seems to go way above and beyond what is needed.
Lord Rowe-Beddoe: Do you have any comments on the commencement date?
Joanne Green: As Sarah has already expressed, the commencement date is, in all honesty, impossible to some extent. Financial institutions will have a cost to bear to get ready for this. They have to have processes in place. We have already said we do not know what information we will be asked for, so until the legislation is set and we know what is happening it is hard to get processes in place. If the commencement date happens to be at the same time, we will not have that ability.
Lord Rowe-Beddoe: Thank you.
Q59 Baroness Bowles of Berkhamsted: How do you feel about the extension of the information powers to debt, in addition to checking someone’s tax position? I do not know whether you were listening in to the conversation that we had with the previous panel; we were concerned that there could be snooping to see how much money was available and “See money, think you can have it”, without looking to see what other claims there might be on those funds. Are these the sorts of concerns that are shared by institutions?
Joanne Green: Our members do not object in theory to extending the information powers to include debt recovery, having implemented direct recovery of debt a few years ago, and we know that it is currently used only for domestic tax debt, but we question why that is not the process that HMRC now seeks to include for international debt. When you look at direct recovery of debt and the number of safeguards in place compared with the number of safeguards that will come out of this, the number is a lot higher. If it was deemed necessary for direct recovery of debt, it is a worry to financial institutions that this process, with the removed safeguards, puts customers and members at a much higher risk of incorrectly recovering debt.
Baroness Bowles of Berkhamsted: Sarah, is that also your view?
Sarah Wulff-Cochrane: This also falls in the category of vagueness around how the regime will work and interact with other regimes such as direct recovery of debt. It would have been helpful for there to have been more clarity in the legislation, to remove subjectivity and take away any question mark over how those regimes interact. In the absence of that, it is still a conversation that we are having with HMRC to understand how the two regimes interact.
Baroness Bowles of Berkhamsted: Could this be a way that gets around safeguards in alternative regimes?
Joanne Green: Until we see the detail, as Sarah said, it is a possibility.
Sarah Wulff-Cochrane: I do not believe that HMRC wants to circumvent the rules—I am reluctant to believe that HMRC officials have that agenda—but it leaves open the possibility for mistakes or for certain of the protections and the safeguards that were built into the direct recovery of debt regime perhaps to become a bit clouded over time.
The Chair: Thank you very much.
Q60 Lord Butler of Brockwell: You referred to the costs that institutions would have to bear in preparing for this. One of them was getting legal advice on whether the Inland Revenue was going beyond its powers and seeking information that previously the tribunal would have settled for you.
I am not quite clear what other extra costs there would be as a result of these powers. Can you elaborate on that for us?
Sarah Wulff-Cochrane: Again, to reiterate, I do not believe the cost implications of these changes are our primary consideration. We are mindful of the role that financial institutions play in helping HMRC to recover unpaid taxes, but we are really concerned about our members’ legal obligations to disclose information only in certain conditions that are legally prescribed.
That is the main driver; and, yes, there are costs involved in training staff and buying in certain legal resources, and establishing processes—making sure that financial institutions, and HMRC for that matter, do not suffer reputational damage or incur legal and financial penalties.
Lord Butler of Brockwell: Apart from getting the legal advice, are there any extra costs compared with dealing with requests that came through the tribunal?
Sarah Wulff-Cochrane: Joanne will be able to speak from the perspective of a financial institution directly. Currently, a person dealing with a notice does not have to be someone who has a particularly technical understanding of tax law. They are just collating information.
This will require a higher degree of expertise and specialism, and that will have a cost. We are not saying it is a huge cost, but we are saying that it will entail a cost. Financial institutions can accept that. It is the risk of getting the judgment wrong and providing information to which HMRC is not entitled that is the true cost, and the true risk that we are concerned about.
Joanne Green: Currently, the cost is probably unknown, given that the information we will be required to provide is unknown, especially for smaller building societies that might not even have received a Schedule 36 notice yet. Given the products that building societies offer and their member demographic, building societies do not get a lot of them. Previously, they might not have had to put anything in place, because had they received a notice, first, they would have received a precursor notice and, secondly, they would have had that opportunity to appeal or raise their concerns. They have not dealt with that. For smaller building societies, although it might seem that this is already in place, they might not have had to prepare for it, and that would be a whole new cost for them to get ready.
Sarah alluded to the fact that cost is not the biggest issue, but, again, talking about the impact cost and things like the commencement date, if we have to do something in a very short timescale, that automatically puts your costs up because you have to put all your resource on it and get it in place now.
I would echo what Sarah said about cost not being the main concern here, but, looking at proportionality, especially for smaller building societies that may not even receive a notice, any costs that they incur will seem quite a lot for the benefit that it is to HMRC.
Lord Butler of Brockwell: I am very grateful. Thank you.
Sarah Wulff-Cochrane: Joanne rightly points out that small financial institutions, unaccustomed to dealing with these notices, may experience costs, but, equally, large financial institutions that receive a glut of notices will have to incur the costs of dealing with this new notice. If HMRC is holding back some tribunal applications to the point at which this legislation becomes live, it is quite possible that, on day one, quite a few of these notices will be received.
Joanne Green: To continue that, HMRC states that the expected impact will be negligible on 20 banks or building societies. There are hundreds in the UK and this legislation affects them all, because all financial institutions have to be ready. We cannot say to building societies, “You might not get one, so don’t prepare”, because they only have 30 days to comply, otherwise they will get penalised for it.
The Chair: I am sorry to jump in, but I am conscious that we only have a couple of minutes. Lord Butler, do you have anything else?
Lord Butler of Brockwell: No, thank you. I have had very good answers.
Q61 The Chair: May I ask a final question? I am hearing from all your answers, for which many thanks, that there is a level of concern both about the implementation of this and the principle about the powers that it is taking. Given that we are where we are, if you had a magic wand, what one thing would you want HMRC to do to address some of your concerns? Is it to scrap it entirely, or are there ways in which one can tweak this proposal to make it more acceptable to you?
Joanne Green: Apologies. I know you said one thing—
The Chair: Perhaps more. I am just trying to keep us to time, because we do not have long; we have one minute.
Joanne Green: A massive concern is safeguards, so HMRC having independent oversight would be one. It does not have to be a tribunal. It could get another body in to look at it or at the tribunal process and see whether it can be streamlined. Building societies and financial institutions need to know what will be in those notices and know what will be asked for, so that, first, we have the comfort that it is okay to give that information, and, secondly, we can prepare to have that information ready for HMRC when it comes through. Those would be my two.
The Chair: Thank you very much. Sarah, do you want to wrap it up?
Sarah Wulff-Cochrane: I completely agree with Joanne on reinserting oversight and scrutiny, and appeal rights. It does not have to be the tribunal. There are alternatives, perhaps the Adjudicator’s Office, but for everyone to be reassured and for the perception of this to be addressed, I think HMRC would do well to reinsert independent oversight, scrutiny and appeal rights.
The Chair: That is excellent. Do any members of the Committee have anything else they wish to raise? If not, it is 6 pm and we will end there. Thank you both very much for your time and for your very helpful answers. We are very grateful. Have a good evening.
