Lydia Challen, Isobel d’Inverno and Adam Craggs.

Q25 The Chair: Good afternoon and welcome to the Finance Bill Sub-Committee. We are taking evidence from witnesses. My name is Lord Leigh of Hurley, and I am chair. The other Peers on this committee are Lord Palmer, Baroness Valentine and Lord Rooker, all of whom will ask questions of our eminent witnesses, to whom we are most grateful for speaking to us. I ask each witness to give a brief introduction of who they are, their background and their relevance, and then we will start the questioning.

Lydia Challen: I co-chair the tax law committee at the Law Society of England and Wales.

Isobel d’Inverno: Hello. I chair the tax law sub-committee of the Law Society of Scotland, and I am the head of corporate tax at Brodies, a law firm.

Adam Craggs: Good afternoon. I am a solicitor and partner at the law firm Reynolds Porter Chamberlain, and I head up the tax team there.

Q26 The Chair: Excellent. Thank you again. We have a number of questions that we want to ask, and we will go round the room in asking them. We would be grateful if you could keep your answers as concise as possible, because we will try to get through the questions in the 45 minutes allotted. If you feel that one of the other witnesses has answered a question satisfactorily, please just say so; there is no need to repeat something if you feel that a question has been answered satisfactorily.

I will kick off by talking about the current civil measures against tax avoidance promotors. They have not really been tested, so what is your view about the timing of the proposed measures in the draft Finance Bill?

Lydia Challen: I preface this by saying, and I am sure my fellow witnesses would agree, that we are all supportive of measures that, in principle, address the mis-selling of tax avoidance schemes to the public and mass-marketed tax avoidance arrangements. That said, as you point out, there are already significant civil measures in place to deal with these issues.

We are concerned that the timing of these measures is a bit premature. The civil measures have not been tested properly yet. The civil regime is quite onerous; its financial penalties can be very substantial. The Revenue has considerable discretion in those civil measures in bringing proceedings under them. It seems to us that introducing a strict liability criminal offence, which is what these measures propose, before the existing regime has been tested is a bit disproportionate at this stage.

The Chair: Do you know how many actions have been brought, and how many cases there are currently?

Lydia Challen: I have not seen up-to-date numbers, but earlier in the consultation process there was talk of about 10 stop notices having been issued. I think I heard one witness say a couple of weeks ago that there had been 13. It is not a large number so far.

Isobel d’Inverno: We would agree with that. It would be better to wait until the stop notices’ provisions have been operated by HMRC for a longer period before adding this strict liability offence.

Adam Craggs: The only thing I would add is that the maximum fine is fairly substantial: £250,000. Obviously, these provisions are in part, quite rightly, intended to act as a deterrent. Like the two previous speakers, I think that at the moment it is probably premature to introduce a strict liability criminal offence when the civil powers have not been in place for that long.

The Chair: Is 10 or 13 what you had expected to see? Is it less or more than you thought?

Adam Craggs: I must confess that I have not been involved in any, but I would have thought that there would have been more than a dozen or so. I would have expected more.

The Chair: That is my view. Thank you.

Q27 Lord Palmer of Childs Hill: It appears that, in this draft legislation, we are adding a criminal offence to the existing HMRC powers without any further measures being taken. It is pretty drastic. What additional safeguards do you consider are needed if this new criminal offence is to be introduced? Should there be some independent oversight of HMRC’s decision to prosecute? If so, what do you think it should be?

What also worries me is that, for civil offences, HMRC very often seems to want to take a financial penalty and not prosecute. It is very much a case of paying the money owed and having a financial penalty. If it is reluctant under the civil procedure, how much more reluctant will it be under a criminal procedure?

Adam Craggs: I think there should be independent judicial scrutiny and review before one of these notices is issued, given the potential criminal liability that we discussed. My own view is that there should be authorisation by the Upper Tribunal and, ideally, by a High Court judge.

Isobel d’Inverno: We would agree with that. Apart from anything else, HMRC being able to impose a criminal sanction without any oversight from elsewhere is a dangerous precedent to set. We would recommend, at the very least, an application to the tribunal being required before HMRC could proceed with imposing a strict criminal liability.

Lydia Challen: We agree too. One possible process could be adopted. Let me use the analogy of things that happen in the wider courts system, where you can attach what is called a penal notice to a court order, which makes it very clear to the recipient that breach of the order will lead to a criminal sanction. It is normally for contempt of court, but it could be adapted for this. It would not impede the Revenue in issuing stop notices under the civil regime, if that is what it wanted to do, but if it wanted to make something a criminal offence, it would have to go to the court and get the court to attach a penal notice to the stop notice. The addressee would then be very clear about the fact that a breach carried criminal sanctions.

As well as giving some oversight on the circumstances in which the stop notice could be issued, it would also have the advantage that there would be some oversight of who the notice was issued to. Stop notices can be issued only in a relatively limited range of circumstances, albeit that the Revenue only has to have a suspicion that the circumstances exist before it can issue the notice. However, the definition of a promoter is, in fact, rather broad and captures all sorts of people in the supply chain.

One concern that we have is that a lot of these schemes affect the legal rights of the users of the scheme—their legal status. It might relate to who their employer is, for example. If a notice was served on the person who was managing the arrangements, who was perhaps the employer, so that they could no longer operate as the promoter and do that management, where would that leave the scheme user? That is a difficult potential limbo. The problem exists in the civil regime, but it is brought into sharp relief by the criminal measures. A court oversight would help that, I think.

Turning to whether there should be oversight of the decision to prosecute, that is quite a difficult question. I am not sure who constitutionally is the right person to have oversight of a decision to prosecute if it is not the Revenue or the CPS. The CPS would need to be involved in a decision to prosecute, which certainly seems to be the proposal. If you have better oversight at the earlier stage, when the notice is issued and it is made a criminal matter, one might be more comfortable that the decision to prosecute could be taken by the Revenue with the CPS, obviously with appropriate seniority of the decision-maker.

Lord Palmer of Childs Hill: You talk about how this will affect the users. This is someone who is using a scheme.

Lydia Challen: Yes. I used that term rather broadly. Sometimes they are knowingly using the scheme and sometimes they are not necessarily knowingly using the scheme. A lot of the committee’s previous work on disguised renumeration, for example, flushed out the fact that there are people who are involved in tax avoidance arrangements but who would not necessarily be fully aware that that is what their position is.

Lord Palmer of Childs Hill: It has become a criminal offence and the promoter is being pursued in one way or another. So what is the position of the individual company that is using that scheme?

Lydia Challen: As long as they are not a promoter, they are not caught by this offence. The issue would be that, to the extent that there are any ongoing obligations between the promoter and the user—if, for example, the promoter has an employment relationship with the user, which is how some of the disguised remuneration schemes work—if they can no longer fulfil that part of the structure, the user or the taxpayer is potentially left in a very difficult position.

Lord Rooker: How does this oversight work in Scotland? I am an outsider to this, but the CPS has no remit in Scotland, surely.

Isobel d’Inverno: No, the position would be different in Scotland, but in relation to tax it would probably end up being harmonised, although using a different court; it would be a sheriff court rather than the High Court, for example.

Q28 Baroness Valentine: To serve as an effective deterrent, there needs to be a realistic prospect of prosecution. How likely do you think the prospect of prosecution is?

Adam Craggs: It is probably unlikely. I say that, because the Criminal Finances Act 2017 brought in some offences to prevent tax evasion and, to my knowledge, to date—five or six years later—there has not been a single prosecution. Certainly, when you talk to large corporate clients and explain this position to them, there is a feeling that the chance of HMRC ever bringing a prosecution under the provision is very slim, so the deterrent effect gets less with every passing year. I do not know the reasons why HMRC has not brought any prosecutions under that provision. It may be lack of resources or it may be for policy reasons. It is a good question: unless prosecutions are brought, the deterrent effect, which is generally the purpose of any sort of criminal sanction, is lessened and weakened.

Isobel d’Inverno: There is also the issue that prosecuting people who are based abroad would be particularly difficult. The whole thing would be enormously complicated, so, as Mr Craggs said, the chance of prosecution probably becomes quite slim. Therefore, it is a bit of an own goal; it is a big stick that is not hitting anyone.

Lydia Challen: My only comment on this is that maybe one difference between this and the criminal finances legislation is that there is a defence under that legislation of having reasonable prevention procedures in place. There is a factual question that has to be debated, which may be one of the reasons why the Revenue has not brought prosecutions there. The design of this measure seems to be aimed at ensuring that the Revenue has to prove as little as possible, so that prosecutions can be more easily brought. That said, obviously they would take up a lot of resource, which may be one reason why there will not be very many.

Q29 Lord Rooker: Could I tease out the point about people operating abroad? Some of the promoters operate offshore and some of the witnesses have pointed out to us concerns about how effective the draft legislation is likely to be against them. HMRC says that it can use international treaties to operate against promoters based overseas. In your view, can this work? What would be the effect on the timescale of attempts to prosecute?

Adam Craggs: In theory it could work. The tools are available to HMRC, just as with any other enforcement agency that has criminal investigation powers. I think that in practice it would slow the process down inordinately. You can just imagine how much time would be spent in obtaining the necessary information from other jurisdictions et cetera. It certainly could work in theory, but there would be practical difficulties.

Lydia Challen: If you wish to prosecute someone who is overseas, our understanding is that you would need to extradite that person. That is obviously possible from certain jurisdictions, although it is challenging and time-consuming. Perhaps one hurdle to that would be that one of the principles for extradition is that there has to be dual criminality: it has to be a criminal offence here and in the jurisdiction where the person is based. As this is a relatively niche procedural offence, it seems to us unlikely that there will be a sufficiently equivalent criminal offence—it does not have to be exactly the same, but it has to be broadly equivalent—to be able to form the dual criminality aspect.

Isobel d’Inverno: There is also, of course, the question of costs. It is not just the amount of time that would be spent but the disproportionate costs that may be incurred out of the public purse in pursuing these cross-border cases. Is this really the best use of the public purse? Will this really bring about a reduction in the selling of the tax avoidance schemes to innocent, albeit naive, taxpayers, which is obviously the desire of HMRC and the profession more widely?

Lord Rooker: Given the negativity of those three answers, why should promoters be able legally to operate offshore in the first place?

Lydia Challen: It is difficult to stop it. That is probably the reason in practical terms.

The Chair: There is no precedent for a promoter being required to be in the UK.

Lord Rooker: I am just the man in the street asking the question. It is okay.

Lydia Challen: Separately, there are proposals that have been in the works about the regulation of the giving of tax advice. If those proposals are taken further, that might be an aspect of those measures.

Isobel d’Inverno: It is such an important point that there is not really any regulation of this area at present, and the victims of some of these tax-avoidance schemes are left very badly off as a result.

Adam Craggs: Certainly in some of the arrangements I have seen, which clients have come to me with, the promoters have deliberately ensured that they are in places like northern Cyprus, so it would be very difficult to extradite them. They are the sort of promotors that I imagine HMRC quite understandably wishes to target.

Q30 The Chair: That is interesting. We have looked at the role of agents in R&D, but we have not really looked at the role of promoters, so that is a new avenue for us to think about. That is very helpful, thank you.

We are aware of concerns that, where a stop notice has been issued and is under appeal, a promotor is still at risk of prosecution. Does that feel right to you? HMRC has apparently said that the legislation covers this. What is your view of its explanation of those circumstances?

Lydia Challen: I understand the revenue to be saying that, if the tribunal orders that the stop notice should cease to have effect, it can order that with retrospective effect. If it ordered that back to the date on which it was issued, HMRC’s argument appears to be that it would effectively cut off the legs of the criminal offence because there is no stop notice. That is likely to be a very debatable legal point. I suspect that it could go to the Supreme Court to work out the right answer. The consultation document very explicitly says that, pending an appeal, you do not have the defence of reasonable excuse to non-compliance with a stop notice.

HMRC’s position seems to be that, until you have appealed, you must comply with the stop notice, because you will not have a reasonable excuse. It is only once you appeal that you will find out whether or not you could have ignored the stop notice in the interim. It is a sort of Schrödinger’s cat situation in which you may or may not be liable for a criminal offence depending on the outcome of the subsequent event. That is fairly undesirable.

It is obviously open to Parliament to legislate for that situation.

Our view, and certainly my personal view, is that if Parliament was to do that, one safeguard would be to ensure that this offence captures only the sort of promotion that we really want to stop: the selling of the schemes. The whole ongoing machinery of existing schemes perhaps should not be within the scope.

Adam Craggs: I would add a practical consideration, which is the length of time it would take if one were to appeal a stop notice. In my experience, it can easily be between 12 and 18 months before you have the hearing, and I regularly wait 12 months after the hearing has concluded for the tribunal’s decision. You could be waiting two and a half years while that process is gone through and remain at risk of a criminal prosecution throughout that period.

The Chair: Thank you. That is helpful.

Lord Palmer of Childs Hill: On that point, it seems strange that we are doing something but talking about how a court of appeal will have to sort it out before we have put the legislation down. It shows a weakness in the proposal.

Lydia Challen: It would certainly be better if it was clear in the legislation if that is the Revenue’s intention.

Q31 Lord Palmer of Childs Hill: I will move on to the disqualification of directors. We have heard that the measure to disqualify directors is to be targeted at controlling minds, rather than the directors themselves. I am not sure what “controlling minds” means, but that is what it talks about. Apparently, some promoters are promoting stooge directors to front their activities. Do you all have a view on this? If so, can we agree what should best be done?

Lydia Challen: We agree that the measures against directors should be targeted at the people who are the controlling minds of these operations and not against the so-called stooge directors.

It is fairly well documented that there are directors of some of these companies who are involved in the supply chain of the schemes. They are recruited via advertising on social media and paid an amount of money to operate effectively as a letterbox. They are probably at worse naive about what they are getting themselves into or are actively misled by the real promotors. It seems to us that these people need protecting under this legislation and perhaps from the effects of this legislation.

Two aspects of the director measures concern us. The first—going back to the criminal offence—is that a director can be prosecuted if a company of which he is a director fails to comply with a stop notice. If the company does that with the consent or the connivance of the director, that seems fine, but it can be as a result of their neglect. The neglect limb is concerning in the context of the potential for stooge directors. That is one aspect of this.

On director disqualification measures, our view is very much that there should be court involvement in any decision to disqualify a director, particularly where there is the potential for stooge directors. There needs to be an assessment of whether those directors are unfit. I suspect that subsequent questions may come to that in more detail.

Lord Palmer of Childs Hill: You talk about disqualifying directors, but these are the controlling minds; they are not directors.

Lydia Challen: Obviously, if you are using the route of director disqualification, you need to have someone who is either a director or shadow director.

Lord Palmer of Childs Hill: So we are talking about shadow directors.

Lydia Challen: I think so, yes. The rules do apply to shadow directors. In that sense, provided someone amounts to a shadow director, they are within the scope of the rules. I think they already do that. I am not sure there is an obvious way to widen them to capture people who are short of being shadow directors but might still be controlling. That would be quite a difficult thing to design.

Isobel d’Inverno: There is also the risk that somebody who is not a shadow director but is one of these stooge directors could be disqualified under these rules when they do not deserve to be. It might prevent them doing other things in the future if, as a teenager, they were enticed into earning an extra 200 quid by acting as a stooge director without being aware of any of the background—well, not as a teenager, because that would be too young, but naively entering into these sorts of arrangements could have far-reaching life-changing consequences for them.

The Chair: How widespread is this use of stooge directors? Do you have any idea?

Lydia Challen: We have no direct evidence, but I am aware of an investigation by someone who has a tax policy consultancy and who looked at a number of companies involved in what were called mini umbrella scheme arrangements. Certainly his article on that suggests that thousands of these companies could have been set up. He has the example of someone they traced who was recruited via social media who was a director of 23 companies. There could be a lot.

Q32 Baroness Valentine: How should HMRC interpret public interest in deciding which cases to take to court to achieve the disqualification of directors? Should the court have discretion on whether to disqualify a director in all cases and, if so, why? I know you have touched on this a bit, but do you have any further insights?

Lydia Challen: Just to pick up on the point that Isobel was making about HMRC’s decision-making as to which cases to take to court, it needs to be mindful of the significant effects of director disqualification on someone’s wider life. It may prevent them becoming a trustee or a governor of a school or qualifying as a solicitor or barrister. If it was a young person who, as Isobel said, had been misled into this, that could have life-changing consequences for them.

The concern we have is that there is a mismatch here between the policy aim and the effects on the individual. The stated policy aim is to choke off the supply of directors to promoters, but the means that are being used are to punish the individual who becomes a director. In the case of companies that have been wound up in the public interest for tax avoidance, the measures as proposed have no discretion on the court as to whether it disqualifies: the court must disqualify. That is a wholly exceptional situation in the regime for company director disqualification.

There are other situations where a court can wind up a company in the public interest that do not have mandatory grounds for director disqualification. We do not really see the difference here, particularly if, as is admitted in the consultation document, part of the problem is people being sucked into this without necessarily knowing what they are doing. It seems to us that the court must have the opportunity to review that at each point, to work out whether the person is unfit to be a director. That is the question: “Are you unfit to be a director?”, not whether you should be punished for what you have done by being disqualified as a director, with all the consequences that brings.

Q33 Lord Rooker: Given the situation, how well placed do you think HMRC is to take on this extra work of additional prosecutions and disqualification applications? We have heard that it is under great pressure. HMRC performance is slipping—if I can put it that way—across the board, so does it have the capacity to do this?

Adam Craggs: My personal view, and I interact with it every day, is no, in a word. It needs to be given far more resources than it has and is incredibly stretched. You can see that in lots of different areas—in particular in the criminal context, where investigations take far more resources than a civil inquiry and cost more. It would certainly need more resources.

Isobel d’Inverno: That is certainly also our experience: that HMRC is really struggling to do what it is supposed to be doing at the moment. Having to undertake these additional areas, which are quite complex, would be challenging. It is debatable whether it is aiming at the right target anyway, because the really bad thing about all this is the mis-selling of these schemes to individuals who do not understand what they are letting themselves in for, particularly individuals on low incomes. The Low Incomes Tax Reform Group has been trying to warn people not to be sucked into these schemes, but this seems to be an area where a cross-departmental approach needs to be adopted, with advertising standards and that kind of thing, so that people on very low incomes cannot be adversely affected.

Q34 The Chair: We just have three short questions, primarily for Mr Craggs, but do feel free to come in if you would like to. The first is on the maximum sentence for tax fraud being doubled, which was in the manifesto. Do you think that is an effective deterrent and will it make a difference?

Adam Craggs: I do not think it is, and I am not convinced that it is necessary. In most of the tax fraud investigations that I deal with, the Revenue generally charges with a common-law offence, such as cheating the public revenue, which has an unlimited fine and could in theory lead to the imposition of a life sentence. In practice, the average custodial sentences that I see are of around four to seven years, so I am not convinced that there is a great need to increase the headline custodial sentence. I do not think I have ever been involved in a case where someone has not been charged with the common-law offence of cheating the public revenue.

Q35 Lord Palmer of Childs Hill: This question is also to Mr Craggs in particular. Is there a realistic prospect of prosecution to deter tax fraud, because HMRC’s actions seem to be somewhat selective? How do you get chosen to be prosecuted against? If there are targets for prosecution, is that helpful or are targets completely impossible to set?

Adam Craggs: If, as we have touched on, the proposals that we are discussing are enacted and on the statute book, it will be quite important for the Revenue to bring prosecutions, because, as we have discussed, if nothing happens for five or six years, as with the Criminal Finances Act, the deterrent effect will weaken. Understandably, with its limited resources it targets the subject of criminal investigations carefully. They normally involve either a very large sum of money or someone who is in the public arena and is well known, as we have seen recently with Bernie Ecclestone and others, because that obviously attracts a huge amount of publicity, which is important to any law enforcement body such as HMRC. If it prosecutes Joe Bloggs at the corner shop for fiddling £100 of VAT, that is not likely to make the national news.

Q36 Baroness Valentine: I have three questions. Two are about whistleblowing and one is slightly wider. We are aware that HMRC operates a whistleblower scheme to encourage and reward whistleblowing about tax fraud. To what extent is that scheme known, and how could it be improved to make a greater contribution to countering tax fraud? As a final sweep-up, are there any other changes to HMRC's strategy in tackling tax fraud that you think could help with deterring it?

Adam Craggs: It is not very well known or understood in this jurisdiction, unlike in the States with the IRS, for example, where it is more formalised. It would certainly assist HMRC if there was greater transparency. This is something to be debated, but perhaps a percentage of any tax that is recovered could, as in the US, be payable to the whistleblower. That would save HMRC an awful lot of time, and it would help with resources, because if it is given information and evidence on a plate, it does not have to spend a huge amount of time and effort investigating. Obviously, it would have to satisfy itself that what is being presented is genuine and can be acted upon, but that would save a lot of heavy lifting, in my view.

Baroness Valentine: There was a follow-up question about any other changes to HMRC’s strategy that could help with deterring tax fraud.

Adam Craggs: More prosecutions, I think. If there were more prosecutions, people could see that there is a real prospect of being held accountable before the criminal courts, which would certainly have a positive deterrent effect.

The Chair: That brings us almost exactly to 5 o’clock, so I thank the witnesses very much for taking the time and trouble to come and talk to us. It is very much appreciated, and I am sorry that there was a slight delay at the beginning.