Treasury Committee

Oral evidence: Budget 2014, HC 1189
Tuesday 8 April 2014

Ordered by the House of Commons to be published on 8 April 2014.

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Members present: Mr Andrew Tyrie (Chair), Mark Garnier, Andrea Leadsom, Mr Andrew Love, Mr Pat McFadden, Jesse Norman, Mr David Ruffley

Questions 443 - 547

Witness[es]: Otto Thoresen, Director General, Association of British Insurers, gave evidence. 

Q443 Chair: Thank you very much for coming to give evidence to us this morning, Mr Thoresen. It has certainly been a lively period for your industry, both in the Budget and subsequently. It is on the subsequently that I want to concentrate for a moment. The FCA has just announced a thoroughgoing review of part of the industry: the long-standing customers issue and legacy issues. Does that have your full support?

              Otto Thoresen: It does, yes.

              Q444 Chair: How bad was the FCA’s blunder?

              Otto Thoresen: Well, if you look at the impact that it had on share prices on that Friday, about 10 days ago, before the clarification was announced in the afternoon, you can see how confused the market was for that period. If you look at the stuff we will spend our time talking about this morning it is all about how a population which is ageing and which needs to save more for its future, can be helped to do that effectively; how we can create an environment in which that can work well. That environment has to be based on trusted relationships between regulators, the industry and Government and a strong reputation for that system. The kind of experience we have had during this period has not been helpful towards that and I think there are certain clear aspects to that which we need to learn from.

              Q445 Chair: That review that you say you support also has the support of this Committee; it could turn out to be extremely important and valuable work. The concern is that it might have been knocked off course by this announcement. Is there a risk of that?

              Otto Thoresen: I do not believe so. I think we have to take the thematic review as one piece of this, and the process which applied around the Thursday and Friday when these events were unfolding, separately. I think that the review as it is now understood, which starts with a discovery process, as the FCA describe it, where there will be an understanding of how the market operates and governance operates, is an important first step and that will lead on to further work. That is entirely appropriate.

              Q446 Chair: Just to be clear, you have said publicly that you are not looking for “heads to roll”. We need clarity that there is no other agenda of trying to remove Martin Wheatley or other senior executives at the FCA.

              Otto Thoresen: There is no other agenda. The letters that I think you have seen that we sent to the Chancellor and the chairman of the FCA talked about the importance of learning lessons from this process. From my point of view, the biggest challenge on the Friday morning when events were unfolding around us was that, unlike any other announcement of this type that has come from the conduct regulator over the last year, we did not have a press release or a report against which we could compare what was being said. Until we did—we got that later in the day, at least in terms of what it was not—it was very difficult to give people confidence.

              Q447 Chair: Well, they are the listing authority and there are some—

              Otto Thoresen: But actually there are many aspects of the way the conduct regulator is operating at the moment that are very positive. What we would not want to see, as a result of what has happened here, is less engagement and consultation with the industry. What we need to see is a regulator that is fair, balanced and objective. It is entirely appropriate that it has a bias towards the consumer—that is the way that you get effective markets for consumers—but it has to be done in the right tone and it has to be dealt with against the parameters I have just described.

              Q448 Chair: One of the things the Committee has made clear on a number of occasions is that it will attempt to scrutinise and ensure high-quality work from the regulator every bit as much as it does from the industry—indeed, that is what is going on at the moment. Perhaps we could just ask one more question on this. Why did you write a letter to the Chancellor as well as to the FCA?

              Otto Thoresen: The view of the CEOs in the industry—there were two aspects to this. One was the desirability of independence around the review: we wanted to ensure that there was an independent process running here. The second point was around how the Government, the industry and the regulator should think more strategically about savings policy going forward. You said yourself—

              Q449 Chair: So the strongest reason was the first: that the initial statement by the FCA did not appear to be creating an independent review. Indeed, that is why after 24 hours of thinking about it, I issued a statement making clear that that review had to be independent and confirmed that with the Committee early the following week.

              Otto Thoresen: Yes.

              Q450 Chair: Turning to the annuities reform, is this shock therapy?

              Otto Thoresen: When it was announced it was certainly a surprise. There are two aspects to this. The first is the macro factors that affect the annuity market; I am talking about low interest rates and increasing longevity. Those aspects create an environment where conventional annuities for relatively young people—people in their early sixties—are challenged on a number of levels. I am quite happy to talk more about that. The second factor is the effectiveness of the market and the way the market works for customers. The FCA themselves published an initial thematic review on the subject quite recently. The industry has been working to try to improve both levels of shopping around for people reaching retirement and levels of switching. The two are different: you may well shop around and then decide to stay with your existing provider, but switching to where you can better deal is an important aspect of trying to improve outcomes for customers. The industry has been working on this over the last three or four years to try to improve that.

              Q451 Chair: It has been in a shocking mess, hasn’t it? That is the truth of it. People have been getting a bad deal for a long time.

              Otto Thoresen: You have to unpack that comment. If interest rates are at current levels and people are living up to 25 or 30 years, then the amount of return you can get for the purchase price of an annuity is going to be low because you are giving a long-term guarantee and you are also, effectively, investing in low-risk assets for 20 to 30 years. How you make sure that within that market context the customer gets the best deal they can—well, we have seen some aspects of the market working quite well, such as where the enhanced annuity providers are brought in, which shows innovation and development; but in other parts of the market, despite all the efforts of the industry as a whole, there still was not enough active switching. It is a complicated subject. We know it is a difficult subject for people—

              Q452 Chair: I was not necessarily apportioning blame with that remark. Some may be due, some may not. I was making the point that where we are is a very unsatisfactory situation indeed for a large number of people, to put it mildly.

              Otto Thoresen: I think the Budget changes create the opportunity for a far more effective market for people retiring.

              Q453 Mark Garnier: Continuing with this annuity point, I did an interview with Radio 5 Live with George Parker from the FT. He said that the collapse of the share price of insurance companies on the announcement of the annuity changes reflected the fact that, actually, the market knew quite a lot about how much consumers were being ripped off by the annuities up to that point. Do you think that was a just comment or an unfair comment?

              Otto Thoresen: There have been many comments made about many aspects of this market, some of which are just and some of which are less just. What you saw was the potential for the removal of a significant part of the market for certain firms, some of whom were specialists in this market and had no other market areas to move into, and some of whom were relying on this business activity as an important part of their business model going forward. I think the extreme nature of the reaction—and I still believe this to be the case—was a tendency to write off the annuity product as part of the solution for the future. I believe the annuity is very much part of the retirement income solutions in the future, but it is going to be used in a different way and used potentially at a different time.

              Q454 Mark Garnier: The stock market has obviously been looking quite closely at the insurance companies, partly because of this, but also again because of the letter from George Osborne on the events in the Daily Telegraph, the insurance review. Do you think that the sharp reaction in the markets to this Telegraph article truly reflects the reaction to the article or was the market just in a very volatile condition with regard to insurance shares and therefore overreacted to the article?

              Otto Thoresen: It has to be both. There is no doubt that with the Budget announcements, which were a genuine surprise to everybody, followed up with the announcement of a charge cap on workplace pensions, which actually was made public the day before this article ran, then this article running the day after, then if you are an institutional investor looking at the sector, and of course representing pension funds and others, it may just be the final thing from your point of view in terms of holding those stocks long term. I think it was the combination of those things, plus the clumsiness of the way the messaging was handled on the day.

              Q455 Mark Garnier: The Telegraph alleges—and in fact a representative of the ABI confirmed this—that you were told about this on Thursday afternoon before the article was written. Did you personally know about this?

              Otto Thoresen: If I can be clear about what we knew: we actually first heard about the plans of the regulator to carry out a thematic review in this area back in February. I think actually it was discussed even earlier—potentially even in December, there was the beginning of talk about something they might do the next year or the year after. In February they said it was in their thinking to include this as part of the business plan for 2014. The way it was described to us was a governance review, so a review of the approach that was taken to governance and oversight of customers of this type. We were told to keep it totally confidential, which we did.

              As we progressed towards the business plan, we heard little—bits and pieces—but then on the afternoon before the Telegraph article appeared, we were told that this part of the business plan was going to be pre-briefed to the Telegraph; we were not told anything more. Then we found ourselves being asked questions by the Telegraph, some about what he might write—could we comment on so-and-so, could we comment on such-and-such? We still had not seen the substance of what the thematic review was going to be—we knew what it might be, from what we had heard earlier—and we had not seen the business plan, because that was not being published until the following Monday.

              Q456 Mark Garnier: So you had no idea that the article was going to be of a price-sensitive nature?

              Otto Thoresen: No. If you look at the article, you will see a comment from the ABI near the end of it, which basically says: “Treating customers fairly and good governance is as important for old customers as it is for new ones and we will work with the regulator on the review.”

              Q457 Mark Garnier: Some of the large investors are considering legal action against the FCA for their cack-handed handling of all this. Do you think they have grounds for legal action?

              Otto Thoresen: That is definitely a question which has to await the outcome of the internal review of the FCA. I have some facts. I know what happened in Gresham Street in our offices, I know our involvement in this, but I do not know any of the other aspects of the process, so I wouldn’t want to comment on that.

              Q458 Mark Garnier: What do you think this has done for the reputation of the insurers? It has brought a certain area into the spotlight again, handled in a less than sympathetic way. Do you think it has damaged the reputation of insurers?

              Otto Thoresen: The answer is it depends on the way the industry is responding to all these challenges, whether it is the new opportunities created by the Budget changes, the workplace pensions cap and the pension reform agenda, or the way that we engage with the regulator on something like this thematic review. If you have an industry that is as socially important as we are, if it has such an important role in supporting customers in their plans for the long-term future, it has to be subject to scrutiny and has to respond positively to that scrutiny.

              As I say, the positive aspects of the way the regulator has been engaging with us over the past 12 months or so show that this can be made to work and made to work for the good of the industry in the medium and long term, but there is no doubt that in the short term it creates a difficult environment.

              Q459 Jesse Norman: To pick up on the point that my colleague Mr Garnier just raised, you must have been very surprised, having had this rather constructive process of engagement with the FCA, that it decided to brief one newspaper with information to which you were not privy in the expectation that you would have some ability to respond.

              Otto Thoresen: I was surprised. There had always been a process of briefing and engagement on previous reviews. Let us take the thematic review on annuities, as it is a subject relevant to the broader discussion today. We actually engaged extremely constructively with the FCA on that piece of work. We had some briefing with the team on their preliminary findings; we had the opportunity to comment on those findings and point out some observations that might be brought into the report. For a specific example, there was a discussion around what the detriment was to an individual who chose not to switch to get the best deal and how that should be estimated. The point we made to them was that the availability of the best rate is affected by the amount of demand for that rate, and if you had a very significant increase in demand for that rate, by definition that rate would be less positive, so it is a matter of trying to factor that into your thinking. The response to that was very good, and we saw some of our comments in discussion reflected in the report. But then you contrast that with the press release: the press release was far more extreme—

              Q460 Jesse Norman: On the annuities?

              Otto Thoresen: On the annuities. It talked about eight out of 10 people not getting the best deal, and so on. There was none of the balance that we had been working on with them on the report. The report itself was far more balanced. We had become used to that kind of approach. The difference in those cases was that we had the report, we had the press release, and we could put our case where we felt there was a case to argue and we had something to respond with. On this one, I do not want to speculate on why they decided to do what they did, but the fact was that we were in a position where we had no basis on which to respond and clarify. That was what the engagement with the FCA through the Friday morning was all about and that was where we concentrated our attention. We were saying, “Please could you get information out there to make that clearer?”

              Q461 Jesse Norman: And by extension, your members would have had no notice of it—they would have been completely blind-sided and unable to prepare any kind a response.

              Otto Thoresen: Absolutely. Having had the engagement the day before, the next point I was alerted to it was mid-morning on the Friday, when I started getting calls from members.

              Q462 Jesse Norman: What is fascinating about what you have just said is that even when the system is working well, what you see as a balanced discussion then becomes slanted in the public presentation of it, but that apparently defective system is not even the one they were following in this case: they were following a system of their own making, which said, “Although we are consulting elsewhere, we do not give any notice to the people concerned. We just put out something.” You can confirm this, but it sounds from what you are saying that the inaccuracy or errors in the initial briefing might have been corrected if they had had a proper discussion with you.

              Otto Thoresen: Well, I was not there, so I do not know. What I was able to do later in the day was to talk about what the actual review appeared to be. Even then, of course, we had not seen the business plan. If the whole thing had been run with the business plan published at the same time as the press coverage—the actual amount in the business plan on this was two or three lines, it was not an extensive piece.

              Q463 Jesse Norman: Is there any precedent for the market reaction to this kind of announcement, or its being briefed out in this way by the regulator to one newspaper?

              Otto Thoresen: I can remember significant market reactions to announcements quite recently. Take the Budget, for example.

              Q464 Jesse Norman: No, I mean regulatory announcements.

              Otto Thoresen: I cannot recall anything like this happening.

              Q465 Jesse Norman: Were any of your members in the process of seeking to raise money from the capital markets at the time this occurred? One can imagine their costs of capital being significantly changed.

              Otto Thoresen: I have no information to answer that.

              Jesse Norman: It would be an interesting further avenue to follow up, because it would greatly strengthen any claims that there had been significant long-term cost to members of this.

              Q466 Chair: Subject to commercial confidentiality, which there may still be in respect of that question, the Committee would appreciate a considered response from you on that point.

              Otto Thoresen: I will be very happy to provide one.

              Q467 Andrea Leadsom: I would like to ask you about the immediacy of some of the changes to annuity arrangements. In particular, George Osborne said during the Budget that some changes will take effect from next week. Cutting the income requirement for flexible draw-down from £20,000 to £12,000; raising the cap draw-down limit from 120% to 150%; increasing the size of the lump-sum small pot fivefold to £10,000; and doubling the total pension savings that someone can take as a lump sum to £30,000—these all came into effect on 27 March, so are effectively already happening. He says that these measures alone amount to a radical change. Your briefing on the Budget indicated that you had some concerns about the impact on people retiring right now who may, in the last days or weeks, have taken out an annuity and whether it might be reversible and so on. Specifically, does the ABI share the Chancellor’s assessment that those changes alone amount to a radical change?

              Otto Thoresen: Yes, they do and they are a big challenge for the industry and for the individual consumers affected. The industry’s response has been to extend cooling-off periods. In a transaction such as this you have a period in which you can change your mind; we have extended those periods.

              Q468 Andrea Leadsom: To what? Can you be specific?

              Otto Thoresen: It varies from company to company, but we hope to make an announcement in the next couple of days on exactly how that will play out.

              Q469 Andrea Leadsom: It will obviously be very important for people in that situation to hear from you, if you are able to give us details now.

              Otto Thoresen: Absolutely, but we have had to work in partnership with HMRC, because there are tax implications of unwinding these types of transactions. HMRC has been working hard since the Budget to clarify the many and various different situations that occur. We hope to clarify in the next 48 hours or so exactly where we stand on that.

              Q470 Andrea Leadsom: You will make a public announcement that people should look out for if they are worried?

              Otto Thoresen: Essentially, the industry will either extend cancellation cooling-off periods or proactively contact every customer to explain to them what their options are and help them deal with circumstances in the best way for them.

              Q471 Andrea Leadsom: What market risks, if any, is the ABI concerned about within the at-retirement market over the next 12 months as a result of these immediate changes?

              Otto Thoresen: The first thing one has to think about is what the population of retirees looks like. There are about 400,000 people retiring through this process every year. The vast majority of those, 60% of those, have small pots—the amounts involved are £30,000 or less. The fact is that for many of those individuals what is being created here is an environment in which they have far more choice. In that sense, it is positive, but, of course, for the industry, when you begin to make these changes to draw-down limits and the rest, the technology and systems implications of those changes are not insignificant.

              This is happening at a time when pension reform is fully under way, there is a review going on in response to the OFT study of workplace pensions last year and there is the work by the FCA—the thematic that caused all the confusion 10 days ago is only one of many thematic reviews and other market studies that are going on, including the market study on annuities. Managing all that change together through this period will be challenging, but I think it is manageable. My concerns are probably more about how we, as a country, can prepare ourselves for the bigger changes to come next year, because, right across the insurance-based defined contribution market and trust-based DC market, which quite often gets forgotten in the general discussion of this but which is just as big a part of the changes as the insurance sector, we have to consider the whole concept of guidance and helping people to make informed decisions when they come to a point where they have a far wider range of choices.

              Q472 Andrea Leadsom: My colleague, David Ruffley, will cover that point with you. I am still keen to look at the immediate impact of the immediate changes. Do you think there is a danger of the mis-selling of pensions or poor advice being given over the next 12 months as firms adjust to the new arrangements?

              Otto Thoresen: The issue is that many people may find themselves as consumers with a large lump sum of money that they were not expecting to have. At that point, they will have to think hard about how they should utilise that cash. Were they to take an annuity, the decision would be made for them, and they would have an income stream for life; we have talked already about some of the challenges of that sector. The important thing is to ensure that people are properly informed about how they should deal with that.

              To be honest though, that is no different, to a certain extent, from any financial transaction. I think the regulator is well aware of the risks and the industry’s desires to ensure that people make the right decisions.

              Q473 Andrea Leadsom: Essentially then, to sum up, not wanting to put words in your mouth, you think that the industry can cope with the immediacy of the changes and that there is no risk of mis-selling or poor advice being given to retiring people in the next 12 months.

              Otto Thoresen: Because there will be more people making those decisions than there would have been otherwise, to say that there is no increase in risk would be an overstatement. But I do not see it as the most significant issue we have to deal with.

              To say that the industry can cope, well, the industry will just have to cope. To a certain extent, one would always have liked more time, but it is clear that, the decision having been made, what we now have to do is to work hard at taking full advantage of it to make an improved retirement market and to increase confidence and commitment to saving.

              Q474 Mr Ruffley: The Treasury has estimated that one in three retiring workers will draw down their pension faster than before this reform was announced. Do you think that that is about right?

              Otto Thoresen: The analysis is best done, if you like, looking at different segments of the population. If you look at people who have, as I say, £30,000 or less in their pot, it would seem that, for most of those people, they will see the opportunity to take the cash and deploy it appropriately, depending on their individual circumstances. They will see that as a positive thing.

              As you move towards the larger retirement pots—I think particularly if someone has £80,000, £100,000 or £150,000—I think you will see more people choose to take an annuity eventually. They may not choose to take an annuity immediately.

              I believe that the model that we will move to will be something that looks like cash for people with relatively small pots; and in the middle territory, an option that allows you to move into quite a simple and more balanced investment vehicle—call it draw-down, for the sake of no other label being available at the moment—which allows you to stay invested but still take income, and at a point when you are older, where you want the certainty that an annuity provides and the price of the guarantee is no longer as onerous, then you move into an annuitised position.

              What I think you will see in the next five to 10 years is lower levels of annuity take-up, but as people move through their retirement process, a recovery and growth again in the annuity market, because its positive aspects continue to be positive—the certainty it gives people and their ability to plan for the future, and they know that they will not run out of money.

              Q475 Mr Ruffley: There will obviously be deleterious consequences if this estimate of a third is wrong: if there is massive pension draw down very early, it could go pear-shaped. At what point do you think the Government should be worried about faster draw down than it currently envisages? Who is responsible? Is it the regulator, you in the industry, the Government or all three of you?

              Otto Thoresen: The consequence of giving people choice and freedom to use their retirement assets in the way they choose is that they will make decisions and we will have to live with the consequences. From that point of view, we have to let the market develop. On what will ensure that more people make good decisions for their own future than not, the guidance process and information that people are equipped with to make the decision and helping them try to understand the consequences of decisions that they are making is part of it. The other part is the industry—I mean that in a broad sense, but the insurance industry will be a big part of this—developing solutions that are better suited to the world that we are in these days and to the new environment that has been created. At the end of that process, you have the potential impact on social care funding and dealing with later years, which is another important part of this whole retirement journey that we are talking about.

              I am sure that Government will continue to monitor how things are developing, but I do not see it necessarily as something to be afraid of. It is more something that we need to understand, keep track of and respond to.

              Q476 Mr Ruffley: Of course. On the annuity market, Barclays estimates that it will shrink £4 billion a year from about £12 billion at the moment and Legal and General estimate that it will shrink by 75%. What is the ABI’s projection?

              Otto Thoresen: We have not actually done one yet. I have read Nigel Wilson’s work at Legal and General, which was a well thought through piece. It is a question of timing. Over the next five years, I think you will see adjustments to the market because of the new opportunity introduced by this quite radical policy. But then I think you will see, as more people come through pension reform and more people save more for their retirement, a different pattern in years to come.

              Q477 Mr Ruffley: As you described earlier. The Chancellor—and indeed you, from what you have said—sees a future for annuities. He has also made it clear that we must ensure that they are still a good-value product. How will the industry ensure that that happens? What measures can you list that will make annuities better value?

              Otto Thoresen: There are factors that one can manage and do something about, and there are factors that one cannot—

              Q478 Mr Ruffley: As an industry, what are they?

              Otto Thoresen: The ones that we cannot do anything about are interest rates and longevity; bigger factors are at work there than we can control. But from our point of view, the critical thing continues to be improving the level of understanding that people have of the consequences of the different decisions open to them. Some of the things that the industry has already done in terms of improving transparency of the range of rates that are offered by all providers in the market, not just those that are operating in the open market or at the top of the market, is part of the ongoing development, as is giving people the right information to allow them to make those comparisons. Making sure that the guidance process helps people understand that, if an annuity is right for them, it is about the structure and shape of that annuity, not just the rate, is an important part of it. And tracking for individual firms the extent to which people are switching—if that is the right thing for them to do or not—is an important piece of analysis that we have to do to keep track of whether the market is working well. And there are other things within the FCA study that will continue that are relevant to this.

              Q479 Mr Ruffley: Isn’t there a risk that, as the market contracts, that will lead to worse pricing and poorer rates?

              Otto Thoresen: A number of factors could lead to rates being poorer, but I do not think it is contraction in the market so much. We are already on a path that was leading to a different annuity market, anyway. The advent of the enhanced annuity providers who effectively underwrite the client at the point of their taking their annuity meant that you were beginning to get a healthier pool of customers in the standard annuity market. If you have a healthier pool of customers, they will live longer. If they live longer, clearly the rate that the market as a whole can offer will become less attractive. One factor certainly could apply: if the only people who take annuities are a particular type of individual, that will shape the annuity pool and the pricing. But I do not think contraction in itself is likely to be the issue.

              One of the challenges of writing annuity business is that you are offering effectively a 30-year guarantee. The Prudential regulator, not surprisingly, wants you to hold solvency capital to support that. Moving to a different segment for a moment, in the bulk annuity market, where there was a market a decade or so ago developing around what we called deferred bulk annuity—this was where a company could buy out its annuity commitments 10 or 15 years ahead of them actually turning into income—the challenge there was that because of longevity improvements, the commitment you were making was so long that the capital you had to hold to back up those promises was so high that it became uneconomic. So if we can move to a point where people annuitise at the right time, you could see an improvement in the way the market operates.

              Mr Ruffley: That is very helpful. Thank you.

              Q480 Mr McFadden: The Budget changes hit the share price of some of your members. Do you think the Chancellor was throwing some of your members a bone by giving the FCA such a public kicking over their cock-up on the review?

              Otto Thoresen: I do not see a link. I would say the surprise that came with the Budget was genuine. The impact in the short term was impact because there was a certain amount of closing off of the annuity solution as being part of the answer. I think that that mood has changed. I think the response of the Chancellor was a genuine response to a particular event that took place 10 days ago, and a thorough review of the conduct regulator in respect of that particular event is important and will now take place.

              Q481 Mr McFadden: On the sort of philosophy of the pension changes, they have been framed as trusting people with their own money at the point of retirement. Do you think there is a philosophical tension between that view and the view that led to auto enrolment, which is a very different view in that the state decided to encourage people to save for their future?

              Otto Thoresen: I don’t, actually. I have always felt, even before the events of the last four weeks, that the concept of auto enrolment and the nudge philosophy was fine when you were trying to get people started on a savings habit. Making it easy for them to continue with that savings habit is very sensible. But there was always going to be a point in the process where the individual had to start to understand that they were building up the assets on which they were going to have to live when they were no longer earning money through work, and they were going to have to then start to think about their own personal situation: about the state of their mortgage; their indebtedness; their ability to go on working in retirement; whether they had dependants; and whether they had elderly dependants. There is a long list of factors you have to start taking into account, which reflect the fact that you have stopped being one of many who all broadly have the same savings need to being a whole lot of individuals who each have a different set of challenges to deal with when you arrive at a retirement decision. So that process of transition from inertia to ownership and personal responsibility was something we were going to have to face up to, anyway. What this has done, though, is to raise the questions that would have come with that transition earlier. That is where I think the challenge is over the next 12 months.

How do we make the guidance system work well, and how do we create an advice system that will be available more economically to more people for those where the guidance system is not enough on its own to get them to the point at which they can make the decisions that they need to take safely?

              Q482 Mr McFadden: May I ask you a little about this guidance advice issue? The Chancellor said in his Budget speech that everyone in a defined contribution scheme “will be offered free, impartial, face-to-face advice”. I would like to take you through these bits to see what you think will work. First, “free”—it will not really be free, will it?

              Otto Thoresen: It will be free to the customer in the sense that they will not have to write a cheque when they are getting it. It will be paid for by the industry—

              Mr McFadden: What does that mean?

              Otto Thoresen: I was going there, don’t worry. It will be paid for by the industry, but—this is why I keep referring to the trust-based schemes, as well as the contract-based schemes, because the contract-based schemes, which are written by insurers are one thing, but trust-based schemes will also have to find the resources to deliver this stuff—it will have to be paid for, and it will be paid for by the customer in the end.

              Q483 Mr McFadden: Have you got any estimates of the cost of this? We took evidence last week from Ros Altmann and the organisation that represents independent financial advisers—I can’t quite remember its name. They said that, at the moment, on the point about buying an annuity, a charge of about 2% of the pot is quite common. As we have heard, that is often for doing a semi-automatic thing of not shopping around, but doing what you were going to do anyway. Given the size of the pots, that is about £680 per customer at the moment, for not very deep advice, if people are just going ahead with their current provider.

              This is a more complex situation: as a customer, you have got this pot of money, you have to consider the tax implications, you might have to consider your debt scenario, as you said a minute ago—if you have an outstanding mortgage—and you possibly have social care costs at some point in your life; and you have got these sometimes quite complex products. If it is £680 in a semi-automatic situation, what will customers ultimately be expected to pay out of their pot, even if it is not writing a cheque?

              Otto Thoresen: Again, I would start to answer that question by segmenting the customers whom we are talking about, because there are two different discussions here. There is a discussion about how, 20 years from now, with pension reform having had a hopefully very successful track record and people having saved over a long period and built up significant pots of money, we deal with it then when there are many, many more people to deal with. There is also the issue that we face in the build-up to next year, when the new regulations come in.

              What we know about the population next year is that it will look quite like the population this year. It will be something of the order of 400,000 people. Many of those people may have guaranteed annuity options within their policies, which are offering pretty generous and pretty strong income at the moment. Many of them might have small pots, and in fact, as I said earlier, around 60% of people have £30,000 or less. For those people, it might be a relatively simple piece of guidance that you can give them, because the better option is fairly obvious.

              When you move into the broader category of people who have a number of different choices to make, how can you deal with that? How will the guidance have to be drawn? I have a spent a lot of time on this, and I did a review in 2007, 2008 on this very subject, which led to the creation of the Money Advice Service, which we were going to call the Money Guidance Service. The question is how you will deliver the guidance, because the Chancellor also said it would be face to face—

              Mr McFadden: I will be coming to that.

              Otto Thoresen: Ah, you are coming to that! Clearly, the cost of delivering this is quite different if it is face to face.

              Q484 Mr McFadden: Ballpark figure—you have given me a lot of information, which is great, but are people looking at £1,000, £2,000 or what?

              Otto Thoresen: I have no data or analysis to argue with what Ros said last week. There was a report published recently that gave some sort of broad estimate, but until you have defined what the guidance is and how far it has to go, it would be wrong to get into trying to estimate what it will cost. The Treasury has a definition for guidance. I have not memorised it, but it is about taking people through the questions they should ask themselves, and saying things like, “People like you might consider x or y.” If we move away from the impartiality point for a minute—we can come back to that—that is almost an extension of customer service. Customer service takes you through quite a lot of that territory already. The other complication, of course, is that guidance at the point of retirement is one thing, but if you opt for something that involves some kind of continued investment, guidance is required in the future, too. It does not just stop.

              Q485 Mr McFadden: Will it be face to face for everyone?

              Otto Thoresen: There is a consultation process running on this. I do not think it would be sensible for it to be face to face for everyone. For some people, the service can be delivered perfectly well over the phone, or using technology in one form or another, to help them get to the point where they know enough that they can start to think about what next. For some people, it will have to be face to face. My approach to this would be to have a system that you go through, and if at the end of it you say, “Actually, I would still like to sit down and talk to somebody,” you have that option, but not for 100%.

              Q486 Mr McFadden: So it is not free; it is not advice, it is guidance; and it may or may not be face to face. I did not have time to ask you about impartial.

              Otto Thoresen: The serious point is that it is a critical component in making the system work safely and well for people.

              Chair: It was an interesting line of questioning. Why don’t you ask your question on “impartial”?

              Q487 Mr McFadden: “Impartial” was the fourth part of the statement. From my point of view, if I am a customer in—let me pluck a company out of the air—Legal & General, I come to them for advice and they are the people who advise me. If I am already their customer, can it really be impartial? Is there not a temptation on their part—I am not picking them out or making any criticism of that company—for them to guide me towards their own products? How do providers give impartial advice? Doesn’t it have to be given by non-providers?

              Otto Thoresen: We are discussing that with our insurance company members currently. My answer to the question would be that I really do believe there are opportunities here for the industry to have a far more positive future in this market than recent months and years have suggested. The important thing is this test. I think the impartiality test is absolutely critical. Whatever way we do it, it has to be demonstrably impartial. I think that is going to be quite a challenging test, but let us see how they can move through it.

              If I could just make one comment—sorry, Chairman—before I finish, I think there is a tendency at the moment in this discussion to have in one’s mind the idea that this happens about a week before you retire. In fact, the retirement code that we have been running within the ABI starts a year before. This process has to start earlier. If you were to deliver it through a third party—whether it is the Money Advice Service, the Pensions Advisory Service or whoever—bringing that together in an orderly way with the service process of dealing with the customer in the run-up to retirement is going to be challenging in itself. There are so many things that we need to discuss here, and we need to get on with it because we do not have long.

              Q488 Mr McFadden: But you are alive to the danger of providers giving customers advice?

              Otto Thoresen: I am very alive to this having to be something that passes the test of public opinion.

              Chair: We have let that run because there were some very interesting replies to those questions, but we are running somewhat short of time and we have some more witnesses to see. Andy Love has some questions.

              Q489 Mr Love: My time is going to be cut short, I can see. Can I just ask you one question? PwC estimated that the cost of providing the service would be £120 million a year. Do you disagree with those figures and how they have been calculated?

              Otto Thoresen: I have not studied them in depth, I have to say. If you look across the size of the challenge, if you are going to deliver every single piece on a face-to-face basis, it would not seem an unreasonable estimate.

              Q490 Mr Love: Talking about the cost being passed on to the customer, we were told last week that that already happens in relation to annuities, where there is a 2% charge, but most customers are not aware of that. Do you think, talking about impartiality, that there is a need for much greater transparency in what happens? How do we achieve that?

              Otto Thoresen: I agree on the transparency point. I was involved in a discussion in this very place with an MP about two or three weeks before the Budget on how we could try to improve transparency in the market. I think that there are things that we will do anyway, because I believe the annuity market will continue to exist. It may be in a different form and it may take a period to recover to its current size, but it is important that we take advantage of these changes to improve transparency there too. I think that there are things that we can do there.

              Q491 Mr Love: You touched on your own review—the Thoresen review—and setting up the Money Guidance Service. We had a long discussion about guidance and advice here last week. Should an independent body be created? Would that overcome the impartiality test? Are there similarities between the previous review that you carried out and where we are at now in terms of pensions?

              Otto Thoresen: The guidance service was there, of course, to cover a far broader range of issues of day-to-day life and to help people to manage their money better. But of course there are aspects of the way that the retirement market works that make delivery of this service challenging anyway. If you have saved with three different companies through your life and you end up at retirement with three different pots of money, do you get three lots of guidance or do you get one lot? Who does it and who doesn’t do it? There are some practical challenges in the way we do this. Of course, if it was delivered through a third party or a utility, it would be far more straightforward.

              I think my members—the insurance companies—would say that they have built strong relationships with our customers and they would want to continue to service those customers well. However, there are a number of ways that we could choose to try to deliver this cost-effectively and consistently, which perhaps would lend yourself to being a bit more radical about the way you think about doing this. We already have a couple of vehicles out there that have been built. The Money Advice Service has had some challenging interrogations from this group and a sub-committee of this group, but the Pensions Advisory Service is also a very strong organisation. There must be ways that we can also use existing capability to get there faster than if we have to build it all from scratch, but I have not had the opportunity yet to get involved in discussions with any of those organisations about how it might work.

              Q492 Mr Love: The sense I get from what you have said is that you are moving away from a new independent body but would seek to discuss the possibilities of existing bodies taking up that challenge.

              Otto Thoresen: There are a number of responses to that. The first one is that the consultation that is running at the moment does not finish until somewhere towards the end of June. Then we have a period where we have to decide what that consultation is telling us. I think we should actually be working with the Treasury now on the different models that might work, so that when the consultation process finishes we can assess how the consultation supports—or otherwise—those models. We need to front-end the work here because the time period between now and next April is very short, and making this system work well and successfully means getting clarity early about what it is that we are going to do and how it is going to work.

              There is a whole other piece that we will not have time to talk about today, which is the advice piece—regulated advice. This change will increase demand for regulated advice around decisions at retirement, and accelerating some of the existing work going on within the FCA about how that advice can be delivered safely and economically using new mechanisms and new technologies is an important part of making this whole system work well for society. I would like to think that we can also take that opportunity to try to move some of this stuff forward faster.

              Q493 Mr Love: One of the interesting responses that we had from independent financial advisers is that they think there are new technologies available that will be able to bring regulated advice, but at a much cheaper rate.

              Do you think that the insurance industry could provide this advice cheaper and more effectively—providing better value for money—than others? And is that the challenge we face, of impartiality versus value for money?

              Otto Thoresen: That is one of the challenges. I think the industry could deliver this; I have no doubt about that. We could deliver this, and deliver it cost-effectively. However, the test we would have to pass is one of genuine and demonstrable impartiality.

              Q494 Mr Love: How could you do that? We heard evidence last week from Ros Altmann, who said that should not even be considered, regardless of whether there is value for money, because of the impartiality that is needed. How do we overcome that and reassure the public?

              Otto Thoresen: There are a number of ways that you could give people more confidence, including through the standards around how it is delivered, the scripts and approach taken to engaging with the customer, the auditing of responses and actions, and collecting statistics on what outcomes are generated—because in the end, the outcomes dictate whether the system is working for the customer or not—but we would have to be very confident that all that transparency and clarity around the process genuinely was convincing of a market that, at the moment, has found it hard to believe that the motives of the industry are as genuine as I believe they are.

              Chair: Thank you very much for giving evidence today. It has been extremely interesting, and we will no doubt be picking up on a number of points when we come to report.

              Otto Thoresen: I will write to you on the issue that we raised quite early on.

              Chair: I would be grateful for that, too.

Examination of Witnesses

Witnesses: Frank Haskew, Head of Tax Faculty, Institute of Chartered Accountants in England and Wales, Patrick Stevens, Tax Policy Director, Chartered Institute of Taxation, and Andrew Courts, Member, ACCA Global Tax Forum, gave evidence.

              Q495 Chair: I will begin by asking you, Mr Stevens, about the Committee’s report on the principles of tax policy, where we set out six principles that we felt should guide tax reform by Governments of whatever hue—simplicity, certainty and clarity were among them. How do you think the Government are doing?

              Patrick Stevens: First, if I can just say, Chair, we in my organisation look on those as being some very good aims to have. They are what we use on a fairly regular basis to ask ourselves those sorts of questions.

              Q496 Chair: Are they becoming established or embedded in the way that you look at Government tax reforms each year? 

              Patrick Stevens: Yes, some more than others, because everybody comes at it from a slightly different place, but I am just saying that it is a very good starting six when looking at these things.

              In answer to your question, my personal view is that some things have improved and some things have got worse. I actually think that they moderately cancel each other out. What has improved, I think, is the method of making law, by which I mean there is now a much longer and more detailed consultation process for detailed tax law. It generally lasts for in excess of a year, where you have a succession of consultations. Not every piece of law does that, of course, because some things are just announced and put straight in a Finance Bill.

              Q497 Chair: It has not meant that the vested interests have had time to coalesce?

              Patrick Stevens: It would be fairer to say that the people who have actually got to use the law in practice have more of an opportunity of saying to Government and HMRC, “This is the result that you will get. Is this what you are intending? If you are trying to do that, why not try doing so-and-so?” I think the general consensus, not just from our profession but from HMRC and the Government generally, is that you end up with materially better law. Everything is relative, but it is better than it would otherwise be.

              Q498 Chair: Where are things getting worse?

              Patrick Stevens: Two main areas: we are seeing a little more retrospection than we have done in the past—

              Chair: We are going to come on to that in a minute.

              Patrick Stevens: Okay. My second area would be that there is, I am sure—definitely—far more taxed by legislation, untaxed by guidance. In other words, various bits of law are very wide in their effect, and when we say, “Well, that could affect all of these situations,” there is a whole lot of guidance from HMRC in order to show in what way the law will be used in practice. Generally, the place that gets you to—the guidance—is perfectly sensible in my view, but it does leave in place the law that is on the statute book, and guidance by its nature can be changed by the tax authority that writes it in the first place. That, I think, is where we are moving from a longer-term certainty in some areas.

              Q499 Chair: Do you want to add anything, Mr Haskew?

              Frank Haskew: I think Patrick has pretty much covered all the points. We obviously speak on a regular basis and Patrick has certainly covered the points. To emphasise, we have a better consultation process I think, but looking at the Treasury Committee’s principles, we do see that we still have very long, hugely lengthy, complicated Finance Acts and, as Patrick said, there is a lot of uncertainty in some of those provisions. We see very widely targeted provisions, which as Patrick mentioned, that had to be cut down by HMRC guidance. We are seeing that at the moment in relation to the salary of partners of limited liability partnerships. Although we have lengthier guidance and consultation process, what we are seeing coming out at the end is pretty much what we have been seeing in previous years and under previous Governments.

              Q500 Chair: So no improvement.

              Frank Haskew: As Patrick said, on the one hand we have some improvements, on the other we still have very long, complicated, uncertain Finance Acts.

              Q501 Chair: So we are not getting tax reform then are we, net?

              Frank Haskew: I was actually in front of this Committee a few years ago with John Whiting when it was stated that the Government had taken out about 100 pages of tax legislation, with the Office of Tax Simplification work, but in fact they had added a 400-page Finance Act at the same time, so the net result was plus 300. Since then we have had the longest Finance Act in history last year, and we had an almost 600-page Bill put in front of us a week ago. If you look at the reality of the size of the Finance Acts, the answer would be that we have not achieved simplification.

              Q502 Chair: What do you think about what this means for small businesses, Mr Courts?

              Andrew Courts: Small businesses’ reaction is that a lot of the legislation that is happening does not affect them. Some of the anti-avoidance legislation would not affect them because they either cannot afford or do not have the funds to follow big schemes.

              Q503 Chair: You wanted to say something about retrospection, Mr Stevens, and I cut you short.

              Patrick Stevens: I will make an opening point and then ask Mr Haskew to talk about it more widely, because he has been thinking through some of the detailed points. Whereas 10 years ago it was very, very unusual for a piece of legislation to be made deliberately retrospective—we remember one in the 1980s and there was the Primarolo statement at the beginning of the 2000s—and it was groundbreaking, now it is a bit more accepted. I am not suggesting that it is a regular event or anything of that sort.

              Q504 Chair: Accepted by whom? By the industry? Do you accept it?

              Patrick Stevens: Accept is probably the wrong word, I apologise. We are less startled than previously when it arises.

              Frank Haskew: It might be helpful if I just run the Committee through some of the history of retrospective legislation, to set the scene for where we are today. This started in earnest back in the 1970s, when we obviously had things such as Rossminster and tax avoidance became very much centre stage. In 1978, there was some retrospective legislation and we then had what was called the Rees doctrine or the Rees rule after Lord Rees. I think that was something that most of us accepted at the time was a reasonable basis: you had to have a clear statement in Parliament about what you were trying to stop; a draft rule had to be produced at the time and subsequently included in the next Finance Act. But I have to say that was aimed at the Chancellor in effect standing up and announcing legislation with effect from that day, rather than necessarily going even further back. The Rees doctrine, I think, was generally accepted as the right way to introduce legislation effective certainly from the date the Chancellor stood up.

              Q505 Chair: Which is not retrospection.

              Frank Haskew: Well, it was the first element, I think, of where subsequently the rules have gone in terms of—

              Chair: Nor, arguably, was Rossminster, which was a question of interpretation. Maybe I should not have said that, because it might take us into a—

              Frank Haskew: I was going to say—

              Q506 Chair: The point that I am making is that these look generically very different from what we are getting now, which is the Chancellor standing up and saying, “We’re going to implement something with retrospective effect.”

              Frank Haskew: Could I just set the scene again? In the ’80s, we had things such as the Padmore case, and we saw in 1987 some legislation introduced to block that decision that did go back to 1970. We have had on the statute books for 25 years or so some legislation that went back 17 years, so we have had precedents.

              In 2004, as Patrick said, Dawn Primarolo made a clear statement in Parliament that the Government were determined to stop employment and NIC tax avoidance schemes. That was another statement that we had then. In 2008, the issue obviously really came to the fore with things such as the Huitson case, and then we had section 58 of the Finance Act 2008, which again was retrospective legislation. The Court of Appeal—

              Q507 Chair: That seems to many reasonably minded people—perhaps I am trying to put myself in that category—to be the starting point for a very different type of retrospection from anything that had preceded it.

              Frank Haskew: I think it had been some of the earlier statements—well, I think Padmore was very much in that mould if I’m honest. I do not think it was that different from the situation that came in in 2008. So we have had precedents.

              Q508 Chair: It dates back to 2004 then, yes.

              Frank Haskew: This has been the culmination of quite a number of changes over the years.

              Q509 Jesse Norman: I would like to turn, if I may, to the question of HMRC’s powers to remove cash from people’s accounts. You have all expressed concerns about this. The Chancellor told us it was simply a modernisation of existing powers. Could one of you explain why it is such an animating point for you?

              Patrick Stevens: First of all, it is very difficult to talk in any detail on the question, because we have not yet got details of what powers there are going to be and what safeguards there are. A very broad statement was made at the time of the Budget, and we are all waiting for the detail to be published. I just wanted to say that first of all.

              The concern that we certainly have is that, however many safeguards there are on the ability simply to take money from somebody’s bank account, it does rely on the authority having worked out how much money should correctly be taken from it in the first place. I am absolutely convinced that HMRC will do all it can and will put in place proper internal safeguards in that respect, but on the basis that we will have legislation that is then surrounded by guidance and internal procedures, it may mean that over a period of time, more vulnerable people particularly—people who are not wealthy, high earners—may become subject to this and that is the area we are most concerned about.

              Q510 Jesse Norman: You have identified two issues. One is inaccuracy and the other is what you might call potentially being regressive. It has been a principle of natural law from Roman times to the current Mayor of London that, as he said this morning, nemo iudex in sua causa—no one should be judge in his own case. Is that a further concern for you?

              Patrick Stevens: It is quite difficult to answer that until we see what the detailed rules will be on what appeals and judgments will be necessary. The real point is whether there will be a necessity to go to an external court—someone outside HMRC. That for me is the big question. If the whole thing takes place within the tax administration it leaves more cause for anxiety than otherwise.

              Q511 Jesse Norman: That is interesting. Mr Haskew, your written evidence suggests that there have been numerous cases of HMRC chasing debts that are not due. How widespread a problem is that?

              Frank Haskew: I think it is quite a widespread problem, and perhaps I could give you two examples. One of our members recently had a letter from HMRC threatening distraint on his assets because he had not paid a tax liability, and the letter he got said his tax liability was nought. HMRC was chasing someone and threatening distraint on a tax that was ostensibly due of nothing. That in a way was a typical example of the sort of things that can happen. We are constantly getting examples. Another last week was an employer who was being threatened with a collector coming round to collect assets to cover the debt. The debt had been paid in full in January, and this was the end of March.

              Q512 Jesse Norman: There are two things we need to distinguish. One is when an enforcement process is launched against someone who owes nothing. The other is when HMRC has failed to calculate the correct tax, even by its own lights, yet they could take money from your account. I am looking for more evidence on the latter type of case. You have made your point well on the first.

              Frank Haskew: In relation to the latter case, it is a difficult area when people persistently do not pay. One can understand in policy terms why HMRC is looking for increased powers, but a member told me only last week that a fundamental tenet of English law and our democratic society is that, unless I have agreed, there must be judicial oversight or a judge must approve taking money out of my bank account. That is a fundamental tenet of the UK’s democratic world in which we would like to live.

              Q513 Jesse Norman: You are coming back to the Mayor’s Roman law point, and rightly so.  What additional safeguards should be put in place to prevent this kind of thing happening? Should everything be judged by court order, or is that too strong a test, given what we are seeing in other countries?

              Frank Haskew: As Patrick said, all we have at the moment is a couple of lines in the Red Book. We are waiting for consultation. Obviously, that consultation will be quite lengthy and detailed, but there will have to be some proper safeguards. At the end of the day, we cannot have HMRC acting as judge and jury. There must be an element of oversight, and I think our preference is some sort of judicial oversight, possibly by way of a tribunal.

              Q514 Chair: Do you think HMRC needs all the powers it has at present, or is there a case for a full review of its powers? That is a general question to any of you.

              Frank Haskew: We have effectively already had that since the merger of HMRC and the Inland Revenue back in 2005. They instituted a review of powers which went on for four years, I think. Indeed, the current proposal to take money out of people’s bank accounts was originally one of the strands of that review of powers work back in 2008 or 2009, but at that time the idea was rejected. We had the idea at least five years ago, and it was rejected at the time.

              Q515 Jesse Norman: Does anyone else want to comment on whether there should be a full review of powers?

              Patrick Stevens: Can I divide the concept of powers into two areas? One of them is what right they have to demand this, make you do that or take money out of your bank account. The other one is their effective right to make law themselves, by what I was describing earlier as wide-ranging legislation narrowed by guidance. What that does is give the Revenue power to make their own guidance and therefore their own law.

              Q516 Jesse Norman: It is a process of allocating discretion to the Revenue which they then use to make what is effectively new law.

              Patrick Stevens: That is right. I am simply saying that there are two types of power one is talking about. We used to be much more exercised by the first one, which you have been homing in on. In the main, the results of all the reviews that have taken place over the past nine years or so are that they have not done that badly. We wait to see where we will get to with taking money from bank accounts, because that is an extension of it. It is the other area that I am more exercised about.

              Q517 Jesse Norman: Right, but just to pick up the point, Mr Haskew, when that review of powers was done at the time of the merger, am I right in saying that there was no reflection given to the issue of shadow law making raised by Mr Stevens? If there were to be a review of powers, one might want to focus specifically on the shadow law-making function that he has described.

              Frank Haskew: That has always been a concern of ours. In that review, the concern was consistently raised that effectively, that was what we were going to see all the time. But it is also important to remember that when that merger happened, Customs and Excise had quite different powers. They were much more about collecting duty, bootlegging and piracy—

              Jesse Norman: Kicking the door down.

              Frank Haskew: Yes. Whereas the Inland Revenue were not in that position, so there was always a danger that in the new organisation, HMRC would be very much based on the old powers of Customs and Excise.

              Q518 Jesse Norman: This is the final question that I want to raise. Excuse me, Chair; it is a rich and interesting topic. Are we actually seeing a cultural change with HMRC whereby the old Excise types are having more of their way, as it were, within the overall organisation?

              Patrick Stevens: Personally, I think it would be unfair to go as far as that.              

              Jesse Norman: It is not necessarily unfair; it is just a description.              

              Patrick Stevens: I am trying to answer by saying that, no, I do not believe that that is so. I think there has been a merging of the cultures, and probably we have ended up with powers which are somewhere between the two.

              Q519 Jesse Norman: That is very helpful. Thank you.

              Chair: When you said some while ago that it was your final question, I was reminded of the guy who said that he was coming to the end of his speech just as he was warming up.

              Jesse Norman: Well, Chair, if witnesses say things of the interest that our witnesses have been saying—

              Chair: If they are of deep interest to us all, we need to follow them up. Absolutely. I know that is what David Ruffley is going to do.

              Q520 Mr Ruffley: Mr Stevens, does the new requirement for money to be put up front in the case of disputes amount to retrospection, in your view? Is it a form of retrospection?

              Patrick Stevens: Oh, yes. I think many people would agree that it is retrospection. They all relate to transactions that took place in earlier years, because we are talking about various cases that are clogging up the courts, if I can put it in those terms. Also, at the time when they entered into the transactions, the law did not say anything about them putting money up front, to use the common parlance. It also brings in, I think most people would agree, a right for HMRC to take that money without effective right of appeal for taxpayers, so it falls into both those areas of things that we do not like.

              Q521 Mr Ruffley: So there are at least two constitutional objections, if one wanted to be pompous about it. Do you think it is proportionate, this means of HMRC proceeding on demanding advance payments?

              Patrick Stevens: My view, and the view of my body, is that the right to demand money up front falls into two distinct legal categories. One of them is the follower cases, the other is the DOTAS cases. I am perfectly happy to talk about them, but if we just remember that. We took the view that in follower cases, the two objections that we are talking about were overruled by the mess that we have got into with these mass-marketed tax avoidance schemes and what that has done to our tax system. So while we found the two points that you are making very unpleasant, we were willing to live with it. We further suggested that that piece of law should be repealed after, say, three years because we could overcome our objections for a period of time while they were mopping up what I would describe as the mess that we have got ourselves into.

              In respect of the DOTAS ones, we felt that that was going too far, because it was using a piece of disclosure law that was never intended for those purposes. We could not see that that was sufficient for it to be justifiable. I am trying to answer your proportionate question.

              Q522 Mr Ruffley: Sure. Are there other jurisdictions and tax authorities elsewhere in the world that use this method?

              Patrick Stevens: There are an awful lot of different jurisdictions doing different things.

              Q523 Mr Ruffley: But where do you think HMRC and Her Majesty’s Government got the idea from? Was it a surprise to you when they introduced it?

              Patrick Stevens: We are about the only country that I am aware of that has got this huge number of tax avoidance cases—many of which probably do not work but which people have not paid tax on—and there are 65,000 cases to get through the courts somehow. So to a large extent, they had to invent it themselves. Did it all come as a complete surprise? Probably not, because it is the sort of thing that we talk about in my profession.

              Q524 Mr Ruffley: Okay. In terms of the revenue that is projected in the Red Book to be raised over the next five years, it is £4 billion through anti-avoidance measures. Do you think that this is a realistic number, having regard to what earlier generations of tax avoidance measures have yielded? Does £4 billion feel right?

              Patrick Stevens: I have not seen any calculation getting to that, to state the fairly obvious. I actually have much less of a problem with that as a number. In other words, I find it credible, compared to some of the other estimates I have seen over the years on what the results of anti-avoidance legislation will be.

              Chair: I apologise for this bell. I actually proposed that we have it turned off for 11.30 and 11.33; I was told that it would cost £140,000 to turn it off in these three rooms alone.

              Mr Ruffley: It is obviously a PFI contract. We need to raise more tax. Please continue, Mr Stevens. There is an assumption when getting to this £4 billion figure that the win rate will be equivalent to HMRC winning 80% of disputed avoidance cases. Again, is that intuitively a reasonable assumption?

              Patrick Stevens: Over the past 18 months to two years that is about the right percentage of what they have won. I think it would be fair to say that the courts are doing their best to produce the 80%.

              Q525 Mr Ruffley: With the accelerated payments policy, I see this was a four-week consultation, from 24 January to 24 February this year. Is that long enough for the industry to make their representations and think through the consequences of this Government appraisal?

              Frank Haskew: The generally accepted period of consultation is 12 weeks. But there is this problem with anti-avoidance measures: the time gets telescoped. That is exactly what we are seeing here. It is quite a controversial measure. Just picking up and amplifying the points Patrick raised earlier, we will see it extended to the general anti-avoidance rule as well, so it is existing schemes, DOTA schemes and it is also GAAR schemes. Given that GAAR came in only last year and we are still finding our feet with it, that is quite a significant extension of the GAAR itself and potentially introduces quite a lot of uncertainty as to how these new rules on accelerated payments will be introduced. When you add all that up, it is quite a substantial consultation in terms of whether these provisions are appropriate for all of those different types of avoidance. Four weeks is not a long time.

              Mr Ruffley: Just going back to Mr Stevens for my final question: in your evidence to the Committee you said that the anti-avoidance measures that are in the Budget will weaken the disclosure of tax avoidance schemes, the DOTAS provisions. Could you just say how the weakening of DOTAS will work?

              Patrick Stevens: DOTAS has been going since 2004 and has generally been working really quite well; I believe everyone would agree, including HMRC. People have been disclosing things that they properly should, other than possibly a few boutique organisations who are not a good idea anyway. Generally people have been erring on the safe side and saying, “I am not sure this falls into the DOTAS regime, but I’ll disclose it. No problem. We are not trying to keep anything secret, so we might as well do so and be on the safe side.”

              The Revenue have used it, perfectly properly, to choose which bits they wanted and introduced anti-avoidance legislation at a subsequent Finance Bill, and so it has worked. The fact that it will now be used as an indicator of when you have to pay tax changes the whole concept of what it is about. People who enter tax avoidance schemes—not that I think there will nearly as many in the future as there may have been in the past—will look at DOTAS not only to see whether it should be disclosed but also to see how it will affect their cash flow, if I may put it in those terms. It will change the nature of what has been a fairly successful piece of legislation.

              Q526 Mr Ruffley: What do HMRC say when you make that point?

              Patrick Stevens: Certainly on a face-to-face basis they wholly accepted the point that I have just made.

              Q527 Chair: We have heard a number of interesting points in the last few minutes, one of which is the question of powers. We need to think about powers from a number of angles. Would it be too burdensome to ask you to set out your views in a little more detail on that, Mr Stevens, and possibly Mr Haskew as well, when you have had more time to think about it and send us written evidence?

              Patrick Stevens: Subsequently, yes.

              Q528 Andrea Leadsom: I think, Mr Stevens, you suggested that 65,000 current avoidance cases is uniquely high. Is that what you were suggesting?

              Patrick Stevens: Unless my colleague is going to argue with me, I am not aware of any other country that has this concept of something that is claimed to be within the law—there are various ways of not paying tax, if you see what I mean—but an avoidance case is something that claims to be within the law and you don’t pay tax on it on the basis that, because our law happens to be that, you can self-assess and claim that that is so. Then, in order to overturn it, each case needs to go through the courts.

              Q529 Andrea Leadsom: Why is it uniquely high? Is it poor legislation in the past or the lack of a general anti-avoidance rule?

              Q530 Chair: Is it providing opportunities or complexity?

              Andrea Leadsom: Yes, is it complexity?

              Patrick Stevens: I will throw in one, if I may: the nature of English law, not British law, if you see what I mean. Because we are absolutely based on the words of the legislation—that is the way that our judicial system has built up over hundreds of years—that gives, I would say, a unique ability for people to get through precise wording even though for most people it would be clear that that was not what the law intended in the first place.

              When, a year or two ago, they were trying to write the GAAR, for most people on the street that would seem simple: you write a law that says it is what we intend it to be, rather than what it says, but you cannot do that, because that goes against the whole way in which English law works. I am simply saying that our legal system has given us this strange animal called the tax avoidance scheme and therefore we need to invent our own way of dealing with it.

              Q531 Chair: Have you got anything to add on this, Mr Courts? I noticed that you were looking up to intervene a moment ago but were not called.

              Andrew Courts: It was just in relation to one of Mr Ruffley’s comments on the length of time for consultation. It is not just the length of time, but also the timing of that consultation. The consultation was given in January, which is the busiest time for practitioners and also corporate reporting. The ACCA had more comments on that—even though it was a very busy time for members—than any other consultation, so it did raise quite a few eyebrows—

              Mr Ruffley: I am sure that it was entirely coincidental.

              Q532 Andrea Leadsom: I will leave that there. That is a very interesting, fundamental point and perhaps something that we can come back to. We could talk for hours about the solution if we have a unique problem with encouraging anti-avoidance schemes, which is something that has been very much in our politics. The public’s resentment, and quite rightly so, of people trying to avoid paying fair taxes has become a huge political as well as a regulatory matter. It would be interesting to know if there was anything further that you wanted to reflect on.

              Completely changing the subject, the question I want to ask you, Mr Courts, is about the annual investment allowance. It will now double to £500,000 until December 2015 and the Government have said that that will particularly benefit small and medium-sized firms. Do you think that that is right?

              Andrew Courts: The annual investment allowance is great for small business; it has benefited many of my clients and small businesses. I have seen that increasing it to £500,000 benefits one of my clients in particular: they are a very small bus operator who, because of legislation, now have to look at renewing their whole bus fleet. They are now able to make tax breaks on the fact of renewing their fleet, which is very helpful. Effectively, they can probably get a new bus.

              Q533 Andrea Leadsom: Do you have other examples of who would benefit from this allowance? The jump from £250,000 to £500,000 is quite big and at quite a high level.

              Andrew Courts: Yes. Not too many small and micro businesses, unless they are capital-intensive, will benefit from the hike from £250,000 to £500,000. The £250,000 was adequate for most small businesses. I just had a particular client who, under a particular set of legislation, can benefit.

              Q534 Andrea Leadsom: Mr Stevens, the annual investment allowance has been changed five times in the past seven years. Do you think that that potentially discourages business investment?

              Patrick Stevens: I certainly think that the constant change and moving around leads to uncertainty. And I know we all say it, but it genuinely does discourage business from doing things. It is not simply that the caps are there and change from year to year.

I actually sat in a technical lecture on the transitional provisions as you go from year to year and, over five years where it has all been changing, almost any date gives you different levels because of the transition. It was the most complicated set of calculations I had seen for quite some time. It mainly affects small and medium-sized businesses and smaller practitioners—it just did not seem to be a terribly sensible way of carrying on.

              Q535 Andrea Leadsom: So the actual calculation becomes more complicated the more frequently you change the number.

              Patrick Stevens: It does.

              Andrew Courts: If I can answer, because it is very much in my field. Clients will see the headline on the news and then have to ask how it relates to them. Before we can give them a straight answer, we have to sit down and work out their year- end, what they are going to spend, and follow it all the way through. So when it went from £50,000 to £25,000 to £250,000, in one year they could have three different rates of allowance and they are not going to get just one figure. The rate of allowance that they would get would also depend on when they purchased the item. That meant that there was quite a lot of uncertainty during that period.

              Q536 Andrea Leadsom: And presumably there were also incentives to move purchasing around, if possible.

              Andrew Courts: For the change from £50,000 to £25,000 to £250,000, there was not really much chance of that because the legislation said £25,000 and then we had quite a surprise announcement that it was increasing to £250,000. There was therefore not really the chance for people to delay to that point in time at which it came in.

              Q537 Andrea Leadsom: Presumably, though, I can image that making business planning very difficult.

              Andrew Courts: It does, yes.

              Q538 Andrea Leadsom: Do you think, first, that it should be widened—qualifying investments are currently in plant and machinery only—and secondly, that perhaps a lower investment allowance that was more consistent over a longer period of time would be a better solution?

              Andrew Courts: To have a fixed figure over a long period of time would be very welcome, because we could all plan to that. However, the fiscal stimulus required by the Government—I would assume—to increase it has definitely helped. It has definitely helped some of my clients at the moment because they have been prepared to invest now, whereas they might have put off the investment for a while.

              Q539 Andrea Leadsom: So on balance, you thank that the fact that it was increased has had the desired effect in terms of people on the ground being incentivised to buy capital and equipment.

              Andrew Courts: Absolutely yes, definitely. But when it decreased to £25,000, people were put off investing.

              Q540 Andrea Leadsom: Of course. Do you think that the definition of what is allowable should be expended?

              Andrew Courts: That would be useful.

              Q541 Andrea Leadsom: What would you include?

              Andrew Courts: You have got plant and machinery, but we have recently lost all the industrial buildings allowances. If something could be brought in around some of those things, that would help, because property is one of the most expensive things a business will invest in and there is currently very little investment incentive on industrial plant allowances.

              Q542 Andrea Leadsom: Can I ask whether you have a specific view on farm and agricultural buildings? Is sufficient investment allowance provided for agriculture in the UK?

              Andrew Courts: I think that has all gone with the industrial buildings allowance now.

              Frank Haskew: Agricultural buildings allowances went when industrial buildings allowances went, so there are not any specific reliefs in that sector anymore.

              Q543 Andrea Leadsom: I only asked because of a constituency matter. The National Farmers Union has been saying that a whole generation of farmers are unable to invest in buildings, whether for dairy farming, grain stores or whatever, because they get no allowances. Would it be right that there is no move towards supporting that?

              All witnesses: indicated assent.

              Mr Ruffley: I had exactly the same representation from the Bury St Edmunds branch of the NFU on that very point last Friday. They were talking about the Budget and why the regime did not favour them.

              Chair: If anybody else would like to chip in with the odd constituency concern, please do so—it is fine.

              Andrea Leadsom: Thank you, Chair. If I may continue—

              Chair: You may.

              Q544 Andrea Leadsom: That was a slight aside, as you know. Mr Stevens and Mr Haskew, is there anything further that you want to add about either the level and continuity, and the importance thereof, of the investment allowance, or whether it is appropriately wide?

              Frank Haskew: I think that the policy actually goes to the heart of the difficulty in formulating tax policy. Going back to your six principles, there is this tension between supporting growth and competitiveness, which is one of your principles, and also certainty and stability. I am afraid tax policy is always trying to balance these different policy objectives, and we are seeing it at the moment, I think, in the annual investment allowance; so it is difficult when you are looking to foster growth and trying to reconcile those. I think we would say that it would be better to at least have some stability because, as we have said already—and indeed it is one of the key messages we always get from businesses—they want certainty more than anything else, so they know where they stand and they know where to invest.

              Going back to your examples with your farmers, if the certainty is you do not actually have any investment allowances, potentially that is quite dangerous as well, so it is a difficult balancing act.

              Patrick Stevens: I agree with my colleagues and I have nothing useful to add.

              Andrea Leadsom: Okay, thank you.

              Q545 Chair: Perhaps I could just read out the Committee’s conclusions from the Budget two years ago, on retrospection: “We recommend that the Government restrict its use of retrospective legislation to wholly exceptional circumstances, which should be narrow and clearly-defined. The Treasury should set these out as soon as possible for consultation, along with an explanation of how gradual further extension of retrospection can be prevented. Any future retrospective tax measure must be justified against the agreed criteria: such justification must include clear explanatory statements to Parliament by the responsible Minister and should invite views from relevant professional bodies.” Do you feel that the spirit of that recommendation has been abided by, Mr Stevens?

              Patrick Stevens: Well, for a start, I would wholly endorse the words that you have just said. I think we all agreed with it then, and I would certainly agree with it now. I did point out earlier that I felt that the “follower cases” legislation fell into the “wholly exceptional” category, just to pick up on the words you were saying, but many of the other words that you have just read out describing how and why, and putting it into context, I am not sure we have wholly achieved.

              Q546 Chair: That is pretty cagey language, if I may say so: “not sure we have wholly achieved”—but we have got it.

              Frank Haskew: “Wholly exceptional”: I think that what the Treasury Committee set out two years ago were very clear principles, which go, really, back to the Rees statement in terms of the ethos of what it was trying to achieve. In a way, I think, two years ago you restated what ought to have been a position which we have had since the ’70s. Therefore I think we wholly welcomed it at the time. In terms of where we are today, I think I would struggle to say that the Government is abiding by those Treasury Committee recommendations.

              Q547 Chair: Is there anything you want to add, Mr Courts?

              Andrew Courts: No. I like the result that was read out just now. I think that is a good thing. “Wholly exceptional” I think is where it should be—if there is something that is really exceptional. So that is it.

              Chair: As for the GAAR, that is something the Committee also expressed views on and we might return to on another day.

              Thank you very much for coming to give evidence to us this morning. It is still this morning. I promised a number of people that we would finish this morning rather than this afternoon and that has been achieved. Thank you very much indeed. [Member’s name (Chair)]: [Question text]

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