Joint Committee on Tax Simplification Bills Minutes of Evidence



APPENDIX 2

MEMORANDUM SUBMITTED BY THE LAW SOCIETY CORPORATION TAX SUB-COMMITTEE

  1.  We welcome the publication of the Capital Allowances Bill. We believe that it does represent a significant improvement upon the existing legislation.

  2.  However, as we commented in our previous comments of 2 October 2000 (Annex), a review of the Bill highlights the complexity of the policy behind the legislation. We believe that there should be a wider review of the capital allowances code with a view to simplifying the underlying policy.

  3.  We believe that there could have been more policy simplification and a greater degree of clarification of parts of the existing legislation which cause difficulty in practice. Examples are the points we raised in our comments of 2 October 2000 on Clause 2.1.2 (now Clause 12), Clause 8.4.2 (now Clause 480) and Clause 12.6.2 (now Clause 572).

  4.  We remain unclear why it was not possible to incorporate the parts of Schedule 12 to the Finance Act 1997 relating to capital allowances. It would have been preferable to incorporate these provisions in the Capital Allowances Bill so that the Bill dealt comprehensively with capital allowances.

  5.  On a minor point, we continue to believe that in Clause 268(7) of the Capital Allowances Bill the word "were" should be "included" so that account is also taken of any previous disposal values of the beneficiary, as well as those of the deceased.

  6.  We consider that there are a number of cases where greater signposting would have been helpful. Examples are the comments we made on 2 October in relation to Clause 2.5.7 (now Clause 58), Clause 2.14.25 (now Clause 196) and Clause 3.12.2 (now Clause 357). It would also have been helpful in Clauses 208 and 211 to have explained that the disposal value is calculated in accordance with item 7 of the table in Clause 61(2).

  7.  In summary, we welcome the publication of the Capital Allowances Bill. We hope that in future re-written Bills there will be a greater degree of review of the underlying policy in order to simplify and clarify where possible.

24 January 2001

ANNEX

COMMENTS ON THE DRAFT CAPITAL ALLOWANCES BILL

  We are very pleased to have the opportunity to comment on the draft Capital Allowances Bill published by the Tax Law Re-Write project in July 2000. We welcome the publication of this Bill, and believe that it does represent a significant improvement upon the existing legislation. However, a review of the draft Capital Allowances Bill highlights the complexity of the policy behind the legislation and we believe that there should be a wider review of the Capital Allowances code with a view to simplifying the underlying policy.

  In our comments on Exposure Draft No 3, we commented that far too much use of deeming provisions was made in the rewrite. In our view, this remains the case.

  We have set out our detailed comments by reference to the numbering of the Clauses in the draft Bill:

Clause 2.1.2

  Clause 2.1.2 follows section 83(2) of the Capital Allowances Act 1990 in referring to expenditure incurred for the purposes of a qualifying activity "by a person about to carry on" the activity. The use of the word "about" could imply that the expenditure is incurred immediately before the qualifying activity is carried on. So far as we are aware, the Inland Revenue have not applied the legislation so restrictively in practice. We consider that it would be clearer, and in line with existing practice, to refer to "expenditure incurred for the purposes of a qualifying activity by a person before he carries on the activity".

Clause 2.2.4(2)

  We did not think it very helpful to define the management of an investment company as "consists of pursuing those purposes expenditure on which would be treated as expenses of management within section 75 of ICTA".

Clause 2.5.7

  It would be helpful to add a cross-reference to the special rules for finance leasing contained in Clause 2.17.9.

  In Clause 2.5.7(7) it would be helpful to explain the circumstances in which only some of the balance is to be allocated to a pool.

Clause 2.6.1

  It would be helpful to add a signpost to the special rules for finance leasing contained in Clause 2.17.8.

Clause 2.8.5

  We consider that Clause 2.8.5(1) should have a counterpart to Clause 2.16.1(c). We believe that this is the effect of the cross-reference to section 80 in section 34(5) of the Capital Allowances Act 1990.

Clause 2.10.12

  We find the reference to the "main pool for a qualifying activity consisting of special leasing" very confusing. It appears to suggest to the reader that all assets used for special leasing are pooled together. In fact this is not the case since Clause 2.2.5(2) makes it clear that each special leasing of plant or machinery is a separate qualifying activity. It would be less confusing to refer to a special leasing single asset pool.

  The word "to" before "allocated" in the first line of Clause 2.10.12(2)(b) is surplus and should be deleted.

Clause 2.10.13

  See the comment in relation to the previous clause and the reference to the main pool for a qualifying activity consisting of special leasing.

Clause 2.11.3

  We refer to the previous comments on the use of the term "the main pool for a qualifying activity consisting of special leasing".

Clause 2.12.6

  The reference in the first line to "designated purpose" should be to "designated period".

Clause 2.13.3

  Clause 2.13.3(1) is expressed to be subject to sub-sections (5) and (6). There is in fact no sub-section (6).

Clause 2.13.7

  In Clause 2.13.7(3)(a), we think that the reference to the "relevant abandonment cost for the chargeable period in which the former trader ceased to carry the ring-fence trade" should be to the "relevant abandonment cost for the post cessation period".

Clause 2.14.14

  We consider that it should be made clearer that Clause 2.14.14(4) applies also where there is more than one past owner in relation to which a disposal event has occurred.

Clause 2.14.25

  A cross-reference should be added to the general limitation on disposal value contained in Clause 2.5.11.

Clause 2.14.28

  The references to item 4 of the table in Clause 2.14.28(1) and (2) should be to item 5 in each case.

Clause 2.15.4

  Clause 2.15.4(2)(a) requires a disposal value to be brought into account for the relevant chargeable period in relation to the single asset pool but does not state the amount of the disposal value. Provision should be added to deal with the amount of the disposal value.

Clause 2.16.3

  Similarly, Clause 2.16.3(4) requires a person to bring disposal value into account for the chargeable period in which the partial depreciation subsidy is paid but does not state the amount of the disposal value. This should be stated.

Clause 2.16.4

  Although there does not appear to be a substantive difference between Clause 2.16.4(4) and Clause 2.15.3(5), the wording is different. We are unclear why the same wording has not been used in both sub-clauses.

Clause 2.20.6

  The word "were" in the penultimate line of Clause 2.20.6(8) should be "included" so that account is also taken of any previous disposal values of the beneficiary, as well as those of the deceased.

Clause 3.5.2

  In relation to Clause 3.5.2(4), we refer to the comment which we made on Clause 2.1.2, which is equally relevant here.

Clause 3.8.1

  The beginning of this Clause should read "for the purposes . . .".

Clause 3.9.2

  In sub-clause 3.9.2(2), the word "to" is missing after the words "in relation".

Clause 3.11.1

  Clause 3.11.1(3) provides that in relation to qualifying enterprise zone expenditure on commercial buildings, 3.11.1(1) has effect as if the reference to the profits of a person's trade were a reference to the profits or gains of a person's profession or vocation. We consider that it should provide that sub-section 3.11.1(1) has effect as if the reference to the profits of a person's trade included a reference to the profits or gains of a person's profession or vocation. Both traders and professionals may incur qualifying enterprise zone expenditure.

Clause 3.12.2

  We consider that this Clause should be signposted earlier in the main provisions dealing with qualifying expenditure and proceeds from balancing events.

Clause 6.3.4

  We consider that Clause 6.3.4(2)(b) should provide that if the disposal event occurs before the person begins to carry on the relevant trade, the chargeable period is the first chargeable period in which the person carries on the trade. The trade may, of course, be carried on in more than one chargeable period.

Clause 8.2.2

  In relation to Clause 8.2.2(2), we refer to our comment on Clause 2.1.2, which is equally relevant here.

Clause 8.3.2

  Clause 8.3.2(5) should refer to the final chargeable period for a pool containing qualifying trade expenditure. Qualifying non-trade expenditure is dealt with in the next sub-clause.

Clause 8.3.3

  The words "the amount of" should be deleted in the second line of Clause 8.3.3(5).

Clause 8.3.4

  The cross-reference in Clause 8.3.4(2)(a) should be to sub-section (1)(a) and the cross-reference in Clause 8.3.4(2)(b) should be to sub-section (1)(b).

Clause 8.3.5

  This Clause refers to paragraph 11 of Schedule 12 to the Finance Act 1997. We consider that, in order that the Capital Allowances Bill should deal comprehensively with capital allowances, the Capital Allowance provisions in Schedule 12 to the Finance Act 1997 should be brought within the Bill.

Clause 8.3.6

  For clarity, Clause 8.3.6(2) should refer to the total amount of the disposal values to be brought into account "in respect of sales of parts of those patent rights".

Clause 8.4.2

  We note that Clause 8.4.2 proceeds on the basis that section 145 of the Capital Allowances Act 1990 does not apply to excess capital allowances in respect of non-trading patents. We note the explanation given in paragraph 4.863 of the Commentary on the Draft Bill. This seems to be borne out by the legislative history of these provisions and, in particular, the relevant provisions of the Income Tax Act 1952. As a matter of policy, however, we can see no reason why the rules in Section 145 CAA 1990 should not apply to excess capital allowances in respect of non-trading patents. We therefore consider that Clause 8.4.2 should be extended so as to give equivalent relief to that given by Section 145 CAA 1990.

Clause 12.5.7

  We believe that Clause 12.5.7(1) is more restrictive than the equivalent provisions of the Capital Allowances Act 1990. This is because Clause 12.5.7(1) only allows that parties to a sale to elect for it to be treated as being for the lower of market value and the specified consideration if the sale would otherwise be treated as being at market value under section 12.5.5(2) or 12.6.3(3). Section 12.5.5(2) only applies to a sale of property that is not in fact at market value. We believe that the effect of section 158(1) of the Capital Allowances Act 1990 is that an election can be made even where property is in fact sold at market value. Clause 12.5.7 should be amended so that an election can be made where the sale is actually at market value.

Clause 12.6.2

  Although we recognise that this goes beyond the existing law, we consider that it would be helpful to clarify whether references to capital expenditure and capital sums include non-monetary consideration such as the issue of shares. It is not uncommon for companies to agree to acquire capital assets in consideration of the issue of their shares. The question then arises whether the issue of the shares amounts to capital expenditure and, in the case of fixtures, a capital sum, so that capital allowances can be given.


 
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