TUESDAY 14 JANUARY 2003
Blackwell, L. Mr Kenneth Clarke, in the Chair
Memorandum submitted by Tax Law Rewrite Project
Examination of Witnesses
MR PETER MICHAEL CBE, Project Director, MR PETER KNOWLES, Head of Drafting Team, MS JACKIE CRAWFORD, Member of Drafting Team, MRS CHERYL SCOTT, Head of lead Rewrite Team, MRS WENDY SAMPSON, Member of lead Rewrite Team, MRS ALISON BERTLIN, Member of Drafting Team, MISS CLAIRE DILLION, Member of Drafting Team, and MRS JENNY MANSON, Member of Rewrite Team, examined.
(Mr Michael) Certainly, Chairman. Perhaps I should start by introducing ourselves. As you say, I am the Project Director for the rewrite and I hope to be able to assist the Committee in particular with any points or questions on either the project generally or the process of consultation. On my left are Peter Knowles and Jackie Crawford who are both members of the Office of Parliamentary Counsel and are on loan to the project. Peter Knowles is Head of the Drafting Team and Jackie Crawford is one of its members. On my right are Cheryl Scott and Wendy Sampson. Cheryl Scott is Leader of the Rewrite Team which for the most part has been producing the instructions for the Drafting Team on the Bill. Wendy Sampson is a tax professional whom we recruited from the private sector on a fixed term contract and is one of the members of Cheryl's team. Perhaps I could add at this point, Chairman, with your agreement, that if necessary I propose to call on some other members of the project to assist the Committee if that becomes necessary. In that event perhaps those concerned could introduce themselves as and when they appear. To come back to your initial point about the project itself, the Tax Law Rewrite Project consists of round about 40 people: a Drafting Team, headed up at present by Peter Knowles, and four Rewrite Teams, each headed up by a team leader. The Rewrite Teams research the existing legislation, the concessions, the practices and other relevant material, and prepare the instructions for the Drafting Team who are then responsible for drafting the new legislation. Within the Rewrite Teams we also have some people who are recruited from the private sector, and we also have a legal consultant on secondment from our Solicitors Office, so we are quite a diverse range of people.
(Mrs Scott) We have taken the approach that we have in the interests of user friendliness of the legislation. When we looked at the existing legislation in ICTA it was apparent that it is not at all easy to find one's way around, particularly if one is a first time user. A first time user might, when trying to decide whether their earnings are taxable or whether their employment is within the scope of the Taxes Act, think to look in the table of contents for mentions of employment or wages or earnings or some other word which is in current usage. The first chapter that appears in the table of contents for ICTA to contain a phrase connected with employment is Chapter 2 of Part 5, which is concerned with benefits chargeable on directors and employees earning £8,500 or more. This is obviously not the right starting point. The taxpayer first needs to identify whether or not they are being charged tax for the year in question. This is in section 19 of ICTA and that bears the unhelpful heading "Schedule E", meaning nothing to anybody from outside the circle of tax professionals. That section in itself refers to tax on emoluments. This is an antiquated term, to say the least, as this Committee's predecessor, when considering the Capital Allowances Act, mentioned in passing. For my own part I did not come across the term until I started training as a tax inspector. I suspect I was not unrepresentative of the general population in being ignorant of the term before then. Therefore, even if the lucky first time user hits upon section 19 as being relevant, that section gives no clues as to where to find some explanation of "emoluments". It merely says right at the end, "Part 5 contains some more provisions". The user might go back to the table of contents to find section 131 defining "emoluments", but this section contains no clue as to how the first chapter that was identified in the index, the one about employees earning £8,500 or more, fits into things. Nor does it mention that there are a number of other benefits that are treated as emoluments, and so a taxpayer may be surprised to learn, for example, that there is a charge to tax on providing living accommodation. The existence of exemptions from the charge to tax is also not trailed in advance in the current legislation, although there is a clue to the existence of deductions in section 131, but there is no signpost as to where you will find the rules. In summary, a first time user has to flip back and forward between the table of contents and the provisions themselves and he stands in fairly obvious need of special tax advice on where to find all the relevant provisions of ICTA and subsequent Finance Acts. The Income Tax (Earnings and Pensions) Bill makes everything plainer. For example, Clause 3 shows exactly how the various parts deal with the charge to tax on employment income, the definition of "earnings", amounts to be treated as earnings, exemptions, deductions and share-related income. From a very early point the taxpayer is made aware of the various matters that may be relevant in determining the amount charged to tax in respect of employment income. Chapters 2 and 3 of Part 2 explain how these components fit together and provide signposts for the reader to other provisions in other parts that are relevant. Clause 7 in particular tells the reader exactly where to look to find out about the various elements of employment that would be charged to tax. Clause 8 alerts the reader to the possibility of exemptions in Part 4 and Clauses 11 and 12 explain how to deal with deductions as well as reminding the reader where they can be found. In the event that the taxpayer has share-related remuneration, this is dealt with all in one place rather than scattered amongst provisions in ICTA, its Schedules and in subsequent Finance Acts. Tax remains a complex subject but that does not mean it cannot be presented in a coherent and user-friendly fashion, and we on the Project Team have attempted to do so in this Bill.
(Mrs Scott) The word "emoluments" is used in the Taxes Acts and in section 131 of ICTA there is an explanation of what the term includes. It is not an exhaustive definition and it has been elaborated on by case law over the years to encompass things which may be provided not in money but that have money's worth in the hands of the employee. All of this case law has built up over the years. The case of Tenant v Smith was in 1892. That is one of the early cases which led to our current understanding of "emoluments" and we have brought all of this together in defining "earnings" for the purposes of this Bill. We have retained the link to all that case law on emoluments to make sure that we do not lose the benefit of that body of case law by saying in the clause 62 definition of "earnings" that it includes any other emoluments. There is a link into that large body of case law should anybody ever need it.
(Mrs Scott) Yes, but we have lowered its profile.
(Mrs Scott) The money or money's worth concept is derived from case law. In the development of our definition of "earnings" we felt it was important to make it clear to taxpayers that "earnings" did not necessarily mean money. There are a lot of things which are chargeable to tax as emoluments in the existing provisions in ICTA because they are deemed to be treated as emoluments. These are benefits which do not have a money's worth in the hands of the employee and so they are taxed usually by reference to the cost of their provision and they may also be taxed by a fixed rate, such as car benefits, or value benefits, that kind of thing. Those things that are treated as emoluments in ICTA are now set out instead in the Benefits Code which follows on immediately after clause 62.
(Mrs Scott) We have covered exactly the same ground but where case law expanded upon what the ICTA provisions meant we have included the expanded explanation where necessary.
Baroness Cohen of Pimlico
(Mrs Scott) No.
(Mrs Scott) Yes.
(Mrs Scott) Clause 5 talks about the application of this Bill to offices and office-holders and includes in subsection (2)(b) the statement that "employee" means the office-holder in the context of this Bill. That would include a non-executive director.
(Mrs Scott) That would depend on the terms of the contract. They may fall within Chapter 6 or Chapter 7 of Part 2. They may be providing those services through the means of an agency so they are an agency workers, or they may be providing those services through the route of having an intermediary placed between themselves and the company to which they provide the services, in which case the payment relating to those services is effectively deemed to be a payment on the employment income. There is a route in each of those chapters that brings the payments in.
(Mrs Scott) If it was a direct contract it would be classed as employment, unless of course it was truly a freelance arrangement and it was self-employment and taxable under Schedule D.
(Mrs Scott) No. The people who are true freelancers and work providing services for a multiplicity of clients remain taxable under Schedule D as before. We have not done anything yet to rewrite the provisions of Schedule D for the self-employed. That is our next job.
(Mrs Scott) Yes.
(Mrs Scott) The actual number of extra-statutory concessions that we have not been able to incorporate in this Bill is covered in paragraph 7 of the memorandum of evidence and that refers in turn to Appendix 2 which sets out in detail what those extra-statutory concessions are and why we have felt unable to incorporate them in this Bill. The extra-statutory concessions that we have not rewritten will remain in place. They will continue to operate as they did before. Unless the circumstances change that necessitate those extra-statutory concessions, they will continue until such time as government decides otherwise. While we feel within the project that it is preferable to incorporate extra-statutory concessions wherever possible, we would not want to do so at the expense of the quality of the legislation that we are producing, so we would not, for example, want to have 26 pages of legislation covering a point that only affects a very small minority of taxpayers and is intended really just to smooth out a rough edge that may occur from time to time in the practical application of the law. There will be instances in the future of the rewrite where extra-statutory concessions have been avoided. Does that answer your point?
(Mrs Scott) The benefits of vehicle use take up a lot of space in the existing legislation as well. They do not just appear in the body of it. There are also Schedules devoted to the treatment of car benefits and fuel benefits. As you rightly put it when you posed your question, I do not feel able to answer what I think is probably a decision for Parliament itself as to the extent to which changes can be made in regulation rather than in primary legislation.
Baroness Cohen of Pimlico: If you could clear my mind by giving an example of an extra-statutory concession that applies to very few people and would take 26 pages to do, I might get better equipped on this subject.
Chairman: Such as clergymen's heating and lighting expenses?
Baroness Cohen of Pimlico
(Mrs Scott) Yes. The one that I was thinking of in particular was payments out of a discretionary trust which are emoluments taxable under Schedule E.
(Mrs Scott) It just says, "which are taxable under Schedule E".
(Mrs Scott) This is part of our problem. Somebody originally must have seen that there was a problem arising but it is not an everyday occurrence.
(Mrs Scott) There is an extra-statutory concession.
(Mrs Scott) That is what extra-statutory concessions are about, as is set out in the booklet IR1. It says here, "An extra-statutory concession is a relaxation which gives taxpayers a reduction in the tax liability to which they would not be entitled under the strict letter of the law. Most concessions are made to deal with what are on the whole minor or transitory anomalies under the legislation and to meet cases of hardship at the margins of the code where a statutory remedy would be difficult to devise or would run to a length out of proportion to the intrinsic importance of the matter."
(Mrs Scott) Where we have looked at the existing extra-statutory concessions and we think they still fall within that definition, even after we have tried to incorporate them in our legislation, then we think that they deserve to remain in this book.
(Mrs Scott) I do not think there necessarily is. Because one of the stated purposes of an extra-statutory concession is to meet cases of hardship at the margins of the code, an extra-statutory concession will generally be cast in fairly flexible terms so that it can bring in all the cases that may be grouped together under the same banner. If we start to put these things down in black and white in the legislation we lose the flexibility or we have to make it very long to cover all the possible scenarios that the extra-statutory concession could include. Talking of the example of extra-statutory concession A4, you might have to consider the position of a director's spouse who is travelling with him because he is sick or incapacitated. Then you have got to decide whether you need a definition of what constitutes sick or incapacitated.
Baroness Cohen of Pimlico
(Mrs Scott) How sick do you have to be before you have somebody going with you?
(Mrs Scott) We do not want to lose flexibility from the kind of broad definition or description of circumstances that we can use in an extra-statutory concession by having to set down a series of hoops that people have to jump through before they can qualify for it.
(Mrs Scott) Yes.
(Mrs Scott) Yes.
Lord Howe of Aberavon
(Mrs Scott) The policy changes have not actually been listed in the memorandum of evidence as such but they are listed as an appendix to the response document which we issued to the draft Bill, which was put out to consultation in the summer. We issued a response document to that consultation in November and all of the policy suggestions that were made, including the very far-reaching and very detailed, were listed at the back of that document. I can say more about how we have drawn the distinctions which we can make or not if the Committee is interested.
(Mr Michael) That is absolutely right.
Lord Howe of Aberavon: There are in fact no less than 84 policy changes proposed in the annex to the response document here, one of them being, as an example, allowing earnings on employment to be taken across in the Rewrite Bill and calculated as earnings related to the national insurance contributions. Thereby hangs a tale of enormous complexity.
(Mr Michael) But outside the scope of our project.
(Mr Michael) Those concessions will still continue.
(Mrs Scott) Those concessions will continue just in case there is an odd one cropping up now and again.
(Mr Michael) Omitted from the Bill.
(Mr Michael) Absolutely not, no.
(Mr Michael) Yes.
Baroness Cohen of Pimlico
(Mr Michael) Yes. All of the extra-statutory concessions that are not incorporated in the Bill, for whatever reason, will continue.
(Mr Michael) Correct.
(Mrs Scott) Yes.
(Mrs Scott) Yes. There is a significant difference in that regard.
Baroness Cohen of Pimlico
(Mrs Scott) Yes.
Chairman: We did not do capital allowances as I recall, unless my memory is playing tricks.
Baroness Cohen of Pimlico: We did.
(Mr Michael) Yes.
(Mr Michael) No. On the contrary, it tends to be very much welcomed, the incorporation of concessions into legislation.
(Mr Michael) Yes. It provides rather more certainty.
(Mrs Scott) Yes.
(Mr Michael) That is correct.
Dawn Primarolo: And that is the purpose of publishing all of the extra-statutory concessions as a transparent argument. The argument is that it is all better in one place, which is legislation, although it is not always possible to do that but it is still enforceable on behalf of the taxpayer if they believe that have not been dealt with properly by the government.
(Mrs Scott) Yes, but in considering the judicial review the courts would have recourse to the published Inland Revenue material explaining the extra-statutory concessions, and it is that material which by and large we have relied upon in the way in which we have brought the extra-statutory concessions within the Bill. It is worth remembering, although this may be a significant change in legal procedure, that all extra-statutory concessions were only ever there because they dealt with a few minor anomalies or cases at the margins. We are not talking about concessions that are applied across the length and breadth of the country to every single taxpayer. That is not what extra-statutory concessions are about.
Baroness Cohen of Pimlico
(Mr Michael) It is under the Board's care and management statutory powers.
(Mrs Scott) It is set out in the Tax and Management Act 1970.
(Mr Michael) Most certainly, yes.
(Mr Michael) That is absolutely correct, or indeed to change it or withdraw it.
Baroness Cohen of Pimlico: Although we call it an extra-statutory concession it is not really, is it? It was originally made as part of the law by some process sanctioned by law, which slightly alters my view about how you treat them.
Lord Howe of Aberavon: It is important to emphasise that this passion for incorporating ESCs in the rewrite Bill has been part of the policy from the outset because of the preference to get them plain and clear.
Chairman: People have always complained about it. Although it is true that tiny numbers of people are affected, most litigation and most of the fierceness of previous attacks to arise from the unexpected fringe of odd cases where I suppose disputes arise. The ordinary PAYE-paying taxpayer incurring ordinary expenses in the course of his employment does not give rise to much tax law problems. It is just a question of calculating how much. We have moved on from the definition where good old Schedule E has been swept away and changes have been made but nobody wishes to pursue this. We have dealt with extra-statutory concessions in terms of this section of the Bill. Would any other member of the Committee like to raise any more queries, particularly on the definition of "earnings"?
(Mrs Scott) This is another one of these interventions that we introduced in the interests of user friendliness. It seemed that it was much easier for a taxpayer to look at rules of timing by reference to whether he has received the money as opposed to by reference to the section under which he is chargeable. If the taxpayer receives money we thought there ought to be one rule that determines when he should be treated as receiving the money. I have got no precise figures but by far and away the vast majority of money payments are ordinary wages and salary earnings. Cash payments may also be made in respect of expenses and the change which we have instigated in respect of expenses does not change the timing of receipt of expenses payments. However, there is in ICTA a general sweep-up charging provision in section 154 which can apply to any other benefits not covered elsewhere. Case law has established over the years that the scope of that sweep-up provision is wide enough to encompass payments of cash, money payments. Under the existing provisions benefits that are chargeable under section 154 are treated as being received when they are provided. Again, I have not any figures on this precisely but one would imagine that in most cases the money being provided, as soon as it is provided you get it, so the time of receipt remains the same under our new rule and under the old rule. Theoretically it is possible for an amount of money to be chargeable under 154 and for it to be paid to the director at a time later than he actually becomes entitled to it. In that case we would be changing the position slightly. We would charge him at the moment he becomes entitled to it. This is likely to be very rare because prior entitlement to money suggests a contractual obligation. It suggests that it is written into your contract of employment. It is difficult to envisage the kind of benefit that would not fall within the definition of earnings anyway. When we were pressed to come up with examples of how this may apply we were a bit stuck as to thinking of actual circumstances where entitlement may arise in advance of payment in a case where there is a benefit chargeable under section 154. The other instance in which we may change the time at which we treat such a payment as being received is if the payment, instead of being handed over in money to the employee, is credited to a director's account with the company. It is worth thinking about an example in this scenario in that the most likely kind of benefit that would be chargeable under section 154 might be a scholarship payment. It seems extremely unlikely that a scholarship payment would be credited to a director's account rather than letting the student in question have access to the funds straightaway. We think it is extremely unlikely that this will apply in very many cases. Where it does apply it will only have a material effect if the time of receipt is moved from one tax year to another because the time may simply change from September to December and make no difference in terms of tax whatsoever. If you do change the tax from one year to another, you may then find that in one of those years the taxpayer pays tax at a different rate although most of the employees who are likely to receive benefits under section 154 we think would be 40 per cent taxpayers year on year.
(Mrs Scott) We have not changed the law in that regard at all.
Lord Blackwell: Does the person in such a case have to pay tax when the employer has failed to pay the earnings to which he is contractually entitled? I should know. Under rule 2 here again it says at the time when the person becomes entitled.
(Mrs Scott) What these provisions are concerned with is not the time of payment of tax but the time at which the payment is treated for tax purposes as being received for the purposes of sorting out whether or not you are liable to be charged for tax and for the purpose of deciding in which year that amount should be taxable in respect of that.
Chairman: But it does not affect the timing for payment of tax? Take a PAYE employee, which I suspect a lot of football players are. A lot of other cash-strapped companies do the same thing. The company suddenly stops paying the wages. Does the Revenue still expect to receive deductions? I suppose it does. The Revenue becomes a creditor along with the employee because the company presumably stops paying the PAYE at the same time it stops paying the wages..
Baroness Cohen of Pimlico
(Mrs Scott) Yes. This sorts out which year you look at which rates of tax you apply.
(Mrs Scott) The pay-as-you-earn provisions sort out the mechanics of how to operate pay-as-you-earn in practice and they are in a later part of the Bill.
(Mrs Scott) If they have got access to the money they might. For example, if you have got a director of a company who, instead of drawing wages in cash, parks them in an account in the company because he does not need the cash right now, the company can better utilise that in terms of cash flow, but it is up to him as to where he has determined that the money should be deposited, then yes, it is entirely reasonable that he should pay tax on it. That has always been the case.
(Mrs Scott) No change.
(Mrs Scott) Income tax is normally, for the majority of employees, operated through pay-as-you-earn. Most cases are dealt with by deduction of tax. You only have to stump up the money in most cases when there is actually a payment. The reason I am being a bit cagey about this is that there are these cases at the margins where you do something a bit peculiar with it and so we do not want to be saying in absolute terms that if you have not got the money you have not got a tax bill because a director may choose to do something else with it.
Baroness Cohen of Pimlico: It is the City case where you have your bonus paid in some funny way or in some funny place or earlier when you are not too bothered about it, or whatever. There were lots of us who were paid in gold bars or not at all, usually for the benefit of the employer.
Dawn Primarolo: That would come up under benefits in kind.
Baroness Cohen of Pimlico
(Mrs Scott) Yes. On the rules for the timing of receipt, rules 2 and 3 are there for ante-payments purposes because before those rules existed there was evidence of people getting up to mischief and moving their date of receipt of the emoluments by deliberate mechanisms.
(Mrs Scott) This is covered in more detail in Appendix 3 of the memorandum which, although it is headed "Provisions appearing in italics in the Bill", will also cover all those changes which have a tick in the "More tax?" column in the other appendix. There are no cases where there is a widespread likely incidence of a higher tax bill. In each case that is listed in Appendix 3 we have attempted to explain the likely impact in practical terms of each of those changes. For example, the first one that appears in Appendix 3 is the one that I was describing earlier on connected with clause 18. In other cases, if we move down to the next one, there is a possibility that it might make a difference for a taxpayer in particular circumstances and it might make a difference in either direction in a lot of cases. There is a possibility that somebody may pay tax at a different rate because of the change. We are not in that particular instance going to be charging anybody to tax on the larger amount but the tax rate might change if you move it from year to year. We cannot rule out the possibility that there will be somebody. In looking at change 6 in particular, "Relief for delayed remittances: referring to income 'received' instead of 'arising'", it is quite esoteric anyway. Relief for delayed remittances - you have to be on the remittance basis to start with and then you have to have your remittances delayed because of the existence of a block on you being able to remit your income straightaway. What we are doing in that case is trying to apply what is currently Inland Revenue practice in sorting out a mismatch in the language before and after. There is no practical effect in that change although there is a theoretical effect. That is one where we have been able to rule out the theoretical possibility that somebody might be affected in their actual tax bill although, in theory, if you are just looking at the change in the law, it may make a difference. They are all of a similar kind of order. There is not any one of these which is going to have a regular impact on a large number of taxpayers. If we look at "Using Y = days in a year rather than a fixed 365 days", that only happens once in every four years anyway. I am happy to take questions on individual changes if there are any that are of concern in particular.
(Mrs Scott) This particular provision reproduces extra-statutory concession A25 (from memory) and as such that extra-statutory concession has never been subject to parliamentary scrutiny.
(Mrs Scott) No. One of the reasons why it was operated by extra-statutory concession was that it compares the overseas target employee with an employee in the Civil Service in the UK. There are obviously changes in the labels attached to civil servants and the levels at which they are remunerated and whatever else may crop up from time to time. The Board may reflect those mechanical changes by having an order of this nature without having to have recourse to Parliament. Speaking on behalf of the Inland Revenue, there is no way in which the Inland Revenue would seek to make a significant change without going to government and asking for advice and seeking the government's view on it. It would seem a different kind of possible amendment that we have in mind for this particular point of order than for others where we might be considering different amounts or whatever, but here we would be looking at probably changes in job title or changes in descriptions. If we go from being in the Civil Service to having a different title we would have to amend.
Mr Jack: Can I raise the intriguing subject to change 90, "Deduction of expenses of ministers of religion"? Ministers of religion keep popping up.
Chairman: This is one which shows a possible increase in taxation. When you read the explanation in Appendix 5 it is difficult to see how.
Mr Jack: Indeed, but they keep popping up now in Thought for the Day to Radio 2 to all kinds of various things. There are clearly a lot of ministers who take a keen interest in this. One point of definition before I start asking questions about how you explore this one: is there a definition in this Bill of what is a minister of religion?
Baroness Cohen of Pimlico: Can I set up my own?
Mr Jack: Yes.
(Mr Michael) It is not defined in the Bill. It is a question of general law.
(Mrs Scott) At present most ministers of religion are taxable as office members under Schedule E and we understand that there are a few chargeable under Schedule D as exercising the profession of a minister. We are not aware that there are any that do the mixing and matching to start with but it is a possibility. You mentioned the ministers cropping on Radio 2 and whatever. Income from journalism by an office holding minister is not chargeable under Schedule D as profits from exercising his profession as a minister. That would be his journalism activities rather than his clerical activities. If a minister should happen to be chargeable under Schedule D and in this Bill and he makes a loss in either of those, then the expense may be set against either source and if that expense creates a loss then we allow it to be set against the other source, so instead of just being able to set the expense directly against the other source you set it first against the chargeable income and if it produces a loss you can set it off against the other. You should get the same number arithmetically at the end of the day.
Mr Jack: So the taxpayer is no worse off by this reformulation?
(Mrs Scott) They may have a small source of income outside their living but it may not be as a minister. They may have income as a journalist.
(Mrs Scott) Yes, freelance funerals.
(Mrs Scott) No.
(Mrs Scott) Yes.
(Mrs Scott) Yes, I am sure that you are right. I am just reading a piece of paper which has been passed to me by a colleague to deal with an earlier point that you raised and that was why had we ticked the box that may mean a difference in tax. It will mean a difference in the earnings chargeable. It will mean a difference in the Schedule E computation possibly but not overall. I suppose theoretically you might -----
Baroness Cohen of Pimlico
(Mrs Scott) You might have a situation where, because you have got a Schedule E liability at one point in the calendar year and a Schedule D liability at a slightly different point in the tax year, you might have things being paid at slightly different times. We are not denying anybody any expenses is what it boils down to.
(Mrs Scott) In the existing tax law, although the computations in leap years have been around for a very long time, when setting out a computation that depends on having to apportion something by reference to a year, the existing legislation does not envisage a leap year. It is a change that will only be relevant one year in four and even then the effect of it will be very marginal as the difference between using 366 days and 365 days is less than one third of one per cent, so we think it is quite small. Because it was a significant difference from what we had seen before in the way in which a year was expressed, we specifically asked in the consultation whether respondents thought it was a good idea to deal with the possibility of a leap year arising every four years, unsurprisingly, and all the respondents who came back to us said that it was a good idea to deal with this on a consistent basis and use "Y" to represent the number of days in a year instead of a fixed 365.
(Mrs Scott) We can only rewrite a proportion of it at a time.
(Mrs Scott) For now we may well do.
Mr Jack: But although it is a very small percentage, and I accept that, if you happen to be in the money market and it was a roller coaster, one third of one per cent of X billions can be quite a lot.
Chairman: It is only car allowances. All we are talking about here is the apportionment of car allowances.
Mr Jack: I am getting carried away now. I am sorry.
Dawn Primarolo: If you had a Formula One racing car in a leap year perhaps.
Chairman: Or a fleet of Rolls Royces.
(Mrs Scott) Quite often, looking back on my time as a tax inspector, I would see people who used 366 days instead of 365 days because they thought, "Oh, it is a leap year". It is an intuitive thing to do if you have got 366 days in the year. You might think that that is how you should apportion it. What we are doing is just recognising the fact that the number of days in a year varies.
(Mrs Scott) It makes it more consistent to have one method of looking at a year rather than having several, some of which are a fixed 365 days and others which refer to the number of days in a year.
Mr Pond: I am not arguing against it. I am just not sure where it fits in with the project.
(Mrs Scott) It saves people having to check the provisions that are in Part 5 to see which apply and then coming to the conclusion that these are not relevant at all.
(Mrs Scott) Yes.
Lord Howe of Aberavon: The Schedules were introduced by Henry Addington 200 years ago. In 1802 he repealed the income tax structure which was a primitive form of self-assessment. He introduced deduction at source in the Schedules in 1803. Thereafter, his career was somewhat less distinguished because he ceased to be Prime Minister and was then Home Secretary for ten years.
Chairman: And Speaker, eventually.
Lord Howe of Aberavon: For a time. In the course of being Home Secretary, he had the magistrates and soldiers who were responsible for the Peterhill massacre. His last recorded contribution in this House was against the Reform Bill in 1832 so I do not think we need stand in silence of his memory.
Chairman: We have not yet touched on approved incentive share schemes, which are a very important part of the Bill. It is controversial, complex and possibly subject to amendment. Would any witness like to give any general introduction beyond the memorandum and the Schedules?
Mr Jack: This part of our questioning deals with all the approved schemes but where are the unapproved ones?
Baroness Cohen of Pimlico: Which most of us deal with regularly every day. Why am I dealing with predominantly unapproved share schemes?
(Mrs Manson) Unapproved share schemes are dealt with in Part 7 of the Bill. During consultation it is very useful to deal with the administrative details of approved schemes. By the very nature of things, we are not having to check whether a lot of details are going to be okay. I am not a share scheme practitioner but I gather they offer a lot of flexibility which we do not offer with approved share schemes, particularly with the changes in capital gains tax. In some cases, unapproved schemes are more attractive.
(Mr Knowles) First of all, one is looking at the overall approach which we have taken to the exposition of these four share schemes. What we have tried to do is adopt a common approach across the piece so that a taxpayer or his adviser who is interested in the tax implications of the various schemes can look at the appropriate clauses in the Bill. On the other hand, those who are concerned with establishing the schemes, the companies and their advisers, will be more interested in the detailed machinery which is contained in the Schedules. Within the Schedules, we have tried to present the material in the same sort of order throughout the Schedules so that you start off with the introduction, unsurprisingly. Then you look at the requirements which need to be met by the various options or shares that can be obtained under the schemes. Finally, one comes to the approval mechanism or, in the case of enterprise management incentives, a verification procedure. That is at the structural level. Also, when one is getting down to the nitty gritty of the provisions, one realises that there are inconsistencies here and there. Sometimes we have borrowed an approach which was apparent in the old schemes: the save as you earn scheme or the company share option plan schemes. We have looked at those provisions and thought that perhaps the approach taken there could be adopted when we came to rewrite the provisions relating to ESOPs, which we now refer to as share incentive plans. These are very minor changes, for example, making the powers of the Inland Revenue to obtain information consistent. Some of the schemes have said that the Inland Revenue can obtain information which they think is necessary and other schemes have said that the Inland Revenue can obtain information which they reasonably require. There was no point in having those two separate formulations in the body of the Bill. We have aligned all the provisions so that there is a test of reasonably required information.
(Mr Knowles) Subject to very minor changes round the edges. We have made it possible for variations to take place on a wider scale but these are low level adjustments in the mechanics. The overall gateways are exactly the same.
(Mr Knowles) Certainly. Jenny Manson will correct me if I am wrong, but the existing provisions do not cater for all the possibilities that need to be catered for where you are providing for a variation of share price to take account of alterations in share capital. They do not reflect the present reality. What we have tried to do is to bring it into line more with the present reality. At a more general level, the Share Scheme Lawyers' Group, whom we have consulted extensively, have been very happy with what we have done. They say, as far as the share scheme legislation is concerned, "We believe that the objective of the rewrite project has been very substantially accomplished."
Lord Howe of Aberavon
(Mr Knowles) Yes.
(Mr Knowles) That is right.
(Mr Knowles) We are looking at avoiding inconsistencies of language in the four Schedules.
(Mrs Manson) Perhaps the relevant question is, did we change anything for the sake of consistency? There was a certain amount of alignment in every case. When we saw something favourable to the taxpayer or when we saw something good in another scheme, we checked to make sure what the practice was. Also, we made sure of simple things like the Inland Revenue notifying the taxpayer of a decision. In some of the older schemes, they did not say. If we had an extra concession in a new scheme, we looked at the old scheme and thought: should we be writing it into the legislation? We have tried to look at the best practice. We did meet with the Share Scheme Lawyers' Group three times. I spoke to them on the phone and e-mailed them. It was not just a paper exercise. It was a personal dialogue. We tried to make sure they were kept abreast of all this new alignment work we were doing.
(Mrs Bertlin) Profit sharing schemes are being phased out. From 1 January this year, it is no longer possible to have shares awarded under profit sharing schemes in order to incur tax advantages. No new profit sharing schemes are capable of being approved to carry tax advantages in the future. In existing legislation, there has been a restriction saying that nobody can have an award of shares under a profit sharing scheme which operated in a similar way to a share incentive plan. The restriction said that no employee could have shares awarded under both a profit sharing scheme and a share incentive plan in the same year. Nor could he have shares awarded to him under two share incentive plans. The object was to ensure that he did not receive two bases of tax relief at that time. By the time the Bill comes into force, there will be no tax purpose in ----
(Mrs Bertlin) They can run on as approved schemes and they can have further shares awarded under them but none of those awards will have the tax advantages that previously existed.
(Ms Crawford) It is the Finance Act 2000.
(Miss Dillion) This replaces the old limitation which was limited to case one of Schedule E taxpayers. Because case one of Schedule E has gone, we have new terminology.
(Miss Dillion) Part of the reason for this is because it includes the description of what are now clauses 15 and 21 and that should give them a clue.
(Mr Michael) The provisions of the Bill which are concerned with share options, share related remuneration and so on have been subject to particularly extensive scrutiny by the experts. Relying on that, one would have thought that they have looked at this particular provision. If they were not happy with it, I am sure we would have heard.
(Mr Michael) So do I.
(Mrs Manson) Yes.
(Mrs Manson) Yes.
(Mrs Manson) We were looking at four schemes. We were trying to make it possible to see how they differed from each other. Although the language needed very little change, the general question of alignment we borrowed from the old as well as the new.
Chairman: The language of Chapter 5 on share options -- certainly the opening introduction -- seems a great deal clearer than some of the previous stuff we have had. It is not written in conversational English but in plain English, in my opinion. The Bill drafted in terms of 472(1) is a starting point. It is attempting to put in plain English the basic principles of liability to taxation which I do not think any of the previous Acts has intended to do. The commendation of the appropriate Lawyers' Group has gone a long way to satisfying the Committee. Can we move to benefits in kind? This section probably gives rise to more disputes than any other, even if it is not because of the amounts of money involved. Paragraphs 41 and 46 of your memorandum apply to this and you claim that you have reorganised all the previously scattered provisions into a structured benefits code.
(Mrs Scott) The phrase "perquisites" appears in the old section which defines emoluments. When we looked at rewriting that section it was obviously in need of some updating. Instead of using the antiquated phrase "perquisites" we have used more common terminology.
(Mrs Scott) In practical terms I suppose there is not. There may be a difference in the way in which you tax a particular perk because it may or may not be money or money's worth in the hands of the employee. You might say that a taxi driver's tips are his perks. They are money and they are taxable as part of his earnings if he is an employed taxi driver.
(Mrs Scott) That is the distinction that we use for the purposes of the way in which the tax code grew up because originally we only charged tax on ordinary earnings. It was only in 1948 when we first started to look at things that were not money's worth in the hands of the employee. This is why the different tax treatment grew up and the necessity is present in what we are rewriting to distinguish between things that are benefits in money or money's worth and benefits in kind that are not money or money's worth.
(Mrs Scott) We have not changed the boundaries. The focus of the benefits code is employment. If this is something that is not provided in the benefits code by reason of employment, it is outside. We have a provision that says that anything provided by the employer otherwise than in connection with ordinary, domestic relationships or whatever is not by reason of the employment. If somebody employs his son and buys him a birthday present, that is not by reason of the employment. Anything else that your employer might give you is assumed to be by reason of your employment under ICTA and the Bill.
(Mrs Scott) If we take a step back and look at why we thought we needed a benefits code, this was a point suggested by outside commentators on our work from the Institute of Fiscal Studies. They pointed out the extreme difficulty of treating the taxation of benefits because of the lack of any coherent order in the legislation. In looking at the various ways in which benefits are taxed, they can range from things that come within the general charge on earnings, if they are money's worth, or they can be taxed under special measures which quantify the benefit in a number of different ways. They share some basic ingredients if they are outside the general charge to tax, which is the basic one but add-on benefits share some basic ingredients. They have to be related to the source. They have to be by reason of the employment. You have to look at the recipient. The recipient is going to be an employee, a member of his family or household. There has to be an amount. You cannot tax something if you cannot identify the amount. We looked at the extent to which we could pull out all these common threads from the various different benefits provisions within ICTA and put them into a general chapter at the beginning of the benefits code that applies to the whole piece. Then, the remaining chapters were designed to clearly set out the source, on whom the charge was made, the details of the quantification of the amount charged to tax and, if applicable, any exceptions from that charge. We also introduced the idea of having a route map at the beginning of the benefits code that shows you exactly where you are going to find each of the charges. If an employee receives a benefit, first of all, he turns to the benefits code, page one, and he can immediately see where he has to look for how to quantify his benefit on provision of a car or a loan. It was the structural reorganisation that was probably the most difficult aspect in the beginning, the pulling together of the whole thing from different places.
(Mrs Scott) No, we have not changed that. It is still possible for an employer to apply for a dispensation in respect of benefits provided to employees. The nuts and bolts remain very much the same.
(Mrs Scott) Yes. It was in 1948 when legislation was introduced to levy a tax charge on things that were not money's worth but were benefits in kind. Before 1948, there were certain benefits in kind which could be taxed because they have money's worth and that is a principle that dates back to a tax case in 1892, Tenant v Smith. There have been supplementary cases since then where, if an employee is provided something which he can turn to monetary value, he can ----
(Mrs Scott) It is the value he can sell it for. It is not the same necessarily as what it costs the employer to provide him with it.
(Mrs Scott) Yes.
(Mrs Scott) Yes.
Lord Goodhart: The gold bars and payment in commodities was used in recent years to avoid national insurance contributions.
(Mrs Scott) I think it has been fixed. I do not know the details.
Dawn Primarolo: It is not quite fixed.
(Mrs Scott) They are still playing games, I understand.
Chairman: The definition of liability for national insurance earnings for the purposes of national insurance is still drafted in quite different language to the language you are now using in income tax.
Dawn Primarolo: Because Parliament itself holds the route for how national insurance legislation is processed. It is administered through the Inland Revenue. The parliamentary process has to be reformed itself to allow a course of alignment, so there has been alignment where possible. It is never perfect because there is always creativity in what the new mechanisms might be and complete alignment is a huge policy issue about flags in the national insurance system on entitlement. The Finance Bill cannot legislate for national insurance without a fundamental change.
Baroness Cohen of Pimlico
(Mrs Scott) I fear that we are getting slightly outside our scope of expertise, but there are class 1A benefits under the national insurance system which apply in respect of car benefits.
Chairman: Attempts are constantly made to get them closer to each other. My examples are not totally irrelevant. There was a brief time when people were paying the earnings of some of their senior employees in debts like gold or silver, not seeking to evade income tax, but they avoided all the national insurance liability until that was dealt with. We talk about the rewriting of the tax laws. Given that we have got rid of the Contributions Agency, a step of which I wholly approve, and given that what we are actually talking about is people's liability to make their contribution on whatever they earn, there is a case for making sure it is all drafted in the same sort of language and it can then be read across more easily.
Lord Howe of Aberavon: We can give thanks for the fact that we are not also grappling with the details of prices and income support.
(Mrs Sampson) When we did the analysis, we went back to the original drafting papers if we could not work out what was meant by the statute as it was and looked at the correspondence between the drafters and the instructor to find out what they were trying to do. We built on that to come back to something that we could put in clearer language, to break it down into the clauses we have here, compared to the very dense sections 141, 142 and 143.
(Mrs Sampson) No. The non-cash vouchers come under section 141 of ICTA. It was the analysis of all that plus drawing on some of the general rules that come within section 144 which we wrote back into here to try to make it clearer.
(Mrs Scott) In every provision that we rewrite, we go back to look at the notes on clauses when the provision was introduced. We will often look at drafting papers. They are not always available. If you are looking at provisions first introduced in the early part of this century, you stand precious little chance of getting hold of the drafting papers. Notes on clauses are generally available. We look at all the manuals and publications by our specialists. We look at outside commentators' views of the law and all the relevant tax cases. We bear them all in mind in weaving together the various concepts that form the clauses in this Bill. It is not necessarily true to say that we will always deliver the original parliamentary intention. If there has subsequently been a court case that establishes that the provision in ICTA does not do what government thought it did when it was being introduced, we cannot change the law to put it back to what government originally intended. That would require a Finance Bill change.
(Mrs Scott) Yes, where it is a settled court decision. When something has appeared in the High Court last month or in the early part of this year, no, but we are not aware that there are any cases where there is currently a dispute.
(Mrs Scott) The original purpose of the legislation may well have been to give a deduction in particular circumstances and the legislation may have been drafted in such a way that the scope of the circumstances in which the deduction is available is different.
(Mrs Scott) I would not recommend that people chuck out their court cases. There is a lot of useful dictum in court cases.
Mr Jack: In terms of real world use, this Bill reflects court judgments which have changed tax law. In other words, it has incorporated the modifications by the courts in this Bill so that, if this Committee were to recommend to the House approval of this, we have incorporated a court change into the law.
(Mrs Scott) No.
Chairman: The only other subject we have not touched on is the drafting. We have been provided in the memorandum of evidence with some before and after examples. In my opinion, the Committee is debating drafting but it is essentially a written exercise and it is a question of the Committee having a look at the examples of before and after and then raise any comments if they are dissatisfied or wish to comment about the way in which it has been done. Can I ask whether anybody will be getting onto the drafting or whether, having studied and taken note of appendix five, we are content, this being the second Bill of its kind, that the exercise of turning it into plain English remains very valuable? There is a prospect that, this afternoon, we could turn to the government amendments. Mr Jack, what is your view on how we handle our general appraisal of rewriting in plain English?
(Mrs Scott) It is in the interest of general, neutral drafting that you do not refer to "husband" or "wife". If the source legislation refers to "husband" or "wife", it would be a change beyond our remit to extend it to "cohabiting couples".
Chairman: A spouse is someone you are married to and a partner is someone that you are not necessarily married to.
Mr Jack: You trespass into difficult waters because you use the word "married".
Chairman: This is not the occasion for a radical reform.
Mr Jack: I appreciate that.
(Mr Michael) The people who will be writing the notes are the people who have been appearing before you this morning, but perhaps we can get something by 3.30.
Chairman: If it is possible to finish it before 4.30, in both Houses there is a letter board system so Members of the Committee can look from three o'clock onwards to see if there is something on the board. If it is not possible, we will have somewhat fuller proceedings this afternoon. If any Member of the Committee wishes to table an amendment, their last opportunity is between now and this afternoon. If none turns up, I shall take it that nobody is proposing any amendments.
(Mr Michael) We will do that.