Examination of Witnesses(Questions 1-19)|
MICHAEL CBE, MR
CB, MS JACKIE
TUESDAY 14 JANUARY 2003
1. Good morning, Mr Michael. I take it you are
the Leader of the Project Team. Could you begin by giving us a
brief description of what the Project Team is for the benefit
of the record and then introduce your front bench as it were,
the people who are appearing before us as the main witnesses likely
to answer most of the questions?
(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.
2. We are grateful for your memorandum of evidence.
The Committee would like to start with the definition of "earnings"
which is fundamental to the whole income tax law because for those
with at least passing familiarity with income tax law what was
proposed about the historic Schedules and so on is quite startling
and quite radical. Would you like to give us a brief introductory
explanation of why you have addressed in this way such a fundamental
part of the taxation laws of this country?
(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.
3. You mentioned the death of the word "emoluments",
which is one that anybody who has anything to do with tax comes
across. Is there actually a definition of what it means? I know
you have taken it in the meaning that you use it, but is there
a definition? Where did it come from?
(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.
4. So I see from 62(2)(c) that the word "emoluments"
still lives on in the current Bill?
(Mrs Scott) Yes, but we have lowered its profile.
5. I appreciate that. You have quite rightly
indicated to the Committee that emoluments are now those things
that are defined as earnings that were scattered liberally throughout
ICTA. How have you ensured that all of the things that needed
to be gathered together in clause 62 have been gathered together?
Is it summed up by the fact that you put "money or money's
worth" in as the catch-all phrase to ensure that everything
that should be there as earnings is there?
(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 van 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.
6. In that part of the Bill you have done no
more than gather together in a better ordered form that which
exists? You mentioned case law but you have not brought into either
clause 62 or clause 63 and the subsequent ones that are associated
with it anything new which was not previously dealt with by some
other part of the tax legislation in the re-statement of now "earnings"
and what were "emoluments" in the associated definitions?
(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
7. That is not the same as a concession?
(Mrs Scott) No.
8. Which is not done by the courts at all. It
is done by the Inland Revenue.
(Mrs Scott) Yes.
9. Can I pick up a related point about the definition
of "earnings" related to employment income and whether,
to have employment income, somebody has to be defined as an employee?
I notice there are various definitions of what "employment"
covers. I stand to be corrected but my understanding was that
certain categories of people, for example, non-executive directors,
may not be classed as employees of a company. They may be office
holders and it may cover it that way, but I was not clear whether
somebody has to be classed as an employee in order to have employment
income and whether there are categories of people such as directors
who would not be classed as employees.
(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
10. What about somebody who was performing services
to a company under a consultancy contract?
(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 of employment income. There is a route
in each of those chapters that brings the payments in.
11. If there was a direct contract between the
company and the
(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
12. That is what I would expect. I was not clear
how that was covered under the various categories here because
they are neither employees nor office holders if they are contractors.
(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.
13. What you said about non-executive directors
is just confirming the present situation, is it not, that non-executive
directors' fees are regarded as earnings and have been for many
(Mrs Scott) Yes.
14. Could I ask a general question which arises
out of Lady Cohen's reference to extra-statutory concessions?
A lot of extra-statutory concessions have now been incorporated
into the new Bill which is obviously something which is very welcome.
I would like to ask if there are any remaining extra-statutory
concessions covering the field of earnings and pensions which
have not been incorporated into this Bill? Secondly, what are
the intentions for the future? Will extra-statutory concessions
be continued, will new ones be made, or is the intention that
they should be incorporated into the legislation as soon as practicable?
(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 will have been omitted. Does that answer your point?
15. Yes. I would like to follow up with a rather
wider point though which follows on from that. It is unfair to
ask you because it is something which is not really within your
remit but it has been a convention for a very long time, perhaps
always, that substantive changes in tax law are done by primary
legislation and not by statutory instrument. On the other hand,
national insurance contributions, which are very much a form of
taxation, the collection of which the Inland Revenue is responsible
for, are to a very large extent laid down in regulations rather
than in statute. Is there not a case for saying that the existing
convention ought to be departed from so that if you have an extra-statutory
concession which takes up 26 pages, this could be given actual
legal effect by being dealt with by regulations? Again, I notice,
for instance, that the benefits of vehicle use, which must amount
to a really trivial proportion of the actual national revenue,
take up I think some 59 sections of the new Bill. Could they not
mostly be put into statutory instruments?
(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
Baroness Cohen of Pimlico
16. It has got to be something like that, has
it not? My imagination will not stretch.
(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.
17. Which is part of employment?
(Mrs Scott) It just says, "which are taxable
under Schedule E".
18. What can these be?
(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.
19. But there is an extra-statutory concession?
(Mrs Scott) There is an extra-statutory concession.