Joint Committee on Tax Law Rewrite Bills Minutes of Evidence

Examination of Witnesses(Questions 1-19)




  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.

Mr Jack

  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.

Lord Blackwell

  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 director.

  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 D.

  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 years?
  (Mrs Scott) Yes.

Lord Goodhart

  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 expenses?

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.

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