Examination of Witnesses(Questions 40-59)|
MICHAEL CBE, MR
CB, MS JACKIE
TUESDAY 14 JANUARY 2003
40. So my memory is playing me tricks, and we
have not had the slightest protest about this.
(Mr Michael) No. On the contrary, it tends to be very
much welcomed, the incorporation of concessions into legislation.
41. People prefer clear English which can be
argued about to just being told it is at the Inland Revenue's
discretion in the end as to how it is interpreted?
(Mr Michael) Yes. It provides rather more certainty.
42. But the Inland Revenue is still challengeable
by the taxpayer if the taxpayer or the taxpayer's representative
disputes the interpretation of the extra-statutory concession?
(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.
43. But only to a limited extent because it
is judicially reviewable. You would have to show not merely that
the Revenue was misapplying its own concession but that there
was something either irrational or that defeated a legitimate
expectation, would you not?
(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
Baroness Cohen of Pimlico
44. One of the things I have forgotten is where
does the authority to make an extra-statutory concession come
from? There is a Bill, and the Inland Revenue think, "Oh,
Christmas, that is not going to work in this case".
(Mr Michael) It is under the Board's care and management
(Mrs Scott) It is set out in the Taxes Management
45. I suppose it comes to ministers.
(Mr Michael) Most certainly, yes.
46. So even though in theory the Board, because
they have to be published because of the generally accepted policy
of governments of all political persuasions, which is where possible
to legislate, the decision to operate an extra-statutory concession
comes to a minister as well?
(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.
47. I do not regard an extra-statutory concession
as part of the law myself. The law is presumably tax law and it
sets out in an ordinary form of legal code which we are familiar
with what the law on liability to tax is. This has given rise
to difficulties in fringe cases, so a practice has arisen (and
I gather it is authorised by law) of granting a concession in
those fringe cases. To stop it being totally arbitrary and to
stop it depending on whether the inspector in Halifax is more
generous than the inspector in London, these are all published.
Because someone has got to be accountable for that concession
a minister usually is expected to sign it off so that if necessary
the minister can be accountable on behalf of the Revenue for the
concession being given. Then, as you say, it can be challenged
once they have agreed to it, but I think it is a big leap from
judicial review, which is more generous nowadaysit used
to involve Wednesbury Rules and reasonableness and all this kind
of thingcompared with ordinary litigation where you are
just saying that Parliament has laid down the statute and the
statute says X and you are wrong in interpreting it in this way,
and so to make it part of the ordinary law of the land means that
your remedies in law become more substantial, it seems to me.
Also, previous concessions could be moderated a bit again when
you have got some more fringe cases where, once you put them into
statute you have got then to go back to Parliament to start changing
the words of the statute before you can do it.
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"?
48. I have a question on one of the changes
to do with the timing of taxable earnings, which I think is clauses
18 and 19 and so on, Chapter 4. There are some changes here and
they are listed at the back of the report in the rewrite with
a tick-in box where there might be an effect on taxpayers on the
timing of when they pay tax from this rewrite. These, as I understand
it, deal with periods when the definition of earnings is not necessarily
the same as the receipt of cash in hand and therefore individuals
may end up being liable to tax before they receive the payments.
Given that there is a suggestion here that there may have been
some change in the impact on taxpayers can I ask the project for
an example of what scale of effect this might be, whether it is
an improvement or a deterioration in taxpayers' position?
(Mrs Scott) This is another one of these innovations
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% taxpayers year on year.
49. That is very helpful but can I just explore
the particular point I had in mind which may be more widespread?
I think it is not uncommon for small cash-strapped companies to
get into a situation where their employees, whether directors
or not, accumulate earnings but the payment of those earnings
is deferred because they simply do not have the cash at that point
in time. If the person who is accruing those earnings nevertheless
has to pay income tax before they actually receive the cash, then
that may be significant to them. What I was trying to understand
was, is the way you have written this changing that situation?
(Mrs Scott) We have not changed the law in that regard
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.
50. Football teams, for instance, if they are
paying their players, are the players liable to tax until the
team or somebody turns up?
(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
51. What this is about is that surely, if the
employee never receives any cash, he does not pay any tax, but
if he does receive any cash the question is, when was he thought
to have received that cash?
(Mrs Scott) Yes. This sorts out which year you look
at which rates of tax you apply.
52. It is which financial year it falls in.
It does not affect problems about liability and date of payment
or anything like that?
(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.
53. Just to be clear, somebody can receive earnings
in one tax year and be liable for tax in that tax year even though
they do not actually receive the cash from their employer until
the following tax year?
(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.
54. So it is no change?
(Mrs Scott) No change.
55. But you are not liable to tax on earnings
until you actually receive the money or you have got control over
the money. If it is your decision not to receive it then you are
taxable. If you choose not to pick it up or if you park it then
you are taxable, but if you become entitled to something in one
year but do not actually get paid it until the next year under
your contract, presumably you are not liable to the income tax
until you are paid it.
(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.
56. Can I approach this question from a slightly
different point of view, which is that the Revenue will take steps
presumably in the exceptional cases to make sure that people cannot
move their so-called payment date artificially between tax years
in order to hit under a particular tax rate, under the 40%. Approaching
this question from a different point of view, where somebody had
failed to be paid, normally through PAYE, because the company
was not paying them, the Revenue moves to being a creditor of
the company because the Revenue has not had the money, as has
the individual not had the money. We then go to the employer in
terms of their liability. Where the person is self-employed we
pick it up on his self-assessment. Presumably your cageyness is
about not whether somebody has actually received the money or
not, whether it is legitimate. Are there ever occasions where
you feel that somebody is trying to manipulate that timing to
get it between tax years?
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
Baroness Cohen of Pimlico
57. Yes, but it is the time shift.
(Mrs Scott) Yes. On the rules for the timing of receipt,
rules 2 and 3 are there for anti-avoidance 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
58. Most people do. It is not at all unusual.
People want their entitlement and their payment to arise in a
particular tax year and if they expect in the next tax year their
tax liability is going to be less they become extremely eager
to move it into the next tax year. There is nothing very original
about that. Perhaps I can call us all back to order. We are getting
into the general question of extra-statutory concessions and some
of these extra-statutory concessions took us into what is the
nature of the concession, what is the nature of the law we are
talking about. Lord Blackwall took us to the Schedule of changes
and their impact on taxpayers which we have not considered yet.
First I shall invite the Committee to say no to all those. Lord
Blackwell has already referred to one which could conceivably
affect the timing of liabilities. There are quite a number of
boxes when one looks at the appendix of various changes, the overwhelming
number of which imply that it is just possible that less tax will
be paid by some taxpayers. There are one or two where the possibility
arises of more tax being paid. Can I first of all ask a general
question? Are any of these involving significant numbers of taxpayers
and are you saying that more tax will definitely be paid by some
taxpayers, or are you just saying that theoretically it is a possibility
but you cannot dictate the circumstance? What is the significance
of a tick in the first box implying that somebody is going to
pay more tax?
(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 remittancesyou
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
59. I have just one on individual change, which
is change 4, which deals with exceptions from tax on general earnings
from overseas Crown employment. Somewhat unusually here, the Board
has power to make an order which disapplies taxation from "general
earnings of any description of employee". Why is it that
this particular order, unlike other orders under the Bill, is
not subject to any form of parliamentary procedure?
(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.