Examination of Witnesses(Questions 60-79)|
MICHAEL CBE, MR
CB, MS JACKIE
TUESDAY 14 JANUARY 2003
60. No extra-statutory concession is 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 kind 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.
61. In America it is usual to do so for tax
purposes and you are completely exempt. One reason for founding
your own church is that all your business activities will be removed
from tax. That is not true here, I do not think. We would have
many more churches if we had the same situation here.
(Mr Michael) It is not defined in the Bill. It is
a question of general law.
62. It may well be there are a number of bizarre
churches establishing and that is where we will have to leave
the matter for the time being. What this appears to say is that
you have ended some cross-scheduling of this particular Act. Could
you explain the mechanism that you have used to bring the Schedule
D and Schedule E treatment of this together in a way which you
say at the conclusion of this in Appendix 3 you believe will cover
any possible cause of hardship?
(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
63. Why do you then tick it as a liability for
more tax? On that explanation you have just given it cannot make
the slightest practical difference to quite a lot of ministers
of religion who do have some self-employed income and fee based
income outside their earnings as a minister. The Radio 4 people
must all be covered by this but up and down the country quite
a lot of ministers are lucky enough to at least have some small
source of income outside their living.
(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.
64. I see. This is only referring to them if,
for example, they are doing funerals freelance?
(Mrs Scott) Yes, freelance funerals.
65. That is self-employed income as a minister.
One should not name individuals but let us take somebody who is
dead, as far as I know. The Reverend Awdry must have made a fortune
writing books about Thomas the Tank Engine which far exceeded
whatever he was earning in his living. This does not apply to
somebody like that at all?
(Mrs Scott) No.
66. It is only if the Reverend Awdry had some
non-salaried income which was being earned as a minister of religion
doing some other religious function in his capacity as a minister
that this would bite? That is why it is such a rarity?
(Mrs Scott) Yes.
67. You say "yes". Are you sure we
(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
68. Claim under Schedule D?
(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.
69. Can we proceed to change 28 which perhaps
might have a more universal application than Thought for the
Day and its presenters? This deals with your calculations
of leap years. I wondered if you could explain this first of all
(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 1%, 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.
70. What about consistency therefore between
this Bill and every other part of the tax system?
(Mrs Scott) We can only rewrite a proportion of it
at a time.
71. The point I am making is, does that mean
you have a different treatment of "year" in this Bill
as opposed to the treatment of "year" elsewhere?
(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 1% 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
Dawn Primarolo: If you had a Formula One racing
car in a leap year perhaps.
Chairman: Or a fleet of Rolls Royces.
72. How does this reduce complexity? Is it a
sensible change to make or is it a change that makes the legislation
easier to understand?
(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.
73. I know it is a sensible thing to do but
do not know if it necessarily makes the legislation easier to
(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.
74. It is not so much improving the English,
which is where we started, but bringing the drafting in line with
reality or common sense. In the MPs' one all you have done is
change the basis for the deduction for accommodation allowances
from the specific provisions to a general deduction. Then you
say that in fact it makes no practical difference because there
is nothing outside the present specific provisions which would
make any change. Why is that? Is it more common sense? Is it clearer
to have a general deduction knowing that nobody is going to widen
it? What is it actually for?
(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.
75. It saves you the trouble of looking up the
detailed provisions because the Revenue are confident that nobody
is going to come up with anything new that is not already exempt.
This is to stop you having to cross-check a rather complicated
(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 10 years.
Chairman: And Speaker, eventually.
Lord Howe of Aberavon: For a time. In the course
of being Home Secretary, he thanked the magistrates and soldiers
who were responsible for the Peterloo massacre. His last recorded
vote in this House was against the Reform Bill in 1832 so I do
not think we need stand in silence in 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?
76. It is because they do not get any tax advantages.
(Mrs Manson) Unapproved share schemes are dealt with
in Part 7 of the Bill. During consultation it was agreed it is
very useful to deal with the administrative details of approved
schemes in Schedules. By the very nature of things, we are not
having to check whether a lot of details are going to be okay
for unapproved schemes. 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
77. You talk in your note about better alignment
of various share schemes in the context of the Bill that is before
us. Could you say a word or two about what that process means,
particularly for the reader of the Bill? How will they benefit
from this better alignment to which you refer specifically in
paragraph 37 of your note?
(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
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 notification 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 schemes 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 Bill.
We have aligned all the provisions so that there is a test of
reasonably required information.
78. That resolution of inconsistency has not
in any way changed the previously defined mechanisms by which
these various share schemes confer benefits on either savers or
recipients of the shares or share options. That remains exactly
was it was.
(Mr Knowles) Subject to very minor changes around
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.
79. When you say variations and mechanics, does
that make it effectively easier for companies in the real world
and their employees to operate and to understand the mechanisms
that are involved in the tax liabilities, involved in share option
schemes? Is that what the objective was?
(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 them 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."