Joint Committee on Tax Law Rewrite Bills Minutes of Evidence

Examination of Witnesses(Questions 80-99)



Lord Howe of Aberavon

  80. It is set out in paragraph 40 of the evidence before us.
  (Mr Knowles) Yes.


  81. The new text, they say, is clearer, more logically ordered, more user friendly and it is preserving the effect of the present legislation apart from minor policy changes, some of which they propose and all of which they welcome. Presumably a new practitioner developing the experience of a member of the Share Scheme Lawyers' Group will find the new legislation much easier to get into and find his or her way around than was the custom in the past. There are four different types of approved scheme now and they are all dealt with clearly and separately, using fairly consistent language.
  (Mr Knowles) That is right.

Lord Blackwell

  82. When you talk about consistency, it is consistency of language as opposed to consistency of terms? If you use consistent language, you are making the terms easier to understand.
  (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, this was not said. If we had an extra-statutory 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 met with the Share Scheme Lawyers' Group three times and 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.


  83. As far as I can see in your Schedule, the changes you have made to share related income do not give rise theoretically to a liability to more tax. There might be a liability to less tax but that is pretty theoretical as well. Page 160 is share related income and share incentive plans and it refers to the restriction on participating in both the share incentive plans and an approved profit sharing scheme in any tax year. Does that mean you removed that restriction? Is that a policy change? Does it have any significant effect?
  (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 so as to carry 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 can he have shares awarded to him under two share incentive plans. The object was to ensure that he did not receive two bites of tax relief at a time. By the time the Bill comes into force, there will be no tax purpose in—

  84. What about all the old, existing profit sharing schemes?
  (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.

  85. Is that last year's Finance Act?
  (Mrs Bertlin) It is the Finance Act 2000.

Mr Jack

  86. If we go to Chapter 5, page 235 of the Bill, clause 473, one of the parts that your note directed us to was the removal of complexity. I suppose by some drafting one can argue that 473, clause 1, was not perhaps all that complicated but it is interesting that it refers us to two other sections of "question mark, what?" and later on it talks about sections 15 and 21. Can you explain to me why it was drafted in that way, because one of the hallmarks of the exercise has been good signposting to help you to understand why things are expressed in the way they are.
  (Miss Dillon) This replaces the old limitation which limited section 135 of ICTA to Case I of Schedule E taxpayers. Because Case I of Schedule E has gone, we have new terminology.

  87. Will tax practitioners recognise this? Will they be able to say, "Ah, yes, I can see what that is. Case one has gone. Therefore, this is what this means"?
  (Miss Dillon) Part of the reason for the lenght 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.

  88. I hope that is the case in reality.
  (Mr Michael) So do I.

  89. Am I right that the EMI parts were originally written in normal language?
  (Mrs Manson) Yes.

  90. That has been lifted?
  (Mrs Manson) Yes.

  91. When you say that there is still some work to do, can you tease out what you mean?
  (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, on 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.

Mr Jack

  92. You have this section in the note headed "Benefits in Kind" and in paragraph 28 you had some interesting discussion about the phrase "perquisites". The two seem to be related. Is there any difference between the two?
  (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.


  93. In defence of the word "perquisites", it is not that antiquated. Nowadays people talk about "perks" but is there any difference between a perquisite and a benefit in kind?
  (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.

  94. A perquisite may include cash, whereas a benefit in kind does not. It means a benefit that is of a non-cash form.
  (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.

Mr Jack

  95. This goes back a long time. Over time, companies have sought to reward employees with various forms of benefits which we are now defining as benefits in kind. In general terms, when you were rewriting, can I be assured that, where a boundary line exists between the things that currently are untaxed and those things that are taxed as a benefit in kind because the law has gradually brought in certain additions over and above the normal monthly or weekly payments into tax, we have not altered the boundaries in any way between those things which are presently outside the burden of tax and those things which the law has over time brought inside it, so that, in definitional terms and in practical terms, when people get their P11Ds at the end of the new tax year, they are not going to say, "Good heavens, this is now taxable whereas last year it was not"?
  (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.

  96. Were there any particular difficulties when you were redrafting this section that you found hard to cope with or was it straightforward?
  (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 teaching 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.

  97. In the way you have laid this out, as far as the employee is concerned, you have not changed the provision whereby an employer can enter a negotiation with the Revenue to effectively pay an element of tax on some benefits, which can be very small amounts, in adding them all together for administrative ease? That has not changed?
  (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.


  98. I have not understood the distinction between something being within general earnings because it is money or money's worth and a benefit in kind. I thought general earnings were cash money. Any other form of payment was a benefit in kind to which you have to attribute a value to be able to tax it. If you get a salary, that is your earnings; if you get a flat in London, the Revenue calculate what it would cost you to obtain that flat yourself and that value is taxable. That is a gross over simplification but is there something in between, which is money's worth, which is not a benefit in kind?
  (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—

  99. If he gets paid part of his salary in gold bars or coffee beans, that has always been flexible because he can work out what he could sell it for.
  (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.

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