Examination of Witnesses(Questions 80-99)|
MICHAEL CBE, MR
CB, MS JACKIE
TUESDAY 14 JANUARY 2003
Lord Howe of Aberavon
80. It is set out in paragraph 40 of the evidence
(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.
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
(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.
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
optionscertainly the opening introductionseems 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.
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
(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
(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
(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.
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.