Memorandum of evidence submitted by the
Tax Law Rewrite Project
1. This memorandum of evidence has been
prepared by the Tax Law Rewrite Project to assist the Joint Committee's
consideration of the Income Tax (Earnings and Pensions) Bill as
introduced in the House of Commons on 5 December 2002 (referred
to hereafter in this evidence as "the Bill" or "this
2. The memorandum is designed to embrace
information on all six bullet points mentioned in the Clerk's
letter of 17 December 2002 to the Director of the Project, Mr
Peter Michael, CBE.
1. There are a total of 183 minor changes
made in the Bill, as recorded in Annex 1 to the Explanatory Notes.
2. These changes fall into a number of categories:
(a) incorporating extra-statutory concessions
or published Statements of Practice or similar;
(b) making the legislation shorter, simpler,
clearer, more certain or more consistent with other legislation;
(c) correcting points overlooked in the course
of consolidation Acts, missed consequential amendments to earlier
legislation, or other technical defects;
(d) removing an anomaly which is patently
(e) making clear the intended and accepted
interpretation of legislation that is currently somewhat opaque;
(f) filling a gap in the legislation.
5. Some minor changes may be made for a
combination of the above reasons. Appendix 1 to this Memorandum
contains a list of the Changes grouped by reference to the main
reason for making them.
6. The Bill incorporates 20 extra-statutory
concessions, representing the majority of those that affect employment
income, pension income or social security income.
7. There are 12 other extra-statutory concessions
directly relevant to employment income, pension income or social
security income. Appendix 2 to this Memorandum lists those concessions
and explains why they are not included in the Bill.
8. Many of the changes have no practical
effect on the burden or incidence of tax on individual taxpayers.
For example, a miner receiving free coal currently exempt under
ESC A6 will pay no more tax just because that ESC is incorporated
in this Bill under clause 306.
9. Likewise, a gap in the current legislation
that this Bill fills in line with Inland Revenue practice will
not change anyone's tax liability.
10. At the end of each of the changes listed
in Annex 1 to the Explanatory Notes is a summary of the effect
of the change, both in principle and in practice.
11. None of the changes have any significant
effect on taxpayer's liabilities either in principle or in practice.
12. Included in Appendix 1 to the Memorandum
is a summary of the effect that each change will have in practice.
13. A number of clauses in this Bill have
been italicised to indicate that they incorporate a possible increase
in the burden of tax (and for this purpose the "in principle"
effect is considered as well as the effect in practice).
14. Appendix 3 to this memorandum contains
more detailed information about the possible increase in the burden
of tax in respect of each of the italicised provisions.
15. The core component of employment income
is earnings, currently known as "emoluments" in tax
16. The definition of "emoluments"
is currently in section 131(1) of ICTA (Income and Corporation
Taxes Act 1988) as follows:
"the expression emoluments shall include
all salaries, fees, wages, perquisites and profits whatsoever."
17. This wide definition means that most
employees receive "emoluments". Many employees do not
receive anything from their employment other than "emoluments".
18. In this Bill this core concept has been
made clearer in four main ways:
the rather antiquated term "emoluments"
is replaced with "earnings", a word which has more immediate
relevance to employees and employers;
the equally antiquated phrase "perquisites
and profits whatsoever" is replaced with "any gratuity
or other profit or incidental benefit of any kind obtained by
the definition of "earnings"
is given more prominence. It is defined in clause 62, right at
the beginning of Part 3 of the Bill, which deals with most of
the "incomings" from employment before consideration
of exemptions in Part 4 and deductions in Part 5;
the definition of "earnings"
is expanded to bring in a proviso from long-standing case law
that in order for a gratuity, profit or incidental benefit to
be "earnings" it must be money or money's worth. (See
Note 13 in Annex 2 to the Explanatory Notes).
19. There are many employees who would not
have to look any further than clause 62 to determine the extent
of their earnings for tax purposes.
20. For those employees who receive benefits
that are outside the clause 62 definition, the Benefits Code in
Chapters 2 to 11 of Part 3 sets out what, if anything should be
treated as earnings in respect of those benefits.
21. Clause 62 earnings and amounts treated
as earnings by the Benefits Code are added together to form "general
earnings" for the year. The extent to which those general
earnings are taxable in the year is determined by the rules in
Part 2 of the Bill.
The move away from Schedules and Cases
22. It is not just the status of the income
that is relevant in determining the charge to tax, but also the
residence and domicile of the employee (and in some cases the
location of the performance of duties and the residence of the
23. Currently, in the case of emoluments
and amounts treated as emoluments by the various provisions dealing
with benefits, these factors are applied by means of the three
Cases of Schedule E. For example, an employee who is resident,
ordinarily resident and domiciled in the UK is within Case I of
Schedule E. But the labels "Case I" and "Schedule
E" are meaningless to anyone other than a tax expert.
24. This Bill adopts a different approach.
Instead of "Schedule E" it uses phraseology that people
can more readily understand: employment income.
25. Instead of applying the Cases of Schedule
E, the Bill sets out, in Part 2, what tax treatment of general
earnings applies in the various sets of circumstances that may
26. About 98 per cent of employees subject
to UK tax are resident, ordinarily resident and domiciled in the
UKso this group of taxpayers (currently within Case I of
Schedule E) are covered first in Chapter 4: Taxable earnings:
rules applying to employee resident, ordinarily resident and domiciled
27. Chapter 5 sets out what tax treatment
applies if the employee is resident, ordinarily resident and/or
domiciled outside the UK, dealing with each permutation in turn
in descriptively headed clauses.
28. It is worth noting that the cases of
Schedule E only apply to emoluments and amounts treated as emoluments
("general earnings" in this Bill). There are other kinds
of employment income chargeable under Schedule E. The income subject
to these free-standing charges is described as specific employment
income in this Bill, enabling it to be distinguished from general
earnings. The basis of assessment and any residence etc tests
pertinent to specific employment income are contained in the relevant
Chapter in Part 6 or 7 setting out that charge.
29. The majority of employees have uncomplicated
tax affairsthis Bill makes it easy for them to see which
clauses are applicable to them.
Part 1 sets out how the Bill is arranged.
Part 2 explains how to work out the amount of
employment income charged to tax. The arrangement of Part 2 means
that most employees would not need to go beyond Chapter 4 of that
Part to work out their taxable earnings.
Part 3 sets out what is earnings or treated
as earnings. The arrangement of Part 3 means that many employees
would not need to look beyond clause 62 in Chapter 1.
Parts 4 and 5 deal with exemptions and deductions
respectively (and will not be relevant to many employees).
Parts 6 and 7 deal with specific employment
income (again not relevant to many employees).
30. Companies often wish to reward employees
by allowing them to acquire shares on advantageous terms; and
successive Governments have decided that they wish to confer tax
advantages on various schemes and plans. Five schemes or plans
exist at present, listed below in the order in which they were
Approved profit sharing schemes.
Legislation relating to these schemes was contained in FA 1978.
These schemes are now being phased out, and they are not included
in this Bill or discussed further in this evidence.
Approved save as you earn ("SAYE")
option schemes. Legislation relating to these schemes was contained
in FA 1980, and later consolidated in sections 185 and 187 of,
and Schedule 9 to, ICTA.
Approved company share option plans
("CSOPs"). Legislation relating to these plans was
contained in FA 1984, and later consolidated in sections 185 and
187 of, and Schedule 9 to, ICTA.
Approved share incentive plans ("SIPs").
Legislation relating to these plans is contained in Schedule
8 to FA 2000 under the name "Employee share ownership plans".
Enterprise management incentives
("EMI"). Legislation relating to EMIs is contained
in Schedule 14 to FA 2000.
31. Legislation to confer tax advantages
on a scheme, needs to cover a number of topics:
the characteristics that the scheme
if the scheme requires approval,
the procedure to be undertaken;
the tax advantages to be conferred
on the scheme;
any tax charges that will apply if
the shares or options are removed from the scheme or plan (or
other "inappropriate" actions are undertaken); and
any supplementary provisions.
32. The current legislation does not deal
with these topics consistently. In the cases of SAYE option schemes
and CSOPs, some provisions are in sections of ICTA; the remainder
are in Schedule 9 to that Act. ICTA also amalgamates the provisions
relating to the two different schemes. From time to time the
legislation needs to distinguish between the two schemes, and
this need affects the way in which provisions are organised.
The legislation relating to SIPs and EMI is set out, in its entirety,
in two Schedules to FA 2000; but those Schedules also deal with
matters outside the scope of this Bill: for there is also material
relating to corporation tax, capital gains tax and stamp duty.
33. This Bill brings the treatment of the
four schemes into better alignment. Each scheme is dealt with
separately (and, as a result, ICTA's amalgamation of the provisions
relating to SAYE option schemes and CSOPs has been reversed).
The rewritten legislation deals with comparable material in the
same order. In each case some provisions have been placed in
an individual Chapter in Part 7 of the Bill, and others in a Schedule
dealing with different aspects of the scheme.
34. In this Bill :
SIPs are covered in Chapter 6 of
Part 7 and Schedule 2.
SAYE option schemes are covered in
Chapter 7 of Part 7 and Schedule 3.
CSOPs are covered in Chapter 8 of
Part 7 and Schedule 4.
EMI is covered in Chapter 8 of Part
7 and Schedule 5.
35. The Chapters in Part 7 deal with the
topics that affect the employee directly. After introductory
clauses, the Chapters set out the tax advantages conferred on
participants in the scheme. Those advantages are dealt with in
a coherent order with, for example in SIPs, the tax advantages
relating to the award of shares being followed by those relating
to the holding of shares and then by those relating to shares
that cease to be subject to the scheme. As necessary, the provisions
relating to tax advantages are then followed by provisions setting
out the tax charges that may arise. Those charges are also dealt
with in a coherent order. Chapter 6 of Part 7 (dealing with SIPs)
also contains clauses dealing with the impact of PAYE; and, where
appropriate, the Chapters in Part 7 conclude by indicating other
provisions in tax law that may be relevant.
36. Schedules 2 to 5 to the Bill deal with
the other matters listed in paragraph Legislation to confer tax
advantages on a scheme, needs to cover a number of topics. These
matters do not concern the employee directly: the detail in these
Schedules may well be of more interest to those setting up and
administering schemes, and to their professional advisers. All
four Schedules are divided into Parts, of which the first is introductory.
The first major topic dealt withsometimes, of necessity,
at considerable lengthis the required characteristics for
the scheme in question. Within this topic, comparable material
continues to be dealt with in the same general order. General
requirements are dealt with first, followed by requirements relating
to the eligibility of individuals to participate in the scheme,
and then (in the cases of Schedules 2 to 4) by requirements relating
to the shares that may be acquired by the individual. The requirements
that apply only to the scheme in question are dealt with later.
The second major topic dealt with (as necessary) is the procedure
to be undertaken if the scheme requires approval; and the third
major topic dealt with (in the final Part of each Schedule) consists
of supplementary provisions.
37. This Bill includes making a certain
number of minor changes to the law designed to bring the rewritten
legislation relating to share schemes into better alignment.
For example, the restrictions to which scheme shares may be subject
have been amended, in the cases of SAYE option schemes and CSOPs,
so that they are now aligned with those applying for SIPs (see
Change 168 in Annex 1); and the approval procedure relating to
SIPs has been amended to bring it into alignment with that applying
for SAYE option schemes and CSOPs (see Change 164 in Annex 1).
38. Various drafting techniques have also
been used to achieve better alignment across the share scheme
provisions. There is, for example, an "Index of defined expressions"
at the end of each Schedulea feature used in the provisions
currently applying for SIPs and EMI and replicated in this Bill
for SAYE and CSOPs too. And the legislation relating to each
scheme is described as a "code", a term suggested by
the term "benefits code" in clause 63 of the Bill.
39. The use of the terms "SIP code"
and "EMI code" is helpful for dealing with those provisions
in Schedules 8 and 14 to FA 2000 that do not fall within the scope
of this Billbecause they are relevant for corporation tax,
capital gains tax or stamp duty. Schedule 6 to the Bill (Consequential
amendments) provides for this material to be placed elsewherein
ICTA, TCGA 1992 and in FA 2001. The use of the two terms enables
the "repositioned" material to be linked with the relevant
material in this Bill, so that expressions used in the relevant
code also apply to the "repositioned" material.
40. This reorganisation and redrafting of
the material relating to share schemes and share option schemes
has been developed in consultation with share scheme practitioners,
who confirm that the provisions are indeed clearer and easier
to understand. The Share Schemes Lawyers group are on record as
"The Share Scheme Lawyers Group has had
a most constructive series of meetings with the TLR project team.
As far as the share scheme legislation is concerned, we believe
that the objectives of the rewrite project have been very substantially
accomplished. The new text is clearer, more logically ordered
and more user friendly while preserving the effect of the present
legislation apart from minor policy changes (some of which we
proposed and all of which we welcome)."