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6.56 pm
The Financial Secretary to the Treasury (John Healey): I beg to move, That the Bill be now read the Third time.
I am pleased to open this Third Reading debate on the Income Tax Bill, which rewrites the core provisions of our current income tax legislation. The Bill has been produced by Her Majesty’s Revenue and Customs tax law rewrite project, which is working to rewrite our direct tax legislation so that it is clearer and easier to use. It is the third rewrite Bill to venture into the complex and extensive territory of income tax. Once enacted— [Interruption.]
Mr. Deputy Speaker (Sir Alan Haselhurst): Order. I am sorry to interrupt the hon. Gentleman, but may I ask Members who are not staying for the debate please to leave the Chamber?
John Healey: I was encouraged a moment ago, Mr. Deputy Speaker, by the attendance in the Chamber for this important debate.
Once enacted, the Bill will complete the project’s work on income tax. In particular, it deals with the basic provisions covering the charge to income tax, including income tax rates, various reliefs and the calculation of income tax liability.
I am grateful to Opposition Members for the constructive way in which they have approached the proper scrutiny of the Bill, as they have with all previous tax law rewrite Bills. The cross-party support for the project and the distinguished and expert input that we get from within and outside Parliament are important features of the tax law rewrite project.
The project was set up in 1996 by the right hon. and learned Member for Rushcliffe (Mr. Clarke), and I am pleased to say that it has continued to have not only the support of his party in opposition but his personal commitment. I wish to place on record my appreciation of the way in which he chaired the proceedings of the Joint Committee on Tax Law Rewrite Bills last month. I also record my appreciation for the work of Lord Newton of Braintree in chairing the project’s steering committee.
The aim of the project is to rewrite the UK’s direct tax code, the provisions of which have been enacted over more than two centuries. The principal aim of the rewritten legislation is that it should be accepted by all the main users as clearer, as easier to use, and as preserving the effect of the present law, apart from minor agreed changes. To that end, the project proceeds through careful consultation and consensus, overseen by its two external committees: the steering committee and the consultative committee.
In between the three income tax Bills that have been enacted, the project has also rewritten pay-as-you-earn regulations in direct response to requests from users and representative bodies. Those Acts and regulations have been warmly welcomed by tax professionals and by other users.
The Bill follows the same tradition. The Institute of Chartered Accountants in England and Wales commented on it in a way that can be taken as representative of wider views of users of the measure. It stated:
“We commend the Tax Law Rewrite team on having produced another excellent rewrite Bill.”
Lembit Öpik (Montgomeryshire) (LD): While the Financial Secretary is speaking generally, I want to highlight the fact that, although the changes might be welcome, one of the problems in implementing them is the possible closure of regional tax offices such as those in Welshpool, Ceredigion and other outlying areas. Does he accept that there is a contradiction between passing potentially beneficial changes to the tax regulations and removing the direct contact through local tax offices that would ensure their smooth application?
John Healey: I am sorry to say that rewriting tax legislation has nothing to do with the hon. Gentleman’s point.
Making any change to the main tax policies is clearly beyond the remit of the rewrite project, but it can encompass minor changes when they improve legislation. Examples include new provisions to: clarify points in existing legislation, repeal obsolete material, and correct minor, unintended anomalies. The explanatory notes on the Bill and the notes on the new clauses, which were added at the Joint Committee stage, list 162 such minor changes. However, major changes will always be matters for a Finance Bill.
The Joint Committee noted the widespread public scrutiny of the Bill as a whole, especially of the minor changes, which were clearly flagged up at each stage of the consultation process. The Committee satisfied itself, and reported to the House, that all the proposed changes were within the project’s remit. The House also heard that they all had the support of the project’s external steering committee.
The Joint Committee carefully considered the amendments to incorporate a new part into the Bill to rewrite the legislation about the accrued income scheme. The amendments were agreed. In reaching that view, the Committee heard that consultation had taken place on the rewritten provisions as part of the previous rewrite Bill and that the external steering committee supported the inclusion of the new material.
The Joint Committee paid particular attention to clause 1029—clause 962 in the original Bill—which confers a new power on the Treasury to undo changes in the law made by the Bill and restore the law to what it was previously. That is similar to the power to make consequential amendments, which is included in the measure and previous tax law rewrite Bills, and allows amendments to be made to correct the Bill without having to use primary legislation. The new provision
will enable inadvertent changes that the Bill makes to the law to be corrected without the need for recourse to a Finance Bill.
I am happy to confirm to the House, as I did to the Joint Committee, that it is our intention and undertaking to introduce orders under the new power only with the agreement of the tax law rewrite project’s steering committee. The benefit of including the power in the Bill may soon become evident—perhaps sooner than we had anticipated given that two minor errors of the sort that I described have already been identified. Both affect paragraph 38 of schedule 2. Subject to the views of the tax law rewrite committees, it is the Government’s intention to correct them with effect from the date on which the Bill is enacted.
I have explained that the Bill tackles the core provisions of income tax and the rewritten legislation for the basic provisions for the charge to income tax, income tax rates, the calculation of income tax liability and personal reliefs. It also includes rewritten legislation for specific reliefs, including loss relief, the enterprise investment scheme, venture capital trusts, community investment tax relief, relief for interest paid, gift aid and gifts of assets to charities.
The measure additionally contains specific rules about settlements and trustees, the deduction of tax at source, manufactured payments and repos, the accrued income scheme, tax avoidance and general income tax definitions.
I stress the management of the project and the consultation to underline the amount of expertise, scrutiny and, indeed, the extent of consensus about the Bill on Third Reading. It is right to pay tribute not only to those directly involved but to the users who play such an important part in ensuring that the tax law rewrite project lives up to its original aims. All those involved in the consultation process have made and will, I hope, continue to make an invaluable contribution to its success. The Paymaster General and I greatly value their commitment and contribution to the work.
To sum up, the project is worth while, modernises our direct tax legislation and makes it clearer and easier to use. The third Income Tax Bill completes the rewrite project’s work on income tax. It is a major milestone and I commend it to the House.
7.6 pm
Mr. Mark Francois (Rayleigh) (Con): Having dealt earlier today with the arguments surrounding the Planning-gain Supplement (Preparations) Bill on behalf of Her Majesty’s Opposition, I am pleased—as, I suspect, is the Financial Secretary—to move on to the less controversial topic of the Income Tax Bill, which is the latest in the series of rewrite Bills undertaken under the auspices of the tax law rewrite project.
As hon. Members know, the House deals with such legislation through a special procedure under Standing Order No. 60. It means that, once the Bill is drafted and introduced, it is referred to a Second Reading Committee, which met on 17 January to take an initial look at the measure and referred it for more detailed consideration to a specially convened Joint Committee of both Houses.
The Joint Committee met on 24 January under the experienced chairmanship of my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), a distinguished former Chancellor of the Exchequer. I am pleased to see him in his place. The Committee took evidence from experts, including the Financial Secretary, and key officials from the tax law rewrite team, led by its director, Mr. Mark Nellthorp.
The Joint Committee subsequently produced a report, HC 268, which I have here, and was published just before the half-term recess. Hon. Members have had an opportunity to examine it during the break.
Before we complete our consideration of the substantial measure, I have several comments to make about the Bill, the Joint Committee’s examination of it and its subsequent report.
The Bill centres on rewriting the tax code for income tax. Its main purpose, as set out in the explanatory notes, is
“to rewrite the income tax legislation that has not so far been rewritten to make it clearer and easier to use.”
The Bill is massive in size. It comprises three volumes, with a total of 1,035 clauses and four large and detailed schedules. Given the mass of detail in the measure, it is important to stress that it has been through a considerable gestation period, including detailed consultation with interested parties, before appearing before the House this evening.
During the proceedings of the Second Reading Committee, which were held Upstairs on 17 January, I went into some detail about the consultation process that took place before the Bill was published. I do not, therefore, intend to reprise that now. Suffice it to say that the measure is the product of extensive consultation with tax professionals for two years or more. It was drafted by a specially configured project team comprising officials from Her Majesty’s Revenue and Customs, parliamentary counsel and public and private sector tax professionals, whose work was overseen by the steering committee, which was originally chaired by Lord Howe of Aberavon and more recently by Lord Newton of Braintree. Considerable effort goes into rewrite Bills before they are even published, and that was certainly the case in this instance.
The spirit of the process is intended to be bipartisan, and to clarify the law rather than introducing measures that are potentially controversial and might more properly be reserved for a Finance Bill. The Financial Secretary was keen to reiterate that this evening. However, I want to return to two issues that I raised in the Second Reading Committee, which were pursued by the Joint Committee when it met the following week, as well as commenting on the special powers in what is now clause 1029.
The first of those issues concerns the draft clauses relating to the accrued income scheme, which clarify the details relating to the taxation of interest on the sale of interest-bearing shares. The clauses were presented to the Second Reading Committee as a set of 66 separate additional draft clauses, which the Government sought permission to add comparatively late in the day. As I observed at the time, the Chartered Institute of Taxation said of the late change:
“We note that to make extensive amendments to a rewrite Bill at such a late stage is unprecedented, and the reduced consultation period (over the Christmas break) has meant that line-by-line analysis of the clauses has not been possible on this occasion”.
However, as the Financial Secretary explained to the Second Reading Committee, the clauses had originally been intended for an earlier rewrite Bill, but had been removed at that stage. It was decided to insert them in this Bill, as it would be the last scheduled to deal specifically with income tax. The Financial Secretary told the Committee:
“The provisions did not come completely out of the blue from the tax law rewrite project; they had previously been proposed but were dropped during the later stages of the last rewrite Bill... Given that this is the last income tax Bill being handled by the tax law rewrite project, it seemed appropriate, given that the provisions are totally within the terms of the project, to include them in this rewrite Bill rather than deal with the matter in the Finance Bill.” ——[Official Report, Income Tax Second Reading Committee, 17 January 2007; c. 14.]
Owing to the slightly unusual nature of what happened, the Joint Committee nevertheless examined the issue of the late changes to the Bill and reached the following conclusion, which should give the House some comfort:
“The Committee accepts the Government’s proposed new part: Accrued income profits. While substantive new clauses such as those forming the new part would normally be included in the Bill prior to its introduction, we recognise that there were exceptional circumstances in this case. We consider that these clauses have been subject to extensive consultation and should be included as part of the Bill.”
We are grateful for that reassurance, and given that the Joint Committee has scrutinised the matter, we are content to allow the changes to be made.
The second issue that I want to raise relates to the definition of “associated operation” for the purpose of the transfer of assets in certain circumstances, which is contained in what is now clause 719. The proposed clause replaces the definition in section 742(1) of the Income and Corporation Taxes Act 1988, which the tax law rewrite project had already described as “ambiguous”.
I raised the issue in the Second Reading Committee following representations from the president and other members of the City of Westminster and Holborn Law Society. What concerned them was that the new definition, although undoubtedly clearer than the original, had changed the law by making the definition of “associated operation” far wider, rendering it beyond the scope of what would normally be expected in a tax law rewrite Bill and to the advantage of Her Majesty’s Revenue and Customs rather than the ordinary taxpayer. I was pleased to note that the Joint Committee paid some attention to that point.
The exchanges on the issue are on pages Ev 4 and 5 of the minutes of evidence that accompany the Joint Committee report. Some reassurance was given by Lord Newton of Braintree and Lady Cohen, and subsequently by the assistant director of the rewrite project, Mr. Brian Jones. Mr. Jones explained that the representations from the City of Westminster and Holborn Law Society had been re-examined by the consultative and the steering committees before the change was endorsed. In his testimony to the Joint Committee, he said:
“When the letter from the City of Westminster and Holborn Law Society arrived, we decided to put that again to the committees and there was a full discussion at the committees when the background was examined and both committees agreed that this was, first, within the remit of the project and, in addition to that, it was a change which should be made because it makes the law clearer.”
As a result, the Joint Committee was happy to let the change proceed. We are grateful for that additional reassurance, as no doubt will be the president and members of the City of Westminster and Holborn Law Society.
I want to say something about the proposed operation of what is now clause 1029, which for much of the process was clause 962. It is unusual, in that it grants Ministers power, by order, to amend the Bill up to 5 April 2010 to restore the law to its previous position following the discovery of any inadvertent change in the law that it might make. In his evidence to the Joint Committee, the Financial Secretary described the power as “novel”. I congratulate him on his perspicacity in ensuring that it can be used to deal with two small lacunae in the Bill. We cannot accuse him of being slow off the mark in implementing the new power with which the House seems ready to provide him.
The Financial Secretary explained the proposed operation of the clause to the Joint Committee. Given that the position is unusual, I think it worth putting what he said on the record:
“Technically... it would be possible to lay the Treasury order without consulting and without clearing it with the Consultative Committee or the Steering Committee of the Tax Law Rewrite Project. In the explanatory memorandum, we have given an indication and a commitment that we would do so, discuss and agree with both committees before laying such an order, if we deemed it appropriate. I, as Minister responsible, would like to underline that commitment on the record for the Committee today.”
The Minister reiterated the commitment this evening, and we are grateful for that.
The Joint Committee obviously appreciated the Minister’s reassurance on what is now clause 1029. In its subsequent report, it commented:
“We accept that the power given in Clause 962”
“will not be used to substantively change the law outside of the Tax Law Rewrite Project. We note with approval the Minister’s assurance that the power could not be exercised without both reference to the Consultative Committee and the agreement of the Steering Committee.”
Mr. Kenneth Clarke (Rushcliffe) (Con) rose—
Mr. Francois: I should be delighted to give way to my right hon. and learned Friend.
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