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House of Commons
Session 2008 - 09
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The Committee consisted of the following Members:

Chairman: Robert Key
Blizzard, Mr. Bob (Lord Commissioner of Her Majesty's Treasury)
Breed, Mr. Colin (South-East Cornwall) (LD)
Browne, Mr. Jeremy (Taunton) (LD)
Duddridge, James (Rochford and Southend, East) (Con)
Field, Mr. Mark (Cities of London and Westminster) (Con)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Havard, Mr. Dai (Merthyr Tydfil and Rhymney) (Lab)
Heald, Mr. Oliver (North-East Hertfordshire) (Con)
Heyes, David (Ashton-under-Lyne) (Lab)
Howell, John (Henley) (Con)
Moffat, Anne (East Lothian) (Lab)
Munn, Meg (Sheffield, Heeley) (Lab/Co-op)
Pound, Stephen (Ealing, North) (Lab)
Timms, Mr. Stephen (Financial Secretary to the Treasury)
Williams, Mrs. Betty (Conwy) (Lab)
Wright, Mr. Anthony (Great Yarmouth) (Lab)
Liam Laurence Smyth, Celia Blacklock, Committee Clerks
† attended the Committee

Second Reading Committee

Thursday 15 January 2009

[Robert Key in the Chair]

Corporation Tax Bill
9 am
The Financial Secretary to the Treasury (Mr. Stephen Timms): I beg to move,
That the Committee recommends that the Corporation Tax Bill ought to be read a Second time.
I am delighted to serve under your chairmanship, Mr. Key, and pleased to open this Second Reading Committee debate. The Bill rewrites basic corporation tax provisions, such as the charge to tax and provisions used by companies to compute their income for tax purposes. It is the fifth Bill produced by Her Majesty’s Revenue and Customs tax law rewrite project. In 2007, the project completed rewriting income tax legislation, and this Bill is the first of two that rewrite substantially all legislation relating to corporation tax. As with the Acts produced by the tax law rewrite project in the past, the Bill continues the project’s work in modernising our direct tax legislation so that it is clearer and easier to use.
I will put the background of the project’s work in context. The project was set up in 1996 by the then Chancellor, the right hon. and learned Member for Rushcliffe (Mr. Clarke)—I pay tribute to his continuing contribution as Chair of the Joint Committee on Tax Law Rewrite Bills—to rewrite the UK direct tax code. The project has enjoyed cross-party support from the outset, and aims to make legislation clearer and easier to apply without changing the law’s meaning, except in very minor, agreed ways. The project’s aim is clarity rather than brevity, as the length of the documents before us testifies, and its work is valuable, because some of the rewritten provisions date back a long time and are often complex, dense and difficult to follow.
The project’s first Bill became the Capital Allowances Act 2001. The project then embarked on rewriting income tax legislation in the Income Tax (Earnings and Pensions) Act 2003, the Income Tax (Trading and Other Income) Act 2005 and the Income Tax Act 2007. In addition, the project rewrote the pay-as-you-earn regulations to meet requests from users and representative bodies. Its work has been warmly welcomed; independent market research shows a very positive response from users, and the Institute of Chartered Accountants in England and Wales has also recently praised the project.
The project now has a well-established approach to rewriting legislation, developed with the help of people whom it has consulted over a number of years. It restructures legislation to bring related provisions together and to provide more logical ordering. It also helps users by providing navigational aids, such as signposts, to make relevant parts of the legislation easier to find, and it has introductory provisions to set the scene. It unpacks dense source legislation by using shorter sentences and, where possible, it harmonises definitions. It uses modern language and helps the reader with aids such as formulae, tables and method statements, when appropriate.
Changes in tax policy are outside the project’s remit—those will always be matters for the Finance Bill—but the project’s work does encompass minor changes in the law where that improves legislation. The project can, for example, remove ambiguities and correct minor anomalies.
The project’s work would be impossible without a full programme of consultation involving UK tax specialists and other interested parties. The project’s strategy is set by an independent steering committee that is appointed by Ministers and chaired by Lord Newton of Braintree, to whom I express particular thanks. The committee’s members come from both Houses of Parliament, the judiciary, the legal and accountancy professions, and business and consumer groups. There is also a consultative committee chaired by HMRC with members drawn from tax and business representative bodies. That committee ensures continuous and detailed consultation of the draft provisions.
The consultation process is very thorough. The project publishes blocks of draft rewritten legislation for consultation on its internet site together with explanatory notes. It also publishes papers to raise points for consultees to address, including suggestions for minor changes in the law. In addition, groups of private sector specialists have worked with the project on some provisions. All draft clauses and papers are presented to both the project’s committees. Finally, the Bill, like those preceding it, benefited from a further round of consultation when it was published in full in draft form.
I provided that background to demonstrate the amount of expertise and scrutiny behind the Bill and the effort to secure consensus on it. I pay tribute to the consultees, who have worked hard on the project to maintain the high standards of work on the earlier Acts. I express gratitude for the commitment and technical expertise of those working in the project, and for the work of the specialists in HMRC who have commented on the clauses. The contribution and commitment of everyone involved deserves the Committee’s warm praise. If the Committee agrees to recommend that the Bill ought to be read a Second time, and the House agrees with that recommendation, the Bill will be subject to detailed scrutiny by the Joint Committee.
Let me say a few words about the contents of the Bill. Corporation tax was introduced in 1965. Its rules were, in part, based on those for income tax. The rewrite of income tax law in the project’s previous Acts has created a separate set of provisions for income tax, so users looking at income tax law no longer have to filter out the corporation tax provisions. However, the matching corporation tax provisions were left in their original form. The Bill rewrites a significant number of those matching corporation tax provisions in a similar way to that applied to income tax provisions. In doing so, it brings the drafting of the two codes back into line.
That means that although some parts of legislation were common to both income and corporation taxes in the past, those provisions are now separate. That is partly why we have such a large number of clauses in the Bill. In particular, the rewrite of income tax provisions marked the end of charging income tax by reference to schedules. Instead, they now refer to the type of income to which the schedules relate. The Bill includes provisions related to trading and property income, and income from other sources, without referring to schedules, so that marks the end of the use of the word “schedule” to refer to types of income—a usage that goes back to Henry Addington’s income tax legislation of 1803.
Many provisions that are specific to corporation tax have been rewritten in the Bill—for example, those for loan relationships, derivative contracts and intangible fixed assets. The Bill also rewrites provisions that govern particular types of expenditure, such as that on research and development and on film production. Finally, and importantly, the Bill includes basic corporation tax provisions, such as the charge to tax, accounting periods and provisions relating to company residence.
I have talked about extensive consultation. No minor change in the law is included in the Bill unless it has been approved by both the project’s committees. Responses to consultation papers and to the draft Bill were detailed in published response documents, which set out how the project took them into account. The draft Bill was published in February 2008 and the response document followed in August. In addition, the project published papers and draft clauses that had not been included in the draft Bill, including material reflecting provisions made in the Finance Act 2008, so that they also had the benefit of detailed consultation
It is clear that the Bill has undergone thorough scrutiny outside the House, and it maintains the high standards of rewritten tax legislation set by the project’s previous work. This important Bill provides companies, tax professionals and others with clear legislation that is easier to use, and I commend it to the Committee.
9.9 am
Mr. David Gauke (South-West Hertfordshire) (Con): First, I welcome you to the Chair, Mr. Key—it is a great pleasure to serve under your chairmanship. Secondly, I thank the Minister for his introduction and his description of the process that has been undertaken with regard to the Bill. I must be honest with the Committee by saying that I was not hugely disappointed that he did not go through the contents of the Bill at great length. However, his introduction was extremely helpful.
This is, I believe, the longest Bill that the House has ever considered, although the parliamentary deliberations will not be as long as those on the average Finance Bill, for which we can be grateful. It would be remiss of me not to state that the Bill will extend our lead over India in having the longest tax code in the world. We overtook India last year with the equivalent income tax Act and last year’s Finance Act.
It is not purely because of the rewrite Bills that our tax code is so long. There is a problem with the complexity of our tax law, to which I shall turn in a moment. Before doing so, I join the Financial Secretary in paying tribute to those involved in putting the Bill together—both the team at HMRC who have drafted it with outside support and the consultees. This enormous project takes a great deal of effort and hard work, and I know from speaking to tax professionals that they appreciate the professionalism with which the matter has been addressed.
The Minister is right to say that there is cross-party support for the project, although I will be raising one or two concerns. Making tax law simpler is clearly useful, although the problem that it addresses is not new. Gladstone, when he was Chancellor of the Exchequer in the 1850s, said:
“To bring the construction of tax laws within the reach of persons who have not received a legal education is no doubt desirable but very far from being easy”.
There is perhaps still some way to go. Speaking as someone with a legal education, I am not sure that we are there yet, but the work involved has been immense, and I pay tribute to those involved.
As the Minister has said, the intention is not to change the substance of the law, other than in very minor circumstances. Consequently, we have an unusual parliamentary process, and the Bill will not receive the line-by-line scrutiny that would otherwise occur, although the Joint Committee will receive representations from professional bodies and others in the event of concerns about weaknesses in the drafting of the Bill, or if there are concerns that the law is inadvertently being changed. That is a valuable process.
I would like reassurance from the Minister on clause 1,324—it is not often that I can say that. I do not have specific comments on the preceding 1,323 clauses—just the provision that allows the Treasury by order to undo any changes. The issue has arisen in previous rewrite Bills. Will the Minister provide some reassurance—I am sure that he can—on the limitations of that clause and confirm that we are not in a Henry VIII-provision position whereby primary legislation can be amended by a statutory instrument?
The Bill is important because tax complexity is a major concern for the British economy. There is a concern among professional bodies and industry groups that the UK tax system is over-complex. Surveys undertaken by the Association of Chartered Certified Accountants show that the UK tax system is too complex and that it is less transparent than that of many of our international competitors. Surveys undertaken by PricewaterhouseCoopers have come to much the same conclusion. The manufacturers’ organisation EEF has also expressed its concerns. The Chartered Institute of Taxation has talked about the tax system becoming so complex that it might malfunction. When United Business Media relocated its head office from the UK, it cited tax complexity as a concern.
There is great worry about tax complexity. Part of it concerns the drafting, presentation and readability, or user-friendliness, of our tax law, which this Bill and its predecessors have been designed to address. One concern raised with me by a tax practitioner was that clarifying the drafting merely made people understand more clearly why they were confused by tax law—the underlying substance did not change. I do not criticise the process, but I note its limitations, because it is not about attempting to address those issues of substance. The fact remains that our tax system, notwithstanding the improvement in drafting, remains hugely complex.
Given the huge resources used—the concentration by HMRC officials and outside bodies on this matter—it is legitimate and reasonable to ask whether the process represents good value. We have to ask who the audience, or the beneficiaries, are. In the case of corporation tax—this is less so than with income tax—the audience will be tax practitioners. When the Bill becomes an Act, it will not be the man on the Clapham omnibus who goes through it to examine what it is about.
However, there is a tension here. Those who already hold a great deal of expertise, understand this area of the existing law, know where everything fits in and are able to find their way around existing legislation easily, will have to re-learn. They will need to develop a new understanding and to get used to new wording and clauses, so there will be some disruption. They will have to take a step back and, at least for an interim period, they will not know the law as well as they did. That has to be balanced with the advantages for new entrants, as those coming to this part of the law afresh might find it easier to learn how the law works with this new drafting. If we are in areas in which the law is going to change fundamentally in the near future, the value of the process is clearly diminished. That is not meant as a carping criticism of this process—we do think it is valuable. However, there is a feeling that the value of the process is diminished in areas of the law that are both complex and likely to change in the near future. I would be grateful for the Minister’s views on that argument and to hear the extent to which it might influence the development of this process.
It is important, however, to make as much use of this process as possible. Clearly, the highly skilled professionals going through the existing law with a fine-toothed comb will be able not only to improve the drafting but, on occasions, to identify weaknesses. There are at least a couple of recent examples of improvements in the law being made following the identification of weaknesses in the course of this process. For example, the income tax Act process revealed some issues regarding charities law that were addressed in the Finance Act 2006. During the progress of the Income Tax (Earnings and Pensions) Act 2003, a possible loophole regarding the anti-avoidance provisions relating to remuneration from shares was identified and addressed. We would certainly encourage those who look at our tax law during the rewrite process to be alive to possible improvements that could be made in subsequent Finance Bills. The impression I get from the people to whom I speak is that this process is doing that and is improving.
Another strong argument for rewriting tax law relates to tax administration. It comes back to the point I made about where the man in the street has contact with tax law, where there is potential for confusion and where clearer drafting would be most valuable. There might be an argument for looking at the filing of tax returns, for example. In recent Finance Acts, we looked at HMRC powers. During the consideration of the last Finance Bill, I made the point to the Financial Secretary’s predecessor that there is an argument for consolidating all HMRC powers, given that we see changes to them almost annually. It would be helpful if, first, they were consolidated and, secondly, if the drafting were made as clear as possible. Will the Minister say whether there is any intention to look at this area under the tax law rewrite process?
Although this is a valuable process, it perhaps needs to go further. It is worth reminding the Committee of its history. It began with an amendment to the Finance Act 1995 that called on the Treasury to produce a report on tax simplification. That evolved into this tax law rewrite process, although perhaps that was not the original ambition of those who tabled and supported that amendment.
Mr. Oliver Heald (North-East Hertfordshire) (Con): Speaking as one of those who supported that amendment, I think we believed that the structure of the law would be changed so that it would say something more general—such as, a profit shall be taxed—rather than define in infinite detail all aspects of a derivative contract, for example. Part 7 of the Bill looks in infinite detail at what a derivative is and what should be treated as one, and all the clever people in the City are devising contracts that are not quite a derivative and aiming to get round the tax. I wonder whether the concept of writing tax law this way is right.
 
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Prepared 16 January 2009