The
Committee consisted of the following
Members:
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 Majestys 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 projects work in modernising our direct
tax legislation so that it is clearer and easier to
use.
I
will put the background of the projects 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 Billsto 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
laws meaning, except in very minor, agreed ways. The
projects 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
projects 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 projects remitthose will always
be matters for the Finance Billbut the projects work
does encompass minor changes in the law where that improves
legislation. The project can, for example, remove ambiguities and
correct minor
anomalies.
The
projects work would be impossible without a full programme of
consultation involving UK tax specialists and other interested parties.
The projects 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 committees
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 projects 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 Committees 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 projects 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 incomea usage that goes back to Henry
Addingtons income tax legislation of
1803.
Many
provisions that are specific to corporation tax have been rewritten in
the Billfor 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
projects 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 projects 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. Keyit 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 years 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
togetherboth 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 1,324it is not often
that I can say that. I do not have specific comments on the preceding
1,323 clausesjust 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 reassuranceI am sure that
he canon 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 lawthe 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 usedthe concentration by HMRC officials and
outside bodies on this matterit 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
taxthis is less so than with income taxthe 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.
There is a
growing feeling within the tax practitioner community, if there is such
a thing, that the benefit from the Bill for corporation tax is perhaps
not as
strong as that from income tax measures, because corporation tax, and
particularly some aspects of it, is already a fairly specialised field.
Part 5 of the Bill, for example, which relates to loan
relationshipsfrom clause 301 onwardsaddresses a
particularly complicated area. Even highly skilled tax practitioners
consider it somewhat impenetrable; there is a small body of experts who
understand it. HMRC and the Treasury have received some lobbying on the
grounds that only a few understand it and that if things are disrupted,
that is likely to cause more problems than it is worth.
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 processwe 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 Ministers 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 Secretarys
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 generalsuch as, a profit shall be taxedrather 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.