Draft Enactment of Extra-Statutory Concessions Order 2014
The Committee consisted of the following Members:
† Bebb, Guto (Aberconwy) (Con)
† Burley, Mr Aidan (Cannock Chase) (Con)
Corbyn, Jeremy (Islington North) (Lab)
† Dakin, Nic (Scunthorpe) (Lab)
† Duddridge, James (Rochford and Southend East) (Con)
Flynn, Paul (Newport West) (Lab)
† Garnier, Sir Edward (Harborough) (Con)
† Gauke, Mr David (Exchequer Secretary to the Treasury)
Hepburn, Mr Stephen (Jarrow) (Lab)
† Lloyd, Stephen (Eastbourne) (LD)
Love, Mr Andrew (Edmonton) (Lab/Co-op)
† Mahmood, Shabana (Birmingham, Ladywood) (Lab)
† Metcalfe, Stephen (South Basildon and East Thurrock) (Con)
† Nuttall, Mr David (Bury North) (Con)
† Rudd, Amber (Hastings and Rye) (Con)
† Thornton, Mike (Eastleigh) (LD)
Wilson, Sammy (East Antrim) (DUP)
Wood, Mike (Batley and Spen) (Lab)
David Slater, Committee Clerk
† attended the Committee
Fifth Delegated Legislation Committee
Tuesday 28 January 2014
[Mr Adrian Sanders in the Chair]
Draft Enactment of Extra-Statutory Concessions Order 2014
2.30pm
The Exchequer Secretary to the Treasury (Mr David Gauke): I beg to move,
That the Committee has considered the Draft Enactment of Extra-Statutory Concessions Order 2014.
It is a pleasure to serve under your chairmanship, Mr Sanders.
Some members of the Committee may be aware that Her Majesty’s Revenue and Customs continues to review its extra-statutory concessions, commonly called “ESCs”, following clarification of HMRC’s administrative powers in the Wilkinson case. The order is a further step in that process and will put two more ESCs on a statutory footing. The order has been fully consulted on and I am grateful to those who took the time to help the Government to improve the legislation.
The first concession, ESC A4, is concerned with the rules for allowing a deduction from the earnings of an employment for travel expenses. Under the rules, the expenses incurred on travel in the performance of the duties of the employment, or for necessary attendance at a temporary workplace, will qualify for a deduction. In contrast, the expenses of travelling from home to a normal place of work will not qualify for relief.
The travelling expenses of company directors are also subject to the rules in determining whether they are eligible for a deduction. However, there are a number of circumstances that are particular to company directors where a strict application of the rules is not appropriate. ESC A4 modifies the normal rules for exemption of income tax on travel expenses for travel by a director to an associated company; travel expenses incurred by a director who gives his services without remuneration to a not-for-profit company; and travel expenses of a sole proprietor or partner in a professional practice, who has been appointed to the board of a company to carry out a specific function, and not because of any financial interest in the company.
The responses to the consultation helped to ensure that the definition of “not-for-profit company” and “associated company” in the draft legislation fully reflect the scope of the ESC.
The fourth part of ESC A4 covers expenses incurred where a spouse or partner accompanies a director or employee because the director is too sick to travel on his or her own. This part of the ESC is not provided for in the draft order, as those expenses already qualify for relief in law.
The second concession, ESC A10, applies to lump sums paid by foreign occupational pension schemes in connection with the retirement or death of employees who have worked outside the UK. Where the pension
scheme is set up as a trust or otherwise exists independently of the employer, the concession can reduce the tax payable on lump sums built up before 6 April 2011.Where the employer pays the lump sums to the employee, the concession can reduce the tax payable on all such lump sums, whenever the rights to receive built up. However, in both those cases, the concession reduces the tax payable only to the extent that the rights to receive the lump sum relate to the employee’s service outside the UK.
The draft legislation will incorporate the reliefs provided by ESC A10 into legislation. Lump sum retirement benefits paid by a third-party pension scheme, where rights to receive the lump sum have accrued since 6 April 2011, are not covered by ESC A10 and the order does not cover them either. Statutory relief for lump sums relating to periods of service outside the UK has instead been given by separate legislation since 6 April 2011.
HMRC continues to review its concessions using the Wilkinson principles. I expect further orders such as the one we are considering, and more withdrawals by HMRC, before the review is completed.
If the Committee passes the order today, the ESC order, which is in draft, will be made quickly and will come into force next month. The legislation in the order will ensure that concessionary treatments continue to provide relief as originally intended. Given the cross-party support for the rolling programme of legislating concessions, and the valuable benefits the ESCs provide, I am pleased to commend the order to the Committee.
2.35pm
Shabana Mahmood (Birmingham, Ladywood) (Lab): It is a pleasure to serve under your chairmanship, Mr Sanders.
As the Minister explained, the order gives legislative effect to extra-statutory concessions, exercising the powers conferred by section 160 of the Finance Act 2008.
I have a couple of questions about the two concessions we are considering. In relation to the exemption or deduction for travel expenses, can the Minister tell the Committee how many directors make use of that ESC? Is the concession well understood and well used? Can he explain how the exemption or deduction will be actioned? Will it be automated, or will it require action on the part of the affected person? I noticed in the explanatory notes that the guidance on the ESC will be updated in a minor way only, and I was not entirely sure what that meant, so I would be grateful if the Minister explained that.
The consultation was conducted in December 2012, and subsequent changes were made to the definitions of a not-for-profit company and associated company used in the earlier draft of the order. Can the Minister explain whether the definitions that we are now using are similar to the understanding of those terms in the rest of our tax legislation? It seemed odd to me that there is not a standard definition, so I would be grateful if the Minister could offer a detailed explanation.
The respondents to the consultation also felt that the terms of the initial draft of the order were more restrictive than how the concession had been understood to operate. Was that by error or design? Is the Minister confident that matters have not gone too far the other way?
The second ESC relates to lump sums paid under foreign pension schemes. Can the Minister tell us the numbers of people affected and whether eligibility for that concession has increased or decreased? In respect of both the ESCs, it would be helpful to the Committee if the Minister could tell us what the overall impact will be on the Exchequer.
2.37pm
Mr Gauke: I thank the hon. Member for Birmingham, Ladywood for her questions, and I hope that I can address all the points that she raised. I am glad to understand from her that she remains broadly supportive of the progress that has been made in terms of implementing the ESCs, either by withdrawing them or legislating for them. I am pleased that that consensus continues.
On ESC A4, the hon. Lady asked a perfectly reasonable question about how much use of it has been made by directors. However reasonable her question might be, it is unfortunately the case that, for the purposes of the answer, HMRC does not collect data on the number of directors making use of the ESC, because employers are not required to report to HMRC when they pay expenses under that concession. The hon. Lady also asked about the process of making a claim. The concession can be used without any director needing to make a claim, the relief will simply be reflected in the individual’s return. I hope that answers the hon. Lady’s second question, and also explains why it is not possible to answer her first question.
The hon. Lady asked how the guidance will be updated. It is worth pointing out that the updating guidance is simply designed to clarify that all parts of the ESC will now be provided for in the legislation. As the hon. Lady said, that is the reason for the changes made during the consultation. She also asked whether the definition of not-for-profit company is aligned with other areas of tax law, and the answer is yes, where there are equivalents in tax law, otherwise that definition is aligned with the definition used elsewhere in the law.
The hon. Lady asked about the numbers affected by ESC A10, and eligibility. My answer is largely the same as the one I gave in relation to ESC A4. Extra-statutory concessions do not have to be claimed, so consequently HMRC does not know the numbers making use of them. As for the effect on the Exchequer, I am told that the concessions have a negligible Exchequer impact.
I hope that those points of clarification are helpful to the Committee, and I hope that we can continue the consensus on these somewhat technical and dry points, which are none the less significant for those affected by them. I hope that reforms can be made and that the extra-statutory concessions can be put on a legislative footing.