Joint Committee on Tax Simplification Bills Minutes of Evidence

Examination of witnesses (Questions 100 - 114)



Baroness Cohen of Pimlico

  100. Something that just caught my eye going through this is the occasional clause which uses the word "extends slightly". It is industrial buildings. "Extends slightly the availability of . . . allowances for roads on industrial estates . . ." Clause 284. The meaning of the word "extends slightly the availability" of allowances. Tell me you are not changing the law, do. In ordinary English the words "extends the availability" of allowances does suggest some change to the law. I will just try and find the wording of the clause. It is Part 3 of the Bill, change 33. " . . . extends the availability of industrial buildings allowances for roads in business parks . . .". It is very commendable but it does sound like a change in the law.
  (Mr Willis) Good point. It is a change in the law but it is covered, at the moment, by an Extra-Statutory Concession, essentially. So it is legislation—

  Chairman: It is applying the law to a long-standing practice. If there are no further points—

  Lord Goodhart: Could I raise one point? I would like to ask whether the witnesses have any response to the Law Society's briefing which has been circulated to us in the papers which we have just received? For instance, one of the points that was raised, perhaps the simplest one, was on Clause 12, where they say "... in referring to expenditure incurred for the purposes of a qualifying activity `by a person about to carry on' the activity" they are unhappy with the use of the word "about" potentially indicating that it might, on the face of it, mean expenditure must be incurred very shortly before the activity is commenced, whereas they say that in practice it is interpreted less restrictively, and that they would have preferred an alternative form of words.

  Chairman: Can I, first of all, check that every member of the Committee has got the document we are referring to. It was in the documents I got last night but which some Members of the Committee have had handed to them this morning, from the Law Society, CA8[4]. It falls into two parts. The bulk of it, in fact, is, I think, the Law Society very helpfully sending us their detailed comments on a draft Bill produced in the summer of last year when it was out to consultation. The up-to-date bit is the first page, where they give their up-to-date comments on the Bill that is now before the Committee. Would you like to direct us to the particular point in the document, Lord Goodhart?

  Lord Goodhart: Yes, on the new document, at the front, it is paragraph 3, where they say "Examples are the points we raised in our comments of 2 October 2000 on Clause 2.1.2 (now Clause 12)". Then, going over to page 1 of the longer document they say: "Clause 2.1.2 follows Section 83(2) of the Capital Allowances Act 1990 in referring to expenditure incurred for the purposes of a qualifying activity `by a person about to carry on' the activity. The use of the word `about' could imply that the expenditure is incurred immediately before the qualifying activity is carried on. So far as we are aware, the Inland Revenue have not applied the legislation so restrictively in practice." Then they suggest an alternative form of words.


  101. Can we have a response from a witness?
  (Mr Willis) On what was Clause 2.1.2, Chairman, I confess my memory of all the comments we received from all the representative bodies on the draft Bill is not perfect.

  102. You have just been shown the document, have you? I am sure the Committee would not mind if you conferred for a moment or two, just to make sure that you have considered it. You have just been reading it as Lord Goodhart has been reading it. I think it is fair that you should be allowed to discuss it for a moment before you reply.
  (Mr Willis) Would you give us one minute?
  (Mr Broke) Chairman, are there other copies available?

  Chairman: Can we get a copy to Mr Broke and anybody else who wants one?

  Lord Howe of Aberavon: Chairman, it might be worth pointing out, while they are deliberating, that the essence of the comments contained in this shorter note is focusing on what could have been more policy simplifications.

  Chairman: I think we are all agreed that most of the Law Society's note—that is, the up-to-date, final note—is saying that this underlines the need for a review of policy. I think this Committee has to accept that a policy review cannot be carried out by us. It is for the Chancellor to have a policy review and, if he feels the case is made, he can produce some proposals for Parliament in a Finance Bill. I am not sure that the point actually raised by Lord Goodhart is totally a policy point, it is more a point of why was the opportunity not taken to incorporate some of the existing law in this Bill.

Lord Goodhart

  103. The law is inconsistent with current practice. It is not really a policy matter.
  (Mr Munro) Chairman, I think I will invite Helen Caldwell to answer first on this point, and then, possibly, Robin Willis to follow.
  (Dr Caldwell) The existing provision we have in the Bill does follow the existing law. If one were to make a change of the kind suggested by the Law Society we would need to look at a variety of other provisions which deal with the issue of whether a person had incurred expenditure before they started to trade, because there would be interactions to look at. From the drafting point of view, there would be a number of complex questions to investigate. Obviously I cannot answer as to how those issues might be resolved in policy terms.
  (Mr Willis) Chairman, my recollection of consideration of this was partly in terms of not being absolutely clear what we would put in place of "about". The Law Society are really suggesting that it is simply expenditure incurred for the purposes and that there is absolutely no time limit, no sense of timing whatsoever. That may be what they are looking for but it did strike us as being quite a significant step to drop the sense of timing between the connection. I am not disputing what the Law Society say when they say the Revenue has not applied it so restrictively, except that I am not perhaps absolutely clear it was not what they meant "about" so restrictively. Perhaps I could also say, in case you are wondering why we did not talk about this, that if I had known that the Law Society felt that that point, in particular, was so strong, clearly we would have discussed it with them. After seeing this I will want to talk to them just to get a better understanding of precisely what, in practice, is their worry.


  104. What is the present practice on timing?
  (Mr Willis) It is not totally defined, Chairman, is my understanding, because it is a matter of facts and circumstances. I would not attempt to say how a Court would approach it but the "about" has, I think, the connotation of time.

Mr Pond

  105. Is the litmus test on this to try to ascertain whether or not the expenditure is directly related to the activity? If one states "before" I can see circumstances where the timing here could be such that it would be very difficult to prove whether it was related to an activity.
  (Mr Munro) The point is that we are not proposing any change in existing practice here. We will obviously need to reassure people in the Law Society that that is the case.

  Chairman: That is quite helpful as a response to the point they made in their original comments on the draft Bill.

  Lord Blackwell: It does seem slightly unsatisfactory. The conclusion is that the way the law is currently applied is uncertain, and therefore we are not defining it because there is uncertainty about the way it is applied. I would have thought one of the objectives of this legislation ought to be to try to create certainty where there is uncertainty in order to make it simpler to understand it.

Mr Davey

  106. I take Lord Blackwell's point, Chairman, but I did not think that was our job in this Rewrite project. If it is uncertain in the current law it probably needs to stay uncertain. If there is an Extra-Statutory Concession which is defined and clear which everyone knows about, fine, bring that into the law, but if there is an area where things are not defined which could affect quite a lot of businesses, then it is not the job of this project to try to sort that out.
  (Mr Broke) Chairman, I cannot recall any discussion in the Consultative Committee of the points made but, plainly, to me, if you change an English word like "about" you are going to change a meaning somewhere and you are going to almost certainly change the law—I would suggest. If there is to be a time limit then that is a matter for Parliament and that would be a matter for the Finance Bill. We are simply following the old words and the old words use English. "About" is an English word.

Dawn Primarolo

  107. Of the two points on 12, the second one is about a policy issue and the first one is that it is more restrictive. You said absolutely that was not the case.
  (Mr Willis) I think, as I understand the Law Society's point, they read "about" as being restrictive and would like that restriction removed. I am not totally clear that I understand why they feel "about" is so restrictive. So I suppose yes is the answer to that, if that is what they are thinking. I think what they are looking for is a change in the law to guarantee that there is no restriction on timing of any sort. I do sympathise with the point that we ought to be making legislation certain, but as Mr Broke said, if we had come forward with a minor change saying "Well `about' is rather vague, let's make it `up to but no more than six months before you start your qualifying activity', then that would have been a taxpayer-adverse change because that guarantees that expenditure six months and one day earlier cannot qualify. I think that was, perhaps, Mr Davey's point, that there is a trade-off, as ever, between plain English and absolute certainty.

  Chairman: So if the law requires greater clarity it needs to change the law and that takes us beyond the scope of this project.

  Baroness Cohen of Pimlico: Where there is doubt let us not bring certainty.

  Chairman: Where there is doubt that requires a change of law to resolve it, it is not for this Committee to change. Do you agree with that conclusion, Lord Blackwell?

  Lord Blackwell: I agree, from what has been said, that that is outside the remit of the Committee. I still think certainty is desirable at some stage.

  Lord Howe of Aberavon: May I take the opportunity of emphasising that as a general point, Chairman, because it is a theme of this exercise time and time again, and we have been tempted to make changes that would improve the policy. What it does do is underline the case for successors to your job—even the present Chancellor—to begin looking at the policy on merit and simply for its own sake. No one could imagine it is easy. Every nuance is difficult and every nuance implies winners and losers, but it is the next most urgent task. What this thing is doing is making clear some of these points. It is a huge agenda, but that goes beyond our function.

  Ms Kelly: I would be very interested in any comments on paragraph 4 of the Law Society's notes. "We remain unclear why it was not possible to incorporate the parts of Schedule 12 to the Finance Act 1997 relating to capital allowances. It would have been preferable to incorporate these provisions in the Capital Allowances Bill so that the Bill dealt comprehensively with capital allowances." At first sight that would seem common sense.


  108. That seems a very straightforward request. Is there a response to that?
  (Mr Willis) It is a very fair question and one we did consider. The legislation in question is anti-avoidance legislation. It is, dare I say, complex—that is by the standards of tax legislation. It does not just apply for the purposes of capital allowances, it has much wider implications. So if you try to rewrite the capital allowances aspect of it we would have been taking some complex provisions, putting them in the Capital Allowances Bill which would have needed a lot of the surrounding territory—if I may put it that way—to set out to people when it applied to tell them the capital allowances consequences and in just about any practical case they would still have to hive off to the Income and Corporation Taxes Act and plough through, essentially, the same legislation there in order to find out the other consequences. That is a very "by and large" answer. I am not saying it would not have been possible but the judgment was that it was not likely, really, to be helpful to people to have a set of anti-avoidance provisions hand-crafted for capital allowances separate from the similar provisions hand-crafted for income or profits.

  109. We do not have Schedule 12 to the Finance Act before us, but it refers back to the Income Tax and Capital Allowances Act.
  (Mr Willis) I have managed to find it. It is rather hard to give you an estimate because this commercial publication uses rather smaller typeface than statutes.

  110. It is a lengthy schedule.
  (Mr Willis) As I go through, I think it is on the sixth page of the schedule, paragraph 11 starts dealing with capital allowances and states: "This paragraph applies in any case where an occasion occurs on or after 26th November 1996 on which a major lump sum falls to be paid in the case of the lease of the asset." Those are terms explained earlier on in the schedule.

  111. Although I quite accept that if we had the benefit of Schedule 12 we would probably find it would take quite some time for all the Committee to get up to speed on this, but actually sorting out this complexity and avoiding these cross-references is what the exercise is about. It is a bit late in the day to start trudging through this particular one; certainly the Law Society's paper only reached me yesterday and some people this morning. Now the Law Society has drawn all our attention to it, perhaps you would like to consider whether, if it is in a discrete part of the schedule it might not be possible to pull it out and put it with the rest of the capital allowances legislation. The Finance Bill is going to start to amend this as soon as we finish this and you could actually address the point as a subject of the Finance Bill.
  (Mr Munro) Chairman, may I just comment briefly on that? One of the things we would like to do, as well as taking all those points on board, is to discuss with the Law Society why, if this is such an important point, it has only been raised at this very late stage. They are represented on the Consultative Committee and they have seen all the earlier consultative material that we have published. So we need, I think, at the very least to confirm that this is something that the Law Society as a body are consistently in favour of. There are certain difficult issues arising from plucking out the relevant bits in Schedule 12 and divorcing them from the rest.

  Dawn Primarolo: So this is a new point. It has been in since 1997 and they have just raised it?


  112. It is raised as a point under Clause 8.3.5 in the comments they made on the draft Bill. They did raise it. It is on page 5 of my copy of the Law Society's document, which is why their up-to-date notes say they "remain unclear" as to why you did not adopt their proposal on what was Clause 8.3.5 in the draft Bill.
  (Mr Munro) Thank you, Chairman. I was not aware of that.

  113. To be fair to the Law Society, I do not think they have raised it at a late stage, it just says it is a point they raised in the draft Bill and they still cannot understand why it has not been done. I think, Mr Munro, for you to have a meeting with the Law Society and discuss it further would be helpful, because they obviously feel—as they put it—unclear as to why their suggestion was not adopted.
  (Mr Munro) I shall do that.

  Ms Kelly: With respect to the team, they have done a brilliant job. It does not really matter whether it was raised late, or how it was raised, or whatever; the point is a substantive one, whether it should be included in the document and for future documents. This is the way that the Bill could be improved, therefore should it not be put out on a wider basis to all the members of the Consultative Committee so that it could be incorporated, perhaps, in a later Finance Bill.

Lord Howe of Aberavon

  114. I think Chairman, is it not right that this Bill was the first of its kind, and the last period of consultation has been more condensed than it might have been had it not been for the imminence of this year's Finance Bill which promises to contain substantial new chapters on intellectual property, in particular? Clearly the course you are suggesting, that this might be considered for amendment in a future Finance Bill, is well worth taking on board, and clearly the whole Rewrite process team are anxious, as always, to have the fullest possible consultation. If this is one that seems to have slipped through without it it may be due to the fact that in this particular case we did not have time to produce a response document to the final round of consultation. We normally produce a response document—and, indeed, more than one for everybody. I think it may be that we did not have quite enough time to do it on this, but I am subject to correction on that.
  (Mr Munro) I think that is right, Chairman. It was a very accelerated timetable and normally our policy is to produce a response document which summarises the points that have been made and explains why any of them have not been taken on board. It may well be that it is simply a lack of explanation on our part which has caused this misunderstanding.

  Lord Howe of Aberavon: I hope the closing words of the Law Society's letter may be read in a benign fashion, " . . . one or two concerns outstanding." If that is the limit of their continuing anxiety, it certainly seems legitimate but it is a modest shortcoming, I hope.

  Chairman: I think the whole tenor of their submission supports that. They "welcome the publication of the . . . Bill . . . and hope that in future rewritten Bills there will be a greater degree of review of the underlying policy in order to simplify and clarify where possible." I think the House has got to decide how far it is going to start reading policy issues into this. I think that might be difficult. Otherwise, I take the whole tenor of the Law Society's submission to be that they are in favour of what has been done, but there are, as they say, "one or two concerns outstanding", including the draft of the schedule. I think we have reached the stage where the Committee has got to decide the form in which it is going to report back to the House. So far as I am aware, we do not have a draft report before us. I am being advised that if we are going into deliberation we should move the witnesses out. I am not familiar with this instant desire of Select Committees to go into private session, I do not approve of House proceedings being in private very often, but I suppose in case our deliberations become confused we had better deliberate in the absence of the witnesses. Lord Howe asks if the witnesses could remain available outside.

4   See Appendix 2, p. 56. Back

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