Blackwell, L. Mr Kenneth Clarke, in the Chair
Brightman, L. Mr Michael Jack
Cohen of Pimlico, B. Mr Chris Pond
Goodhart, L. Dawn Primarolo
Howe of Aberavon, L. Mr Anthony D Wright


Memorandum submitted by Tax Law Rewrite Project

Examination of Witnesses

MR PETER MICHAEL CBE, Project Director, MR PETER KNOWLES, Head of Drafting Team, MS JACKIE CRAWFORD, Member of Drafting Team, MRS CHERYL SCOTT, Head of lead Rewrite Team, MRS WENDY SAMPSON, Member of lead Rewrite Team, MRS ALISON BERTLIN, Member of Drafting Team, MISS CLAIRE DILLION, Member of Drafting Team, and MRS JENNY MANSON, Member of Rewrite Team, examined.


  1. Good morning, Mr Michael. I take it you are the Leader of the Project Team. Could you begin by giving us a brief description of what the Project Team is for the benefit of the record and then introduce your front bench as it were, the people who are appearing before us as the main witnesses likely to answer most of the questions?
  2. (Mr Michael) Certainly, Chairman. Perhaps I should start by introducing ourselves. As you say, I am the Project Director for the rewrite and I hope to be able to assist the Committee in particular with any points or questions on either the project generally or the process of consultation. On my left are Peter Knowles and Jackie Crawford who are both members of the Office of Parliamentary Counsel and are on loan to the project. Peter Knowles is Head of the Drafting Team and Jackie Crawford is one of its members. On my right are Cheryl Scott and Wendy Sampson. Cheryl Scott is Leader of the Rewrite Team which for the most part has been producing the instructions for the Drafting Team on the Bill. Wendy Sampson is a tax professional whom we recruited from the private sector on a fixed term contract and is one of the members of Cheryl's team. Perhaps I could add at this point, Chairman, with your agreement, that if necessary I propose to call on some other members of the project to assist the Committee if that becomes necessary. In that event perhaps those concerned could introduce themselves as and when they appear. To come back to your initial point about the project itself, the Tax Law Rewrite Project consists of round about 40 people: a Drafting Team, headed up at present by Peter Knowles, and four Rewrite Teams, each headed up by a team leader. The Rewrite Teams research the existing legislation, the concessions, the practices and other relevant material, and prepare the instructions for the Drafting Team who are then responsible for drafting the new legislation. Within the Rewrite Teams we also have some people who are recruited from the private sector, and we also have a legal consultant on secondment from our Solicitors Office, so we are quite a diverse range of people.

  3. We are grateful for your memorandum of evidence. The Committee would like to start with the definition of "earnings" which is fundamental to the whole income tax law because for those with at least passing familiarity with income tax law what was proposed about the historic Schedules and so on is quite startling and quite radical. Would you like to give us a brief introductory explanation of why you have addressed in this way such a fundamental part of the taxation laws of this country?
  4. (Mrs Scott) We have taken the approach that we have in the interests of user friendliness of the legislation. When we looked at the existing legislation in ICTA it was apparent that it is not at all easy to find one's way around, particularly if one is a first time user. A first time user might, when trying to decide whether their earnings are taxable or whether their employment is within the scope of the Taxes Act, think to look in the table of contents for mentions of employment or wages or earnings or some other word which is in current usage. The first chapter that appears in the table of contents for ICTA to contain a phrase connected with employment is Chapter 2 of Part 5, which is concerned with benefits chargeable on directors and employees earning 8,500 or more. This is obviously not the right starting point. The taxpayer first needs to identify whether or not they are being charged tax for the year in question. This is in section 19 of ICTA and that bears the unhelpful heading "Schedule E", meaning nothing to anybody from outside the circle of tax professionals. That section in itself refers to tax on emoluments. This is an antiquated term, to say the least, as this Committee's predecessor, when considering the Capital Allowances Act, mentioned in passing. For my own part I did not come across the term until I started training as a tax inspector. I suspect I was not unrepresentative of the general population in being ignorant of the term before then. Therefore, even if the lucky first time user hits upon section 19 as being relevant, that section gives no clues as to where to find some explanation of "emoluments". It merely says right at the end, "Part 5 contains some more provisions". The user might go back to the table of contents to find section 131 defining "emoluments", but this section contains no clue as to how the first chapter that was identified in the index, the one about employees earning 8,500 or more, fits into things. Nor does it mention that there are a number of other benefits that are treated as emoluments, and so a taxpayer may be surprised to learn, for example, that there is a charge to tax on providing living accommodation. The existence of exemptions from the charge to tax is also not trailed in advance in the current legislation, although there is a clue to the existence of deductions in section 131, but there is no signpost as to where you will find the rules. In summary, a first time user has to flip back and forward between the table of contents and the provisions themselves and he stands in fairly obvious need of special tax advice on where to find all the relevant provisions of ICTA and subsequent Finance Acts. The Income Tax (Earnings and Pensions) Bill makes everything plainer. For example, Clause 3 shows exactly how the various parts deal with the charge to tax on employment income, the definition of "earnings", amounts to be treated as earnings, exemptions, deductions and share-related income. From a very early point the taxpayer is made aware of the various matters that may be relevant in determining the amount charged to tax in respect of employment income. Chapters 2 and 3 of Part 2 explain how these components fit together and provide signposts for the reader to other provisions in other parts that are relevant. Clause 7 in particular tells the reader exactly where to look to find out about the various elements of employment that would be charged to tax. Clause 8 alerts the reader to the possibility of exemptions in Part 4 and Clauses 11 and 12 explain how to deal with deductions as well as reminding the reader where they can be found. In the event that the taxpayer has share-related remuneration, this is dealt with all in one place rather than scattered amongst provisions in ICTA, its Schedules and in subsequent Finance Acts. Tax remains a complex subject but that does not mean it cannot be presented in a coherent and user-friendly fashion, and we on the Project Team have attempted to do so in this Bill.

    Mr Jack

  5. You mentioned the death of the word "emoluments", which is one that anybody who has anything to do with tax comes across. Is there actually a definition of what it means? I know you have taken it in the meaning that you use it, but is there a definition? Where did it come from?
  6. (Mrs Scott) The word "emoluments" is used in the Taxes Acts and in section 131 of ICTA there is an explanation of what the term includes. It is not an exhaustive definition and it has been elaborated on by case law over the years to encompass things which may be provided not in money but that have money's worth in the hands of the employee. All of this case law has built up over the years. The case of Tenant v Smith was in 1892. That is one of the early cases which led to our current understanding of "emoluments" and we have brought all of this together in defining "earnings" for the purposes of this Bill. We have retained the link to all that case law on emoluments to make sure that we do not lose the benefit of that body of case law by saying in the clause 62 definition of "earnings" that it includes any other emoluments. There is a link into that large body of case law should anybody ever need it.

  7. So I see from 62(2)(c) that the word "emoluments" still lives on in the current Bill?
  8. (Mrs Scott) Yes, but we have lowered its profile.

  9. I appreciate that. You have quite rightly indicated to the Committee that emoluments are now those things that are defined as earnings that were scattered liberally throughout ICTA. How have you ensured that all of the things that needed to be gathered together in clause 62 have been gathered together? Is it summed up by the fact that you put "money or money's worth" in as the catch-all phrase to ensure that everything that should be there as earnings is there?
  10. (Mrs Scott) The money or money's worth concept is derived from case law. In the development of our definition of "earnings" we felt it was important to make it clear to taxpayers that "earnings" did not necessarily mean money. There are a lot of things which are chargeable to tax as emoluments in the existing provisions in ICTA because they are deemed to be treated as emoluments. These are benefits which do not have a money's worth in the hands of the employee and so they are taxed usually by reference to the cost of their provision and they may also be taxed by a fixed rate, such as car benefits, or value benefits, that kind of thing. Those things that are treated as emoluments in ICTA are now set out instead in the Benefits Code which follows on immediately after clause 62.

  11. In that part of the Bill you have done no more than gather together in a better ordered form that which exists? You mentioned case law but you have not brought into either clause 62 or clause 63 and the subsequent ones that are associated with it anything new which was not previously dealt with by some other part of the tax legislation in the re-statement of now "earnings" and what were "emoluments" in the associated definitions?
  12. (Mrs Scott) We have covered exactly the same ground but where case law expanded upon what the ICTA provisions meant we have included the expanded explanation where necessary.

    Baroness Cohen of Pimlico

  13. That is not the same as a concession?
  14. (Mrs Scott) No.

  15. Which is not done by the courts at all. It is done by the Inland Revenue.
  16. (Mrs Scott) Yes.

    Lord Blackwell

  17. Can I pick up a related point about the definition of "earnings" related to employment income and whether, to have employment income, somebody has to be defined as an employee? I notice there are various definitions of what "employment" covers. I stand to be corrected but my understanding was that certain categories of people, for example, non-executive directors, may not be classed as employees of a company. They may be office holders and it may cover it that way, but I was not clear whether somebody has to be classed as an employee in order to have employment income and whether there are categories of people such as directors who would not be classed as employees.
  18. (Mrs Scott) Clause 5 talks about the application of this Bill to offices and office-holders and includes in subsection (2)(b) the statement that "employee" means the office-holder in the context of this Bill. That would include a non-executive director.

  19. What about somebody who was performing services to a company under a consultancy contract?
  20. (Mrs Scott) That would depend on the terms of the contract. They may fall within Chapter 6 or Chapter 7 of Part 2. They may be providing those services through the means of an agency so they are an agency workers, or they may be providing those services through the route of having an intermediary placed between themselves and the company to which they provide the services, in which case the payment relating to those services is effectively deemed to be a payment on the employment income. There is a route in each of those chapters that brings the payments in.

  21. If there was a direct contract between the company and the -----
  22. (Mrs Scott) If it was a direct contract it would be classed as employment, unless of course it was truly a freelance arrangement and it was self-employment and taxable under Schedule D.

  23. That is what I would expect. I was not clear how that was covered under the various categories here because they are neither employees nor office holders if they are contractors.
  24. (Mrs Scott) No. The people who are true freelancers and work providing services for a multiplicity of clients remain taxable under Schedule D as before. We have not done anything yet to rewrite the provisions of Schedule D for the self-employed. That is our next job.


  25. What you said about non-executive directors is just confirming the present situation, is it not, that non-executive directors' fees are regarded as earnings and have been for many years?
  26. (Mrs Scott) Yes.

    Lord Goodhart

  27. Could I ask a general question which arises out of Lady Cohen's reference to extra-statutory concessions? A lot of extra-statutory concessions have now been incorporated into the new Bill which is obviously something which is very welcome. I would like to ask if there are any remaining extra-statutory concessions covering the field of earnings and pensions which have not been incorporated into this Bill? Secondly, what are the intentions for the future? Will extra-statutory concessions be continued, will new ones be made, or is the intention that they should be incorporated into the legislation as soon as practicable?
  28. (Mrs Scott) The actual number of extra-statutory concessions that we have not been able to incorporate in this Bill is covered in paragraph 7 of the memorandum of evidence and that refers in turn to Appendix 2 which sets out in detail what those extra-statutory concessions are and why we have felt unable to incorporate them in this Bill. The extra-statutory concessions that we have not rewritten will remain in place. They will continue to operate as they did before. Unless the circumstances change that necessitate those extra-statutory concessions, they will continue until such time as government decides otherwise. While we feel within the project that it is preferable to incorporate extra-statutory concessions wherever possible, we would not want to do so at the expense of the quality of the legislation that we are producing, so we would not, for example, want to have 26 pages of legislation covering a point that only affects a very small minority of taxpayers and is intended really just to smooth out a rough edge that may occur from time to time in the practical application of the law. There will be instances in the future of the rewrite where extra-statutory concessions have been avoided. Does that answer your point?

  29. Yes. I would like to follow up with a rather wider point though which follows on from that. It is unfair to ask you because it is something which is not really within your remit but it has been a convention for a very long time, perhaps always, that substantive changes in tax law are done by primary legislation and not by statutory instrument. On the other hand, national insurance contributions, which are very much a form of taxation, the collection of which the Inland Revenue is responsible for, are to a very large extent laid down in regulations rather than in statute. Is there not a case for saying that the existing convention ought to be departed from so that if you have an extra-statutory concession which takes up 26 pages, this could be given actual legal effect by being dealt with by regulations? Again, I notice, for instance, that the benefits of vehicle use, which must amount to a really trivial proportion of the actual national revenue, take up I think some 59 sections of the new Bill. Could they not mostly be put into statutory instruments?
  30. (Mrs Scott) The benefits of vehicle use take up a lot of space in the existing legislation as well. They do not just appear in the body of it. There are also Schedules devoted to the treatment of car benefits and fuel benefits. As you rightly put it when you posed your question, I do not feel able to answer what I think is probably a decision for Parliament itself as to the extent to which changes can be made in regulation rather than in primary legislation.

    Baroness Cohen of Pimlico: If you could clear my mind by giving an example of an extra-statutory concession that applies to very few people and would take 26 pages to do, I might get better equipped on this subject.

    Chairman: Such as clergymen's heating and lighting expenses?

    Baroness Cohen of Pimlico

  31. It has got to be something like that, has it not? My imagination will not stretch.
  32. (Mrs Scott) Yes. The one that I was thinking of in particular was payments out of a discretionary trust which are emoluments taxable under Schedule E.

  33. Which is part of employment?
  34. (Mrs Scott) It just says, "which are taxable under Schedule E".

  35. What can these be?
  36. (Mrs Scott) This is part of our problem. Somebody originally must have seen that there was a problem arising but it is not an everyday occurrence.

  37. But there is an extra-statutory concession?
  38. (Mrs Scott) There is an extra-statutory concession.

  39. But not one every day?
  40. (Mrs Scott) That is what extra-statutory concessions are about, as is set out in the booklet IR1. It says here, "An extra-statutory concession is a relaxation which gives taxpayers a reduction in the tax liability to which they would not be entitled under the strict letter of the law. Most concessions are made to deal with what are on the whole minor or transitory anomalies under the legislation and to meet cases of hardship at the margins of the code where a statutory remedy would be difficult to devise or would run to a length out of proportion to the intrinsic importance of the matter."

  41. Coal; I agree.
  42. (Mrs Scott) Where we have looked at the existing extra-statutory concessions and we think they still fall within that definition, even after we have tried to incorporate them in our legislation, then we think that they deserve to remain in this book.


  43. There are two reasons why you have left some of them out. The ones you have included are some obvious ones like miners' concessionary coal and so on which was finally going into statutory form. If I understand you correctly you have two reasons for leaving these out. One is that you take up a lot of space for trivial numbers of people, probably three or four cases a year, and you have got 20 pages of legislation so it is not worth it; everybody knows where they are. Otherwise you also gave as a reason that for some of them it is too complicated to draft. Once you go into it, if I understood you correctly, you discover that it is a complete maze trying to set it out in the clear English which is the object of our whole exercise, so you decided to leave those as they were. The only thing that troubles me about that is, when you find you cannot draft it in clear English does that give some indication that the concession might itself be rather confused so that it is a bit ad hoc and discretionary and if you put it down on paper it may mean that the individual inspector in the end is left to make his or her judgment and decide where there is hardship? I am not sure that the Committee could do anything about it if you come to that conclusion, but should they perhaps be looked at by the Revenue to make sure there is some clarity that cannot for some reason be put into writing? For example, travelling expenses for directors and employees earning 8,500 a year or more is in Appendix 2 and it is on the grounds of complexity. I think there are probably quite a large number of taxpayers who have quite a dispute about the treatment of their travelling expenses because most directors and employees now earn more than that. Because 8,500 a year is now obsolete practically everybody is now getting caught by this and, rather like vehicle charges which have just been touched upon, I can think of few areas of more controversy in taxation once it gets down to the tax treatment of car and travel expenses. Is there something wrong if you cannot put that into basic English? I mean wrong in the way in which the discretion is being applied.
  44. (Mrs Scott) I do not think there necessarily is. Because one of the stated purposes of an extra-statutory concession is to meet cases of hardship at the margins of the code, an extra-statutory concession will generally be cast in fairly flexible terms so that it can bring in all the cases that may be grouped together under the same banner. If we start to put these things down in black and white in the legislation we lose the flexibility or we have to make it very long to cover all the possible scenarios that the extra-statutory concession could include. Talking of the example of extra-statutory concession A4, you might have to consider the position of a director's spouse who is travelling with him because he is sick or incapacitated. Then you have got to decide whether you need a definition of what constitutes sick or incapacitated.

    Baroness Cohen of Pimlico

  45. Or spouse?
  46. (Mrs Scott) How sick do you have to be before you have somebody going with you?

  47. Does it apply to a director's companion? Yes; one sees.
  48. (Mrs Scott) We do not want to lose flexibility from the kind of broad definition or description of circumstances that we can use in an extra-statutory concession by having to set down a series of hoops that people have to jump through before they can qualify for it.


  49. I suppose I have been misunderstanding it. The vasty majority of directors and employees, or a very large number of them, have some tax decisions to be made on their travelling expenses, but the vast majority presumably are covered by the ordinary law now.
  50. (Mrs Scott) Yes.

  51. The extra-statutory concession subject only deals with fringe cases, very few of them, including a lot of the extraordinary ones that you have just cited, so we are even there dealing with a very narrow point.
  52. (Mrs Scott) Yes.

    Lord Howe of Aberavon

  53. You have touched on, have you not, an illustration of the many examples we get all the time where people one consult suggest policy changes? We are accumulating a raft of policy changes, some of them extremely wide-ranging. Some, for example, suggest doing away with the whole structure of most benefits and starting again. I think that everyone concerned with the project must be frustrated to some extent by their inability to tackle these areas. It is bad enough to try and state in simple language what already exists and needs to be clear. The other point I want to make is that the Steering Committee and the Consultative Committee do look very carefully at the extent to which we may or may not be touching on something which involves a policy change. We did have a long discussion on it, including last summer, and our minutes show us studying three in particular, but we decided that two of them would involve changes in underlying law and should not be done by ESCs. One we thought was just on the right side of the margin. We are very anxious not to appear to slip in covert removals of tax avoidance opportunities, however tempting it may be to the Revenue to do so. It is something that we look at very carefully and they are flagged up, are they not, in the evidence before us?
  54. (Mrs Scott) The policy changes have not actually been listed in the memorandum of evidence as such but they are listed as an appendix to the response document which we issued to the draft Bill, which was put out to consultation in the summer. We issued a response document to that consultation in November and all of the policy suggestions that were made, including the very far-reaching and very detailed, were listed at the back of that document. I can say more about how we have drawn the distinctions which we can make or not if the Committee is interested.


  55. You have set out policy changes as suggestions to be made, but you did not address any of them in this exercise. Presumably, if it is thought that some merit in looking at them they are taken off by the Revenue and considered as possible candidates for Finance Bill preparation?
  56. (Mr Michael) That is absolutely right.

    Lord Howe of Aberavon: There are in fact no less than 84 policy changes proposed in the annex to the response document here, one of them being, as an example, allowing earnings on employment to be taken across in the Rewrite Bill and calculated as earnings related to the national insurance contributions. Thereby hangs a tale of enormous complexity.


  57. And a long-standing policy argument.
  58. (Mr Michael) But outside the scope of our project.

  59. On the extra-statutory concessions in this part of the Bill you have ditched three on the basis that they are obsolescent or of very limited application, so you found three that there is no point in extending, and you are satisfied that absolutely nobody is going to be affected by ditching those concessions, or you are not aware that any taxpayers are going to emerge claiming that their concession on widows' pension paid to widows of Singaporean nationality and so on is going to cause trouble?
  60. (Mr Michael) Those concessions will still continue.

    (Mrs Scott) Those concessions will continue just in case there is an odd one cropping up now and again.

  61. So when you say they are omitted because they are obsolescent, -----
  62. (Mr Michael) Omitted from the Bill.

  63. So it does not mean they are changed? You are not ditching them?
  64. (Mr Michael) Absolutely not, no.

  65. And so if some Singapore widow resident in the United Kingdom turns up the concession could still be available to her?
  66. (Mr Michael) Yes.

    Baroness Cohen of Pimlico

  67. Provided her husband is a UK national.
  68. (Mr Michael) Yes. All of the extra-statutory concessions that are not incorporated in the Bill, for whatever reason, will continue.


  69. Although these concessions are all subject to change by the Inland Revenue, the ones that have gone into the Bill will in future require legislation to amend them?
  70. (Mr Michael) Correct.

    Lord Goodhart

  71. What is the significance from the legal point of view of changing something from extra-statutory concession to included in the Bill? As I understand it, once it is in a Bill the terms are subject to interpretation by the Commissioners, the Special Commissioners and the courts in the ususal way. While it is an extra-statutory concession the courts do not have that kind of power but the decision to withhold an extra-statutory concession in any case would presumably be subject to judicial review on the grounds of irrationality or defeat of a legitimate expectation, something of that kind?
  72. (Mrs Scott) Yes.

  73. So there is a significant legal difference between having something as an extra-statutory concession and including it in a Bill?
  74. (Mrs Scott) Yes. There is a significant difference in that regard.

    Baroness Cohen of Pimlico

  75. You are presumably jolly careful about it in case it embodied some things which you did not mean it to?
  76. (Mrs Scott) Yes.

    Chairman: We did not do capital allowances as I recall, unless my memory is playing tricks.

    Baroness Cohen of Pimlico: We did.


  77. Because it is actually quite a significant change. As you say, it all becomes subject to the jurisdiction of the courts. To change a concession now requires primary legislation and not just a change of policy announcing a change of concession, so we did do it in the Capital Allowances Bill, did we?
  78. (Mr Michael) Yes.

  79. So my memory is playing me tricks, and we have not had the slightest protest about this.
  80. (Mr Michael) No. On the contrary, it tends to be very much welcomed, the incorporation of concessions into legislation.

  81. People prefer clear English which can be argued about to just being told it is at the Inland Revenue's discretion in the end as to how it is interpreted?
  82. (Mr Michael) Yes. It provides rather more certainty.

    Dawn Primarolo

  83. But the Inland Revenue is still challengeable by the taxpayer if the taxpayer or the taxpayer's representative disputes the interpretation of the extra-statutory concession?
  84. (Mrs Scott) Yes.

    (Mr Michael) That is correct.

    Dawn Primarolo: And that is the purpose of publishing all of the extra-statutory concessions as a transparent argument. The argument is that it is all better in one place, which is legislation, although it is not always possible to do that but it is still enforceable on behalf of the taxpayer if they believe that have not been dealt with properly by the government.

    Lord Goodhart

  85. But only to a limited extent because it is judicially reviewable. You would have to show not merely that the Revenue was misapplying its own concession but that there was something either irrational or that defeated a legitimate expectation, would you not?
  86. (Mrs Scott) Yes, but in considering the judicial review the courts would have recourse to the published Inland Revenue material explaining the extra-statutory concessions, and it is that material which by and large we have relied upon in the way in which we have brought the extra-statutory concessions within the Bill. It is worth remembering, although this may be a significant change in legal procedure, that all extra-statutory concessions were only ever there because they dealt with a few minor anomalies or cases at the margins. We are not talking about concessions that are applied across the length and breadth of the country to every single taxpayer. That is not what extra-statutory concessions are about.

    Baroness Cohen of Pimlico

  87. One of the things I have forgotten is where does the authority to make an extra-statutory concession come from? There is a Bill, and the Inland Revenue think, "Oh, Christmas, that is not going to work in this case".
  88. (Mr Michael) It is under the Board's care and management statutory powers.

    (Mrs Scott) It is set out in the Tax and Management Act 1970.

    Dawn Primarolo

  89. I suppose it comes to ministers.
  90. (Mr Michael) Most certainly, yes.

  91. So even though in theory the Board, because they have to be published because of the generally accepted policy of governments of all political persuasions, which is where possible to legislate, the decision to operate an extra-statutory concession comes to a minister as well?
  92. (Mr Michael) That is absolutely correct, or indeed to change it or withdraw it.

    Baroness Cohen of Pimlico: Although we call it an extra-statutory concession it is not really, is it? It was originally made as part of the law by some process sanctioned by law, which slightly alters my view about how you treat them.


  93. I do not regard an extra-statutory concession as part of the law myself. The law is presumably tax law and it sets out in an ordinary form of legal code which we are familiar with what the law on liability to tax is. This has given rise to difficulties in fringe cases, so a practice has arisen (and I gather it is authorised by law) of granting a concession in those fringe cases. To stop it being totally arbitrary and to stop it depending on whether the inspector in Halifax is more generous than the inspector in London, these are all published. Because someone has got to be accountable for that concession a minister usually is expected to sign it off so that if necessary the minister can be accountable on behalf of the Revenue for the concession being given. Then, as you say, it can be challenged once they have agreed to it, but I think it is a big leap from judicial review, which is more generous nowadays - it used to involve Wednesbury Rules and reasonableness and all this kind of thing - compared with ordinary litigation where you are just saying that Parliament has laid down the statute and the statute says X and you are wrong in interpreting it in this way, and so to make it part of the ordinary law of the land means that your remedies in law become more substantial, it seems to me. Also, previous concessions could be moderated a bit again when you have got some more fringe cases where, once you put them into statute you have got then to go back to Parliament to start changing the words of the statute before you can do it.
  94. Lord Howe of Aberavon: It is important to emphasise that this passion for incorporating ESCs in the rewrite Bill has been part of the policy from the outset because of the preference to get them plain and clear.

    Chairman: People have always complained about it. Although it is true that tiny numbers of people are affected, most litigation and most of the fierceness of previous attacks to arise from the unexpected fringe of odd cases where I suppose disputes arise. The ordinary PAYE-paying taxpayer incurring ordinary expenses in the course of his employment does not give rise to much tax law problems. It is just a question of calculating how much. We have moved on from the definition where good old Schedule E has been swept away and changes have been made but nobody wishes to pursue this. We have dealt with extra-statutory concessions in terms of this section of the Bill. Would any other member of the Committee like to raise any more queries, particularly on the definition of "earnings"?

    Lord Blackwell

  95. I have a question on one of the changes to do with the timing of taxable earnings, which I think is clauses 18 and 19 and so on, Chapter 4. There are some changes here and they are listed at the back of the report in the rewrite with a tick-in box where there might be an effect on taxpayers on the timing of when they pay tax from this rewrite. These, as I understand it, deal with periods when the definition of earnings is not necessarily the same as the receipt of cash in hand and therefore individuals may end up being liable to tax before they receive the payments. Given that there is a suggestion here that there may have been some change in the impact on taxpayers can I ask the project for an example of what scale of effect this might be, whether it is an improvement or a deterioration in taxpayers' position?
  96. (Mrs Scott) This is another one of these interventions that we introduced in the interests of user friendliness. It seemed that it was much easier for a taxpayer to look at rules of timing by reference to whether he has received the money as opposed to by reference to the section under which he is chargeable. If the taxpayer receives money we thought there ought to be one rule that determines when he should be treated as receiving the money. I have got no precise figures but by far and away the vast majority of money payments are ordinary wages and salary earnings. Cash payments may also be made in respect of expenses and the change which we have instigated in respect of expenses does not change the timing of receipt of expenses payments. However, there is in ICTA a general sweep-up charging provision in section 154 which can apply to any other benefits not covered elsewhere. Case law has established over the years that the scope of that sweep-up provision is wide enough to encompass payments of cash, money payments. Under the existing provisions benefits that are chargeable under section 154 are treated as being received when they are provided. Again, I have not any figures on this precisely but one would imagine that in most cases the money being provided, as soon as it is provided you get it, so the time of receipt remains the same under our new rule and under the old rule. Theoretically it is possible for an amount of money to be chargeable under 154 and for it to be paid to the director at a time later than he actually becomes entitled to it. In that case we would be changing the position slightly. We would charge him at the moment he becomes entitled to it. This is likely to be very rare because prior entitlement to money suggests a contractual obligation. It suggests that it is written into your contract of employment. It is difficult to envisage the kind of benefit that would not fall within the definition of earnings anyway. When we were pressed to come up with examples of how this may apply we were a bit stuck as to thinking of actual circumstances where entitlement may arise in advance of payment in a case where there is a benefit chargeable under section 154. The other instance in which we may change the time at which we treat such a payment as being received is if the payment, instead of being handed over in money to the employee, is credited to a director's account with the company. It is worth thinking about an example in this scenario in that the most likely kind of benefit that would be chargeable under section 154 might be a scholarship payment. It seems extremely unlikely that a scholarship payment would be credited to a director's account rather than letting the student in question have access to the funds straightaway. We think it is extremely unlikely that this will apply in very many cases. Where it does apply it will only have a material effect if the time of receipt is moved from one tax year to another because the time may simply change from September to December and make no difference in terms of tax whatsoever. If you do change the tax from one year to another, you may then find that in one of those years the taxpayer pays tax at a different rate although most of the employees who are likely to receive benefits under section 154 we think would be 40 per cent taxpayers year on year.

  97. That is very helpful but can I just explore the particular point I had in mind which may be more widespread? I think it is not uncommon for small cash-strapped companies to get into a situation where their employees, whether directors or not, accumulate earnings but the payment of those earnings is deferred because they simply do not have the cash at that point in time. If the person who is accruing those earnings nevertheless has to pay income tax before they actually receive the cash, then that may be significant to them. What I was trying to understand was, is the way you have written this changing that situation?
  98. (Mrs Scott) We have not changed the law in that regard at all.

    Lord Blackwell: Does the person in such a case have to pay tax when the employer has failed to pay the earnings to which he is contractually entitled? I should know. Under rule 2 here again it says at the time when the person becomes entitled.


  99. Football teams, for instance, if they are paying their players, are the players liable to tax until the team or somebody turns up?
  100. (Mrs Scott) What these provisions are concerned with is not the time of payment of tax but the time at which the payment is treated for tax purposes as being received for the purposes of sorting out whether or not you are liable to be charged for tax and for the purpose of deciding in which year that amount should be taxable in respect of that.

    Chairman: But it does not affect the timing for payment of tax? Take a PAYE employee, which I suspect a lot of football players are. A lot of other cash-strapped companies do the same thing. The company suddenly stops paying the wages. Does the Revenue still expect to receive deductions? I suppose it does. The Revenue becomes a creditor along with the employee because the company presumably stops paying the PAYE at the same time it stops paying the wages..

    Baroness Cohen of Pimlico

  101. What this is about is that surely, if the employee never receives any cash, he does not pay any tax, but if he does receive any cash the question is, when was he thought to have received that cash?
  102. (Mrs Scott) Yes. This sorts out which year you look at which rates of tax you apply.


  103. It is which financial year it falls in. It does not affect problems about liability and date of payment or anything like that?
  104. (Mrs Scott) The pay-as-you-earn provisions sort out the mechanics of how to operate pay-as-you-earn in practice and they are in a later part of the Bill.

    Lord Blackwell

  105. Just to be clear, somebody can receive earnings in one tax year and be liable for tax in that tax year even though they do not actually receive the cash from their employer until the following tax year?
  106. (Mrs Scott) If they have got access to the money they might. For example, if you have got a director of a company who, instead of drawing wages in cash, parks them in an account in the company because he does not need the cash right now, the company can better utilise that in terms of cash flow, but it is up to him as to where he has determined that the money should be deposited, then yes, it is entirely reasonable that he should pay tax on it. That has always been the case.

  107. So it is no change?
  108. (Mrs Scott) No change.


  109. But you are not liable to tax on earnings until you actually receive the money or you have got control over the money. If it is your decision not to receive it then you are taxable. If you choose not to pick it up or if you park it then you are taxable, but if you become entitled to something in one year but do not actually get paid it until the next year under your contract, presumably you are not liable to the income tax until you are paid it.
  110. (Mrs Scott) Income tax is normally, for the majority of employees, operated through pay-as-you-earn. Most cases are dealt with by deduction of tax. You only have to stump up the money in most cases when there is actually a payment. The reason I am being a bit cagey about this is that there are these cases at the margins where you do something a bit peculiar with it and so we do not want to be saying in absolute terms that if you have not got the money you have not got a tax bill because a director may choose to do something else with it.

    Dawn Primarolo

  111. Can I approach this question from a slightly different point of view, which is that the Revenue will take steps presumably in the exceptional cases to make sure that people cannot move their so-called payment date artificially between tax years in order to hit under a particular tax rate, under the 40 per cent. Approaching this question from a different point of view, where somebody had failed to be paid, normally through PAYE, because the company was not paying them, the Revenue moves to being a creditor of the company because the Revenue has not had the money, as has the individual not had the money. We then go to the employer in terms of their liability. Where the person is self-employed we pick it up on his self-assessment. Presumably your cageyness is about not whether somebody has actually received the money or not, whether it is legitimate. Are there ever occasions where you feel that somebody is trying to manipulate that timing to get it between tax years?
  112. Baroness Cohen of Pimlico: It is the City case where you have your bonus paid in some funny way or in some funny place or earlier when you are not too bothered about it, or whatever. There were lots of us who were paid in gold bars or not at all, usually for the benefit of the employer.

    Dawn Primarolo: That would come up under benefits in kind.

    Baroness Cohen of Pimlico

  113. Yes, but it is the time shift.
  114. (Mrs Scott) Yes. On the rules for the timing of receipt, rules 2 and 3 are there for ante-payments purposes because before those rules existed there was evidence of people getting up to mischief and moving their date of receipt of the emoluments by deliberate mechanisms.


  115. Most people do. It is not at all unusual. People want their entitlement and their payment to arise in a particular tax year and if they expect in the next tax year their tax liability is going to be less they become extremely eager to move it into the next tax year. There is nothing very original about that. Perhaps I can call us all back to order. We are getting into the general question of extra-statutory concessions and some of these extra-statutory concessions took us into what is the nature of the concession, what is the nature of the law we are talking about. Lord Blackwall took us to the Schedule of changes and their impact on taxpayers which we have not considered yet. First I shall invite the Committee to say no to all those. Lord Blackwell has already referred to one which could conceivably affect the timing of liabilities. There are quite a number of boxes when one looks at the appendix of various changes, the overwhelming number of which imply that it is just possible that less tax will be paid by some taxpayers. There are one or two where the possibility arises of more tax being paid. Can I first of all ask a general question? Are any of these involving significant numbers of taxpayers and are you saying that more tax will definitely be paid by some taxpayers, or are you just saying that theoretically it is a possibility but you cannot dictate the circumstance? What is the significance of a tick in the first box implying that somebody is going to pay more tax?
  116. (Mrs Scott) This is covered in more detail in Appendix 3 of the memorandum which, although it is headed "Provisions appearing in italics in the Bill", will also cover all those changes which have a tick in the "More tax?" column in the other appendix. There are no cases where there is a widespread likely incidence of a higher tax bill. In each case that is listed in Appendix 3 we have attempted to explain the likely impact in practical terms of each of those changes. For example, the first one that appears in Appendix 3 is the one that I was describing earlier on connected with clause 18. In other cases, if we move down to the next one, there is a possibility that it might make a difference for a taxpayer in particular circumstances and it might make a difference in either direction in a lot of cases. There is a possibility that somebody may pay tax at a different rate because of the change. We are not in that particular instance going to be charging anybody to tax on the larger amount but the tax rate might change if you move it from year to year. We cannot rule out the possibility that there will be somebody. In looking at change 6 in particular, "Relief for delayed remittances: referring to income 'received' instead of 'arising'", it is quite esoteric anyway. Relief for delayed remittances - you have to be on the remittance basis to start with and then you have to have your remittances delayed because of the existence of a block on you being able to remit your income straightaway. What we are doing in that case is trying to apply what is currently Inland Revenue practice in sorting out a mismatch in the language before and after. There is no practical effect in that change although there is a theoretical effect. That is one where we have been able to rule out the theoretical possibility that somebody might be affected in their actual tax bill although, in theory, if you are just looking at the change in the law, it may make a difference. They are all of a similar kind of order. There is not any one of these which is going to have a regular impact on a large number of taxpayers. If we look at "Using Y = days in a year rather than a fixed 365 days", that only happens once in every four years anyway. I am happy to take questions on individual changes if there are any that are of concern in particular.

    Lord Goodhart

  117. I have just one on individual change, which is change 4, which deals with exceptions from tax on general earnings from overseas Crown employment. Somewhat unusually here, the Board has power to make an order which disapplies taxation from "general earnings of any description of employee". Why is it that this particular order, unlike other orders under the Bill, is not subject to any form of parliamentary procedure?
  118. (Mrs Scott) This particular provision reproduces extra-statutory concession A25 (from memory) and as such that extra-statutory concession has never been subject to parliamentary scrutiny.

  119. No extra-statutory concession is subject to parliamentary scrutiny.
  120. (Mrs Scott) No. One of the reasons why it was operated by extra-statutory concession was that it compares the overseas target employee with an employee in the Civil Service in the UK. There are obviously changes in the labels attached to civil servants and the levels at which they are remunerated and whatever else may crop up from time to time. The Board may reflect those mechanical changes by having an order of this nature without having to have recourse to Parliament. Speaking on behalf of the Inland Revenue, there is no way in which the Inland Revenue would seek to make a significant change without going to government and asking for advice and seeking the government's view on it. It would seem a different kind of possible amendment that we have in mind for this particular point of order than for others where we might be considering different amounts or whatever, but here we would be looking at probably changes in job title or changes in descriptions. If we go from being in the Civil Service to having a different title we would have to amend.

    Mr Jack: Can I raise the intriguing subject to change 90, "Deduction of expenses of ministers of religion"? Ministers of religion keep popping up.

    Chairman: This is one which shows a possible increase in taxation. When you read the explanation in Appendix 5 it is difficult to see how.

    Mr Jack: Indeed, but they keep popping up now in Thought for the Day to Radio 2 to all kinds of various things. There are clearly a lot of ministers who take a keen interest in this. One point of definition before I start asking questions about how you explore this one: is there a definition in this Bill of what is a minister of religion?

    Baroness Cohen of Pimlico: Can I set up my own?

    Mr Jack: Yes.


  121. In America it is usual to do so for tax purposes and you are completely exempt. One reason for founding your own church is that all your business activities will be removed from tax. That is not true here, I do not think. We would have many more churches if we had the same situation here.
  122. (Mr Michael) It is not defined in the Bill. It is a question of general law.

    Mr Jack

  123. It may well be there are a number of bizarre churches establishing and that is where we will have to leave the matter for the time being. What this appears to say is that you have ended some cross-scheduling of this particular Act. Could you explain the mechanism that you have used to bring the Schedule D and Schedule E treatment of this together in a way which you say at the conclusion of this in Appendix 3 you believe will cover any possible cause of hardship?
  124. (Mrs Scott) At present most ministers of religion are taxable as office members under Schedule E and we understand that there are a few chargeable under Schedule D as exercising the profession of a minister. We are not aware that there are any that do the mixing and matching to start with but it is a possibility. You mentioned the ministers cropping on Radio 2 and whatever. Income from journalism by an office holding minister is not chargeable under Schedule D as profits from exercising his profession as a minister. That would be his journalism activities rather than his clerical activities. If a minister should happen to be chargeable under Schedule D and in this Bill and he makes a loss in either of those, then the expense may be set against either source and if that expense creates a loss then we allow it to be set against the other source, so instead of just being able to set the expense directly against the other source you set it first against the chargeable income and if it produces a loss you can set it off against the other. You should get the same number arithmetically at the end of the day.

    Mr Jack: So the taxpayer is no worse off by this reformulation?


  125. Why do you then tick it as a liability for more tax? On that explanation you have just given it cannot make the slightest practical difference to quite a lot of ministers of religion who do have some self-employed income and fee based income outside their earnings as a minister. The Radio 4 people must all be covered by this but up and down the country quite a lot of ministers are lucky enough to at least have some small source of income outside their living.
  126. (Mrs Scott) They may have a small source of income outside their living but it may not be as a minister. They may have income as a journalist.

  127. I see. This is only referring to them if, for example, they are doing funerals freelance?
  128. (Mrs Scott) Yes, freelance funerals.

  129. That is self-employed income as a minister. One should not name individuals but let us take somebody who is dead, as far as I know. The Reverend Awdry must have made a fortune writing books about Thomas the Tank Engine which far exceeded whatever he was earning in his living. This does not apply to somebody like that at all?
  130. (Mrs Scott) No.

  131. It is only if the Reverend Awdry had some non-salaried income which was being earned as a minister of religion doing some other religious function in his capacity as a minister that this would bite? That is why it is such a rarity?
  132. (Mrs Scott) Yes.

  133. You say "yes". Are you sure we are right?
  134. (Mrs Scott) Yes, I am sure that you are right. I am just reading a piece of paper which has been passed to me by a colleague to deal with an earlier point that you raised and that was why had we ticked the box that may mean a difference in tax. It will mean a difference in the earnings chargeable. It will mean a difference in the Schedule E computation possibly but not overall. I suppose theoretically you might -----

    Baroness Cohen of Pimlico

  135. Claim under Schedule D?
  136. (Mrs Scott) You might have a situation where, because you have got a Schedule E liability at one point in the calendar year and a Schedule D liability at a slightly different point in the tax year, you might have things being paid at slightly different times. We are not denying anybody any expenses is what it boils down to.

    Mr Jack

  137. Can we proceed to change 28 which perhaps might have a more universal application than Thought for the Day and its presenters? This deals with your calculations of leap years. I wondered if you could explain this first of all to us.
  138. (Mrs Scott) In the existing tax law, although the computations in leap years have been around for a very long time, when setting out a computation that depends on having to apportion something by reference to a year, the existing legislation does not envisage a leap year. It is a change that will only be relevant one year in four and even then the effect of it will be very marginal as the difference between using 366 days and 365 days is less than one third of one per cent, so we think it is quite small. Because it was a significant difference from what we had seen before in the way in which a year was expressed, we specifically asked in the consultation whether respondents thought it was a good idea to deal with the possibility of a leap year arising every four years, unsurprisingly, and all the respondents who came back to us said that it was a good idea to deal with this on a consistent basis and use "Y" to represent the number of days in a year instead of a fixed 365.

  139. What about consistency therefore between this Bill and every other part of the tax system?
  140. (Mrs Scott) We can only rewrite a proportion of it at a time.

  141. The point I am making is, does that mean you have a different treatment of "year" in this Bill as opposed to the treatment of "year" elsewhere?
  142. (Mrs Scott) For now we may well do.

    Mr Jack: But although it is a very small percentage, and I accept that, if you happen to be in the money market and it was a roller coaster, one third of one per cent of X billions can be quite a lot.

    Chairman: It is only car allowances. All we are talking about here is the apportionment of car allowances.

    Mr Jack: I am getting carried away now. I am sorry.

    Dawn Primarolo: If you had a Formula One racing car in a leap year perhaps.

    Chairman: Or a fleet of Rolls Royces.

    Mr Pond

  143. How does this reduce complexity? Is it a sensible change to make or is it a change that makes the legislation easier to understand?
  144. (Mrs Scott) Quite often, looking back on my time as a tax inspector, I would see people who used 366 days instead of 365 days because they thought, "Oh, it is a leap year". It is an intuitive thing to do if you have got 366 days in the year. You might think that that is how you should apportion it. What we are doing is just recognising the fact that the number of days in a year varies.

  145. I know it is a sensible thing to do but do not know if it necessarily makes the legislation easier to understand.
  146. (Mrs Scott) It makes it more consistent to have one method of looking at a year rather than having several, some of which are a fixed 365 days and others which refer to the number of days in a year.

    Mr Pond: I am not arguing against it. I am just not sure where it fits in with the project.


  147. It is not so much improving the English, which is where we started, but bringing the drafting in line with reality or common sense. In the MPs' one all you have done is change the basis for the deduction for accommodation allowances from the specific provisions to a general deduction. Then you say that in fact it makes no practical difference because there is nothing outside the present specific provisions which would make any change. Why is that? Is it more common sense? Is it clearer to have a general deduction knowing that nobody is going to widen it? What is it actually for?
  148. (Mrs Scott) It saves people having to check the provisions that are in Part 5 to see which apply and then coming to the conclusion that these are not relevant at all.

  149. It saves you the trouble of looking up the detailed provisions because the Revenue are confident that nobody is going to come up with anything new that is not already exempt. This is to stop you having to cross-check a rather complicated provision?
  150. (Mrs Scott) Yes.

    Lord Howe of Aberavon: The Schedules were introduced by Henry Addington 200 years ago. In 1802 he repealed the income tax structure which was a primitive form of self-assessment. He introduced deduction at source in the Schedules in 1803. Thereafter, his career was somewhat less distinguished because he ceased to be Prime Minister and was then Home Secretary for ten years.

    Chairman: And Speaker, eventually.

    Lord Howe of Aberavon: For a time. In the course of being Home Secretary, he had the magistrates and soldiers who were responsible for the Peterhill massacre. His last recorded contribution in this House was against the Reform Bill in 1832 so I do not think we need stand in silence of his memory.

    Chairman: We have not yet touched on approved incentive share schemes, which are a very important part of the Bill. It is controversial, complex and possibly subject to amendment. Would any witness like to give any general introduction beyond the memorandum and the Schedules?

    Mr Jack: This part of our questioning deals with all the approved schemes but where are the unapproved ones?

    Baroness Cohen of Pimlico: Which most of us deal with regularly every day. Why am I dealing with predominantly unapproved share schemes?


  151. It is because they do not get any tax advantages.
  152. (Mrs Manson) Unapproved share schemes are dealt with in Part 7 of the Bill. During consultation it is very useful to deal with the administrative details of approved schemes. By the very nature of things, we are not having to check whether a lot of details are going to be okay. I am not a share scheme practitioner but I gather they offer a lot of flexibility which we do not offer with approved share schemes, particularly with the changes in capital gains tax. In some cases, unapproved schemes are more attractive.

    Mr Jack

  153. You talk in your note about better alignment of various share schemes in the context of the Bill that is before us. Could you say a word or two about what that process means, particularly for the reader of the Bill? How will they benefit from this better alignment to which you refer specifically in paragraph 37 of your note?
  154. (Mr Knowles) First of all, one is looking at the overall approach which we have taken to the exposition of these four share schemes. What we have tried to do is adopt a common approach across the piece so that a taxpayer or his adviser who is interested in the tax implications of the various schemes can look at the appropriate clauses in the Bill. On the other hand, those who are concerned with establishing the schemes, the companies and their advisers, will be more interested in the detailed machinery which is contained in the Schedules. Within the Schedules, we have tried to present the material in the same sort of order throughout the Schedules so that you start off with the introduction, unsurprisingly. Then you look at the requirements which need to be met by the various options or shares that can be obtained under the schemes. Finally, one comes to the approval mechanism or, in the case of enterprise management incentives, a verification procedure. That is at the structural level. Also, when one is getting down to the nitty gritty of the provisions, one realises that there are inconsistencies here and there. Sometimes we have borrowed an approach which was apparent in the old schemes: the save as you earn scheme or the company share option plan schemes. We have looked at those provisions and thought that perhaps the approach taken there could be adopted when we came to rewrite the provisions relating to ESOPs, which we now refer to as share incentive plans. These are very minor changes, for example, making the powers of the Inland Revenue to obtain information consistent. Some of the schemes have said that the Inland Revenue can obtain information which they think is necessary and other schemes have said that the Inland Revenue can obtain information which they reasonably require. There was no point in having those two separate formulations in the body of the Bill. We have aligned all the provisions so that there is a test of reasonably required information.

  155. That resolution of inconsistency has not in any way changed the previously defined mechanisms by which these various share schemes confer benefits on either savers or recipients of the shares or share options. That remains exactly was it was.
  156. (Mr Knowles) Subject to very minor changes round the edges. We have made it possible for variations to take place on a wider scale but these are low level adjustments in the mechanics. The overall gateways are exactly the same.

  157. When you say variations and mechanics, does that make it effectively easier for companies in the real world and their employees to operate and to understand the mechanisms that are involved in the tax liabilities, involved in share option schemes? Is that what the objective was?
  158. (Mr Knowles) Certainly. Jenny Manson will correct me if I am wrong, but the existing provisions do not cater for all the possibilities that need to be catered for where you are providing for a variation of share price to take account of alterations in share capital. They do not reflect the present reality. What we have tried to do is to bring it into line more with the present reality. At a more general level, the Share Scheme Lawyers' Group, whom we have consulted extensively, have been very happy with what we have done. They say, as far as the share scheme legislation is concerned, "We believe that the objective of the rewrite project has been very substantially accomplished."

    Lord Howe of Aberavon

  159. It is set out in paragraph 40 of the evidence before us.
  160. (Mr Knowles) Yes.


  161. The new text, they say, is clearer, more logically ordered, more user friendly and it is preserving the effect of the present legislation apart from minor policy changes, some of which they propose and all of which they welcome. Presumably a new practitioner developing the experience of a member of the Share Scheme Lawyers' Group will find the new legislation much easier to get into and find his or her way around than was the custom in the past. There are four different types of approved scheme now and they are all dealt with clearly and separately, using fairly consistent language.
  162. (Mr Knowles) That is right.

    Lord Blackwell

  163. When you talk about consistency, it is consistency of language as opposed to consistency of terms? If you use consistent language, you are making the terms easier to understand.
  164. (Mr Knowles) We are looking at avoiding inconsistencies of language in the four Schedules.

    (Mrs Manson) Perhaps the relevant question is, did we change anything for the sake of consistency? There was a certain amount of alignment in every case. When we saw something favourable to the taxpayer or when we saw something good in another scheme, we checked to make sure what the practice was. Also, we made sure of simple things like the Inland Revenue notifying the taxpayer of a decision. In some of the older schemes, they did not say. If we had an extra concession in a new scheme, we looked at the old scheme and thought: should we be writing it into the legislation? We have tried to look at the best practice. We did meet with the Share Scheme Lawyers' Group three times. I spoke to them on the phone and e-mailed them. It was not just a paper exercise. It was a personal dialogue. We tried to make sure they were kept abreast of all this new alignment work we were doing.


  165. As far as I can see in your Schedule, the changes you have made to share related income do not give rise theoretically to a liability to more tax. There might be a liability to less tax but that is pretty theoretical as well. Page 160 is share related income and share incentive plans and it refers to the restriction on participating in both the share incentive plans and an approved profit sharing scheme in any tax year. Does that mean you removed that restriction? Is that a policy change? Does it have any significant effect?
  166. (Mrs Bertlin) Profit sharing schemes are being phased out. From 1 January this year, it is no longer possible to have shares awarded under profit sharing schemes in order to incur tax advantages. No new profit sharing schemes are capable of being approved to carry tax advantages in the future. In existing legislation, there has been a restriction saying that nobody can have an award of shares under a profit sharing scheme which operated in a similar way to a share incentive plan. The restriction said that no employee could have shares awarded under both a profit sharing scheme and a share incentive plan in the same year. Nor could he have shares awarded to him under two share incentive plans. The object was to ensure that he did not receive two bases of tax relief at that time. By the time the Bill comes into force, there will be no tax purpose in ----

  167. What about all the old, existing profit sharing schemes?
  168. (Mrs Bertlin) They can run on as approved schemes and they can have further shares awarded under them but none of those awards will have the tax advantages that previously existed.

  169. Is that last year's Finance Act?
  170. (Ms Crawford) It is the Finance Act 2000.

    Mr Jack

  171. If we go to Chapter 5, page 235 of the Bill, clause 473, one of the parts that your note directed us to was the removal of complexity. I suppose by some drafting one can argue that 473, clause 1, was not perhaps all that complicated but it is interesting that it refers us to two other sections of "question mark, what?" and later on it talks about sections 15 and 21. Can you explain to me why it was drafted in that way, because one of the hallmarks of the exercise has been good signposting to help you to understand why things are expressed in the way they are.
  172. (Miss Dillion) This replaces the old limitation which was limited to case one of Schedule E taxpayers. Because case one of Schedule E has gone, we have new terminology.

  173. Will tax practitioners recognise this? Will they be able to say, "Ah, yes, I can see what that is. Case one has gone. Therefore, this is what this means"?
  174. (Miss Dillion) Part of the reason for this is because it includes the description of what are now clauses 15 and 21 and that should give them a clue.

    (Mr Michael) The provisions of the Bill which are concerned with share options, share related remuneration and so on have been subject to particularly extensive scrutiny by the experts. Relying on that, one would have thought that they have looked at this particular provision. If they were not happy with it, I am sure we would have heard.

  175. I hope that is the case in reality.
  176. (Mr Michael) So do I.

  177. Am I right that the EMI parts were originally written in normal language?
  178. (Mrs Manson) Yes.

  179. That has been lifted?
  180. (Mrs Manson) Yes.

  181. When you say that there is still some work to do, can you tease out what you mean?
  182. (Mrs Manson) We were looking at four schemes. We were trying to make it possible to see how they differed from each other. Although the language needed very little change, the general question of alignment we borrowed from the old as well as the new.

    Chairman: The language of Chapter 5 on share options -- certainly the opening introduction -- seems a great deal clearer than some of the previous stuff we have had. It is not written in conversational English but in plain English, in my opinion. The Bill drafted in terms of 472(1) is a starting point. It is attempting to put in plain English the basic principles of liability to taxation which I do not think any of the previous Acts has intended to do. The commendation of the appropriate Lawyers' Group has gone a long way to satisfying the Committee. Can we move to benefits in kind? This section probably gives rise to more disputes than any other, even if it is not because of the amounts of money involved. Paragraphs 41 and 46 of your memorandum apply to this and you claim that you have reorganised all the previously scattered provisions into a structured benefits code.

    Mr Jack

  183. You have this section in the note headed "Benefits in Kind" and in paragraph 28 you had some interesting discussion about the phrase "perquisites". The two seem to be related. Is there any difference between the two?
  184. (Mrs Scott) The phrase "perquisites" appears in the old section which defines emoluments. When we looked at rewriting that section it was obviously in need of some updating. Instead of using the antiquated phrase "perquisites" we have used more common terminology.


  185. In defence of the word "perquisites", it is not that antiquated. Nowadays people talk about "perks" but is there any difference between a perquisite and a benefit in kind?
  186. (Mrs Scott) In practical terms I suppose there is not. There may be a difference in the way in which you tax a particular perk because it may or may not be money or money's worth in the hands of the employee. You might say that a taxi driver's tips are his perks. They are money and they are taxable as part of his earnings if he is an employed taxi driver.

  187. A perquisite may include cash, whereas a benefit in kind does not. It means a benefit that is of a non-cash form.
  188. (Mrs Scott) That is the distinction that we use for the purposes of the way in which the tax code grew up because originally we only charged tax on ordinary earnings. It was only in 1948 when we first started to look at things that were not money's worth in the hands of the employee. This is why the different tax treatment grew up and the necessity is present in what we are rewriting to distinguish between things that are benefits in money or money's worth and benefits in kind that are not money or money's worth.

    Mr Jack

  189. This goes back a long time. Over time, companies have sought to reward employees with various forms of benefits which we are now defining as benefits in kind. In general terms, when you were rewriting, can I be assured that, where a boundary line exists between the things that currently are untaxed and those things that are taxed as a benefit in kind because the law has gradually brought in certain additions over and above the normal monthly or weekly payments into tax, we have not altered the boundaries in any way between those things which are presently outside the burden of tax and those things which the law has over time brought inside it, so that, in definitional terms and in practical terms, when people get their P11Ds at the end of the new tax year, they are not going to say, "Good heavens, this is now taxable whereas last year it was not"?
  190. (Mrs Scott) We have not changed the boundaries. The focus of the benefits code is employment. If this is something that is not provided in the benefits code by reason of employment, it is outside. We have a provision that says that anything provided by the employer otherwise than in connection with ordinary, domestic relationships or whatever is not by reason of the employment. If somebody employs his son and buys him a birthday present, that is not by reason of the employment. Anything else that your employer might give you is assumed to be by reason of your employment under ICTA and the Bill.

  191. Were there any particular difficulties when you were redrafting this section that you found hard to cope with or was it straightforward?
  192. (Mrs Scott) If we take a step back and look at why we thought we needed a benefits code, this was a point suggested by outside commentators on our work from the Institute of Fiscal Studies. They pointed out the extreme difficulty of treating the taxation of benefits because of the lack of any coherent order in the legislation. In looking at the various ways in which benefits are taxed, they can range from things that come within the general charge on earnings, if they are money's worth, or they can be taxed under special measures which quantify the benefit in a number of different ways. They share some basic ingredients if they are outside the general charge to tax, which is the basic one but add-on benefits share some basic ingredients. They have to be related to the source. They have to be by reason of the employment. You have to look at the recipient. The recipient is going to be an employee, a member of his family or household. There has to be an amount. You cannot tax something if you cannot identify the amount. We looked at the extent to which we could pull out all these common threads from the various different benefits provisions within ICTA and put them into a general chapter at the beginning of the benefits code that applies to the whole piece. Then, the remaining chapters were designed to clearly set out the source, on whom the charge was made, the details of the quantification of the amount charged to tax and, if applicable, any exceptions from that charge. We also introduced the idea of having a route map at the beginning of the benefits code that shows you exactly where you are going to find each of the charges. If an employee receives a benefit, first of all, he turns to the benefits code, page one, and he can immediately see where he has to look for how to quantify his benefit on provision of a car or a loan. It was the structural reorganisation that was probably the most difficult aspect in the beginning, the pulling together of the whole thing from different places.

  193. In the way you have laid this out, as far as the employee is concerned, you have not changed the provision whereby an employer can enter a negotiation with the Revenue to effectively pay an element of tax on some benefits, which can be very small amounts, in adding them all together for administrative ease? That has not changed?
  194. (Mrs Scott) No, we have not changed that. It is still possible for an employer to apply for a dispensation in respect of benefits provided to employees. The nuts and bolts remain very much the same.


  195. I have not understood the distinction between something being within general earnings because it is money or money's worth and a benefit in kind. I thought general earnings were cash money. Any other form of payment was a benefit in kind to which you have to attribute a value to be able to tax it. If you get a salary, that is your earnings; if you get a flat in London, the Revenue calculate what it would cost you to obtain that flat yourself and that value is taxable. That is a gross over simplification but is there something in between, which is money's worth, which is not a benefit in kind?
  196. (Mrs Scott) Yes. It was in 1948 when legislation was introduced to levy a tax charge on things that were not money's worth but were benefits in kind. Before 1948, there were certain benefits in kind which could be taxed because they have money's worth and that is a principle that dates back to a tax case in 1892, Tenant v Smith. There have been supplementary cases since then where, if an employee is provided something which he can turn to monetary value, he can ----

  197. If he gets paid part of his salary in gold bars or coffee beans, that has always been flexible because he can work out what he could sell it for.
  198. (Mrs Scott) It is the value he can sell it for. It is not the same necessarily as what it costs the employer to provide him with it.

    Dawn Primarolo

  199. If an employer transfers a debt to the employee which is about to be paid to the employer, the value of that debt is not high but when it is paid , if it is paid in the full value, its value is higher.
  200. (Mrs Scott) Yes.


  201. If a manufacturer of chocolate bars paid in chocolate bars, it would cost the employer much less than the employee could sell it for. You tax it on the basis of what the employee could sell it for. That is still treated separately from benefit in kind?
  202. (Mrs Scott) Yes.

    Lord Goodhart: The gold bars and payment in commodities was used in recent years to avoid national insurance contributions.


  203. This is outside your remit but national insurance views are not yet drafted in plain English. Is there any prospect of this moving across and getting rid of these problems whereby you can pay people with various commodities and avoid national insurance?
  204. (Mrs Scott) I think it has been fixed. I do not know the details.

    Dawn Primarolo: It is not quite fixed.


  205. Every time Parliament has legislated to cover some bizarre new commodity being used for payment, people have thought of another bizarre commodity which they could start paying out and which avoided national insurance. They are still playing that game of catch-up, are they?
  206. (Mrs Scott) They are still playing games, I understand.

    Chairman: The definition of liability for national insurance earnings for the purposes of national insurance is still drafted in quite different language to the language you are now using in income tax.

    Dawn Primarolo: Because Parliament itself holds the route for how national insurance legislation is processed. It is administered through the Inland Revenue. The parliamentary process has to be reformed itself to allow a course of alignment, so there has been alignment where possible. It is never perfect because there is always creativity in what the new mechanisms might be and complete alignment is a huge policy issue about flags in the national insurance system on entitlement. The Finance Bill cannot legislate for national insurance without a fundamental change.

    Baroness Cohen of Pimlico

  207. The rules are inconsistent because you do not pay national insurance on health insurance or cars, although they are treated as benefits in kind over the year. There are artificially assigned amounts.
  208. (Mrs Scott) I fear that we are getting slightly outside our scope of expertise, but there are class 1A benefits under the national insurance system which apply in respect of car benefits.

    Chairman: Attempts are constantly made to get them closer to each other. My examples are not totally irrelevant. There was a brief time when people were paying the earnings of some of their senior employees in debts like gold or silver, not seeking to evade income tax, but they avoided all the national insurance liability until that was dealt with. We talk about the rewriting of the tax laws. Given that we have got rid of the Contributions Agency, a step of which I wholly approve, and given that what we are actually talking about is people's liability to make their contribution on whatever they earn, there is a case for making sure it is all drafted in the same sort of language and it can then be read across more easily.

    Lord Howe of Aberavon: We can give thanks for the fact that we are not also grappling with the details of prices and income support.

    Mr Jack

  209. Can I go to an area which has been around a long time, which is people being paid in non-cash vouchers? Clause 84 of the Bill, page 42, deals with this matter. I would be interested if you could give us a commentary on the before and after effects of what you have done. How far back does the tax law dealt with by clause 84 go and, given that there have been all kinds of attempts in the past not just in the 20th but the 19th and the 18th centuries to pay people without paying them cash, how far back does the tax law go on this and how far do you go in ensuring that you replicate in today's language and terminology some of these effects of history in this part of tax law?
  210. (Mrs Sampson) When we did the analysis, we went back to the original drafting papers if we could not work out what was meant by the statute as it was and looked at the correspondence between the drafters and the instructor to find out what they were trying to do. We built on that to come back to something that we could put in clearer language, to break it down into the clauses we have here, compared to the very dense sections 141, 142 and 143.

  211. There were three different sections of the existing tax law which constituted what is now clause 84 of this Bill?
  212. (Mrs Sampson) No. The non-cash vouchers come under section 141 of ICTA. It was the analysis of all that plus drawing on some of the general rules that come within section 144 which we wrote back into here to try to make it clearer.

  213. You have alerted us to an interesting piece of methodology which you have used. Has that been in general the way that you have approached not just this particular clause but other parts of the Bill to ensure the line of purity of thought in terms of ensuring that what we see before us today is what Parliament meant in terms of the original wording of the original legislation from which this Bill has now been drawn?
  214. (Mrs Scott) In every provision that we rewrite, we go back to look at the notes on clauses when the provision was introduced. We will often look at drafting papers. They are not always available. If you are looking at provisions first introduced in the early part of this century, you stand precious little chance of getting hold of the drafting papers. Notes on clauses are generally available. We look at all the manuals and publications by our specialists. We look at outside commentators' views of the law and all the relevant tax cases. We bear them all in mind in weaving together the various concepts that form the clauses in this Bill. It is not necessarily true to say that we will always deliver the original parliamentary intention. If there has subsequently been a court case that establishes that the provision in ICTA does not do what government thought it did when it was being introduced, we cannot change the law to put it back to what government originally intended. That would require a Finance Bill change.

  215. If the court has changed the way people thought the law was working, are those changes now incorporated in this Bill?
  216. (Mrs Scott) Yes, where it is a settled court decision. When something has appeared in the High Court last month or in the early part of this year, no, but we are not aware that there are any cases where there is currently a dispute.

  217. By and large, those court cases would have affected the mechanism but not the purpose of the original legislation. Would that be right?
  218. (Mrs Scott) The original purpose of the legislation may well have been to give a deduction in particular circumstances and the legislation may have been drafted in such a way that the scope of the circumstances in which the deduction is available is different.

  219. Users of the old tax legislation which this replaces would have to have had the original Act together with their knowledge of the court cases and an accountant advising a client would have said, "This is what the Act says, but so and so has now changed it." You have brought this together so that people can chuck out their court cases because it is all in the Bill.
  220. (Mrs Scott) I would not recommend that people chuck out their court cases. There is a lot of useful dictum in court cases.

    Mr Jack: In terms of real world use, this Bill reflects court judgments which have changed tax law. In other words, it has incorporated the modifications by the courts in this Bill so that, if this Committee were to recommend to the House approval of this, we have incorporated a court change into the law.


  221. I think what you are asking is this: you have not taken the opportunity anywhere of reversing a court decision in order to draft the law in a way that overturns the decision.
  222. (Mrs Scott) No.

    Chairman: The only other subject we have not touched on is the drafting. We have been provided in the memorandum of evidence with some before and after examples. In my opinion, the Committee is debating drafting but it is essentially a written exercise and it is a question of the Committee having a look at the examples of before and after and then raise any comments if they are dissatisfied or wish to comment about the way in which it has been done. Can I ask whether anybody will be getting onto the drafting or whether, having studied and taken note of appendix five, we are content, this being the second Bill of its kind, that the exercise of turning it into plain English remains very valuable? There is a prospect that, this afternoon, we could turn to the government amendments. Mr Jack, what is your view on how we handle our general appraisal of rewriting in plain English?

    Mr Jack

  223. You have made particular reference in our deliberations this morning to getting rid of old language and yet on appendix five I notice the word "spouse". Given that we are into the world of partners, wives and various other modern phrases to determine the arrangements between persons being together in whatever way they choose, I wondered why "spouse", which is quite an old word, survives.
  224. (Mrs Scott) It is in the interest of general, neutral drafting that you do not refer to "husband" or "wife". If the source legislation refers to "husband" or "wife", it would be a change beyond our remit to extend it to "cohabiting couples".

    Chairman: A spouse is someone you are married to and a partner is someone that you are not necessarily married to.

    Mr Jack: You trespass into difficult waters because you use the word "married".

    Chairman: This is not the occasion for a radical reform.

    Mr Jack: I appreciate that.


  225. Can I therefore conclude by asking whether it might be possible this afternoon for the Minister and the team to produce the annotated version of the amendments which you referred to? Then we can start looking at the amendments. I apologise for having given no more opportunities for private and deliberative sessions this morning. My suggestion is let us finish the evidence and turn to the amendments and wind up with one deliberative session on the whole thing before deciding what we report back to the House. If that meets general consent, I think the Committee should now rise and, if it is physically possible to get the notes to us this afternoon or put them on the board beforehand so that people have a chance to read them, I would be very grateful, although it means somebody working through their lunch hour.
  226. (Mr Michael) The people who will be writing the notes are the people who have been appearing before you this morning, but perhaps we can get something by 3.30.

    Chairman: If it is possible to finish it before 4.30, in both Houses there is a letter board system so Members of the Committee can look from three o'clock onwards to see if there is something on the board. If it is not possible, we will have somewhat fuller proceedings this afternoon. If any Member of the Committee wishes to table an amendment, their last opportunity is between now and this afternoon. If none turns up, I shall take it that nobody is proposing any amendments.

    Dawn Primarolo

  227. Would the officials group how they do the amendments into one set which is purely corrections and technical points and concentrate on explaining to the Committee the issue where there was an inadvertent extension? That would be helpful.

(Mr Michael) We will do that.