Joint Committee on Tax Law Rewrite Bills Minutes of Evidence

Memorandum of evidence submitted by the Tax Law Rewrite Project

  1.  This memorandum of evidence has been prepared by the Tax Law Rewrite Project to assist the Joint Committee's consideration of the Income Tax (Earnings and Pensions) Bill as introduced in the House of Commons on 5 December 2002 (referred to hereafter in this evidence as "the Bill" or "this Bill").

  2.  The memorandum is designed to embrace information on all six bullet points mentioned in the Clerk's letter of 17 December 2002 to the Director of the Project, Mr Peter Michael, CBE.


  1.  There are a total of 183 minor changes made in the Bill, as recorded in Annex 1 to the Explanatory Notes.

  2.  These changes fall into a number of categories:

    (a)  incorporating extra-statutory concessions or published Statements of Practice or similar;

    (b)  making the legislation shorter, simpler, clearer, more certain or more consistent with other legislation;

    (c)  correcting points overlooked in the course of consolidation Acts, missed consequential amendments to earlier legislation, or other technical defects;

    (d)  removing an anomaly which is patently unfair;

    (e)  making clear the intended and accepted interpretation of legislation that is currently somewhat opaque; and

    (f)  filling a gap in the legislation.

  5.  Some minor changes may be made for a combination of the above reasons. Appendix 1 to this Memorandum contains a list of the Changes grouped by reference to the main reason for making them.

  6.  The Bill incorporates 20 extra-statutory concessions, representing the majority of those that affect employment income, pension income or social security income.

  7.  There are 12 other extra-statutory concessions directly relevant to employment income, pension income or social security income. Appendix 2 to this Memorandum lists those concessions and explains why they are not included in the Bill.


  8.  Many of the changes have no practical effect on the burden or incidence of tax on individual taxpayers. For example, a miner receiving free coal currently exempt under ESC A6 will pay no more tax just because that ESC is incorporated in this Bill under clause 306.

  9.  Likewise, a gap in the current legislation that this Bill fills in line with Inland Revenue practice will not change anyone's tax liability.

  10.  At the end of each of the changes listed in Annex 1 to the Explanatory Notes is a summary of the effect of the change, both in principle and in practice.

  11.  None of the changes have any significant effect on taxpayer's liabilities either in principle or in practice.

  12.  Included in Appendix 1 to the Memorandum is a summary of the effect that each change will have in practice.

  13.  A number of clauses in this Bill have been italicised to indicate that they incorporate a possible increase in the burden of tax (and for this purpose the "in principle" effect is considered as well as the effect in practice).

  14.  Appendix 3 to this memorandum contains more detailed information about the possible increase in the burden of tax in respect of each of the italicised provisions.



  15.  The core component of employment income is earnings, currently known as "emoluments" in tax legislation.

  16.  The definition of "emoluments" is currently in section 131(1) of ICTA (Income and Corporation Taxes Act 1988) as follows:

    "the expression emoluments shall include all salaries, fees, wages, perquisites and profits whatsoever."

  17.  This wide definition means that most employees receive "emoluments". Many employees do not receive anything from their employment other than "emoluments".

  18.  In this Bill this core concept has been made clearer in four main ways:

    —  the rather antiquated term "emoluments" is replaced with "earnings", a word which has more immediate relevance to employees and employers;

    —  the equally antiquated phrase "perquisites and profits whatsoever" is replaced with "any gratuity or other profit or incidental benefit of any kind obtained by the employee";

    —  the definition of "earnings" is given more prominence. It is defined in clause 62, right at the beginning of Part 3 of the Bill, which deals with most of the "incomings" from employment before consideration of exemptions in Part 4 and deductions in Part 5;

    —  the definition of "earnings" is expanded to bring in a proviso from long-standing case law that in order for a gratuity, profit or incidental benefit to be "earnings" it must be money or money's worth. (See Note 13 in Annex 2 to the Explanatory Notes).

  19.  There are many employees who would not have to look any further than clause 62 to determine the extent of their earnings for tax purposes.

  20.  For those employees who receive benefits that are outside the clause 62 definition, the Benefits Code in Chapters 2 to 11 of Part 3 sets out what, if anything should be treated as earnings in respect of those benefits.

  21.  Clause 62 earnings and amounts treated as earnings by the Benefits Code are added together to form "general earnings" for the year. The extent to which those general earnings are taxable in the year is determined by the rules in Part 2 of the Bill.

The move away from Schedules and Cases

  22.  It is not just the status of the income that is relevant in determining the charge to tax, but also the residence and domicile of the employee (and in some cases the location of the performance of duties and the residence of the employer).

  23.  Currently, in the case of emoluments and amounts treated as emoluments by the various provisions dealing with benefits, these factors are applied by means of the three Cases of Schedule E. For example, an employee who is resident, ordinarily resident and domiciled in the UK is within Case I of Schedule E. But the labels "Case I" and "Schedule E" are meaningless to anyone other than a tax expert.

  24.  This Bill adopts a different approach. Instead of "Schedule E" it uses phraseology that people can more readily understand: employment income.

  25.  Instead of applying the Cases of Schedule E, the Bill sets out, in Part 2, what tax treatment of general earnings applies in the various sets of circumstances that may apply.

  26.  About 98 per cent of employees subject to UK tax are resident, ordinarily resident and domiciled in the UK—so this group of taxpayers (currently within Case I of Schedule E) are covered first in Chapter 4: Taxable earnings: rules applying to employee resident, ordinarily resident and domiciled in UK.

  27.  Chapter 5 sets out what tax treatment applies if the employee is resident, ordinarily resident and/or domiciled outside the UK, dealing with each permutation in turn in descriptively headed clauses.

  28.  It is worth noting that the cases of Schedule E only apply to emoluments and amounts treated as emoluments ("general earnings" in this Bill). There are other kinds of employment income chargeable under Schedule E. The income subject to these free-standing charges is described as specific employment income in this Bill, enabling it to be distinguished from general earnings. The basis of assessment and any residence etc tests pertinent to specific employment income are contained in the relevant Chapter in Part 6 or 7 setting out that charge.

The result

  29.  The majority of employees have uncomplicated tax affairs—this Bill makes it easy for them to see which clauses are applicable to them.

  Part 1 sets out how the Bill is arranged.

  Part 2 explains how to work out the amount of employment income charged to tax. The arrangement of Part 2 means that most employees would not need to go beyond Chapter 4 of that Part to work out their taxable earnings.

  Part 3 sets out what is earnings or treated as earnings. The arrangement of Part 3 means that many employees would not need to look beyond clause 62 in Chapter 1.

  Parts 4 and 5 deal with exemptions and deductions respectively (and will not be relevant to many employees).

  Parts 6 and 7 deal with specific employment income (again not relevant to many employees).


  30.  Companies often wish to reward employees by allowing them to acquire shares on advantageous terms; and successive Governments have decided that they wish to confer tax advantages on various schemes and plans. Five schemes or plans exist at present, listed below in the order in which they were originally introduced:

    —  Approved profit sharing schemes. Legislation relating to these schemes was contained in FA 1978. These schemes are now being phased out, and they are not included in this Bill or discussed further in this evidence.

    —  Approved save as you earn ("SAYE") option schemes. Legislation relating to these schemes was contained in FA 1980, and later consolidated in sections 185 and 187 of, and Schedule 9 to, ICTA.

    —  Approved company share option plans ("CSOPs"). Legislation relating to these plans was contained in FA 1984, and later consolidated in sections 185 and 187 of, and Schedule 9 to, ICTA.

    —  Approved share incentive plans ("SIPs"). Legislation relating to these plans is contained in Schedule 8 to FA 2000 under the name "Employee share ownership plans".

    —  Enterprise management incentives ("EMI"). Legislation relating to EMIs is contained in Schedule 14 to FA 2000.

  31.  Legislation to confer tax advantages on a scheme, needs to cover a number of topics:

    —  the characteristics that the scheme must possess;

    —  if the scheme requires approval, the procedure to be undertaken;

    —  the tax advantages to be conferred on the scheme;

    —  any tax charges that will apply if the shares or options are removed from the scheme or plan (or other "inappropriate" actions are undertaken); and

    —  any supplementary provisions.

  32.  The current legislation does not deal with these topics consistently. In the cases of SAYE option schemes and CSOPs, some provisions are in sections of ICTA; the remainder are in Schedule 9 to that Act. ICTA also amalgamates the provisions relating to the two different schemes. From time to time the legislation needs to distinguish between the two schemes, and this need affects the way in which provisions are organised. The legislation relating to SIPs and EMI is set out, in its entirety, in two Schedules to FA 2000; but those Schedules also deal with matters outside the scope of this Bill: for there is also material relating to corporation tax, capital gains tax and stamp duty.

  33.  This Bill brings the treatment of the four schemes into better alignment. Each scheme is dealt with separately (and, as a result, ICTA's amalgamation of the provisions relating to SAYE option schemes and CSOPs has been reversed). The rewritten legislation deals with comparable material in the same order. In each case some provisions have been placed in an individual Chapter in Part 7 of the Bill, and others in a Schedule dealing with different aspects of the scheme.

  34.  In this Bill :

    —  SIPs are covered in Chapter 6 of Part 7 and Schedule 2.

    —  SAYE option schemes are covered in Chapter 7 of Part 7 and Schedule 3.

    —  CSOPs are covered in Chapter 8 of Part 7 and Schedule 4.

    —  EMI is covered in Chapter 8 of Part 7 and Schedule 5.

  35.  The Chapters in Part 7 deal with the topics that affect the employee directly. After introductory clauses, the Chapters set out the tax advantages conferred on participants in the scheme. Those advantages are dealt with in a coherent order with, for example in SIPs, the tax advantages relating to the award of shares being followed by those relating to the holding of shares and then by those relating to shares that cease to be subject to the scheme. As necessary, the provisions relating to tax advantages are then followed by provisions setting out the tax charges that may arise. Those charges are also dealt with in a coherent order. Chapter 6 of Part 7 (dealing with SIPs) also contains clauses dealing with the impact of PAYE; and, where appropriate, the Chapters in Part 7 conclude by indicating other provisions in tax law that may be relevant.

  36.  Schedules 2 to 5 to the Bill deal with the other matters listed in paragraph Legislation to confer tax advantages on a scheme, needs to cover a number of topics. These matters do not concern the employee directly: the detail in these Schedules may well be of more interest to those setting up and administering schemes, and to their professional advisers. All four Schedules are divided into Parts, of which the first is introductory. The first major topic dealt with—sometimes, of necessity, at considerable length—is the required characteristics for the scheme in question. Within this topic, comparable material continues to be dealt with in the same general order. General requirements are dealt with first, followed by requirements relating to the eligibility of individuals to participate in the scheme, and then (in the cases of Schedules 2 to 4) by requirements relating to the shares that may be acquired by the individual. The requirements that apply only to the scheme in question are dealt with later. The second major topic dealt with (as necessary) is the procedure to be undertaken if the scheme requires approval; and the third major topic dealt with (in the final Part of each Schedule) consists of supplementary provisions.

  37.  This Bill includes making a certain number of minor changes to the law designed to bring the rewritten legislation relating to share schemes into better alignment. For example, the restrictions to which scheme shares may be subject have been amended, in the cases of SAYE option schemes and CSOPs, so that they are now aligned with those applying for SIPs (see Change 168 in Annex 1); and the approval procedure relating to SIPs has been amended to bring it into alignment with that applying for SAYE option schemes and CSOPs (see Change 164 in Annex 1).

  38.  Various drafting techniques have also been used to achieve better alignment across the share scheme provisions. There is, for example, an "Index of defined expressions" at the end of each Schedule—a feature used in the provisions currently applying for SIPs and EMI and replicated in this Bill for SAYE and CSOPs too. And the legislation relating to each scheme is described as a "code", a term suggested by the term "benefits code" in clause 63 of the Bill.

  39.  The use of the terms "SIP code" and "EMI code" is helpful for dealing with those provisions in Schedules 8 and 14 to FA 2000 that do not fall within the scope of this Bill—because they are relevant for corporation tax, capital gains tax or stamp duty. Schedule 6 to the Bill (Consequential amendments) provides for this material to be placed elsewhere—in ICTA, TCGA 1992 and in FA 2001. The use of the two terms enables the "repositioned" material to be linked with the relevant material in this Bill, so that expressions used in the relevant code also apply to the "repositioned" material.

  40.  This reorganisation and redrafting of the material relating to share schemes and share option schemes has been developed in consultation with share scheme practitioners, who confirm that the provisions are indeed clearer and easier to understand. The Share Schemes Lawyers group are on record as saying:

    "The Share Scheme Lawyers Group has had a most constructive series of meetings with the TLR project team. As far as the share scheme legislation is concerned, we believe that the objectives of the rewrite project have been very substantially accomplished. The new text is clearer, more logically ordered and more user friendly while preserving the effect of the present legislation apart from minor policy changes (some of which we proposed and all of which we welcome)."

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