Joint Committee on Tax Law Rewrite Bills Minutes of Evidence

Examination of Witnesses(Questions 40-59)



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

  41. 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?
  (Mr Michael) Yes. It provides rather more certainty.

Dawn Primarolo

  42. 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?
  (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

  43. 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?
  (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

  44. 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".
  (Mr Michael) It is under the Board's care and management statutory powers.
  (Mrs Scott) It is set out in the Taxes Management Act 1970.

Dawn Primarolo

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

  46. 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?
  (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.


  47. 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.

  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

  48. 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?
  (Mrs Scott) This is another one of these innovations 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% taxpayers year on year.

  49. 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?
  (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.


  50. Football teams, for instance, if they are paying their players, are the players liable to tax until the team or somebody turns up?
  (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

  51. 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?
  (Mrs Scott) Yes. This sorts out which year you look at which rates of tax you apply.


  52. It is which financial year it falls in. It does not affect problems about liability and date of payment or anything like that?
  (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

  53. 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?
  (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.

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


  55. 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.
  (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

  56. 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%. 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?

  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

  57. Yes, but it is the time shift.
  (Mrs Scott) Yes. On the rules for the timing of receipt, rules 2 and 3 are there for anti-avoidance 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.


  58. 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?
  (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

  59. 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?
  (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.

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