Income Tax (Trading and Other Income) Bill

House of Lords House of Commons Joint Committee on Tax Law Rewrite Bills Income Tax (Trading and Other Income) Bill

First Report of Session 2004-05

Report, together with formal minutes, oral and written evidence

Ordered by The House of Lords to be printed 1 February 2005

Ordered by The House of Commons to be printed 1 February 2005

HL Paper 37 HC 285 Published on 10 February 2005 by authority of the House of Commons and the House of Lords London: The Stationery Office Limited £11.00

The Joint Committee on Tax Law Rewrite Bills

The Joint Committee on Tax Law Rewrite Bills is appointed to consider tax law rewrite bills, and in particular to consider whether each bill committed to it preserves the effect of the existing law, subject to any minor changes which may be desirable.

Current Membership Rt Hon Kenneth Clarke QC MP (Conservative, Rushcliffe) (elected Chairman, 14th January 2003)

Mr Parmjit Dhanda MP (Labour, Gloucester) John Healey MP (Labour, Wentworth) Mr Ivan Henderson MP (Labour, Harwich) Rt Hon Michael Jack MP (Conservative, Fylde) Mr David Laws MP (Liberal Democrat, Yeovil) Mr Anthony D Wright MP (Labour, Great Yarmouth)

Lord Blackwell (Conservative) Rt Hon Lord Millett (Crossbencher) Baroness Cohen of Pimlico (Labour) Lord Goodhart QC (Liberal Democrat) Lord Haskel (Labour) Rt Hon Lord Howe of Aberavon Kt CH QC (Conservative)

The following were also members of the Committee during the Parliament.

Mr Chris Pond MP (Labour, Gravesham) Rt Hon Dawn Primarolo MP (Labour, Bristol South) Rt Hon Lord Brightman (Crossbencher)

Powers The Joint Committee is appointed under Standing Order No. 152C of the House of Commons and pursuant to the motion of 9 December 2004 of the House of Lords. It has the power to require the submission of written evidence and documents, to examine witnesses, to meet at any time (except when Parliament is prorogued or dissolved), to appoint specialist advisers, and to make Reports to the House.

The Lords Committee has the power to agree with the Commons in the appointment of a Chairman. The procedures of the Joint Committee follow those of House of Commons Select Committees where they differ from House of Lords Committees. The Chairman of the Committee has the power to select amendments.

Publication The Reports and evidence of the Joint Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at: www.parliament.uk/parliamentary_committees/joint_committee_on_tax_rewrite _billscfm.

Joint Committee staff The staff of the Joint Committee are Geoffrey Farrar (Commons Clerk), Nicolas Besly (Lords Clerk), Richard Dawson (Committee Assistant) and Lisette Pelletier (Secretary).

Contacts All correspondence should be addressed to the Clerk of the Joint Committee of Tax Law Rewrite Bills, House of Commons, London SW1A 0AA. The telephone number for general enquiries is 020 7219 3258. The Committee’s email address is [email protected]

Contents

Report Page

INCOME TAX (TRADING AND OTHER INCOME) BILL 3

Annex 4 Proposed amendments to the Income Tax (Trading and Other Income) Bill 4

Formal minutes 6

Witnesses 8

List of written evidence 8

INCOME TAX (TRADING AND OTHER INCOME) BILL

1. The Committee has considered the Income Tax (Trading and Other Income) Bill which was referred to it by the House of Commons on 20 December 2004.1 We heard oral evidence from members of the Tax Law Rewrite Project team, and took into consideration the extensive process of consultation with all representative bodies to which the Bill had been exposed.

2. The Committee paid particular attention to— a) the decision to restrict the Bill to income tax, rather than also applying it to corporation tax; b) the restructuring of the relevant provisions of income tax law; c) cases where there are possible changes in the incidence and burden of taxation on tax payers; d) the elements of income tax law not yet rewritten by this or previous Tax Law Rewrite Bills; e) the next stage of the Tax Law Rewrite programme, which will address the remainder of the income tax code; and f) the undertaking given by the Minister that any proposed order to be made under clause 88(2) would not be laid before Parliament before it had been agreed with the Consultative and Steering Committees of the Tax Law Rewrite Project.2

3. The Committee accepted the Government’s proposed amendments to the Bill, submitted after its publication, which were of a minor, technical nature. The list of amendments accepted by the Committee is published with this Report as Annex 1.3

4. We are of the opinion that the Bill is a welcome clarification of the existing law relating to income tax in this important area, which will be of value to Parliament, the judiciary, professionals and business people, and other users of legislation. The Committee is satisfied that the only changes that the Bill makes to the existing law are of such minor significance that they need not be referred to the attention of Parliament. The Committee looks forward to the preparation of future Bills under the auspices of the Tax Law Rewrite Project.

5. There is no other point to which the special attention of Parliament should be drawn.

1 Votes and Proceedings, 20 December 2004 2 Q 48 3 See p 4

Annex

Proposed amendments to the Income Tax (Trading and Other Income) Bill4 1 Clause 485, page 209, line 14, leave out ‘and’ and insert ‘or’. 2 Clause 485, page 209, line 15, leave out ‘no’ and insert ‘a’. 3 Clause 485, page 209, line 22, leave out second ‘and’ and insert ‘or’. 4 Clause 485, page 209, line 23, leave out ‘no’ and insert ‘a’. 5 Schedule 1, page 386, line 6, leave out ‘those Schedules’ and insert ‘Schedule D’. 6 Schedule 1, page 386, line 12, after ‘and D”,’ insert –

‘(aa) for “those Schedules” substitute “Schedule D”,’. 7 Schedule 1, page 405, line 28, at end insert –

‘99A In section 118ZK(2)(b) and (5) (transitional provision for years after the first restricted year) after “1992” insert “or any of sections 138 to 140 of ITTOIA 2005”.’. 8 Schedule 1, page 411, leave out lines 42 to 44. 9 Schedule 1, page 412, line 4, after ‘section 56(5),”’ insert ‘, and

(ii) after “under which” insert “, or uncertificated eligible debt security units under which”’. 10 Schedule 1, page 412, line 9, after ‘section 56(5),”’ insert ‘and after “issued” insert “, and no uncertificated eligible debt security units have been issued,”’. 11 Schedule 1, page 419, leave out lines 13 to 15.

4 The page and line numbers refer to the Bill as presented to the House of Commons and ordered to be printed on 30 November 2004 [Bill 9].

12 Schedule 1, page 419, line 25, leave out from ‘2005”’ to end of line 28. 13 Schedule 1, page 420, line 8, after ‘56(5),’ insert ‘which is’. 14 Schedule 1, page 420, line 9, after ‘units’ insert ‘, being a certificate or units’. 15 Schedule 1, page 437, line 23, leave out ‘552(1)(b)’ and insert ‘552(1)(a) or (b)’. 16 Schedule 1, page 461, line 19, at end insert –

Section 844(4) Withdrawal of relief for unremittable foreign income after source ceases’. 17 Schedule 1, page 474, line 18, after ‘income);’ insert—

‘(iia) section 421(1) of that Act (release of loan to participator in close company);’. 18 Schedule 1, page 478, line 18, after first ‘cash’ insert ‘(within the meaning of section 251(2) to (4) of the Taxes Act)’. 19 Schedule 1, page 515, line 23, after ‘etc.))’ insert ‘and section 770 of that Act (exemption for amounts applied by SIP trustees acquiring dividend shares or retained for reinvestment)’. 20 Schedule 2, page 553, line 9, leave out from ‘the’ to ‘preceding’ in line 11 and insert ‘condition in paragraph (a) or (b) is met) have effect with the omission of paragraph (b) (company interest in the rights under the policy) and the word “or”’. 21 Schedule 3, page 582, line 47, after ‘56,’ insert ‘57,’.

Formal minutes

Tuesday 1 February 2005

Members present:

Mr Kenneth Clarke, in the Chair

John Healey Lord Blackwell Mr Ivan Henderson Baroness Cohen of Pimlico Mr Anthony Wright Lord Goodhart Lord Howe of Aberavon

The Joint Committee deliberated.

Ordered, That the uncorrected transcript of the oral evidence given this day by officials from the Tax Law Rewrite Project together with the associated memoranda be published on the Internet.—(The Chairman.)

The Joint Committee further deliberated.

Income Tax (Trading and Other Income) Bill: Mr Robin Martin CB, Project Director, Mr David Cook, Head of Drafting Team, Ms Hazel Colclough, Team Leader, Mr John Morris, Team Leader, and Ms Vicki Carr, Technical Advisor, the Tax Law Rewrite Project, Inland Revenue, were examined.

Resolved, That the Income Tax (Trading and Other Income) Bill be now considered.

Clauses 1 to 484 agreed to.

Clause 485 (Disregard of certain events in relation to qualifying policies).

Amendments (Nos. 1 to 4) made.

Clause, as amended, agreed to.

Clauses 486 to 886 agreed to.

Schedule 1 (Consequential amendments).

Amendments (Nos. 5 to 19) made.

Schedule, as amended, agreed to.

Schedule 2 (Transitionals and savings etc.).

Amendment (No. 20) made.

Schedule, as amended, agreed to.

Schedule 3 (Repeals and revocations).

Amendment (No. 21) made.

Schedule, as amended, agreed to.

Schedule 4 agreed to.

The Joint Committee further deliberated.

Draft Report [Income Tax (Trading and Other Income) Bill], proposed by the Chairman, brought up and read.

Ordered, That the Chairman's draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 5 read and agreed to.

Annex [Amendments made to the Income Tax (Trading and Other Income) Bill] agreed to.

Resolved, That the Report be the First Report of the Joint Committee to each House.

Ordered, That the Chairman do make the Report to the House of Commons and Lord Howe of Aberavon do make the Report to the House of Lords.

Ordered, That the Minutes of Evidence taken before the Committee, together with the Appendices to the Minutes of Evidence, be reported to each House.—(The Chairman.)

[Adjourned to a day and time to be fixed by the Chairman.

Witnesses

Tuesday 1 February 2005

Tax Law Rewrite Project, Inland Revenue

Mr Robin Martin CB, Project Director, Mr David Cook, Head of Drafting Team, Ms Hazel Colclough, Team Leader, Mr John Morris, Team Leader, and Ms Vicki Carr, Technical Advisor, the Tax Law Rewrite Project

List of written evidence

1 Inland Revenue Ev 1 2 Inland Revenue Ev 3 3 Inland Revenue Ev 22 4 Institute of Chartered Accountants Ev 33

Joint Committee on Tax Law Rewrite Bills: Evidence Ev 1 Oral evidence

Taken before the Joint Committee on Tax Law Rewrite Bills

on Tuesday 1 February 2005

Members present:

Mr Kenneth Clarke, in the Chair

Blackwell, L. John Healey Cohen of Pimlico, B. Mr Ivan Henderson Goodhart, L. Mr Anthony D. Wright Howe of Aberavon, L.

1. Memorandum by the Inland Revenue

Introduction 1. The Committee askedus for a short initial memorandumcovering these thr ee points: — what is the general purpose of the bill; which are the key areas of taxation that are covered? — are there any changes proposedwhich have the potential to be non-tax neut ral? — were there any parts of the rewrite process that were ﬁendishly diYcult andtherefore couldgive rise to potential problems later on? This memorandum covers these three points (we shall also be providing a more comprehensive one shortly).

General Purpose of the Bill and Key Areas Covered 2. The purpose of the Bill is to rewrite income tax legislation relating to trading, property and investment income, making it clearer andeasier to use. 3. Part 1 is introductory. 4. Parts 2 to 5 are charging Parts. They cover trading income, property income, savings andinvestment income andmiscellaneous income. These Parts rewrite the rules that: — charge the income to tax; — calculate the income chargeable; and — identify the person liable. 5. Parts 6 to 9 deal with further rules that aVect the amount of income chargeable to tax. They cover exempt income, rent-a-room andfoster-care reliefs, foreign income (spe cial rules), andpartnerships. 6. Part 10 contains general provisions. 7. There are four schedules covering consequential amendments, transitionals andsavings, repeals and revocations andabbreviations anddefinedexpressions. 8. The Bill: — is an income tax Bill; — brings the charging andcalculation rules for the di Verent sorts of income together in updated classifications, such as “trading income” and “savings and investment income”, andprovides separate charges for each type of income; and — includes foreign income in the same Parts as equivalent United Kingdom income, confining any special rules that apply to foreign income to a diVerent Part (Part 8). 9. Not all the rules that impact on the calculation of income are rewritten in this Bill. For example, the rules in Part 17 of ICTA—Tax Avoidance—remain in ICTA for the time being.

Changes with Potential to be Non Tax-neutral 10. We will provide in our longer memorandum a comprehensive list of the changes in the Bill. In general, the changes adjust the law marginally to reﬂect how it is operated in practice or they incorporate existing extra-statutory concessions into the law. Out of the total of 159 changes made in the Bill just 43 are judged to have the potential to reduce or increase the amount of tax a person will in practice pay. But even in these Ev 2 Joint Committee on Tax Law Rewrite Bills: Evidence

cases the situations they deal with are obscure and there is little or no evidence of them having arisen in practice. Annex A to this memorandum describes ﬁve examples of those changes most likely to have an impact in practice. More detailed material on each change can be found in the Explanatory Notes to the Bill (Volume III pages 72 onwards).

Difficult Parts of the Rewrite Process

11. Rewriting tax legislation without changing the eVect of the law (other than by way of agreedminor changes) is a diYcult andtime consuming exercise. But the project has hadthe benefit of exte nsive consultation with experts both within the Revenue andoutsideit. No parts of this Bill caused insurmountable diYculty, andthe very thorough consultation to which it was subject shoulden sure that it will function well in practice. 12. Considerable time and eVort has been spent on the issue of splitting income tax from corporation tax. The Bill rewrites provisions that in the source legislation apply for both income andcorporation tax purposes. But it does so only for income tax purposes. Consequential amendments have been made to ensure that these provisions continue to operate as before for corporation tax. 13. The Project consultedat an early stage on whether we shouldaim for grea ter separation of the Income Tax andCorporation Tax codes. 14. None of the representative bodies favoured retaining ICTA in its present mammoth form andall but one either advocated splitting income tax and corporation tax or were neutral. The near-unanimous view in the consultation was that the combination of income tax andcorporation tax in a single Act, with some rules applying for one tax alone, andsome for both, makes the legislation d iYcult to understand because the logical flow for both taxes is fractured. 15. Moreover, since corporation tax was first enactedas an extension of inc ome tax in 1965, the rules for the two taxes have diverged and continue to do so. For example: — the 1996 loan relationship legislation creates a regime for corporation tax completely diVerent from that for income tax; and — large parts of Schedule D now apply only to income tax. 16. The general view in consultation was that the diVerences between income tax andcorporation tax are now so significant that it makes sense to put each code into separate Acts. Most were willing to accept repetition of rules anda resulting increase in the length of legislation i f that ledto greater clarity. More than one remarkedthat what matters is not how many pages the rules take up but how long it takes to understand them.

17. Splitting ICTA is a substantial step. The main advantages are: — IT and CT users will not be diverted by provisions that do not apply to them; — each code can be given the structure best suited to its own provisions; and — future legislation can be made to apply more clearly to, and with suitable wording in, each of the codes. 18. The potential disadvantages are: —diVerent legal interpretations of identically-worded provisions (this cannot be ruledout, although we doubt that it would arise frequently, if at all); — unintentional divergence of the codes caused by the failure to pick up, say, the corporation tax consequential of an income tax change; and — duplication of eVort because a provision which requires amendment is in two Acts (but we do not expect that this wouldgenerally involve two Parliamentary debates). 19. A decision was taken to give eVect to the income tax/corporation tax split in relation to the content of this Bill. Andit is our intention to approach the rewrite of the balance o f income tax legislation in the same way. This does not mean that we will necessarily rewrite corporation tax as a fully standalone code. It provides the opportunity to take such a decision in the future. But it leaves open the possibility of utilising in full or in part the rewritten income tax code if or where it appears sensible to do so. A ﬁnal decision on the approach to corporation tax will be made after full consultation when the project turns to this aspect of its task. January 2005 Joint Committee on Tax Law Rewrite Bills: Evidence Ev 3

Annex A

Examples of Changes in the Bill

Change 5: wayleaves (Clause 22) Change 5 relates to the taxation of income from wayleaves. It extends somewhat the class of wayleaves that can beneﬁt from being treatedas income from a trade,as opposedto inco me from property. This will allow a taxpayer to set the income in question against trading losses or expenses.

Change 7: bad and doubtful debts (clause 35) Change 7 simpliﬁes the law by bringing the rules that apply to baddebtstran sferredwith a tradeinto line with the rules for bad debts generally. It does so by applying the more recent andfuller rules of section 74(1)(j) of ICTA to all debts. Relief may be due earlier under clause 35 than under the source legislation. But this is a timing diVerence only. Andclause 35 allows relief for debtsreleasedas part of a “statutory insol vency agreement” whereas the source legislation does not. This may provide relief that is not currently available. But it is more likely to encourage such arrangements for the beneﬁt of all involved.

Change 53: enterprise allowance (Clause 204) Change 53 allows enterprise allowances to be included in the calculation of trade proﬁts, as opposed to being taxed (as is the case at present) under Schedule D Case VI. Trading losses brought forwardand terminal losses couldbecome available against the allowances; since tax payers are more likely to have trading losses than Schedule D Case VI losses this could beneﬁt some taxpayers.

Change 58: averaging (Clause 221) This change allows an individual to claim averaging of profits derived from creative work carriedon wholly abroad. Extending averaging to these profits (which will be rare in practice) simplifies the rule and makes it consistent between qualifying trades.

Change 136: Claims for delayed remittances: (Clause 835) This change enables a claim for relief to be made in respect of some (as opposedto all) of a taxpayer’s delayed remittances where the taxpayer is taxed on the remittance basis. Although the InlandRevenue allow a partial claim which meets the relevant conditions for relief the number of partial claims may increase because it will be clear from the text of clause 835(1) that such a claim can be made. A partial claim is likely for a tax year where, for example, personal reliefs which otherwise wouldbe lost can be usedto eliminate the tax charge on part of the unremittable income.

2. Further memorandum from the Inland Revenue

INCOME TAX (TRADING AND OTHER INCOME BILL) This memorandum of evidence has been prepared by the Tax Law Rewrite Project to assist the Joint Committee’s consideration of the Income Tax (Trading and Other Income) Bill as introduced in the House of Commons on 30 November 2004.

Purpose and Content of the Bill

Overview The purpose of the Bill is to rewrite income tax legislation relating to trading, property and investment income, making it clearer andeasier to use. Part 1 is introductory. Parts 2 to 5 are charging Parts. They cover trading income, property income, savings andinvestment income andmiscellaneous income. These Parts rewrite the rules that: — charge the income to tax; — calculate the income chargeable; and — identify the person liable. Ev 4 Joint Committee on Tax Law Rewrite Bills: Evidence

Parts 6 to 9 deal with further rules that aVect the amount of income chargeable to tax. They cover exempt income, rent-a-room andfoster-care reliefs, foreign income (special ru les) andpartnerships. Part 10 contains general provisions. There are four Schedules covering consequential amendments, transitionals andsavings, repeals and revocations, andabbreviations anddeﬁnedexpressions.

Main features of the Bill The Bill: — is an income tax Bill; — brings the charging andcalculation rules for the di Verent sorts of income together in updated classiﬁcations such as “trading income” and “savings and investment income” andprovides separate charges for each type of income; and — includes foreign income in the same Parts as equivalent United Kingdom income, conﬁning any special rules that apply to foreign income to a diVerent Part (Part 8). Not all the rules that impact on the calculation of income are rewritten in this Bill. For example, the rules in Part 17 of the Income andCorporation Taxes Act 1988 (ICTA)—Tax Avoidanc e—remain in ICTA for the time being.

An income tax only Bill—The separation of income tax and corporation tax The Project consultedat an early stage on whether we shouldaim for greater separation of the Income Tax andCorporation Tax codes. None of the representative bodies favoured retaining ICTA in its present mammoth form andall but one either advocated splitting income tax and corporation tax or were neutral. The near-unanimous view in the consultation was that the combination of income tax andcorporation tax in a single Act, with some rules applying for one tax alone, andsome for both, makes the legislation di Ycult to understand because the logical flow for both taxes is fractured. Moreover, since corporation tax was first enactedas an extension of income tax in 1965, the rules for the two taxes have diverged and continue to do so. For example: — the 1996 loan relationship legislation creates a regime for corporation tax completely diVerent from that for income tax; and — large parts of Schedule D now apply only to income tax. The general view in consultation was that the diVerences between income tax andcorporation tax are now so significant that it makes sense to put each code into separate Acts. Most were willing to accept repetition of rules anda resulting increase in the length of legislation if that leads to greater clarity. More than one remarkedthat what matters is not how many pages the rules take up but how lon g it takes to understand them. Splitting ICTA is a substantial step. The main advantages are: — IT and CT users will not be diverted by provisions that do not apply to them; — each code can be given the structure best suited to its own provisions; and — future legislation can be made to apply more clearly to, and with suitable wording in, each of the codes. The potential disadvantages are: —diVerent legal interpretations of identically-worded provisions (this cannot be ruledout, although we doubt that it would arise frequently, if at all); — unintentional divergence of the codes caused by the failure to pick up, say, the corporation tax consequential of an income tax change; and — duplication of eVort because a provision which requires amendment is in two Acts (but we do not expect that this wouldgenerally involve two Parliamentary debates). A decision was taken to give eVect to the income tax/corporation tax split in relation to the content of this Bill. Andit is our intention to approach the rewrite of the balance of i ncome tax legislation in the same way. This does not mean that we will necessarily rewrite corporation tax as a fully stand-alone code. It provides the opportunity to take such a decision in the future. But it leaves open the possibility of using in full or in part the rewritten income tax code if, or where, it appears sensible to do so. A final decision on the approach to corporation tax will be made after full consultation when the project turns to this aspect of its task. Joint Committee on Tax Law Rewrite Bills: Evidence Ev 5

An updated structure and separate charges Restructuring the source legislation is an essential feature of the rewrite. Each Part of the Bill brings together rules that are spreadwidelyin the sou rce legislation. In doing so each Part adopts a logical structure suited to its contents. For example, the order of the trading income Part follows the order of the steps that are in practice necessary to calculate the taxable profits of a trade: — identify the income taxed as profits of a trade (Chapter 2); — calculate the profits of the trade for a period of account (Chapters 3 to 7); — apply the rules for particular trades (Chapters 8 to 11); — apply other rules aVecting the calculation of profits of the trade (Chapters 12 to 14); — apply the basis periods rules (Chapter 15) to convert the profit of the periodof account to the profit for the tax year; and — apply the averaging rules (Chapter 16) where applicable. Andeach Part that charges income (Parts 2 to 5) adoptsas consistent an appr oach as the material allows in charging the income, indicating the territorial scope of the charge, the person liable andso on. The Bill has separate provisions for the various specific charges currently routedthrough the Cases of Schedule D in the source legislation and a pure sweep-up provision for both UnitedKingdomandforeign income not otherwise chargedto tax. For income that is currently routedth rough Cases III andVI this approach makes it easier to identify the type of income that is charged, to locate the charging provision and to set out the rules applicable to that particular type of income. A new provision has been insertedin ICTA to preserve the e Vect of the Case VI loss relief regime.

The integration of foreign income Most users think of income in terms of the type of income rather than whether it arises in the United Kingdom or abroad. In the source legislation most foreign income is chargedseparately from United Kingdom income. The Bill uses an “integrated approach”. The Project’s previous Act—the Income Tax (Earnings andPensions) Act 200 3 (ITEPA) also usedan integratedapproach. That Act brought together the rules for UnitedKingd om pension andsocial security income previously charged under Schedule E with equivalent foreign income previously chargedunder Schedule D Case V. This Bill: — includes foreign income in the same Parts as equivalent types of United Kingdom income wherever possible; and — includes the special rules that apply generally to foreign income in Part 8 of the Bill. The special rules for foreign income in Part 8 of the Bill apply to “relevant foreign income”. That expression is defined (in clause 830 of the Bill) to include all the income charged under Schedule D Cases IV andV in ICTA. The special rules are: — the remittance basis (clauses 831 to 834 in Chapter 2 of Part 8 of the Bill); — relief for delayed remittances (clauses 835 to 837 in Chapter 2 of Part 8 of the Bill); and — deductions and reliefs for relevant foreign income charged on the arising basis (Chapter 3 of Part 8 of the Bill). In addition, Chapter 4 of Part 8 gives relief for unremittable income. That relief applies to all income that arises outside the United Kingdom, not just to relevant foreign income. The endof the Schedulesfor Income Tax The Income Tax Act of 1803 charged income under five Schedules: A, B, C, D and E. Schedule F was added in 1965. Three of these Schedules have already gone: — Schedule B was abolished by FA 1988; — Schedule C was abolished by FA 1996 (for income tax purposes); and — Schedule E was rewritten by ITEPA 2003 (the project’s first income tax Act) in terms of employment, pension andsocial security income. This Bill repeals, for income tax purposes, the remaining Schedules A, D andF. Ev 6 Joint Committee on Tax Law Rewrite Bills: Evidence

Proposed Changes in the Law

The project proposes minor changes to the law where these will improve the legislation. There are a total of 159 minor changes explainedin detailin Annex 1 to the Explanatory Notes (starting on page 72 in Volume 3). Two Changes list the instances where redundant material has been dropped (Change 158) or principles derived from case law have been included (Change 159). The remaining 157 changes are listed in Appendix 1 to this memorandum. These changes are groupedin the following categories: — incorporating extra-statutory concessions or publishedstatements of practice or similar; — making the legislation shorter, simpler, clearer, more certain or more consistent with other legislation; — correcting points overlookedin the course of consolidationActs, misse dconsequential amendments to earlier legislation, or other technical defects; — removing an anomaly; — making clear the intended and accepted interpretation of legislation that is currently somewhat opaque; and — ﬁlling a gap in the legislation. Some minor changes may be made for a combination of the above reasons. In Appendix 1 the changes are groupedby reference to the main reason for making them. The last six columns of Appendix 1 indicate the eVect of each proposedchange both in principle and practice.

Changes in principle

Of course, all changes are changes in principle whether or not they aVect the amount of tax charged. But in deciding whether or not a change is within the remit of the project we are concernedwith the practical e Vect.

Changes in practice

In the context of income tax as a whole the total eVect of all the proposedchanges will be negligible. We cannot be certain that the eVect of a change on an individual taxpayer will always be negligible. We doubt that anyone will be materially aVectedby the proposedchanges. But often the necessary information is simply not available. In Appendix 1 we have indicated that a change will result in more or less tax if there is any possibility of this being the case. We have identified 43 changes of this nature. But usually the chances of any significant eVect are very small. To illustrate this Appendix 2 to this memorandum describes five examples of those changes most likely to have an impact in practice.

Points raised in the Second Reading Debate

In the Second Reading Committee debate Sir Teddy Taylor MP raised four points of detail. Three concernedproposedchanges set out in Annex 1 of the Explanatory Notes. One concernedclause 53. Appendix 3 contains our comments on the points raised.

Extra-Statutory Concessions

The Bill will legislate 11 extra-statutory concessions, 8 fully and3 in pa rt. These are listedin Annex 2 on page 236 of Volume 3 of the Explanatory Notes. There are 11 other extra-statutory concessions that aVect income dealt with within the Bill. Appendix 4 to this memorandum lists the concessions not legislated, or not fully legislated, and indicates why they are not included in the Bill. Joint Committee on Tax Law Rewrite Bills: Evidence Ev 7

Before and After Examples Appendix 5 to this Memorandum contains examples of the way in which various provisions look before andafter the rewrite. January 2005

APPENDIX 1

EFFECTS OF PROPOSED CHANGES IN PRINCIPLE AND PRACTICE

Change Description Change in principle Change in practice No More Less More Less Timing1 Admin2 tax tax tax tax Changes incorporating extra-statutory concessions or published statements of practice or similar 3 Caravan sites where trade carried on: — } ———— clause 20 4 Surplus business accommodation: — } ———— clause 21 11 Car hire: hire agreements without option — } ———— to purchase: clause 49 18 Redundancy payments: legislate the — } ———— practice of allowing voluntary payments made in connection with a cessation: clause 79 20 Contributions to local enterprise — } ———— organisations or urban regeneration companies: disqualifying benefits: clause 82 32 Herdbasis rules: meaning of “substantial — } ———— part of herd”: clause 113(6) and clause 120(7) 36 Herdbasis elections: 5 year gap in which — } ———— no production herd kept: clause 125 37 Herdbasis elections: slaughter under — — — — — } disease control order: clause 126 38 Tax treatment of soundrecordings: — } ———— clauses 130, 132 and135 50 Deductions for unremittable amounts: — } — } — } clauses 187 to 191 52 Basis periods etc: to allow any reasonable — } ———— andconsistent time basis for apportioning profits or for calculating deductible overlap profit: clauses 203, 220, 275 and 871 54 Basis periods: treat accounts regularly — } ———— preparedto datesnear the endof the tax year as if preparedto 5 April subject to a taxpayer’s opt out: clauses 208, 209 and 210 55 Basis periods: to allow accounts prepared — } —— — to a date near the end of the tax year to be treatedas if preparedto 5 April: clauses 208, 209, 210 and220 56 Basis periods: to allow accounts regularly — } ———— preparedto a particular dayin the year to be treatedas if preparedto a particular date: clauses 211, 212 and 213 57 Overlap profit (calculating a deduction): — } ———— to allow the taxpayer to disregard 29 February when there is a change of accounting date to a date late in the tax year: clause 220 59 Averaging: clause 221 — } ———— Ev 8 Joint Committee on Tax Law Rewrite Bills: Evidence

Change Description Change in principle Change in practice No More Less More Less Timing1 Admin2 tax tax tax tax 64 Post cessation receipts treatedas UK — } ———— relevant earnings for pension purposes: clause 256 66 Priority of the charge on trade profits: the }}———— “Crown Option” andclauses 261, 366 and 575 85 Stock dividends from UK resident } }}} —— companies: the net amount of stock dividends: clause 412 88 Gains from contracts for life insurance etc: }}}——— individuals who are not resident in the UnitedKingdomin the tax year not liable for tax: clauses 465 and539 89 Gains from contracts for life insurance etc: — } ———— disregard of alteration of terms of old life insurance policies where insurer stops collecting premiums: clauses 488 and489 91 Gains from contracts for life insurance etc: — } ———— disregard of trivial inducement benefits: clause 497 94 Gains from contracts for life insurance etc: — — — — — } enactment of regulations about personal portfolio bonds in primary legislation: clauses 515 to 526 113 Exempt income: Ulster Savings — } ———— Certificates: clause 693 118 Exempt income: purchasedlife annuity }}———— payments: methodof calculating exempt part of purchasedlife annuity: clause 719 119 Exempt income: purchasedlife annuity — } ———— payments: carry forwardof excess exempt capital element in purchasedlife annuity payment: clause 719 andSchedule2 125 Exempt income: interest on damages for — } ———— personal injury: awards by foreign courts: clause 751(1) 139 Pensions chargedon the arising basis — } ———— (sections 575, 613 and635 of ITEPA): relief for arrears of foreign pensions: clause 840 andPart 11 of Schedule2 143 Partnerships: allocation of firm’s profits }}———— between partners: clause 850 157 Gains from contracts for life insurance etc: — } ———— time limit for policy holders previously not resident in the United Kingdom to vary policy or contract so it is not a personal portfolio bond: Part 7 of Schedule 2 Changes making the legislation shorter, simpler, clearer, more certain or more consistent with other legislation 1 Income taxedas tradeprofits: omit the }}———— words “immediately derived from” in the identification of the foreign income to which the trade profit rules apply: clause 7 2 Profits of mines, quarries andother }}———— concerns: clause 12 5 Rents in respect of wayleaves where — } — } —— associatedwith a trade:clauses 22 and344 7 Align rules for debts proving irrecoverable — } — } —— after trade deemed to have ceased with general rules for badanddoubtfuldebts: clause 35 Joint Committee on Tax Law Rewrite Bills: Evidence Ev 9

Change Description Change in principle Change in practice No More Less More Less Timing1 Admin2 tax tax tax tax 8 Unpaidremuneration of employees: — — — — — } payment made after return submitted but within 9 months of the endof the period of account: clauses 37 and865 14 Requiring an apportionment to be just }}———— andreasonable: clauses 61, 65, 78, 93, 289, 294, 316, 471, 472, 645, 719 and722 15 Restrictions on expenses under clauses 61 } }}} —— and292: clauses 64, 65, 293 and294 17 Retraining courses: deduction no longer — } — } —— dependent on employee’s exemption: clause 74 21 Contributions to local enterprise — — — — } — organisations or urban regeneration companies: gifts of trading stock: charge any beneﬁt by reference to periods of account: clauses 82 and109 22 Contributions to local enterprise — } — } —— organisations or urban regeneration companies, assets of mutual concerns, gifts of trading stock to charities etc, income chargedon withdrawalof relief after source ceases: clauses 82, 104, 109 and844 23 Patent fees paid: clauses 89 and 90 — — — — } — 24 Payments to Export Credits Guarantee — — — — } — Department: clause 91 25 Expenses connectedwith foreign trades: — } — } —— relax condition for family expenses: drop “functions” test: clause 92 26 Expenses connectedwith foreign trades: — } — } —— Irish trades: clause 92 27 Assets of mutual concerns: exclude — } ———— distributions of capital gains from the charge to tax: clause 104 28 Sums recoveredunderinsurance policies, — — — — } — etc: clause 106 29 Gifts of trading stock: drop the need for — } — } —— the gift to be plant andmachinery in the hands of the educational establishment: clause 108 30 Gifts of trading stock: gifts “for the — } — } —— purpose of” a charity etc: clause 108 31 Gifts of trading stock: drop the need for a — — — — — } claim: clause 108 33 Herdbasis rules: sale of whole or } }}} —— substantial part of herd: clauses 119, 120 and122 34 Herdbasis elections: time limit for making — — — — — } election: clause 124 35 Herdbasis elections: datefrom which — } ———— eVective: clause 124(7) 40 Allocation of expenditure to relevant — — — — — } periods: clauses 135, 137 and 138 41 Allocation of expenditure to relevant — — — — } — periods: clauses 135 and 137 42 Securities heldas circulating capital: } }}} —— clause 150 43 Ministers of religion: deductions to be — } — } —— allowedin calculating proﬁts of profession or vocation: clause 159 Ev 10 Joint Committee on Tax Law Rewrite Bills: Evidence

Change Description Change in principle Change in practice No More Less More Less Timing1 Admin2 tax tax tax tax 45 Ministers of religion: alter the deduction — — — — — } rule in section 332(3)(b) of ICTA so that it is appliedwithout reference to an inspector: remove the special appeals mechanism: clause 159 46 Combine pools payments rules: — } ———— clauses 162 and748 47 Extendpools payments treatment to the — } ———— 1995 reduction: clauses 162 and 748 48 Waste disposal: site preparation — — — — — } expenditure: drop requirements to make claim andsubmit plans anddocuments: clause 165 49 Valuation of trading stock: adopt the — — — — — } normal self-assessment time limit for an election by connectedpersons: clause 178 53 Enterprise allowance: include in trade } }}} —— profits: clause 207 58 Averaging: foreign trades: clause 221 — } — } —— 61 Averaging: time limit for a further claim: — — — — — } clause 225 65 Statutory insolvency arrangement— — } ———— Scotland: clause 259 69 Identifying the profits involved where an — — — — } — amount is to be taken into account as a receipt in calculating the profits of a property business: clauses 277, 279, 280, 281, 282, 284 and285 74 Deduction for expenditure on energy — — — — — } saving items: drop the requirement for a claim: clause 312 78 Deduction of management expenses of — } ———— owner of mineral rights: omission of condition that expenses are “necessarily” incurred: clause 339 79 Distributions made by UK companies: — } ———— clause 366 80 Building society dividends: payment of — — — — — — dividends treated as interest: clause 3723 81 Industrial and provident society payments: — — — — — — clause 379 82 Funding bonds: charge to tax as interest: — } — } —— clause 380 andSchedule1 83 Discounts: charge to tax as interest: — — — — — — clause 381 86 Deeply discounted securities: deemed }}———— acquisitions at market value where deemed disposals on conversion of securities or transfer by personal representatives to legatees: clause 441 92 Gains from contracts for life insurance etc: — — — — — } removal of requirement for calculation under section 546(1) of ICTA to be made annually: clause 498 98 Gains from contracts for life insurance etc: — — — — — } removal of requirement for claims for top slicing relief: clause 535(1) 101 Disposals of futures andoptions involving }}———— guaranteedreturns: foreign non-trading income: clause 555 Joint Committee on Tax Law Rewrite Bills: Evidence Ev 11

Change Description Change in principle Change in practice No More Less More Less Timing1 Admin2 tax tax tax tax 106 Beneficiaries’ income from estates in — } ———— administration: set oV of excess of allowable estate deductions in the final tax year of the administration period: beneficiaries with absolute interests: clause 660 107 Beneficiaries’ income from estates in } }}} —— administration: exclusion of income from specific dispositions and income from contingent interests from the aggregate income of the estate: clauses 664 and666 108 Beneficiaries’ income from estates in } }}} —— administration: removal of the requirement for interest to be annual and a charge on residue to be deductible in calculating the residuary income of the estate: clause 666 111 Beneficiaries’ income from estates in — } — } —— administration: omission of section 695(6) of ICTA: clause 678 114 Individual investment plans: non-resident — — — — — — insurance companies: clauses 697 and 698(6) 117 Exempt income: purchasedlife annuity — — — — — } payments: claim for exemption of capital element of purchasedlife annuity: clause 717(3) 120 Exempt income: purchasedlife annuity — } ———— payments: determining the age of the person during whose life a purchased life annuity is payable: clauses 720(4) and 721(4) 121 Exempt income: personal injury damages: — — — — — } omission of statutory references and inclusion of damages for death: clauses 731 and751 andSchedule2 122 Exempt income: personal injury damages: — } ———— exemption of persons receiving payments on behalf of injuredpersons: clause 734 123 Exempt income: health andemployment — } — } —— insurance payments: extension to insurance against loss of oYce: clauses 736(2) and737(2)(b) 126 Interest under employees’ share schemes: — } — } —— participants in the scheme: clause 752 127 Interest under employees’ share schemes: — } — } —— foreign source interest: clause 752 129 Rent-a-room relief: making the United— } — } —— Kingdom location condition explicit and a potential disqualification from the relief: clauses 785 and786 131 Foreign income: special rules: meaning of — } — } —— “relevant foreign income”: treatment of certain payments made by industrial and provident societies arising from a source outside the UK: clause 830 133 Foreign income: special rules: relevant — } ———— foreign income chargedon remittance basis: amalgamation of rules for Schedule D Cases IV andV: clause 832 Ev 12 Joint Committee on Tax Law Rewrite Bills: Evidence

Change Description Change in principle Change in practice No More Less More Less Timing1 Admin2 tax tax tax tax 135 Foreign income: special rules: relief for — } — } —— unremittable income anddelayed remittances: conditions for granting relief: clauses 835 and841 140 Foreign income: special rules: — — — — — } unremittable income: time limit for claims for relief: clause 842(5) 142 Relevant foreign income: unremittable — — — — — } income: appeals to the Special Commissioners: Chapter 4 of Part 8 and Part 11 of Schedule 2 146 Exception of certain business gifts from — } ———— the disallowance of expenditure on business entertainment andgifts in calculating the profits of non-trade and non-property businesses: clause 867 147 General calculation rules: apportionment — } — } —— of profits: clause 871 148 Definition of “caravan” given by clause — } — } —— 875 relevant to clauses 20, 266, 308, 787 and809 149 References to “the InlandRevenue”: — — — — — } clause 878 150 Definition of “houseboat” given by clause — } — } —— 878 relevant to clauses 787 and809 151 Definition of “personal representatives” }}———— andreplacement of the expression “executors or administrators” with “personal representatives”: clause 878 152 Intellectual property receipts which are — } ———— earnedincome for the purposes of the Income Tax Acts: Schedule 1 (section 833 of ICTA) 156 Post-cessation receipts: Part 3 of — } — } —— Schedule 2 Changes correcting points overlooked in the course of consolidation Acts, missed consequential amendments to earlier legislation, or other technical defects 12 Trade profits: exclusion of double relief — — — — — } for interest: final variation of claim: clause 52 51 Disposal of know-how: restore an express }}———— definition of mineral deposits: clauses 192 and583 75 Meaning of “relevant period” in sections }}—— — 325 and326: non-residentcompanies: clause 324 87 Strips of government securities: — — — — — — acquisitions anddisposals:clause 445 90 Gains from contracts for life insurance etc: — } ———— allowing the deduction of gains previously chargedon relatedpolicies to be madein calculating later gains: clause 491(5) 93 Gains from contracts for life insurance etc: }}———— treating taking a capital sum under a contract for a life annuity as a surrender of a part of the rights under the contract for all purposes: clause 500 97 Gains from contracts for life insurance etc: — } ———— clarification of entitlement to credit for income tax at the lower rate in the case of Joint Committee on Tax Law Rewrite Bills: Evidence Ev 13

Change Description Change in principle Change in practice No More Less More Less Timing1 Admin2 tax tax tax tax certain foreign life insurance policies: clause 531(5) 102 Guaranteedreturns on futures and — } — } —— options: associatedcompanies: clause 561 104 Death of a seller of patent rights: time for — — — — — } serving notice: clauses 593 and862 105 Settlements: approvedpension — } ———— arrangements: clause 627 andSchedule2 128 Rent-a-room relief: income other than — } ———— trading or property income: clauses 785, 786, 794 and798. 141 Foreign income: special rules: } ————— unremittable income: withdrawal of relief: ECGD payments received: clause 843 153 Deduction for employers’ national — } — } —— insurance contributions paidby an employee: Schedule 1 154 Certain pension income from the Republic — } ———— of Ireland: basis of calculation: Schedule 1 (sections 575, 613, 631 and635 of ITEPA) 155 Employment-relatedannuities: taxable — } ———— pension income: annuities arising in the Republic of Ireland: Schedule 1 (section 613 of ITEPA 2003) Changes removing an anomaly 10 Car hire: release of debt after debtor has — } — } —— ceasedtrading:clause 48 13 Deduction for tenant under taxed lease if }}———— land is outside the United Kingdom: clauses 60 and64 76 Furnished holiday accommodation: — } — } —— permittedlonger-term occupation: clause 325 77 Furnished holiday accommodation: period — } — } —— over which lettings are averaged: clause 326 124 Exempt income: health andemployment }}———— insurance payments: meaning of “the insured”: clause 742 130 Rent-a-room relief: removing anomaly — } — } —— from qualifications for relief: clauses 788 and795 132 Foreign income: special rules: relevant — } — } —— foreign income chargedon remittance basis: conditions for claim: clauses 831 and857(1) Changes making clear the intended and accepted interpretation of legislation that is currently somewhat opaque 6 Relationship between rules prohibiting — } — } —— deductions and rules allowing deductions: clauses 31 and274 16 Clarification of position of employees — } ———— seconded to charities: clause 70 19 Devolution: clauses 80, 83, 110, 167, 207, — — — — — } 732, 755, 769, 879 and880 39 Treatment of interest in production and — } ———— acquisition expenditure on films and soundrecordings:clause 130 Ev 14 Joint Committee on Tax Law Rewrite Bills: Evidence

Change Description Change in principle Change in practice No More Less More Less Timing1 Admin2 tax tax tax tax 44 Ministers of religion: omission of section — } ———— 332(3)(a) of ICTA: clause 159 60 Averaging: clarify the rule that a claim } ————— cannot be made in commencement or cessation year: clause 222 62 Adjustment income: how an election }}———— aVects later years: clause 239 63 Post-cessation receipts: design right: — } — } —— clause 253 68 Sums payable insteadof rent, or as }}———— consideration for the variation or waiver of a term of a lease, for periods of 50 years or less: clauses 276, 279 and281 70 Lease premiums etc: no receipt in respect }}—— — of sum payable for variation or waiver of term of lease if sum due to someone other than the landlord or a person connected with landlord: clause 281 71 Applying the additional calculation rule to }}———— receipts in respect of sums payable for variation or waiver of term of lease: clauses 281, 287, 288, 289 and294 72 Receipts in respect of sales with right to — } — } —— reconveyance andsale andleaseback transactions: clauses 284 and285 73 Limiting the reductions in receipts under } }}} —— clause 288 and the deductions for expenses under clause 292: clauses 287, 288, 289, 290, 291, 292 and295 84 Dividends etc from UK resident }}———— companies: tax credits etc where dividends etc receivedby companies who pay income tax: clauses 397, 399 and400 95 Gains from contracts for life insurance etc: — — — — — — reductions for sums chargeable to tax apart from section 547(1) of ICTA: clause 527 96 Gains from contracts for life insurance etc: — — — — — — reduction in gains where non-UK resident trustees holdpolicy: clause 529 103 Charge on income treatedas arising from }}———— foreign holdings: foreign dividend coupons: clause 570 109 Beneficiaries’ income from estates in }}———— administration: how reduction in share of residuary income of estate under section 697(2) and(3) of ICTA operates for successive absolute interests: clause 671 110 Beneficiaries’ income from estates in }}———— administration: requirement for apportionments where the parts of the residuary estate in which successive interests subsist do not wholly correspond: clause 676 112 Exempt income: savings certificates: — } ———— unauthorisedpurchases involving multiple certificates: clauses 692(2) and693(5) 115 Exemptions: venture capital trust — } ———— dividends: conditions for shares where share reorganisations have occurred: clause 712 Joint Committee on Tax Law Rewrite Bills: Evidence Ev 15

Change Description Change in principle Change in practice No More Less More Less Timing1 Admin2 tax tax tax tax 116 Interest from FOTRA securities heldon — } ———— trust: clause 715 134 Foreign income: special rules: relevant — } ———— foreign income chargedon remittance basis: allowable deductions under section 65(5)(b) of ICTA: clause 832 136 Foreign income: special rules: delayed — } — } —— remittances: remittances in respect of which a claim may be made: clause 835 137 Foreign income: special rules: deductions: — } ———— omission of requirement for income not to be receivedin the UnitedKingdom: clause 838 138 Foreign income: special rules: specifying }}———— deductions available: clause 838 144 Partnerships: carrying on by partner of }}———— notional business: clause 854 145 Partnerships: resident partners and double — } ———— taxation agreements: clause 858 Changes filling a gap in the legislation 9 Exceptions to the rule restricting — — — — — } deductions for business gifts: clause 47 67 Territorial scope of charge to tax: landin }}———— Ireland: clause 269 99 Gains from contracts for life insurance etc: }}———— definition of “insurance company”: clause 545(1) 100 Gains from contracts for life insurance etc: }}—— — definition of “market value”: clause 545(1)

1 AVects the time when income is taken into account for tax purposes. 2 AVects only administrative procedures relating to tax. 3 Absence of ticks indicates a change which does not aVect tax, timing or administration.

APPENDIX 2

EXAMPLES OF CHANGES THAT MAY ALTER TAX PAYABLE Change 5: Rents in respect of wayleaves where associatedwith a trade:clau ses 22 and344. Clause 22 rewrites section 120(1) of ICTA as it applies to trades. Under clause 22 income from wayleaves related to land on which the recipient carries on a trade is charged to income tax as proﬁts of that trade if the taxpayer so chooses and has no other income from the landin question. This enacts the non-statutory practice for wayleaves to which section 120 of ICTA applies. Section 120 applies to “any easement enjoyedin the UnitedKingdomin conne ction with any electric, telegraphic or telephonic wire or cable” other than an easement of a kindme ntionedin section 119(1) of ICTA. Section 119 of ICTA applies to certain easements which are or might be usedor enjoyedin connection with any of the concerns listedin section 55 of ICTA. Those concerns includ e mines, quarries, certain industrial concerns, canals, docks, markets, bridges, ferries, and railways. Clause 22 is not conﬁnedto wayleaves within section 120 of ICTA. It has been extended to include: — wayleaves other than those connectedwith “electric, telegraphic or tel ephonic wire or cable”; — wayleaves relating to land outside the United Kingdom; and — wayleaves within section 119(1) of ICTA. The eVect of the clause is to allow the taxpayer to treat income from wayleaves as income from a trade rather than income from property (but only if the taxpayer has no other income from the land). Ev 16 Joint Committee on Tax Law Rewrite Bills: Evidence

EVect of the change in practice The eVect of the Change is to extendthis option to wayleaves not within section 12 0. This may benefit an individual taxpayer who: — receives income from wayleaves within paragraph 0; — carries on a trade on the land in question; and — has trading losses or expenses that would otherwise be unrelieved for the time being. This is a timing benefit only unless the trading losses or expenses would never otherwise be relieved(for example because the trade ceases without making suYcient profit to absorb them). Clause 22 applies the same treatment to landoccupiedfor the purposes of a p rofession or vocation. This is unlikely to have any eVect in practice. It also makes clear that any expenses incurredin respect of the wayleave ca n be allowed as deductions in calculating the trade profits. But such expenses are likely to be very small. Change 7: Align rules for debts proving irrecoverable after trade deemed to have ceasedwith general rules for badanddoubtfuldebts:clause 35 This change aligns the relief given for baddebtsby section 89 of ICTA 1988 w ith the relief given by section 74(1)(j) of ICTA. Section 113(1) of ICTA provides that where there is a complete change in the persons carrying on a trade the trade is deemed to cease and recommence. Section 89 of ICTA provides relief for bad debts where there has been a change in the persons carrying on the trade and the trade is deemed to cease under section 113 of ICTA. It gives relief for baddebtswhich are assigned to the successor to the trade. Since the trade carried on prior to the change is deemed to be diVerent from the trade carried on after the change section 74(1)(e) of ICTA wouldotherwise prohibit a deduction for bad debts. The desired eVect of section 89 of ICTA is to treat the trade as continuing as far as bad debts are concerned. Although the aim of section 89 of ICTA is the same as that of section 74(1)(j) of ICTA (that is, to give relief for bad trade debts), there are diVerences between the two sections. Specifically: — section 89 gives relief for debts which are “irrecoverable”, whereas section 74(1)(j) gives relief for debts which are bad or doubtful; — section 89 requires the taxpayer to prove that a debt is irrecoverable, whereas this needfor proof was removedfrom section 74(1)(j) by FA 1996; — relief in section 89 is relatedto the periodin which the debtbecomes in wh ole or in part irrecoverable, whereas section 74 is silent on timing; — section 74(1)(j) allows relief for debts released as part of a “relevant arrangement or compromise”, whereas section 89 does not; and — section 74(1)(j)(iii) makes specific provision for the bankruptcy or insolvency of debtors, whereas section 89 does not. The Bill does not rewrite section 89 of ICTA. Section 89 of ICTA is not needed because the approach adopted in the Bill is to focus on the person carrying on the trade rather than the trade.

EVect of the change in practice The eVect of the change is to extendthe more generous provisions of section 74(1) (j) of ICTA to debts within section 89 of ICTA. This: — simplifies the law by bringing the rules that apply to baddebtstransferre dwith a tradeinto line with the rules for baddebtsgenerally; and — does so by applying the more recent and fuller rules of section 74(1)(j) of ICTA. Relief may be due earlier under clause 35 than under section 89 of ICTA. But this is a timing diVerence only—section 89 of ICTA gives relief for baddebtsonce they are provedto be bad. Clause 35 allows relief for debts released as part of a “statutory insolvency agreement” (defined in clause 259 in the same terms as “relevant arrangement or compromise” in section 74 of ICTA) whereas section 89 does not. This may provide relief that is not available under section 89 of ICTA. But it is more likely to encourage such arrangements for the benefit of all involved. Change 53: Enterprise allowance: include in trade profits: clause 207 This change includes enterprise allowance in the calculation of trade profits. Under the source legislation the allowance is taxed under Schedule D Case VI. The former enterprise allowance scheme provided financial assistance for people starting their own businesses. The payments are now more commonly known as business start-up allowances. These may be in variable amounts including lump sums in certain circumstances. Joint Committee on Tax Law Rewrite Bills: Evidence Ev 17

Without section 127 of ICTA the allowances wouldbe taxedon first principle s as trade profits. But under the former prior year basis of assessment some profits of the first year of trading were taxed more than once. As the allowance is usually paidfor the first year this might be the case for t he allowance. So section 127 of ICTA was introduced to avoid this. It does so by taxing the allowance under Schedule D Case VI insteadof ScheduleD Case I or II, circumventing the basis periodr ules. Trade profits are now taxed on a current year basis. But there may still be an overlap periodwhen trading commences. So clause 207(2) ensures that the allowance is taxedonly once, by being included in the profits of only the first of two basis periods.

EVect of the change in practice In some cases this change may leadto a delayin the assessment of the allowan ces. This is because they will be taken into account in a basis periodof the traderather than in the ta x year in which they are received. It will no longer be possible to set Schedule D Case VI losses against the allowances. But trading losses brought forwardandterminal losses may become available against the allo wances. Since taxpayers are more likely to have trading losses than Schedule D Case VI losses this might benefit some taxpayers. The amounts involvedare small. The original scheme (administeredcentra lly) provided payments of £40 per week. The scheme is now administered locally by Business Links or Local Enterprise Companies. Those bodies make payments in the light of local economic conditions and the circumstances of individual applicants. Many of the payments are loans or grants. But some periodical payments are still made. Typically they are at rates between £20 and£90 per week. Change 58: Averaging: foreign trades: clause 221 This change allows an individual to claim averaging of profits derived from creative work carriedon wholly abroad. Schedule 4A to ICTA applies to profits derived from “creative works” that are “chargeable to tax under Case I or II of Schedule D”. Trades carried on wholly abroad by a UK resident are taxed under Schedule D Case V. But there is no policy reason why the profits of such a trade should not be averaged. Extending averaging to qualifying trades carried on wholly abroad simplifies the rule and makes it consistent between qualifying trades.

EVect of the change in practice It will be rare for a UK resident individual to carry on a “creative” trade wholly outside the United Kingdom. But if this is the case that individual will now be able to make an averaging claim. The beneﬁt of this will depend on the level of proﬁts in the relevant years. Change 136: Foreign income: special rules: delayed remittances: remittances in respect of which a claim may be made: clause 835 This change enables a claim for relief to be made in respect of some (as opposedto all) of a taxpayer’s delayed remittances where the taxpayer is taxed on the remittance basis.

EVect of the change in practice Although the InlandRevenue allow a partial claim which meets the relevant conditions for relief the number of partial claims may increase because it will be clear from the text of clause 835(1) that such a claim can be made.

APPENDIX 3

POINTS RAISED IN THE SECOND READING DEBATE Change 19—Devolution—page 90 of Volume 3. This change concerns the eVect of the devolution settlements. The question askedwas why, if the Scottish Parliament gives housing grant s, shouldthese be exempt from income tax when earlier grants by the Scottish Parliament are not exempt? Is this not a significant change in the powers of the Scottish Parliament? Section 578 of ICTA confers an exemption from tax in relation to housing grants made under “any enactment”. In Schedule 1 to the Interpretation Act 1978 “Act” is defined to mean an Act of Parliament and “enactment” is defined as not including “an enactment comprised in, or in an instrument made under, an Act of the Scottish Parliament”. The definitions in that Schedule apply “unless the contrary intention appears”. Ev 18 Joint Committee on Tax Law Rewrite Bills: Evidence

The intention of section 578 of ICTA is that housing grants shouldbe exempt from income tax. It can be assumed that the devolution settlement did not intend section 578 of ICTA to operate diVerently in relation to EnglandandWales on the one handandScotlandin the other. Income tax is n ot a devolved function. In practice all housing grants are treatedas exempt. Clause 879(4) provides that Acts of the Scottish Parliament and Scottish statutory instruments are coveredby the reference to “enactment” in clause 769, so that payments und er them fall within the exemption in that clause. It is not clear if this is a change in the law. If it is, it is one that brings the law into line with practice and which reflects the intention of the devolution settlement. Change 9—Business gifts—page 80 of Volume 3 This change provides for the allowable cost of gifts to be increased by Treasury order. The question askedwas, why is it thought appropriate for the amount to be in creasedby Treasury order rather than by a Finance Bill provision? Clause 47(3)(b) rewrites the £50 limit in section 577(8)(b) of ICTA for income tax purposes. Alterations to the limit in section 577(8)(b) have to be made by a Finance Bill. The £50 limit on the cost of business gifts appears at present in two other places in tax legislation. It appears in Schedule 4 to the Value Added Tax Act 1994. Section 33(2) of FA 1996 provided that this limit can be increasedby Treasury order. It appears also in section 358(3)(b) of ITEPA 2003. Section 716(2) of ITEPA provides that this limit can be increasedby Treasury order. So Change 9 merely brings the mechanism for changing the income tax limit into line with the VAT Act andwith ITEPA. This power will be subject to the negative procedure (which applies unless other provision is made—see clause 873). This is also the position under ITEPA and the VAT Act (where the VAT order is for an increase in the limit). Section 577(8)(b) of ICTA will remain in place for corporation tax purposes. When it is rewritten for corporation tax the intention is to bring it into line with clause 47(3)(b). Change 3—Caravan sites—page 73 of Volume 3 This change gives statutory eVect to ESC B29 (caravan sites where there is both trading and letting income). The question askedwas, if someone sells landthat is being usedby people as a residence either legally or illegally, is that a trade or business? Whether or not the sale of land is a trading transaction for tax purposes depends on all the circumstances. If the landwas purchasedwith a view to resale at a profit the transaction may be trading. If the land is purchasedwith a view to holdingit as an investment or as the purchaser’s re sidence any subsequent sale is unlikely to be a trading transaction. A property developer is the obvious example of a person for whom the sale of landwill be a tradingtransaction. Change 3 allows income from letting caravans or pitches, which wouldother wise be income of a property business, to be treatedas income of an associatedtrade.In these circumst ances landwill be heldas a fixed asset of the property business or of the trade and any profit on the sale of the landis unlikely to be liable to income tax. Change 3 does not alter the tax treatment of the land. Clause 53—Social security contributions—page 33 of Volume 1 of the ENs This clause prevents a deduction for most social security contributions in calculating trade profits. The question askedwas, why are a trader’sown social security contributio ns not allowedwhen contributions in respect of his staV are allowed? Clause 53 rewrites section 617 of ICTA without any change in the law. So the question concerns the underlying tax policy rather than the rewrite. But that policy seems clear andconsistent. Expenses incurredfor the purp oses of a trade are allowable. The costs of employing people in the trade include employer’s social security contributions. These are therefore allowed as deduction. The trader’s own social security contributions are not for the purposes of carrying on the trade. They are personal expenses. Expenses personal to a trader are, with very few exceptions, not allowable in calculating profits of a trade. Joint Committee on Tax Law Rewrite Bills: Evidence Ev 19

APPENDIX 4

EXTRA-STATUTORY CONCESSIONS NOT REWRITTEN

ESC Number Description Why not rewritten A14 Deceasedperson’s estate: residuaryincome More appropriate to a rewr ite of residence received during the administration period. rules. A37 Director’s fees. Complexity. A47 Home purchase loans. Obsolescent andof limitedapplication. A93 Payments from oVshore trusts to minor More appropriate to a rewrite of double unmarriedchildrenof settlor. taxation relief. A94 Proﬁts andlosses of theatre backers (angels). Complexity. A96 Oldlife insurance policies: insurer stopping The part applying to qua lifying policy rules (part) collection of premiums. (Schedule 15 to ICTA)—specialist material not yet rewritten. A99 FSA/PIA review of sales of freestanding Short shelf life. additional voluntary contributions schemes (FSAVCS): tax treatment of compensation. A100 Tax exemption for compensation paidon bank Limitedapplication. accounts ownedby holocaust victims. Short shelf life. B7 Benevolent gifts by traders. Largely superseded by relief for charitable gifts in section 577(9) of ICTA/clause 47(5). B11 Compensation for compulsory slaughter of Complexity. farm animals. B42 “Free gifts” andinsurance contracts. The part applying to qualifying policy rules (part) (Schedule 15 to ICTA)—specialist material not yet rewritten. B47 Furnishedlettings of dwellinghouses—Wear Complexity. andtear of furniture. B53 Non-residents and gains on life insurance Part 2 of ESC—information duties of (part) policies. insurers. B56 Herdbasis rules: Slaughter of immature Probably obsolete —applies on ly to animals animals intended to be replacements. slaughtered during 2001 foot and mouth outbreak.

APPENDIX 5

BEFORE AND AFTER EXAMPLES

Example 1

Section 21C (1)-(4) of ICTA—Mutuality

This is an example of a applying a diVerent approach.

The approach in section 21C of ICTA is to apply the normal proﬁt calculation rules to any “mutual business” and add the result to the proﬁts of the rest of the Schedule A business. Clause 321 on the other hand prevents, from the outset, the concept of mutuality operating on amounts within Part 3 of this Bill.

Before

Section 21C of ICTA: The Schedule A charge and mutual business 1. The following provisions have eVect for the purpose of applying the charge to tax under Schedule A in relation to mutual business. 2. The transactions or relationships involvedin mutual business are trea tedas if they were transactions or relationships between persons between whom no relationship of mutuality existed. 3. Any surplus arising from the business is regarded as a proﬁt (and any deﬁcit as a loss) if it wouldbe so regarded if the business were not mutual. Ev 20 Joint Committee on Tax Law Rewrite Bills: Evidence

4. The person— (a) to whom the proﬁt arises for corporation tax purposes, or (b) who is regarded as receiving or entitled to the proﬁt for income tax purposes, is the person who wouldsatisfy that descriptionif the business were not mu tual business.

After Clause 321: Mutual business 1. Nothing in this Part is to be readas applying the rules relating to mutual business to property businesses. 2. Accordingly, receipts and expenses are to be brought into account in calculating the proﬁts of a person’s property business even if a relationship of mutuality exists between that person andanother.

Example 2 Section 525(2) of ICTA

This is an example of breaking down a long and complex sentence amounting to 174 words. The clause also reﬂects a change (number 104 on page 172 of volume 3 of the explanatory notes) to bring the time limit for making an election into line with the normal Self Assessment time limits.

Before Section 525(2) ICTA: Patent rights—death of seller—extract 2. In the case of a death the personal representatives may, by notice served on the inspector not later than 30 days after notice has been served on them of the charge falling to be made by virtue of subsection (1) above, require that the income tax payable out of the estate of the deceased by reason of the increase provided for by that subsection shall be reduced so as not to exceed the total amount of income tax which wouldhave been payable by him or out of his estate by reason of the operation of section 524 in relation to that sum, if, insteadof the amount falling to be chargedfor the year in wh ich the death occurs being increasedby the whole amount of the sums chargedfor subsequent years, the several amounts falling to be chargedfor the years beginning with that in which the capital sum was recei vedandendingwith that in which the death occurred had each been increased by that whole amount dividedby the number of those years.

After Clause 593: Death of seller 2. The personal representatives may elect that the tax payable by reason of subsection (1) be reduced to the total amount of income tax that the seller andthe estate wouldhave been liable to pay if the amounts chargeable by reason of that subsection hadbeen taxedin equal parts in eac h of the lifetime tax years. 3. In subsection (2) “the lifetime tax years” means— (a) the tax year in which the seller receivedthe proceedsor, as the case may be, the instalment, and (b) each of the next tax years up to and including that in which the seller died. 4. An election under subsection (2) must be made on or before the ﬁrst anniversary of the normal self- assessment ﬁling date for the tax year in which the death occurs.

Example 3 Section 539(2)(a) of ICTA: Exclusion of mortgage protection policies from the charge on chargeable event gains

This is an example of using deﬁned terms to help to explain a provision.

Before Section 539(2)(a) of ICTA: Introductory [Extracts] 2. Nothing in this Chapter shall apply— (a) to any policy of life insurance having as its sole object the provision on an individual’s death or disability of a sum substantially the same as any amount then outstanding under a mortgage of his residence, or of any premises occupied by him for the purposes of a business, being a mortgage the principal amount securedby which is repayable by instalment s payable annually or at shorter regular intervals; Joint Committee on Tax Law Rewrite Bills: Evidence Ev 21

After Clause 478: Exclusion of mortgage repayment policies 1. This Chapter does not apply to a mortgage repayment policy. 2. In this section “mortgage repayment policy” means a policy of life insurance with the sole object of providing, on an individual’s death or disability, a sum substantially the same as any amount then outstanding under a repayment mortgage— (a) of the individual’s residence, or (b) of any premises occupied by the individual for the purposes of a business. 3. In this section “repayment mortgage” means a mortgage securing a principal amount which is repayable by instalments payable annually or at shorter regular intervals.

Example 4 Section 18of ICTA: Schedule D Case III This example illustrates our approach to providing a speciﬁc charge for each identiﬁable source of income to make the legislation clearer.

Before Section 18: Schedule D [extracts] Tax under this Schedule shall be charged in respect of— [omitted text]...... Case III tax in respect of— (a) any interest of money, whether yearly or otherwise, or any annuity or other annual payment . . . Case IV tax in respect of income arising from securities out of the UnitedKi ngdom Case V tax in respect of income arising from possessions out of the UnitedKi ngdom [as it applies to Case III type income]

After Clause 369: Charge to tax on interest [extract] 1. Income tax is chargedon interest.

Clause 422: Charge to tax on purchased life annuity payments [extract] 1. Income tax is charged on annuity payments made under a purchased life annuity.

Clause 427: Charge to tax on proﬁts from deeply discounted securities [extract] 1. Income tax is charged on proﬁts on the disposal of deeply discounted securities.

Clause 547: Charge to tax under Chapter 10 [extract]) 1. Income tax is chargedon income treatedas receivedby a unit holderfrom a scheme to which section 469 of ICTA applies (unauthorisedunit trust schemes).

Clause 578: Contents of Chapter [extract] 1. This Chapter imposes charges to income tax under— (a) section 579 (royalties andother income from intellectual property)

Clause 614: Charge to tax on certain telecommunication rights of a non-trader [extract] 1. Income tax is chargedon income derivedfroma relevant telecommunicati on right that is not usedor heldfor the purposes of a trade,profession or vocation.

Clause 683: Charge to tax on annual payments not otherwise charged [extract] 1. Income tax is chargedunderthis Chapter on annual payments that are not c hargedto income tax under or as a result of any other provision of this Act or any other Act. Ev 22 Joint Committee on Tax Law Rewrite Bills: Evidence

3. Further memorandum from the Inland Revenue

INCOME TAX (TRADING AND OTHER INCOME) BILL, MINOR TECHNICAL AMENDMENTS

Notes on Amendments Under Consideration by Joint Committee on Tax Law Rewrite Bills

Gains from Contracts for Life Insurance—Qualifying Policies Chapter 9 of Part 4 1 Clause 485, page 209, line 14, leave out ‘and’ and insert ‘or’. 2 Clause 485, page 209, line 15, leave out ‘no’ andinsert ‘a’. 3 Clause 485, page 209, line 22, leave out second‘and’andinsert ‘or’. 4 Clause 485, page 209, line 23, leave out ‘no’ andinsert ‘a’. 20 Schedule 2, page 553, line 9, leave out from ‘the’ to ‘preceding’ in line 11 and insert ‘condition in paragraph (a) or (b) is met) have eVect with the omission of paragraph (b) (company interest in the rights under the policy) andthe word“or”’.

Reason why amendments needed: Clause 485 does not rewrite a rule in the source legislation (section 540(5A)). The rule is that a chargeable event takes place in respect of a qualifying policy, irrespective of whether subsection (2)(a) or (3)(a) of clause 485 applies, if there is a company interest in the rights under the policy immediately before the event occurs. These amendments ensure that the rule is rewritten and make consequential changes to the provision in the transitionals and savings schedule (Schedule 2) which modiﬁes the application of clause 485 for pre-14 March 1989 policies.

Various Amendments to Schedules 1 and 3: Consequential Amendments and Repeals 5 Schedule 1, page 386, line 6, leave out ‘those Schedules’ and insert ‘Schedule D’. 6 Schedule 1, page 386, line 12, after ‘andD”,’ insert— ‘(aa) for “those Schedules” substitute “Schedule D”,’ 7 Schedule 1, page 405, line 28, at endinsert— ‘99A In section 118ZK(2)(b) and(5) (transitional provision for years aft er the ﬁrst restrictedyear) after “1992” insert “or any of sections 138 to 140 of ITTOIA 2005”.’. 17 Schedule 1, page 474, line 18, after ‘income);’ insert— ‘(iia) section 421(1) of that Act (release of loan to participator in close company);’. 18 Schedule 1, page 478, line 18, after ﬁrst ‘cash’ insert ‘(within the meaning of section 251(2) to (4) of the Taxes Act)’. 19 Schedule 1, page 515, line 23, after ‘etc.))’ insert ‘andsection 770 of that Act (exemption for amounts applied by SIP trustees acquiring dividend shares or retained for reinvestment)’. 21 Schedule 3, page 582, line 47, after ‘56,’ insert ‘57,’.

Reason why amendments needed: These amendments deal with a handful of unrelated tidying-up points in Schedules 1 and 3 (consequential amendments and repeals). Amendments 5 and 6 alter wording in section 9 of ICTA (which is based on an amendment to that section by ITEPA 2003) so as to spell out the fact that the only relevant Cases are those of Schedule D. Joint Committee on Tax Law Rewrite Bills: Evidence Ev 23

Amendment 7 spells out the eVect of paragraph 5 of Schedule 2 (general transitional provisions) on section 118ZK(2)(b) and (5) of ICTA. Section 118ZK(2)(b) and (5) refers to deductions under section 42(1) of F(No 2)A 1992 andsection 42(1) is being rewritten in clauses 138 to 140 of the Bil l. It is therefore helpful to refer expressly to those clauses in section 118ZK. Amendment 17 ensures that the Bill does not change the calculation of a gift aiddonor’stotal income tax liability (the purpose of the calculation is to determine whether the donor has paidenough tax to cover the amount the charity can reclaim under the gift aid scheme). Without this amendment tax treated as paid under the loans to participators legislation would be included in the donor’s total income tax liability whereas it is excluded in the source legislation. Amendment 18 ensures that some additional descriptive words are removed. Amendment 19 inserts an additional signpost. Amendment 21 repeals a paragraph which amends a provision which is itself being repealed.

Amendments to Schedule 1Concerning “Certificates of Deposit” and “Uncertified Eligible Debt Security Units” 8 Schedule 1, page 411, leave out lines 42 to 44. 9 Schedule 1, page 412, line 4, after ‘section 56(5),”’ insert ‘, and ‘(ii) after “under which” insert “, or uncertificated eligible debt security units under which”’. 10 Schedule 1, page 412, line 9, after ‘section 56(5),”’ insert ‘andafter “issued”insert “, andno uncertificated eligible debt security units have been issued,”’. 11 Schedule 1, page 419, leave out lines 13 to 15. 12 Schedule 1, page 419, line 25, leave out from ‘2005”’ to endof line 28. 13 Schedule 1, page 420, line 8, after ‘56(5),’ insert ‘which is’. 14 Schedule 1, page 420, line 9, after ‘units’ insert ‘, being a certificate or units’. 15 Schedule 1, page 437, line 23, leave out ‘552(1)(b)’ andinsert ‘552(1)(a) or (b)’.

Reason why amendment needed: The Bill incorporates a modification of the term “certificate of deposit” from secondary legislation. This ledto a number of consequential amendmentsfor provisions that cross-ref er to the definition in the Bill of a “certificate of deposit”. The amendments for section 349(3A) of ICTA inadvertently changedthe law. Amendments 8 to 10 restore the correct position. Amendments 11 to 14 are a knock-on from the revised amendments to section 349. Amendment 15 simply corrects a reference.

Preservation of Availability of Set Off of Loss Relief Against Income which is Charged on Withdrawal of Unremittable Income Relief 16 Schedule 1, page 461, line 19, at endinsert—

‘Section 844(4) Withdrawal of relief for unremittable foreign income after source ceases’.

Reason why amendments needed: The Bill changes the methodof charge where relief has been given for unremi ttable income, that income then becomes remittable, but the source of that income has ceased. Section 584(4) of ICTA contains a speciﬁc charge under Schedule D Case VI for withdrawing relief in this situation. The Bill taxes that income as a post-cessation receipt in the case of trading and property income, or as if the source continues in the case of other types of income. Ev 24 Joint Committee on Tax Law Rewrite Bills: Evidence

But the intention is to preserve entitlement to loss relief on the same basis as the source legislation. The Bill achieves this for trading income and property income but not for other income. This amendment ﬁlls the gap by adding section 844(4) to the table inserted as section 836B of ICTA. This ensures that this income continues to beneﬁt from set oV of miscellaneous losses. Change note 22 (see page 94 of volume 3 of the explanatory notes) explains our approach for trading and property income but not for other income. We have amended the change note andattach a copy of the revision.

Revised Change 22: Trade etc and Other Income Charged on Withdrawal of Relief after Source Ceases:Clauses 82, 104, 109 and 844 This change treats certain amounts as post-cessation receipts andother a mounts as if the source had not ceased. Sections 79(9), 79A(4), 79B(4), 83A(4), and84(4) of ICTA create a charge u nder Schedule D Case VI if the trader is not chargeable under Schedule D Case I or II in the “chargeable period” in which a benefit is received. Section 491(3) of ICTA creates a similar charge on a distribution by a mutual concern. Section 584(4) of ICTA creates a charge under Schedule D Case VI if income becomes remittable after the trade or other source of income has ceased. This Bill unpacks Schedule D Case VI charges and deals with the income where it logically belongs. In most of these cases, the income is trading income. As regards a trade profession or vocation, by treating the benefit or distribution as a post-cessation receipt, the Bill: — allows the trader to make the same deductions as those available from other post-cessation receipts; — makes it clear that the benefit or distribution may be earned income and relevant earnings; — allows an election to carry the benefit or distribution back in accordance with clause 257; — removes any possibility that the benefit is chargedboth by the specific rul e about benefits andby any general rule; and — preserves the loss relief position under section 392 of ICTA (by virtue of entries in the table in section 836B of ICTA, insertedby Schedule1 to the Bill). Clause 844(4) contributes to the unpacking of the Schedule D Case VI charge. It treats the source of the foreign income as not having ceased, where income that was relieved under clause 842 ceases to be unremittable after the source has actually ceased. The income is then chargedunderthe provision that would apply had clause 843 (withdrawal of relief) applied instead. In a very few cases, the income may be charged at a lower tax rate than was the case under section 584(4) of ICTA. The loss relief position under section 392 of ICTA is also preservedby virtue of an entry in the table in section 836 B of ICTA. This change is in taxpayers’ favour in principle andmay benefit some in prac tice. But the numbers aVected andthe amounts involvedare likely to be small.

Witnesses: Mr Robin Martin, CB, Project Director, Mr David Cook, Headof Drafting Team , Ms Hazel Colclough, Team Leader, Mr John Morris, Team Leader, and Ms Vicki Carr, Technical Advisor, the Tax Law Rewrite Project, InlandRevenue, examined.

Q1 Chairman: May we open the session. We will and dealt with separately. From reading the begin with oral evidence from oYcials of the Tax evidence, that decision has not actually given rise to Law Rewrite Project from the InlandRevenue, any controversy or opposition from any of the whom we invite to our proceedings: Mr Robin practitioners involved. Would you just like to Martin, Project Director; Mr DavidCook, Headof remindthe Committee as to why that seems to be the the Drafting Team, Ms Hazel Colclough, Team one basic decision in principle which was taken? Leader, Mr John Morris, Team Leader, and Ms Vicki Carr, Technical Advisor. You are involved in this particular Bill andI wouldinvite each of you to Mr Martin: Perhaps I couldask DavidCook or John take us through anything you wish to add to the Morris to follow up with a few comments. As you memoranda we have had submitted. May I begin by say, this was quite a basic decision and it was taken asking you, Mr Martin, that it seems to me the ﬁrst very much in consultation with the Project’s two decision of major principle taken in the course of external committees: the Steering Committee and creating this Bill was to produce an income tax bill the Consultative Committee. The issues were gone as opposedto a corporation tax bill andit was over quite fully with them at a pretty early stage in decided as part of the Rewrite Project that it would the process. They came down markedly in favour of make sense to separate out the income tax doing it this way for the future. The beneﬁts certainly provisions—leaving open future decisions as to seem to outweigh any disadvantages—although in whether corporation tax shouldbe totally taken out the memoranda to the Co mmittee we have triedto Joint Committee on Tax Law Rewrite Bills: Evidence Ev 25

1 February 2005Mr Robin Martin, CB, Mr David Cook, Ms Hazel Colclough, Mr Jo hn Morris and Ms Vicki Carr set out both sides of the case. I do not know if any of Mr Morris: A vast amount! my colleagues wouldlike to addawordor two about more of the backgroundto this. Q5Baroness Cohen of Pimlico: Once you have Mr Morris: Yes. I suppose the backgroundstarts in eliminatedall the Scheduleswhat is left; what other 1799 when we first hadincome tax; we didnot have sort of income is there left to tax? corporation tax until relatively recently in the Mr Morris: It wouldnot be taxing the income, no. Finance Act 1965. When corporation tax was What we have here in Bill 31 are the rules which brought in, it was sensible not to reinvent the wheel identify what is taxable, who is taxable and the entirely at that stage andthe aim was to piggyback calculation rules. After that there are rules about on to income tax anduse the income tax calculation personal reliefs, about annual payments, about rules. That was achievedthrough what is now losses, andsome tax avoidancelegislation which we section 9 of ICTA [Income andCorporation Tax have left until the end—enough to fill another bill 1988], which says that income for corporation tax this size. purposes is calculatedin accordancewith income tax law andpractice using the income tax schedulesand Q6 Chairman: So the tax avoidance legislation is cases. There is a legal fiction that is saying you have going to be the biggest challenge because it is going two codes but corporation tax is working through to be extremely complex? section 9 andpicking up the income tax rules. Since Mr Morris: It will be a challenge, yes, but it is all 1965 the rules have diverged markedly. We have complex. special corporation tax legislation andmuch of the income tax legislation applies for income tax Q7 Lord Goodhart: I think the problem with tax purposes only. I suspect that the eVect of section 9 avoidance legislation is that it is virtually has been overlookedon occasion because when you incomprehensible unless you know what the scheme come to the legislation in ICTA andelsewhere it is was that it was intended to stop? not always clear whether or not it applies for income Mr Morris: It helps to understand the background tax or corporation tax or both codes. It was andthe intent, yes, but I think your comments can obviously a question we hadto confront fairly early apply to a lot more of the current legislation than on in the life of the Project andwe didconsulton this just the tax avoidance legislation. at an early stage. As you will have seen from the Chairman: That is the next part of the Project. We memorandum, none of the representative bodies we are dealing with trading, property and other income. consultedwere in favour of retaining this integrated We have had your memorandum of evidence, so approach which is so confusing in practice; andall there is no point in deliberating on that. I think we were in favour of wanting to move to two separate shouldturn to the e Vect of the minor changes, the Acts for the two codes (or neutral) and that is what main function of this Committee. As far as I can see, we have startedhere. We have a Bill that is income the principal change is that you have alteredthe tax only. The provisions we have rewritten (which structure so that in the case of the three categories of apply also to corporation tax) at the moment are left income you are dealing with you have brought freestanding in ICTA. Still working through section together provisions which were previously scattered 9, so not entirely freestanding, we still have this through the legislation so people can now logically working through section 9 for corporation tax and turn to the section andthe type of income they are income tax; but we now have the start of two codes considering. Otherwise you seem to have followed separate in diVerent Acts. What we have not decided the usual remit of a Rewrite Project. That is yet is the extent to which we will entirely separate obviously a sensible thing to do. There are no other them; that will needdecisionswhen we come on to broadissues of principle proposedby this. rewriting corporation tax in due course and we will again be consulting on the extent to which we will Q8 Lord Blackwell: CouldI ask a question on cross-refer or make it entirely freestanding. foreign income? I want to understand the practical implication of integrating foreign income with UnitedKingdomincome. Does that mean that there Q2 Chairman: The next part of the Project, on which will no longer be a separate form to fill in for foreign I think you have already embarked, is yet another, income andit will all be on the same tax form? presumably hopefully final, income tax Bill, which Ms Colclough: We wouldhope to move to may appear in the next two or three years? something like that, but at the moment we are Mr Morris: Our next bill is an income tax only bill, dealing with the statute on the Project. At the yes. moment, in the tax law we have a charge for foreign income under Schedule D, cases IV and V. All foreign income in the main goes through that charge. Q3 Chairman: That will be completely income tax? What we have done for this Bill is we have separated Mr Morris: Substantially completely rewrite income out foreign aspects andput them with the same type tax, yes. of UK income, so that we have a charge, say, in Part 4 on interest andit charges both UK andforeign Q4 Baroness Cohen of Pimlico: I think we have still 1 The previous two bills produced by the Tax Law Rewrite got some income tax left to complete but I just could Project are the Capital Allowances Act 2001 andthe Income not think what? Tax (Earnings andPensions) Act 2003. Ev 26 Joint Committee on Tax Law Rewrite Bills: Evidence

1 February 2005Mr Robin Martin, CB, Mr David Cook, Ms Hazel Colclough, Mr Jo hn Morris and Ms Vicki Carr interest; but at the moment the tax return will still here for “in principle” and“in practice” is that, ask for foreign income in a separate place. We would although the amount chargeable on the beneficiary hope that over time improvements couldbe made. will be less, the tax e Vect will depend on whether the Chairman: In the past this Committee has beneficiary is liable to tax. concentratedon active changes in law which have resultedfrom the rewrite to make sure we agree that Q11 Baroness Cohen of Pimlico: It goes through the the changes are so minor that it is proper to deal with beneficiary rather than sticking it in the estate? it in this way, andthat no substantial changes are Ms Colclough: Yes. Whether or not the beneficiary being made to the uses of the law that should be left is exempt, or whether or not the beneficiary is liable to the Finance Bill andfull parliamentary at higher rates, that is where this more or less comes procedure. We have also gone on to consider into play. whether there might be changes in instances of taxation for individual taxpayers and whether that Q12 Mr Wright: I suppose the bottom line for the amounts to something that is suitable for the Exchequer is whether all these changes wouldendup Rewrite Project or whether someone wouldpay in a tax neutral rather than positive outcome for the more tax or less tax in a predictable or significant Exchequer, or a worse situation for the Exchequer? way so it shouldbe left to the Finance Bill. Are there Ms Colclough: The changes in the first andsecond any general points before we look at the examples boxes will not have any eVect on the Exchequer. It is which have been set out in the appendix to the only where we have tickedthe thirdandfourth box memorandum which any member of the Committee because that is where there is a change that we wouldlike to raise? propose in practice. Baroness Cohen of Pimlico: Many of the changes proposedcause more tax andless tax to be paid.Is Q13 Mr Wright: Overall? that more tax for some andless tax for others? Ms Colclough: Overall, we wouldexpect that all of Chairman: It might cause more tax to be paidby these changes are at the very margin. some taxpayers andit might cause less tax to be paid by others; in most cases it is not certain if anybody shouldpay more or less but it is a possibility that Q14 Mr Wright: Andthey wouldnot make much V somebody might. di erence at all? Ms Colclough: Absolutely not. When you get down Q9 Baroness Cohen of Pimlico: It is where you tick to examine them they are tiny anomalies, the sort of the first two boxes.2 thing that we have here will not change much. Mr Morris: I think it couldbe di Verent taxpayers involved. The same taxpayer could be better oV or Q15Chairman: My understanding in previous bills worse oV depending on individual circumstances. was that we were often toldthat it was possible for Ms Colclough: A change in principle will not mean someone to pay more or less tax although no-one any more or less tax tomorrow for that person; that couldthink of a particular instance when that would wouldonly happen where there is a change in happen. You just tick these boxes because it is practice. That is the thirdandfourth box in our possible with the re-statement of the law that you table. The first andthe secondbox are about changes will get some individual case somewhere. Again, in principle, andthat is where we are changing the presumably, if someone can have a significantly law; andthe secondandthirdbox is where there is altered instance of tax, you would probably decide it a change in practice. Where we have an ESC (Extra is not suitable for the Project. Do you have any cut- Statutory Concession) at the moment there would oV point, any measure of changes or the probability not be a tick in those boxes. of people being aVectedor the amounts which might be involved which leads the Project team to decide Q10 Baroness Cohen of Pimlico: Can we try change “We can’t do that: people will challenge that, and number 108, which is dear to my heart?3 we’re going into rewrite rather than substantial “Beneficiaries” income from estates in legislation”? administration” has changed somewhat, and Mr Martin: I think, Chairman, the answer is that we “removal of the requirement for interest to be do not have any sort of formal cut-oV point. The annual . . .”, if one ticks the first four boxes. The reason for that is that, quite often, in these examples change in principle involves more tax for some and you are dealing with very marginal situations. In less tax for others; andthe change in practice will looking at these you do not necessarily have the involve more tax for some andless tax for others? information which wouldenable you to be Ms Colclough: Yes, 108 is the change we brought in absolutely precisely certain what the eVect is going to say that all interest is an allowable deduction in to be; in which case it makes it a bit diYcult to have the calculation of the estate income. At the moment a formal cut-oV point of the sort you are suggesting. the legislation talks about annual interest andshort In the end, I think I would say it does come down to interest—it is still framedin oldterms—but all some extent to a matter of judgment. But, as you interest would be deductible. We propose a change were saying, andI think we have followedin this the andour committees have been happy with the same approach people followedin previous bills we change. The reason we have tickedall of the boxes have triedvery much to restrict ourselves to changes which have either no eVect in practice “for the 2 Ev 7 reasons Hazel was giving—perhaps they are 3 Ev 11 enactment of an extra statutory concession, or Joint Committee on Tax Law Rewrite Bills: Evidence Ev 27

1 February 2005Mr Robin Martin, CB, Mr David Cook, Ms Hazel Colclough, Mr Jo hn Morris and Ms Vicki Carr simply bringing the law into line with existing life of a policy. This is a relief just to make sure we practice”—or changes which, as far as we can judge are not overcharging the policyholder. In the past, andas far as our committees know, will e Vect because we operatedthe extra-statutory concession, nobody or possibly very few people at the margins, we treatednon-residentsas though they hadpaidtax because you can think of theoretical cases. Certainly on the gains, so they were entitledto deficiencyrelief. I think it is true to say that in line with previous bills Now, because we are treating them as not liable, they we have triednot to make changes which are going have no chargeable gain aga inst which deficiency to have any substantial eVect. relief couldbe given. Some people may say they have no entitlement to deficiency relief because they have Q16 Chairman: I am not aware of any controversy never been chargedto gain; but what we dois try to which has arisen from the previous two bills. set out all of the circumstances andwe explain what V Certainly I do not know of anyone complaining of the tax e ects wouldbe. For this person to even get the rewrite altering their evidence of tax. I do not into the realms of feeling disadvantaged by this know if there has been any consultation of people change they have to be non-resident; they have to complaining to the Steering Committee or the have had part surrender of their policy during the InlandRevenue that they have hada case which has lifetime of the policy; the total gains chargedhave occurredwhich hadledto some change? got to be more than the actual gains; andthey have Mr Martin: No, in our experience that is correct, also got to have other UK income, which is income Chairman; there have not been complaints of that derived from somewhere else, not the policy, which sort. they couldset this deficiencyrelief against. Even then there is a catch with that because that income has got to be chargeable at the higher rate for Q17 Baroness Cohen of Pimlico: You have consulted deficiency relief to bite. There is one other piece of at the sharp end, I think? the jigsaw andthat is a rule which we put into the Mr Martin: Yes, indeed we have. All of this goes up Finance Act 1985 which saidthat certain types of on our website, which is consultedquite frequently income wouldnot be chargeable at higher rate, and by practitioners so they see everything that is going that excludes interest, dividends and pensions. It has on. got to be some income which is not in this category that is chargeable at the higher rate. Q18 Lord Howe of Aberavon: I think I am right in Chairman: There is no reason to fear that the bars of saying that in this long Schedule there are only three Marbella are full of people in these circumstances changes which have, as it were, a net tax plus. discussing the rule! Balance tick against tick, to see if there are any over- Lord Howe of Aberavon: I thought it a useful balancing ticks 60, 80 and141. Both 60 and141 are illustration, Chairman. unbalancedonly in principle andnot in practice. The Chairman: Indeed, and we will come to the only one unbalancedin practice is number 88 on amendments later. The occasional oversight is page 8 of the evidence, in the middle.4 I have selected rather forgivable if people have thought of yet more that as an example of this andit is the only example obscure circumstances. We are following past I can findof a net minus for the taxpayer in practice. practice andwe have hadthis extremely useful Ms Colclough: Chairman, if you like I could appendix which has been produced because, in the comment on change 88 andexplain why we have past, this Committee thought it really ought to have recorded it as a net minus, if it would help the set out in front of us what the eVects are on the tax Committee. This is a very unusual circumstance. It burden. involves a change we have made in the chapter which taxes gains on life assurance policies. That Q19 Mr Wright: legislation is very complex andit has been amended On Appendix 4, we have a number in many ways over the years to take account of the of areas where they are not rewritten; andyou have diVerent types of activities andthe di Verent types of got down there certain areas why they were not ownership of these policies. What we are doing here rewritten andone is “complexity”. Does it mean it with this change is enacting an extra- statutory wouldbe impossible to rewrite that particular clause concession. At the moment the Department or wouldit take too long? operates this concession in such a way that we do not Ms Colclough: It wouldnot be impossible to legislate recover the tax liability of a non-resident with a gain it, but it probably wouldnot be the best thing to do to make it clearer and easier to understand. Some of on such a policy. Although we compute it, we Y actually do not go out and try and recover the tax. the ESCs straddle the taxes, so it is very di cult to What we are doing now in the Bill is making this pick out parts of it andput it into the Bill. It would clearer andwe are saying that we donot tax a non- operate better for the taxpayer. resident. That is wholly relieving and that, if you like, is one leg of the change. There is another aspect Q20 Mr Wright: You couldnot make it more to this: because of the rules involvedin calculating transparent than it already is? chargeable event gains over the lifetime of a policy Ms Colclough: If we can make it better by enacting we have a special rule called“deficienciesrelief” and it then we woulddo.We examine every ESC that it is given where the overall gain achievedin a policy falls into the subject matter which we have in our is less than the gains that have been taxedover the Bill. Those that are listedthere we have examined and decided there is nothing to be gained from 4 Ev 8 doing that. Ev 28 Joint Committee on Tax Law Rewrite Bills: Evidence

1 February 2005Mr Robin Martin, CB, Mr David Cook, Ms Hazel Colclough, Mr Jo hn Morris and Ms Vicki Carr

Chairman: Appendix 1 gives examples of what the Ms Carr: It couldbe anything. It couldbe the fact instance might be. I assume we approve of the that a person gets married or does not get married. principle of putting things like extra statutory- It couldbe any contingency. The possibility is that it concessions or statements of practice being followed couldreally be any non-life contingency. into the substantive law? Q24 Lord Blackwell: There are other examples. On page 15 changes number 90, 93 and97 all talk about Q21 Lord Blackwell: Chairman, on Appendix 1 6 couldI just ask, there are a number of these changes gains from contracts for life insurance. In 93, for which aVect the tax treatment of long-term example: “. . .treating take a capital sum under a statements of contract, life assurance, endowments, contract for a life annuity as a surrender of a part of the rights under the contract . . .”.7 Again, I do not etc. For example, at the bottom of page 8 change 118 understand the details of this. I would like comfort concerns “purchasedlife annuity payments: method that somewhere in the bowels of some life assurance of calculating exempt part of purchasedlife company there are not policies where this annuity”5 What I wouldlike to ask is, ﬁrstly, have fundamentally changes customer expectations? these been consultedwith the life assurance industry Ms Colclough: This is change number 90. This is one andactuaries to make sure that none of these which is on the gains from chargeable life assurance changes have a consequential impact on the material Chapter which we have discussed with the commercial terms on which these policies are being Association of British Insurers. They have been very soldandthe expectations of policyholders?Can I helpful to us throughout the Project andthey have also take it that if that has been done, the life met with my specialist who deals with this aspect. If assurance industry and the practitioners are there hadbeen any problems we wouldhave heard comfortable with these changes? about it. They have been very happy with the Ms Colclough: Not in relation to the purchasedlife changes we have suggested. annuities. What we have done with purchased life annuities is just in the roundwith our committee members andthe Institute of Chartered Q25Mr Henderson: What are the major concerns Accountants in EnglandandWales, Scottish coming out of the consultation, if any arose, and accountants, CIOT. All of the representative bodies from whom? have seen purchasedlife annuity changes. We have Mr Morris: Do you mean generally? discussed with the Association of British Insurers all the changes to the chargeable events regime. Where Q26 Mr Henderson: Yes. we were looking at a purchasedlife annuity that was Mr Morris: I suppose the main concern is that we are brought to an endby a payment, there we would not changing the law in anything other than a minor have discussed that with the ABI. This particular respect with which they agree. Our respondents do change you mention is a one-oV situation as well. concentrate on the changes andgo through them When we startedwriting ESCA46 we hada look at meticulously—at least the larger bodies do. They are the situation where you couldhave a purchasedlife also concerned, of course, that outside the changes annuity where the annuity and the term depended on we have identiﬁed, we are reproducing the current a life anda non-life contingency. As far as we can tell legislation faithfully. from consulting our specialists andothers, we have not met this annuity in practice; but if we did meet Q27 Chairman: Tuckedaway in Appendix1 of your this sort of annuity what we decided was that the memorandum there were not any particular constant proportion calculation for computing the provisions which took up a lot of time when you met exempt amount couldnot work in practice. What we the ABI. They are all set out here—pages andpages have done is substituted the constant sum of them—andpresumably for some of them nobody calculation for computing the amount of the responded at all when they were consulted. Are there exemption. any tuckedaway, where you foundit was necessary to have meetings to sort them out andwhich proved to be contentious but you got agreement? Q22 Lord Blackwell: I think my concern (andthis Mr Morris: In the main, the representative bodies one sounds relatively benign) would be that if the will sendus their responses saying that unless they policyholders entered into policies based on certain comment otherwise they are in favour of or accept expectations of the tax law, that in some way or the changes. We have hadone or two instances other this wouldcause problems? where the changes have not been agreedandwe have Ms Colclough: None of our changes do that. withdrawn them accordingly. There have been one Chairman: You are dealing with an eventuality or two examples of us going back to our which has not yet occurred and realised, as phrased, Consultative Committee andsaying, “This one has you wouldhave di Yculty if you ever discovered an been rejectedbut we’re not sure the position is fully example of that nature. understood. It’s really benign, but we think it’s worth doing”. After discussion in front of the Consultative Committee, the change has been Q23 Baroness Cohen of Pimlico: What is a non-life accepted. There is a little bit of too-ing and fro-ing event? I cannot imagine what this is? 6 Ev 12 5 Ev 8 7 Ibid Joint Committee on Tax Law Rewrite Bills: Evidence Ev 29

1 February 2005Mr Robin Martin, CB, Mr David Cook, Ms Hazel Colclough, Mr Jo hn Morris and Ms Vicki Carr at the margin but no disagreement. If we receive Chairman: These are ones you give more detail of opposition which is firm, then we do not proceed andthis takes us into wayleaves, baddebts,business with it. start-up, allowances andaveraging of profits from foreign trade, each of which you deal with in some Q28 Lord Howe of Aberavon: I think the detail—in each case coming to the conclusion that Consultative Committee meetings last considerably you are not likely to make any significant change in longer than the Steering Committee meetings practice, andcannot conceive of anybodywho will because you have a wider range of expertise and they be aVectedto any significant extent. serve as a court of appeal for the judgments you are making as you go. Is that roughly the position? Q32 Baroness Cohen of Pimlico: Perhaps the best Mr Morris: Yes. way to put it, Chairman, is that not many people will Mr Martin: Yes, I wouldsay that is very much the be aVected, although it might be significant for the case. I think in principle if we foundit unable to individual taxpayer. To get to the bit on wayleaves, agree with something with the Consultative paragraph 49,10 I have just inventedthis taxpayer Committee we wouldbring it to the Steering who is running a caravan site on landwhich has a Committee of the Project. In general we have wayleave andhas got trailer houses andis not very managedto achieve agreement on these technical goodat it. He may slightly benefit from a wayleave. issues with the Consultative Committee. He is just making a profit, my taxpayer, andrunning a caravan site. Q29 Lord Howe of Aberavon: I am trying to recollect Mr Morris: If he is just making a profit, I do not whether there were any examples that vexedus to think there will be much advantage to him. distraction. Some have reached us on the Steering Baroness Cohen of Pimlico: He is just making a loss. Committee but I cannot recall any that have given Chairman: He keeps trading and hands it to someone rise to the sort of problems we are discussing. else andgets relief from the losses. He has failedto Mr Martin: I do not think I can either. make a living from the caravan site which has got Lord Howe of Aberavon: There are some we can refer pylons going through it andis about to handit on to to later on in relation to the changes in clause 882. a relative. There is a particular issue on that. It is clause 882 and this is a representation we have receivedfrom the 8 Q33 Baroness Cohen of Pimlico: Or maybe he has got CharteredAccountants. his wayleave in his tax bill because he is laying it oV against losses from his unprofitable caravans. How Q30 Chairman: Appendix 2: examples of changes many of those are identified—or running stables? that may alter tax payable.9 We have already Mr Morris: It is any trade carried on, not just trading commented. Theoretical changes of instances of tax by way of a caravan site. have been set out one by one for all the changes in Appendix 1. Do I gather Appendix 2 is taken out separately? Does this mean tax payable in these Q34 Baroness Cohen of Pimlico: Or he is a writer cases, for example, possibly couldbe more with a wayleave? significant? Mr Morris: He will not be carrying on a trade on the Mr Morris: In paragraph 38 of our memorandum, land. It has got to be a farmer or a caravan site, or we have chosen our words with great care. What we whatever. You have got to have wayleaves. You have saidis that in Appendix1, where we hadall the have got to have losses, which wouldotherwise be ticks, we have tickedup changes in principle, not relieved. Most trading losses are relieved, so it is changes in tax in practice, if there is any possibility only in that fairly unlikely instance. of there being a change, andwe have identified43 instances in which we have identified a possibility or Q35Baroness Cohen of Pimlico: A situation where a remote possibility of a change in tax practice. you cannot do anything with them? Mr Morris: Exactly. Q31 Chairman: Can you give us examples of remote Mr Martin: If he is a chicken farmer andhis chickens possibilities? will not lay any eggs because of the proximity of the Mr Morris: As I say, we have chosen our words pylons, I suppose this would— carefully. We have chosen five examples of those changes most likely to have an impact. They are not Q36 Baroness Cohen of Pimlico: I do not believe the the five changes most likely to have an impact, proximity of the pylons wouldhave anything to do because we do not know which are the five most with it. You do not need cause and eVect. You just likely because the situations are so obscure andso needpylons andnon-laying chickens. complex we do not think any of them will have a Mr Martin: Yes, indeed. material eVect: but if any of them do then perhaps these five are the better examples. We put them forwardso that the Committee can see how obscure Q37 Chairman: I got the impression that as the the situation has to be, andhow complex they all are rewritten law will actually be stating what people andhow they are working at the margin. thought the law was anyway andwhat the intention of the original Act was, none of these actions are 8 Ev 33 9 Ev 15 10 Ev 15 Ev 30 Joint Committee on Tax Law Rewrite Bills: Evidence

1 February 2005Mr Robin Martin, CB, Mr David Cook, Ms Hazel Colclough, Mr Jo hn Morris and Ms Vicki Carr making any substantial change to the evidence of the particular question he asked. I do not know whether tax which wouldhave been perceivedto be dueby Sir Teddy has received a copy of this Appendix, but any taxpayer. I think I am right in saying that these are all points Mr Morris: That is quite right, Chairman. raised by Sir Teddy Taylor? Mr Martin: Yes, that is correct, Chairman. They Q38 Chairman: Where, as a taxpayer, wouldI be were raisedat SecondReadingin the Commons. surprisedby the consequence of this change? After today, we were proposing to send Sir Teddy a Probably until I hadconsultedmy accountant I copy of the memorandum and a note of any points wouldnot be aware what the rules were on that were raisedin debateabout the issues he has wayleaves or business start-up allowances. raised, but we have not done so yet. Mr Morris: We have pickedthese examples as examples of the situations in which there is possibly a change in practice. There is certainly a change in principle, but also possibly a change in practice. Whether your taxpayer wouldbe surprised,no, I Q41 Chairman: He was given a reply in the debate doubt that he or she would be because they are but this sets out the detail. He appears to have been common sense. We are removing anomalies and informed that there was a discrepancy or diVerent taking sensible lines andmaking the law simpler and treatment of housing grants in Scotlandand more consistent. EnglandandWales following devolution.This Baroness Cohen of Pimlico: When we get to debts Appendix makes it clear that in practice there is no there is a clear example of timing. It makes no odds diVerence in treatment in housing grants north or but it does make odds if you get relief earlier. south of the border and the Rewrite makes this clear. Conceptually that is cash in now, therefore more Income tax is not a devolved matter; and devolved valuable than cash in next year. assemblies cannot of their own volition alter the position of income tax. Q39 Chairman: I thought with bad debts everybody would assume that when you have handed on a trade Mr Martin: Yes, that is right. that it wouldbe the person who hadacquiredit who Chairman: Business gifts: he queriedwhy the exempt wouldcontinue to get tax relief for the debts.It turns limit shouldbe raisedby Orderas opposedto in the out there are two diVerent parts of the previous Act Finance Bill. That is a substantial change andis which made it clear in one and unclear in the other, subject to negative procedure. Presumably any but that is actually the case. It is a change in the law substantial change will give rise to significant debate. because you have removedthe indignationof people Does any member of the Committee query the getting themselves caught by previous law andtold power to vary the exempt limits on business gifts by by the InlandRevenue that they couldnot get tax way of an Order subject to negative procedure? relief for debts on the trade before they acquired it. Mr Morris: Yes, the situation is clear but slightly Baroness Cohen of Pimlico: Presumably you do not diVerent so it is inconsistent; but I think you are right vary them much from the inflation rate. It was meant that everybody would have been proceeding on the to be a de minimis provision—you wouldnot have to basis that you get bad debt relief under section 74 declare the last bottle of wine from a grateful andthe rules of section 74 apply andthat wouldhave customer. If one suddenly put it up to £5,000 that is been the situation in practice. more than one bottle of wine these days. Lord Blackwell: All the changes seem to work to the Chairman: It is far less than a case of wine. In theory benefit of the taxpayer. This may be the wrong it is £50, which is far less than a case of wine, which approach but I think I am more relaxedabout things it is the custom to sendto each other in the City. I do which work for the benefit of the taxpayer than the not think Sir Teddy was pressing too forcibly against taxpayer getting an unfortunate surprise. it. He hada question on caravan sites. Change does Chairman: The taxpayer is entitledto say, “The not alter the tax treatment of the landin question. InlandRevenue will increase my liability to tax, so I The point raisedabout social security contributions: want Parliament to give it the full process of why could the owner of the business not deduct his scrutiny”. own social security contributions from the taxable Lord Howe of Aberavon: This is why I raisedchange profits of the business? It is not possible now andnot number 88, which we have discussed already. I think always has been the position. It is regarded as a it was the only one that did not function to the personal liability andnot part of the cost of running benefit of the taxpayer rather than to the Revenue. a business. All these happen to be beneficial to the taxpayer, if V anything. Baroness Cohen of Pimlico: It is the di erence between a sole trader and a limited company. Q40 Chairman: Appendix 3 seems to be in response Chairman: Does any member of the Committee wish to points made in the Second Reading debate by Sir to intervene, or does Sir Teddy have an adequate Teddy Taylor, Member of Parliament for Rochford answer to this question? No. Thank you. A copy of & SouthendEast. 11 I have not hadthe chance of that will be sent to Sir Teddy. Then we have talking to Sir Teddy and asking what prompted the Appendix 5: before and after examples of the way in which things have been rewritten for the Committee 11 SecondReadingCommittee, Income Tax (Trading and to dip into it if they wish to query the drafting Other Income) Bill, 14 December 2004. approach. Joint Committee on Tax Law Rewrite Bills: Evidence Ev 31

1 February 2005Mr Robin Martin, CB, Mr David Cook, Ms Hazel Colclough, Mr Jo hn Morris and Ms Vicki Carr

Q42 Lord Blackwell: Chairman, couldI ask about of the tax profession saidthat they thought it m ade the consultation here on mutuals. There are a huge life easier andit was a distinctbenefit. I think the range of businesses out there andI think this is one only discordant note was sounded by the most of the consequences of splitting corporation eminent lawyers. I think their position was that, as taxation from the present taxation? far as they were concerned, they understood the Mr Morris: I do not think it is that complex. This original legislation very well andhadno trouble is to do with the calculation of property business with it andthey askedwhy we were messing them income. The current law simply says that in aroundandcreating new legislation which they had calculating profits of a property business you do to familiarise themselves with. If I may say so, with not take into account mutuality. This is not a all due respect to the legal profession, I think they change in the law; this is just a change in the are in a minority in the sense that most users of the drafting approach to get a much simpler, more Taxes Acts are people who welcome the Project’s succinct anddirectresult. work andfindthat it genuinely makes their life Chairman: All these are examples of how the easier. drafting has been changed and should not involve substantial changes in law. Q46 Chairman: As far as I can recall the other Q43 Baroness Cohen of Pimlico: Building societies submissions receivedwere from people who were pay corporation tax, do they not? actually arguing about an instance of tax, or the Mr Morris: Yes. complications of the burden of taxation, all of which are substantial matters for Parliament, the Chancellor of the Exchequer andfull legislation? Q44 Baroness Cohen of Pimlico: This is all about Mr Martin: Yes. We publishedmore or less the property income. whole of this Income Tax Bill in draft last March— Mr Morris: Yes, andhow you calculate property andpeople hada periodof months to look at it income. andcomment. We got a lot of comments on the draft, which were incorporated. For example, the Q45Chairman: Unless anybody wishes to raise Institute of CharteredAccountants in Englandand anything about the memorandum of evidence that Wales saidthey thought it was a very goodproduct is it. Given that this Committee appears to be but it still resultedin complicatedlaw; but that is endorsing the approach of the Rewrite Bill, I because the underlying law itself is complicated and suppose we ought to make some passing reference there is not much you can do about that as part to the fact that we have triedto evaluate the of the rewrite exercise. As you rightly say, they are previous two Rewrite Acts. As far as I can see, this making the point that in a lot of instances we have has produced almost universal approval from got quite a complex law here. accountants andfinancial adviserswho prefer the Baroness Cohen of Pimlico: If you rewrite it why law set out this way. The only reservation we not re-legislate it? appear to get is from lawyers that they findit Chairman: If the Chancellor andParliament insist inconvenient to have to get familiar with the way on making the burden of taxation extremely the law is—the renumbering of sections and complicatedwith countless exemptions rewriting it schedules of the law which they are used to. By and reproduces all of that. What you cannot do is alter large, the evaluation of those two appears to have the burden of taxation. produced general approval. Lord Howe of Aberavon: Chairman, it is very well Mr Martin: In fact, Chairman, we have done an summarisedin the excellent note producedbythe evaluation of our first Act—the Capital Allowances House of Commons Library. There is now a Act 2001, andarrangedthat consultants went mounting discussion taking place about tax policy roundandintervieweda range of users about that simplification which was the subject of a lecture Act. We have not yet done a similar operation on given by Adam Broke, who was a witness here last our secondAct—the Income Tax (Earnings and Pensions) Act—because our committees felt that time. Subsequently the Budd Committee appointed each Act needs to be given a certain amount of time by the Institute of Fiscal Studies said the clamour to bed-in before people have actually had the for undertaking tax policy simplification is experience of using it. However, we are going to mounting inside and outside Parliament, but it is evaluate our secondAct duringthe course of this all outside the remit of this Committee. year, in other words a couple of years after the Act Chairman: Many members of the Committee, took eVect; andthat was actually what we didwith including yourself, agree with the policy of the Capital Allowances Act when we left it for two simplification of tax policy but we also accept it is years. People have enough memory left of the old quite outside the remit of the Project and of this system to be able to compare the two but they have Committee. Is there any more evidence any also hadtime to have some experience of the new member of the Committee wouldlike to receive Act andare in a position to give a reasonably from the Project Team? informedopinion. As you say, in reviewing the Capital Allowances Act there was almost universal approval for how the Act has been working in Q47 Lord Goodhart: Clause 882 on consequential practice. Practitioners from all sorts of diVerent bits amendments—subsection (2) of that gives the Ev 32 Joint Committee on Tax Law Rewrite Bills: Evidence

1 February 2005Mr Robin Martin, CB, Mr David Cook, Ms Hazel Colclough, Mr Jo hn Morris and Ms Vicki Carr

Treasury power by Order to modify primary it cannot change the eVect of the law as it existed legislation, although that seems to be fairly tightly before the date we anticipate for the restrictedby subsection (4). The DelegatedPowers commencement of this Act, which is 6 April this Committee in the House of Lords in general insists year. Beyondthat—andthis is a point the Institute on the power to amendprimary legislation, even if of CharteredAccountants of EnglandandWales it is a consequential amendment, to be done by the have made13—they want to see a reinforcement of aYrmative resolution procedure; but under clause the commitment set out in the Explanatory Notes 873 it will be done by negative procedure. Is that to this Bill; that, were the Treasury by Order to justified? consider making such consequential amendments, Mr Cook: We have in fact been to the Delegated then the changes wouldbe discussedandagreed Powers Committee on the whole Bill andthey have first with the two committees (the Consultative reportedboth on this power andon other powers. 12 Committee andthe Steering Committee) of this I am pleasedto say that they have given the whole Tax Rewrite Project before those Orders were Bill a clean bill of health. As to the scope of the made. If I may, Chairman, I would just like to power andwhy it is such a narrow power, (andthis reinforce that commitment andput it on the record was part of our evidence to the Committee), it is for the Committee—that will indeed be the case narrow not only, as you say, because it is expressly under this Rewrite Project, both under the Inland restrictedin subsection (4) of clause 882 so that it Revenue andwhen we have the mergedHMRC cannot change the eVect of the law before [HM Revenue andCustoms] for its successor in commencement of the Bill, except in some very Parliament as well. I hope that will give the narrow circumstances; but it also very limited Committee andthose that follow the Project very because it is a consequential power on a Bill that closely the reassurances they are looking for. Chairman: is rewriting the law with minor changes. The very That is precisely the ministerial reassurance that the Institute of Chartered scope of the power is itself narrowedby the fact Accountants are asking for. I hope the Committee that this is a bill eVectively re-enacting the law will agree with me in congratulating the members subject to any very minor changes. Over andabove of the Project Team andthe InlandRevenue on the that, it is also restrictedin practice by the fact that extremely useful exercise they have carriedout and we have a comprehensive schedule of consequential the completeness of the work they have produced. amendments, and it would not be within the scope We are very grateful for this extraordinary Project of the power to go against the express provision of as it continues. It has taken much longer than those amendments. The position at the moment is anybody expected but it does seem to be continuing that we think we have dealt with everything in the to attract widespread support from all parties but, consequential amendment schedule but it is such a more importantly, from those who try to advise the vast undertaking that we cannot quite be sure. public on taxation. I think it wouldbe useful if the Those factors taken together mean that we are in expert witnesses remain whilst we turn to the fact dealing with an extremely narrow power. amendments that are put forward for our Bill. I do not know if the Minister wishes to do anything Q48 Lord Goodhart: This is intended simply to other than to move these formally. Can I ask if the cover something that shouldhave been in Schedule Minister wishes to say anything to introduce or 1 but has not been spottedand,therefore, has not comment on Amendments 1–4 and Amendment been included in Schedule 1? 20? John Healey: There are some explanations where Mr Cook: Yes. The primary purpose behindit is the amendments are not entirely consequential or that and, in particular, because of the work we have technical, which I hope will be suYcient andhelpful been doing in relation to the Income Tax/ to the Committee. Corporation Tax split, which has meant that we Chairman: Does anyone wish to debate have hadto make numerous consequential Amendments 1–4 and Amendment 20? The next amendments to the source legislation to confine it grouping, as I describe it, are Amendments 5, 6, 7, to corporation tax. We have found, just on the and17; andthe next group are 18, 19, 20 and21. technical side of things, that this is an extremely The next group is 8 to 15. I think that covers all the complicatedexercise both in trying to, firstly, work amendments. Can I put them all together en bloc to out whether section 9 of ICTA operates to convert the Committee? The written explanations we have income tax provisions to corporation tax; andwhen receivedappear to be satisfactory to every member we have decided it does, in deciding how it works of the Committee, so the question is that the so as to spell this out in the consequential amendments proposed by the Minister be made? amendments. We are operating right at the margins There appears to be nobody against, so they are of the eVect of section 9 of ICTA so we feel we need agreed. I think we have reached a stage in our the added comfort of the power for any cases that proceedings where all we need to do is discuss in may have been missed. private the Bill andour Report to the House on the John Healey: As Mr Cook says, the scope of this Bill. I thank the expert witnesses andthe project is very restricted, explicitly in subsection (4)(a)— team for attending and I am sure they will be this is Volume Two of the Bill on page 381. It says grateful to be releasedfrom their attendance.

12 DelegatedPowers andRegulatory Reform Committee, Sixth Report of Session 2004–05, HL Paper 31. 13 Ev 33 Joint Committee on Tax Law Rewrite Bills: Evidence Ev 33 Written evidence

4. Memorandum from the Tax Faculty of the Institute of Chartered Accountants

INCOME TAX (TRADING AND OTHER INCOME) BILL: CONSEQUENTIAL POWERS (TAX LAW REWRITE)

Introduction 1. We welcome the opportunity to comment on Paper CC(04)20, publishedon 24 November at http:// www.inlandrevenue.gov.uk/rewrite/exposure/menu.htm, concerning proposednew powers containedin clauses 882 (Consequential amendments) and 883 (Commencement and transitional provisions etc) of the Income Tax (Trading and Other Income) Bill (“ITTOIB”) to enable the Treasury to make by Order consequential amendment, transitional and savings provisions in limitedcircumstances after enactment of the Bill.

Key Point Summary 2. We appreciate the needfor necessary changes to the rewritten law to be ab le to be made expediently, accept that a Treasury Order is the best way of achieving this end and acknowledge that draft clauses 882 and883 prohibit any changes to the law as it was immediatelybefore 6 April 2 005. In view of the complexity of tax law, which can frequently admit more than one interpretation, and especially in the case of a modification aVecting a change in the law resulting from a ProposedRewrite Change, we cons ider that there shouldbe consultation, even if for less contentious amendmentsit is confi nedto the Tax Law Rewrite Steering andConsultative Committees. 3. The best way of ensuring that this happens wouldbe to includean obligati on to consult within clause 882 (andclause 883) itself. Failing this we suggest that the undertakingi n para 12 of paper CC(04)20 and paras 1886 and1890 of the Explanatory Notes to the ITTOIB, that any matters that require the powers to be invokedwill be discussedwith the Steering andConsultative Committee s or its successors, shouldbe confirmed by way of a Ministerial Undertaking during the course of the Bill’s progress through Parliament.

Who We Are 4. The Institute of CharteredAccountants in EnglandandWales (“ICAEW”) i s the largest accountancy body in Europe, with more than 128,000 members. Three thousand new members qualify each year. The prestigious qualiﬁcations oVeredby the Institute are recognisedaroundthe worldandallow members to call themselves CharteredAccountants andto use the designatoryletters ACA or FCA. 5. The Institute operates under a Royal Charter, working in the public interest. It is regulatedby the Department of Trade and Industry through the Accountancy Foundation. Its primary objectives are to educate and train Chartered Accountants, to maintain high standards for professional conduct among members, to provide services to its members and students, and to advance the theory andpractice of accountancy, including taxation. 6. The Tax Faculty is the focus for tax within the Institute. It is responsible for tax representations on behalf of the Institute as a whole andit also providesvarious tax services including the monthly newsletter “TAXline” to more than 11,000 members of the ICAEW who pay an additional subscription.

Detailed Comments 7. Clauses 882 and883, as publishedon 1 December 2004 in the Income Tax (Tra ding and Other Income) Bill, now incorporate actual Schedule and section references to Income Tax (Trading and Other Income) Act (“ITTOIA”), but nothing turns on this for the purposes of Paper CC(04)(20) andthe draftingof the clauses is otherwise unchangedfrom those attachedto the Paper (apart fro m acceptable minor changes made to clause 883). 8. Paper CC(04)(20) focuses consultation on clause 882(2)–(5) andon clau se 883(5), which deal speciﬁcally with the proposedTreasury powers to be exercisable by Order. We have no objection in principle to these powers being given to the Treasury and, subject to our comments below, are content with the approach in andstructure of the clauses. 9. We accept that the purpose of clause 882(2) is precautionary only: an Order to be made by the Treasury only where foundnecessary in practice to rectify the consequential amend ments andrepeals e Vectedby ITTOIA. The hope is that this power neednot be used,but a more realistic exp ectation is that its exercise may be foundnecessary in view of the complications in the existing legisla tion andin particular arising from the income tax/corporation tax split approach in its rewriting. Modiﬁcation by Order is also appropriate as a fast-tracking mechanism to eVect necessary correction, rather than otherwise via the Finance Bill process. Ev 34 Joint Committee on Tax Law Rewrite Bills: Evidence

10. It is appropriate that the Treasury shouldmake “such modifications”(c lause 882(2) and(3)) andsuch transitional or saving provision (clause 883(5)) as it considers appropriate in connection with the coming into eVect of ITTOIA, limitedin clause 882(2) to modificationsappropriate “in co nsequence of [ITTOIA]” only andas further limitedunderclause 882(4) to not changing the e Vect of the law. 11. The drafting of any modification within these limitations, or of any transitional or saving provision under clause 883(5), is at the discretion of the Treasury. It is clearly sensible that the Tax Law Rewrite draftsman should draft the modification or provision for the purposes of the Order, the need for this having either been identified by the Inland Revenue itself or in consequence of outside representations made to the InlandRevenue. 12. However, a major feature of the Tax Law Rewrite is the requirement for the rewrite draftsmen to consult upon their work as the rewriting of the tax legislation progresses, particularly with the Steering and Consultative Committees but also more widely with outside professional bodies etc and with the public generally. 13. There is no provision in clause 882 or in clause 883 that such consultation shouldbe enteredinto prior to the making of any Order found to be necessary after ITTOIA is enacted. 14. In principle it is preferable that such consultation shouldtake place , as safeguarding the obligation not to change the eVect of the law. Whilst clearly the Tax Law Rewrite draftsman would not consciously breach this obligation, the benefit of other independent expert scrutiny must add to the certainty that any modification does not change the eVect of the law. This is of general relevance in the case of taxation legislation, which can frequently admit of diVerent interpretations, andis specifically relevant in the case of orders to which clause 882(5) applies where the modification aVects a change in the law resulting from a ProposedRewrite Change. As regardsthe latter, it will be most important t hat a rewrite Change, already subjectedto consultation andfocussedattention, shouldnot be modifiedt o unintended eVect. Whilst this risk exists, we wouldnot over-emphasise it as we wouldexpect most modifica tions or transitional or saving provision by Order to be of minor and probably technical relevance only and unlikely in practice to create any new adverse consequence for the taxpayer (nor, of course, should they create any unintended advantage). Taxpayers, or more likely their representatives, might also be expectedto drawattention to any amendment made which was considered invalid. 15. Accepting the benefit of consultation in the case of a proposedOrder,th e question then arises how to ensure that it takes place. 16. The preferable andmost certain approach wouldbe to includean obligat ion to consult within clause 882 (andclause 883) itself. This might require publishing the proposedOr der in draft and inviting any comments from any source on it within a set period, which would logically be quite short in a fast-tracking context. Ideally there would then need to follow a “response to responses” stage, setting out the Tax Law Rewrite team’s reaction to points made and any revised draft order. In theory, this couldprove to be a long- running process if respondents still objected to the drafting. In practice, this situation shouldarise infrequently if at all, as in most cases it is to be expectedthat the origina l draft Order would prove acceptable, andthe response to responses might simply be confirmation of this. If there was, exceptionally, prolonged dispute then the original drafting could at the least be regarded as challengeable as inappropriately changing the eVect of the law andthe lengthier process wouldbe justified. 17. This would, however, clearly be a more cumbersome procedure than that envisagedin clauses 882 and883, andthe question arises whether some alternative form of informal consultation might work instead. 18. The proposedundertaking,set out in paragraph 12 of Paper CC(04)20, an dnow confirmedin Explanatory Notes paragraphs 1886 (clause 882) and1890 (clause 883), tha t any matters which require the clause 882 or 883 powers to be invokedwouldbe brought before the Steering a ndConsultative Committees for consideration and would only be taken further forward if these Committees were content for the Tax Law Rewrite Project to proceedwith them, is close in e Vect andprocedureto the possible statutory approach indicated above. 19. Such a proposed undertaking must be robust. As presently drafted the undertaking is that the Inland Revenue (for the Treasury) will consult with the Tax Law Rewrite Project’s Steering andConsultative Committees. Whilst this is reassuring, although narrower in scope than wider public consultation, the robustness of the undertaking for taxpayers would be improved if express Ministerial authority were to be given to it andto a continuing commitment to consultation. Whilst the maki ng of any Order might be expectedsooner rather than later following the enactment of ITTOIA, prov ision ought also to be made for consultation at any time when the Consultative andSteering Committees ha dfor any reason ceasedto exist. Similarly, the giving of the undertaking should be capable of continuity following the merger of the Inland Revenue with HM Customs andExcise. 21 December 2004

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