Further to the Consultative Committee meeting on 26 November 2002, the Institute details concerns on the “annual value” living accommodation clause, and also some further comment on the matter of training costs and future employments following the Silva v Charnock case and the PBR. Comments sent to the Inland Revenue on 2 December 2002.
We also note from the latest version of the Bill, published on your website on 26 November 2002, that there has been no change to clause 223 (Payments on account of director’s tax other than by a director). We await publication of the Explanatory Notes and may comment further on this clause in due course.
We also thank your colleague Jenny Manson for her comment on the relationship between EMI and the charge under section 162 of ICTA. Our only further comment is that we would like to see the Inland Revenue’s website and the EMI booklet amended to reflect the tax and Class 1A potentially due. We do not think that the charge, which you have now identified, has been widely recognised in the past.
Living accommodation and meaning of “annual value”
Whilst realising that it is no easy task to combine tax law and law written for a totally different rating purpose, we find the new version of clause 110 very hard to follow. Problems we have identified so far are as follows:
1. Sub-clause 2(a) seems a repetition of the stem of sub-clause 1. If it is intended that 2(a) should say ‘use the rent in respect of the accommodation only’ (cf original sub-clause 3), then perhaps it would be better to add the word “only”.
2. Sub-clause 2(b) refers to “amounts that may be deducted”, but nowhere is there any prior reference to deductions. This has been taken from section 23 of GRA, but at least in that section there is an introduction explaining that these provisions have effect where the “rent of the standard hereditament is partly attributable to the provision by the landlord of services in relation to that hereditament”, and there is a rubric to the section explaining that the section is for the “Adjustment of gross value by reference to provision of or payment for services etc”. Some further explanation seems necessary here to show that sub-clause 2 will only apply where there are “other services”.
3. Sub-clause 2 does accurately rewrite section 23(2) of the General Rate Act (GRA) 1967, in that that subsection only allows deductions for the costs to the landlord of providing what the new clause identifies as “relevant services”. However, this adjustment is very different from the one previous proposed by your original clause 110, namely the “just and reasonable basis” of original sub-clause 4. Moreover, although this may be accurately rewriting section 837(2), it is going to come as a complete shock to many, particularly since there is no reference to any of these adjustments in the IR manuals.
4. We wonder if part of the problem has arisen from the fact that we no longer have the equivalent of original sub-clause 2.
5. Sub-clause 3 is a rewrite of section 23(3) and (4) of the GRA 1967. It did not feature in old clause 110. It does not appear to be a wholly accurate rewrite. It introduces a new concept of living accommodation - that which is “of a kind that might reasonably be expected to be let on terms under which etc”. We cannot find any of this in section 23, which just talks about the section applying where “the tenant, in addition to the rent, contributes towards the cost of any such services” (s23(1)(b)).
6. Sections 23(3) and (4) of GRA 1967 deal with the tenant’s payments or contributions by adding the actual amounts to the gross value, but then allowing the deduction for the cost to the landlord of providing those services per subsections 1 and 2. New sub-clause 3 deals with the same thing by saying “add the profit element to the annual value”. At first sight this looks the same, but we are not sure that it is, because under sub-clause 3(a)(ii) you are including the profit element of the payments for “the repair, insurance or maintenance of any premises which do not form part of the accommodation but belong to or are occupied by the landlord”, whereas under section 23 these are added at full value (s23(3)(b)) but then not deducted at all (s23(2)(b)). (This anomaly is however to the taxpayer’s advantage.)
7. We also wonder how all these reference to “services” will be interpreted by the Courts in deciding how the annual value charge interacts with the charge on ancillary services (cf original clause 109, now clause 315).
8. Another area which could be a potential cause of confusion for readers of this Act is how the additions, under sub-clause 3, interact with the deductions for employee’s payments under clause 105(2)(b). Of course the provisions of the General Rates Act, which you are seeking to rewrite here, did not have to consider the implications of tenants getting a deduction for their payments, as they do for tax.
Our conclusion from all of this is that we might be better to have a rewrite of section 837 which still referred to section 23 of the General Rates Act, making clear that it is used as it applied until it was repealed on … - the date could be given. We believe there is a precedent for such treatment. In Butterworths, on page iii, there is a reference to repealed legislation and the words:
“Generally, repealed legislation is omitted. Exceptionally, where it may be necessary to refer to the repealed text in dealing with tax liabilities for the current year, the text is retained and is printed in italics.”
We think this would provide a much more familiar and understandable meaning for annual value.
We are glad to see the reproduced SE11434 and trust that such references to gross rateable value will be retained in the new version of the employment income manual. As mentioned at the committee meeting, it may be appropriate to delete any reference to (b) of section 19 GRA 1967.
We also welcome the addition of the words “The practice of using gross rateable values will continue unchanged” in the Explanatory Notes to the Bill, although we think the sentence could be given more prominence if it was not ‘buried’ in what looks like a myriad of ‘new’ rules on adjustments for services.
Silva v Charnock
We have now had the opportunity to read the judgement in this case, and note the Special Commissioner’s following comments on the application of section 200B to the point at issue:
“Further support is obtained from subsection (6) where the definition of relevant employment includes an employment that the employer is to hold under the employer, or to which he has a serious opportunity of being appointed, or which he can realistically expect to have such an opportunity in due course. It is therefore clear that an employer can incur expenditure on training for a future employment (even a future employment that may never happen) that has nothing to do with the current employment.” (page 431, Simon’s Tax Cases) and,
“The existence of section 200C reinforces the conclusion I have reached on section 200B. An employment inducement is defined to include ‘an inducement to … accept, any … employment with the employer’. Therefore there must be some inducement payments that are exempted by section 200B. It is possible that the circumstances envisaged are that the employee is in one employment with the employer and is induced to accept a different employment (which could be a relevant employment). If an employer can incur expenditure on training as an inducement to take a different employment with the same (or a related) employer, so long as the training is not unconnected with imparting of knowledge which is likely to be useful when performing the duties of the new employment, why should the exemption not apply to incurring the expenditure as an inducement to take the original employment in which case the training is bound to take place before the employment starts?” (page 432)
We think this judgement clearly sets out the possibility of a training exemption for a future employment with a different employer and we still maintain that the current clause 251(2) does not accurately rewrite section 200B. We cannot agree with the comment in the latest version of your response document, paragraph 213 - for the reasons set out in our letter of 8 November 2002.
We also note that in Wednesday’s Pre-Budget speech the Chancellor placed great emphasis on skills and training for employment, making such comments as:
“While in our first five years the New Deal has been helping the young, lone parents and many disabled people move into work, the priority now is to focus also on how we help young people and adults move up the skills ladder” and
“And in pilot projects in high unemployment areas we will test a more intensive estate by estate approach of interviews, training and job search services, matched by benefit sanctions to help the long term unemployed back to work”.
We cannot think, therefore, that it is Government policy not to allow training exemptions for future employments with different employers and we would be glad of your agreement that clause 251 needs to be changed.
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