Comments of the CIOT on the Income Tax (Earnings & Pensions) Bill, sent to the Inland Revenue on 8 November 2002. Thank you for your, and your colleagues’, letters of 9, 10 and 16 October 2002 (four in total). As explained in a telephone conversation with Liz Lathwood on 5 November 2002, we have now had the opportunity to review these letters and the draft response document and we detail below some items on the Bill that we think are material enough to be worthy of further scrutiny.
We understand that you are looking again at many of the exemption clauses, to widen their scope, and we hope that this will deal with some of the issues we raised in response to the Bill. We will look at the new version of these clauses in conjunction with clause 402 (as discussed on the phone) to see if we still have any continuing problems with this clause and how it deals with the amendment to section 148 as introduced by FA 2002.
We also look forward to reviewing the new living accommodation clauses when they are ready.
We did not mention it when speaking to you on 5 November, but we understand from a conversation with Matthew Sawyer, after the consultative committee meeting on 22 October 2002, that your colleagues will look again at the interaction of bringing foreign social security benefits (in the nature of pensions) within the pensions income charge, whilst leaving the enactment of ESC A24 in the social security part.
Items worthy of further scrutiny prior to presentation of the finalised Bill
1. Miners’ coal (clauses 306 and 639)
As discussed on the phone, we feel that enactment of ESC A6 with a restriction to personal consumption is a change to the law and one beyond the scope of the Rewrite. We are also concerned that this change was not highlighted as a PRC, which may be the reason it was not commented on by other respondents. The point applies of course to both clause 306 (miners in employment) and clause 639 (retired miners or miners’ widows).
In practical terms, we cannot see that the absence of such a restriction is likely to cause any material loss to the exchequer, particularly as the current ESC regime has operated perfectly satisfactorily for many years. We also consider that this new piece of law places an unnecessary regulatory compliance burden on employers, employees and the Revenue, who may have to audit whether the amount of coal has, as a question of fact, been used by the individual in question. This is red tape for the sake of it, and should be removed from the Rewrite.
You mentioned on the phone the possibility of employees taking coal in lieu of an otherwise taxable pension. We have looked again at SE66695 which says:
”The concession should be regarded as applying to miners on pension and to miners’ widows where the miner was within the concession immediately prior to retirement” (emphasis added).
ESC A6 itself does not mention ex-miners or miners’ widows and we do not therefore see how the concession could be used to get tax-free coal in lieu of a pension.
It appears that clause 639 needs to be reworded to reflect this part of SE66695 more accurately, and that clause 306(2) is the sub-clause that needs to be deleted. We would be happy to discuss this further with you if necessary. In any event, we thought we should put you on notice that if it is not deleted we will suggest that it is raised during the parliamentary debates on the subject.
2. Divers remaining chargeable on specific income (clause 6)
You mentioned on the phone that you have rewritten this clause to include all employment income, and we look forward to seeing this in due course.
3. Clause 10(3) and the use of the words “or any other enactment”
You mentioned on the phone that you will include in the Explanatory Notes the reason for this addition to the sub-clause.
As we understand it, it is there to ensure that when any other enactment - such as a CG provision for instance - introduces an exceptional employment income charge, the charge will still be clearly within this Bill.
You explained that such a charge would still have to specify under which part of the Bill it becomes chargeable, to ensure the correct application of residency, exemption and deduction rules. This was the cause of our concern.
4. Repeated use of “D” and “I”
We understand from the phone call that these will be distinguished in the finalised Bill.
5. Grandfathering provisions for pre March 82 transport vouchers (clause 84)
As mentioned on the phone, we still cannot find these in the new Schedule 7 that you published on 24 October.
6. Deductions for employee’s capital contributions where living accommodation charged on market values basis (clause 105)
As mentioned on the phone, we still think that this restriction (to a deduction for improvement expenditure only) is manifestly unfair and not what happens in practice.
We also can see no policy reason for the difference in treatment from the case where the living accommodation is charged on the basis of cost.
The distinction is not mentioned in the Revenue Manuals and, whilst we can see your argument for saying that this is an accurate rewrite, we do not think your interpretation is beyond doubt.
There seems absolutely no logic for this restriction and we press strongly for clause 105(3) to be amended to read, under the definition of “P”:
”(a) reimbursement of MV or I”
in the same way that clause 102 gives relief for “reimbursement of A or I”.
This is a matter on which we would have to brief members of the Joint Committee if no change was made.
7. Clauses 194 and 534 – favourable tax treatment for EMI options not to apply to employees who are not resident and/or not ordinarily resident
You explain at paragraphs 143 and 376 of your draft response document that to change the law in this regard is beyond your remit, and that you have therefore referred this matter to your policy colleagues and included it in the policy list (number 24). We thank you for doing this, but we consider that such action is not necessary.
Paragraph 54 of Schedule 14 FA 2000 gives relief from the section 162 charge “as it applies to an employee chargeable under Case I”. It does not say that the employee has to be chargeable under Case I. In our view, the EMI rules are being misinterpreted and the view you have taken is completely counter to the intention of the EMI legislation. The Bill should give EMI relief in all cases without the need to refer to policy colleagues. We should be glad if you would reconsider this matter.
8. Apportionment of residual benefits charge where asset/benefit provided only for part of a year (Chapter 10 Part 3)
As mentioned on the phone, we cannot see any reference in your draft response document to our suggestion that residual benefits should also be subject to apportionment, as in SE21200, per section 156(2) TA 1988.
We note the recent decision in Kerr v Brown (Sp C 333) which also authorised such an apportionment.
We think Chapter 10 should include such a provision for the avoidance of doubt, particularly since the other benefit sections provide specifically for apportionment (see our response to the draft Bill, page 19 for further detail).
9. Rewriting section 164 TA 1988 to include partial deductions (clause 223)
We still maintain that this is a change to the law that should, at the very least, be highlighted as a PRC.
We do not agree with your interpretation that “the whole of that amount is not so deducted“ means “not all of that amount is deducted”. It seems to us that these two phrases have totally different meanings.
Also, you do not comment on our observation that none of the IR manual instructions refer to partial deductions (paragraph 169 of your draft response document).
As mentioned on the phone, we are concerned that this change will mean that section 164 will be applied in new ways after the enactment of this Bill, and we do not think this is appropriate. If Ministers wish to tighten this anti-avoidance legislation they should do so by means of Finance Bill amendments.
You mentioned on the phone that there may be some changes to this section in the finalised Bill, or in the Explanatory Notes, to clarify the purpose of the references to partial deductions. We await these with interest.
We cannot say at this stage that this will not be an area on which we would wish to lobby Joint Committee members.
10. Meaning of work related training and prospective employments (clause 252)
We do not think the issue we raised here (in our response to ED11) has been dealt with, and perhaps we should explain it again more fully.
Section 200B(6)(a) defines “relevant employment” to include “any office or employment … which he is to hold under the employer”. Clause 252(2) of the Bill, on the other hand, only uses the words “is to hold” in the context of defining “related employment” (ie in the context of another employment with the same employer). There is no provision in these clauses for a non-related employment to be an employment held at some time in the future, and we think there should be.
We discussed the recent decision in the Silva v Charnock case (Sp C 332) on the phone and we think this clearly supports this interpretation of section 200B.
11. Business entertaining and gifts (clause 353)
We are glad that you intend to make explicit the point we raised about exempt bodies and the interaction of the relief for employees in a new version of clause 354. This will presumably reflect the position as outlined in the article in the August 1999 Tax Bulletin.
We realise that this article did not deal with the position of representative offices of overseas businesses, but we think that this is a practical issue of sufficient merit to be passed to your policy colleagues, and included in your policy list. We understand from our telephone conversation that this is possible.
12. Question 60 in the Draft Bill (clause 543)
As we mentioned on the phone we are now able to give our formal response to this question.
We can see the reason for the change being made here, but to make the position clearer we think the words “as a beneficiary of the trust” need to be added after “having an interest”. Otherwise it is easy to lose track and somehow think we are talking about direct shareholdings by the individual, which of course we are not.
13. Former employees deductions for liabilities (clause 558)
As mentioned on the phone, you have not commented on our suggestion that 558(1) might make more sense if it read “the relevant employment” rather than just “an employment”.
14. Credit tokens (clauses 685)
As discussed on the phone, our main difficulty with these rules on credit tokens is a practical one. We note from your paragraph 516 (and your letter of 9 October) that you have left this issue “under review”.
We have done a little more research ourselves and find that in CWG2 (2002), at page 74, the use of a credit card by an employee for expenditure other than goods and services bought on the employer’s behalf does not have to have PAYE applied to it, and only requires NICs application when the employer decides not to seek reimbursement. This seems the practical solution to the problem of how the employer is to know that the credit card has been used (to obtain money, or anything else for that matter).
Should the Bill not reflect the guidance given to employers, as outlined in CWG2?
15. As mentioned on the phone we have not seen any response to our comment on PRCs 9 and 10 in Paper CC/SC(02)14, but these may be being dealt with as we write. We think the issue is sufficiently important to be addressed.
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