Article by David Southern, barrister and Visiting Professorial Fellow in the Centre for Commercial Law Studies, Queen Mary College, published in the June 2001 issue of Tax Adviser. The Capital Allowances Act 2001 is the first Act of Parliament to result from the Tax Law Rewrite project. It became law on 22 March 2001. It marks a significant epoch in the development of the Rewrite programme. As Churchill said of El Alamein:
‘This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.’
While opinions vary on the merits and demerits of the Tax Law Rewrite project itself, the new Act should be regarded as a very considerable achievement. This is because, apart from the sheer excellence of its detailed realisation, it represents a sensible blend of old and new style law-making. As a whole, the new legislation is less radical than some had hoped, and others had feared.
In the first place, the Act is divided into the familiar, sequentially numbered sections of Acts of Parliament. A fundamental feature of the Rewrite Exposure Drafts hitherto has been the use of a ‘multi-character numbering system’, which some have regarded as an essential element of the rewritten legislation. In the Exposure Drafts which have hitherto marked the various stages of the project, the sections have been organised on the basis of three or more levels of numbers. The most recent Exposure Draft – No. 11 on Employment Income – retains the system. Numbered Parts are divided into numbered Chapters, which are divided into numbered Sections, which are divided into numbered sub - sections. Thus Part 3, Chapter 4, Section 5, Sub-section 6 becomes 188.8.131.52. This – it was claimed – is a flexible system of numbering, which can easily be expanded and adapted to cope with amendments and additions. The method constitutes, it was said, ‘a new, more logical structure for the rewritten legislation … a multi-character numbering system.’
‘Rome has spoken ...’
However, the issue is now academic. As St Augustine observed, Roma locuta est; causa finita est – ‘Rome has spoken; the case is concluded.’ Last autumn, the Joint Committee to consider Tax Simplification Bills – made up of seven members of the House of Commons and six of the House of Lords – rejected the new numbering system and decided in favour of the established system of consecutively numbered clauses. That decision having been taken, it may be assumed that subsequent Exposure Drafts and legislation will conform to the familiar legislative style.
For myself, I wholeheartedly welcome this assertion of parliamentary power. The multi-layered numbering system suffered from three fatal flaws. First, it faced the logical difficulty that it is not possible to order, classify and refine rules on an ascending scale of generality, as if law were mathematics. Rules have multiple points of reference, and it is not possible to assign to each a single, logically correct place in a hierarchy of norms. Second, and in consequence of this, the alleged flexibility of the new system proved, in practice, a straight-jacket. Third, it would have set tax legislation apart from all other legislation on the statute book, without any functional justification or benefit. Pragmatism has triumphed over academic theory.
In the second place, the relationship between the new legislation and the existing body of tax case law and legal doctrine has been clarified. There had been hope or concern that the rewritten legislation would make all things new, thereby actualising the prescription of Ludwig von Kruckman: ‘Three amending words of the legislator and whole libraries become waste-paper.’ In the outcome, the substantive rules on capital allowances have hardly changed. This is not quite consolidation: it is super-consolidation, because there has been a substantial tidying up of obsolete and anomalous provisions. However, familiar legal principles on the interpretation of consolidating acts will apply, and the substantial body of case law on what constitutes, for example, ‘plant and machinery’ will continue to be relevant.
In the third place, we had been threatened that alongside the rewritten legislation there would also be issued as part of the legislation an extended commentary on its provisions. As it is an inherent feature of words that they need to be interpreted, such a policy would have greatly increased the bulk of the legislative materials. It would also have led to a proliferation of quasi-legislative sources alongside the Act itself, leading to the dilution of the authority and clarity of legislation. It is the ‘one more explanatory pamphlet’ fallacy which dogs modern government. The motivation which underlies the desire to provide commentaries on legislation which end commentaries is redolent of the Kafkaesque illusion that one final resolute attempt at clarification will somehow overcome the incomprehensible state of existence. As things have turned out, we have a modest set of notes published with the legislation, and those who find this sort of thing useful will be able to make such use of it as they choose. Essentially, however, the supremacy of the legislation is unchallenged.
Hitherto, the primary emphasis of the Taw Law Rewrite has been on making the language of tax legislation simpler and clearer. This is knocking on open doors. Everyone is in favour of simplicity and clarity. However, the means for their attainment are complex. In any case, to conceive of legislation solely in these terms is to succumb to the fallacy that there can be neutral, rational, objective, apolitical, scientific solutions to political problems and that the making of tax law is an activity best entrusted to suitably qualified technical experts.
The difference between the old legislation and the new can be simply expressed. The 1990 Act is rule-based, the 2001 Act is concept-based.
The novel act
Where the new Act is truly novel is in terms of conceptual clarity. The act provides a structure with each of nine Parts dealing with a specific allowance, and a common structure in each Part. Under the old legislation plant and machinery allowances were available to a person carrying on a trade, but in this context the term trade has been so expanded as to lose any identifiable meaning. Thus, besides trades sensu stricto there were a number of notional trades. Instead, Pt. 2 of the new Act (plant and machinery allowances) is drafted in terms of a person carrying on a ‘qualifying activity’. Where a particular qualifying activity is to be delimited for allowance purposes, this segregation is achieved by establishing a separate pool for that specific activity.
While the old legislation revolved around pooling, the term was never actually used. Pooling is made one of the controlling ideas of the new legislation: s. 53 provides for the pooling of qualifying expenditure, while s. 54 defines the different kinds of pool.
Typology of pools
There are three kinds of pool: single asset pools, e.g. a ship, class pools, e.g. overseas leasing, and the main pool (everything which does not go into a single asset or class pool). Some commentators objected to the oxymoron ‘single asset pool’, which replaces the concept of ‘notional trade’. While such criticism was understandable, this three-fold typology of pools makes a great deal of practical sense. For example, where an asset is provided or used only partly for a qualifying activity, that activity can be isolated in a single asset pool.
The term ‘qualifying expenditure’ is used throughout the new act to mean the expenditure which creates allowances.
These terms are found in a general introduction containing rules common to all the parts. Each Part – dealing with a separate allowance – is then set out in terms of:
- qualifying activities;
- qualifying expenditure; and
- how effect is given to claims.
The complex rules on allowances for plant and machinery which becomes a fixture by virtue of being incorporated into a building, are now concentrated in Ch. 14 of Pt. 2 (s. 172–204) and this constitutes a particularly felicitous exposition of an area where the law had become exceedingly entangled.
Throughout the Act formulae are used in place of verbal descriptions of calculations and this both saves space and is much easier to follow. The familiar terminology of writing down allowances, balancing charges and balancing allowances is retained. A particular aim of the draftsman is to replace long sentences with short numbered sub-sections and this has been successfully achieved.
The best policy
Practitioners cannot in general assume that familiar sections of the earlier legislation have simply been transposed to the new act and given a new section number. Most sections of the 1990 Act and subsequent Finance Acts have been spread over a number of sections of the 2001 Act, because the new act is organised upon the basis of concepts. For example, the provisions of the Capital Allowances Act 1990, s. 24 are now distributed over some 20 separate sections. The best policy for practitioners to follow is to forget the old legislation and thoroughly immerse themselves in the structure of the new. In this case it would not be a good idea to follow the example of my old boss in the Inland Revenue, who analysed everything in terms of the Income Tax Act 1952, or doctoral supervisor, who confronted with a contemporary legal problem simply went back to the Roman law solution. The new legislation has got to be grasped in its newness.
For those starting off in capital allowances, the new Act is an unqualified blessing. It makes for more sense than the patchwork of legislation which it replaces. Because of the need to start de novo, it places them on an equal footing with old hands. The new Act has an effect somewhat similar to the introduction of the Dreadnought to the British battle fleet in 1906. It renders obsolete much previous superiority of resources and puts old and new entrants to tax on the same starting line.
The Capital Allowances Act 2001 illustrates both the possibilities and the inherent limitations of the Tax Law Rewrite. It expresses and embodies a conscious decision that a detailed rewrite should precede, not follow, a reform of tax policy as such. This seems to me to be both right and sensible. Tax legislation necessarily, not contingently, forms part of an imperfect world. There is in the UK, a working tax system, which people pretty well understand, achieves its objectives and plays a key role in securing a civilised and orderly society. Its defects are those common to all systems devised and operated by human beings. Those with experience of the nascent tax systems of East European countries will confirm that a developed tax system is a substantial achievement of human society. Those who conceived of the Tax Law Rewrite as an opportunity to take a bold and slashing approach to the UK tax system have been repelled. The Capital Allowances Act 2001 shows what can be achieved by gradualist reform within the system, rather than seeking to overthrow it from without.
020 7235 9381
June 2001 by