Income Tax (Trading and Other Income) Bill

Public Bill Committee, 14 December 2004.

Second Reading Committee

Income Tax (Trading and Other Income) Bill

John Healey (Labour, Wentworth)

I beg to move,

That the Chairman do now report to the House that the Committee recommends that the Income Tax (Trading and Other Income) Bill ought to be read a Second time.

May I say, Mr. Benton, how pleased I am to find you in the Chair this morning, overseeing this Second Reading debate, which is being conducted in Committee?

I am pleased to open this debate on the Bill, which rewrites our current legislation on the taxation of trading, property and savings and investment income. The Bill was produced by the Inland Revenue tax law rewrite project, which is a long term undertaking to modernise our direct tax legislation so that it is clearer and easier to use.

This is the second rewrite Bill to venture into the realms of income tax, and it does so in a significant way by tackling schedules A, D and F of previous tax legislation. About 20 million people receive income of one variety or another that is taxable under those three schedules. Before I say more about the specifics of the Bill, the Committee may find it useful if I put it into context by explaining a little of the work of the tax law rewrite project.

The project was set up in 1996 by the right hon. and learned Member for Rushcliffe (Mr. Clarke). The hon. Member for Bury St. Edmunds (Mr. Ruffley) was his right-hand man at the time and had no small part to play in that. It is a project to rewrite the UK direct tax code, the provisions of which were enacted more than two centuries ago. The principal aim is that the rewritten legislation should be accepted by all main users as being clearer and easier to apply and as preserving the effect of the present law, apart from minor agreed changes.

This is the third Bill produced by the project. The first became the Capital Allowances Act 2001 and the second the Income Tax (Earnings and Pensions) Act 2003. The project has also rewritten the pay-as-you-earn regulations, in direct response to requests from users and representative bodies. The rewritten regulations took effect in April. The team on the rewrite project does an excellent job, and the rewritten Acts and regulations have been warmly welcomed by tax professionals and other users. The Chartered Institute of Taxation commented on the draft of the Bill, and it can be taken to be representative of users of the legislation, saying:

''We support the overall aim to rewrite the United Kingdom's primary direct tax legislation with a view to making it clearer and easier to use.''

The Institute of Chartered Accountants in England and Wales, another representative body, said that

''the draft Bill was well constructed and we commend its drafting. It covers important ground and, as it facilitates taxpayers' easier understanding of legislation which will affect very many of them, it is a useful addition to the rewritten legislation''.

I acknowledge in return that the Bill simply could not have been rewritten without the substantial investment made by those and other organisations in commenting on the draft legislation and on particular issues raised during the project. The project does its work in a methodical, deliberative and consultative way, still guided by the principles set out when it started in 1996.

Teddy Taylor (Conservative, Rochford and Southend East)

Is not the Minister being a little unfair—I know that he is a very fair person—in not giving credit to the previous Government for the planning of this difficult measure, which was introduced in the 1996 Budget by a very controversial Conservative Chancellor?

John Healey (Labour, Wentworth)

I am sorry if the hon. Gentleman missed it, but I paid due and full tribute to the previous Chancellor, the right hon. and learned Member for Rushcliffe, for introducing the project, and to the hon. Member for Bury St. Edmunds, now one of the hon. Gentleman's colleagues, who was with the then Chancellor as a special adviser in the Treasury. In a moment, I shall pay tribute to the substantial role played by Lord Howe of Aberavon in chairing the steering group. One characteristic of the project, and one of the strengths of the legislation, is that it has strong all-party support as well as professional support from outside the House.

The project aims to restructure existing legislation into a more logical order for its present purpose. However, it recognises, as will hon. Members, because they have all studied sufficient statutes in their time, that even if the legislation is rearranged into a coherent structure, readers may still need help to find their way through it. The project therefore includes, as standard, many navigational aids to the reader, such as introductory scene-setting chapters and signposts to other relevant provisions, and formulae, tables and method statements that help to illuminate the principles and practice of the legislation. Other features are shorter sentences, modern language and more consistent definitions. All those features should combine to make a new style of tax law that is more accessible, easier on the eye and more user friendly.

It must be made clear that one thing that is beyond the remit of the tax rewrite project is making any change to main tax policies. Its work can, none the less, encompass minor changes, if they will improve legislation. Examples of such changes would be new provisions to fill gaps in existing legislation—perhaps in place of existing extra-statutory concessions—the repeal of obsolete material, the correction of minor anomalies, or other minor changes of that nature. Major changes will always be matters for a Finance Bill, but there is general consensus that minor housekeeping matters can be proposed for rewrite Bills, providing that they are flagged up clearly in the consultation process so that they can be properly considered. Moreover, such matters must always be subject to the Joint Committee's acceptance, which is part of the process of passing the legislation through both Houses.

The consultation process is extremely rigorous. The first two rewrite Bills—on capital allowances and earnings and pensions—confirmed the importance of full consultation throughout the process of developing the Bill, and even after publication of the draft Bill, with the people who use the legislation daily. The project team therefore adopted that approach from the outset, and consulted the UK tax community and other interested parties.

The work of the project is overseen by a high-level steering committee appointed by my right hon. Friend the Chancellor of the Exchequer. The committee is chaired by Lord Howe of Aberavon, whose interest in, commitment to and enthusiasm for the project is unflagging. I pay tribute to his substantial contribution to its successful work. Other members of the steering committee are drawn from both Houses of Parliament, the judiciary, the legal and accountancy professions, and business and consumer interests. There is also a consultative committee, the members of which are drawn from the main representative bodies in the tax world and the world of business and consumer affairs.

For wider consultation, the project publishes papers containing blocks of rewritten legislation with commentaries. Moreover, the consultative process does not stop with formal papers. The project is making more use of its website. Over the past two years it has published work in progress in the form of early drafts or changes to previously published work.

I stress the way in which the project and the consultation are managed to underline the degree of scrutiny and consensus behind the Bill by the time it reaches us. It is right to pay tribute to all the users who have played an important part in ensuring that the tax rewrite project lives up to its original aims. All those involved in the consultation have made and continue to make an invaluable contribution to the project's success. The Paymaster General and I value their commitment to the project team in helping to ensure that its work is as accurate and of as high a quality as possible.

It may be helpful to say a few general words about the legislation, although detailed scrutiny will take place in the Joint Committee to which I hope this Committee will pass the Bill. The charge to income tax is currently broken down in schedules A, D and F, which apply to income tax and corporation tax. Before the Income Tax (Earnings and Pensions) Act 2003, schedule E dealt with income from employment, pensions and taxable social security benefits. The Bill tackles the income charged under schedules A, D and F and brings the charging and calculation rules for the different sorts of income together in updated classifications, such as trading, savings and investment income.

Unlike the current legislation, the Bill integrates foreign income into the same parts as equivalent UK income, confining any special rules that apply to foreign income to a different part of the statute. The Bill applies only to income tax. The project consulted at an early stage on whether to aim for a greater separation of the income tax code from corporation tax. Users of the legislation are in favour of making that fit, as they made clear from the outset. Where the legislation rewritten in the Bill applies to both codes, the current provisions will be repealed for income tax purposes only and will continue to apply to corporation tax.

I have already mentioned in general terms the extensive consultation that is the hallmark of the tax rewrite project's work. Eighteen consultation papers were issued on this piece of legislation between May 1997 and the publication of the draft Bill this March. A formal response document summarising the comments made on the draft Bill and setting out how the project has taken account of them was issued in September.

This is an immensely worthwhile project that modernises our current direct tax legislation, making it clearer and easier to use. The Bill is a major milestone in the work of the project, but still more remains to be done to complete the rewrite on income tax. The Bill is a demonstration of significant progress and maintains the project's excellent track record on improving the existing legislation. I commend it to the Committee.

George Osborne (Conservative, Tatton)

I won a bet in the Tea Room this morning when I said that I was to debate the Second Reading of a Bill in Committee and challenged people to name what Bills are debated in that way, but I am delighted to be here. The project is immensely valuable, as the Minister says. It began under the previous Conservative Government, and the Conservative Opposition continue to support it.

At the risk of repeating something like an Oscar award acceptance speech, I, too, should pay tributes. I start by paying tribute to Lord Howe, although I am not sure whether it is in order to refer to the fact that he is in the Room listening to our proceedings and do not know whether that will appear on the record. A huge amount of work has been done under his chairmanship of the steering committee. I pay tribute to him, to my right hon. Friend the Member for Fylde (Mr. Jack), who serves with him, and to all the other hon. Members on that committee. I pay tribute to the other former Chancellor, my right hon. and learned Friend the Member for Rushcliffe, who initiated the project and chairs the Joint Committee, which does an important job. After the Bill leaves this Committee, assuming it gets a fair wind, it will go to the Joint Committee, which scrutinises the detail. I shall deal with that later.

The whole tax rewrite project seems to be a retirement home for former Chancellors and Treasury Ministers. So, I look forward, on 6 May 2005, to appointing the Economic Secretary to it. I reiterate my thanks, and those of my party, to the members of the consultative committee and the various representatives of the industry, by which I mean the businesses, accountancy firms and tax lawyers who are at the sharp end of the legislation that we are discussing today and the general legislation that we pass in relation to tax. Anything that we can do to make the impact of tax compliance less burdensome is good work as far as I am concerned.

I notice that the Treasury now regards the whole project not as a rewrite, but as ''modernisation''. A press release from the Inland Revenue talks about modernising UK direct tax law. It is good to know—I think this is always the case in politics—that the Chancellor and the Prime Minister started using language seven or eight years ago that has eventually filtered down to the press offices of the various Departments, long after the Prime Minister and the Chancellor abandoned it; I came across the ''third way'' in a press release a couple of days ago, which is a classic example of that.

Whether the process is modernisation, rewriting or just making tax simpler and easier to understand, it is obviously a good thing and a good investment of our time and resources. We rely on the Joint Committee to do the hard work, which is ensuring that the Bill mainly changes the language of the legislation rather than its substance. Of course, trust in that process is vital, because it should not be used as a mechanism for stealthy or unconscious changes to the substance of tax law.

As the Minister acknowledged, we are talking about small and substantive changes to the tax law. He called them ''minor housekeeping'' and they are helpfully set out in the explanatory notes. I think that there are 159 substantive changes that have an impact on taxpayers. We should not be under the illusion that there is no impact. Indeed, the explanatory notes make that clear and in relation to a number of cases they repeat the mantra:

''This change is adverse to some taxpayers and favourable to others in principle and in practice. But the numbers affected and the amounts involved are likely to be small.''

I suppose that that is somewhat reassuring, unless one is one of the small number of taxpayers who are adversely affected. If one reads through the Bill and the notes at random, it is clear, for example, that the changes to the tax deduction that is allowed for patent fees, in clauses 89 and 90, will have an adverse impact on some taxpayers, and change 42, which is brought about by clause 150, alters the tax rules for securities held as circulating capital. Does the Inland Revenue make any assessment of the impact on taxpayers and the impact on revenue? I understand that we are talking about small housekeeping changes, as the Minister said, but will there be any general impact, because I have not come across any in the information provided on the revenue impact of the Bill? According to the Inland Revenue, many of the changes appear to be favourable to taxpayers, so maybe the result will be a diminution of revenue. What will the impact be? Will there be any hard cases? Although we may be talking about a small number of taxpayers, it is important that we, as their representatives, at least make some attempt to assess whether individuals will be particularly adversely affected. I would be grateful if the Minister said something about that.

In addition, I have some general questions. What are the future plans for the tax law rewrite project? The Minister mentioned that at the end of his speech, but he did not say much about it. When it was launched in 1996, it was expected to take five years. Obviously, we are now eight years from that point and, as he says, there is still more to be done on income tax in terms of the tax law rewrite. That is not a criticism, and I am not blaming anyone for the delay. It has obviously been a bigger task than many people imagined at the time, and it will be a good thing if we get it right. Does he have a future timetable for it? Will it end with direct taxation—that is, with just another income tax Bill—or will it move on to capital and corporation taxes? Whose decision will that be? Will it ultimately be one for Ministers and the Government, or will they largely act on the recommendations of Lord Howe's committee?

That brings me to a second and related point, which is the cost of the tax law rewrite project. According to the regulatory impact assessment, the cost of producing the Bill is £8 million, although that is spread over several years and some of it would have been incurred anyway in routine consolidation of tax law. Are there any costs for the overall tax law rewrite project, and what sort of sums are we talking about? I am sure that it is money well spent, but it is right to ask the Minister how much is being invested and how much it is envisaged will be invested in future.

My third point is about how we can ensure that our time is not being completely wasted when we examine the Bill. How can we be sure that the Government will not replace large chunks of it in the next Finance Bill with legislation that is not as simple or clear as that produced by the tax law rewrite committee? That is not an idle point, because that is exactly what happened to the last tax law rewrite Act—the Income Tax (Earnings and Pensions) Act 2003. Only a couple of months after it came into force, a large chunk was replaced by schedule 22 of the Finance Act 2003, which was not written in as simple and clear language.

That point was brought up by the Inland Revenue in a document called ''Tax Law Rewrite: Plans for 2004/2005''. It appears under the name of someone called Basil Rajamanie. I do not know whether he is in this Room, but he lives in Room 826 of the south-west wing of Bush house on the Strand. The document makes these points:

''Critics argued that the style and format of Schedule 22''—

the bit that replaced a lot of the tax law rewrite legislation from last year—

''compared unfavourably with the quality of legislation produced by the project; and that it was highly unfortunate that a substantial part of the second Tax Law Rewrite Act had to be replaced so quickly by new legislation that was perceived to be of lower quality.

The topic received considerable public airing. It was also discussed on several occasions by the project's Committees . . . It is a difficult but very important issue. On one hand, it may be hard to produce comprehensively well-structured legislation in the context of the Finance Bill, for which in some instances the drafting has to be done under time pressure and with decisions being taken late in the process. On the other hand, it is clearly highly desirable that (so far as possible) new legislation amending a Rewrite Act should emulate and match the quality of the original.''

The Inland Revenue goes on to say that

''this is an issue that will no doubt stay with us—to some degree—and on which we must continue to work. It will be a priority in 2004-05 to keep this issue in front of us and to promote further discussion about how best to tackle it.''

I have done my best to do that, but I will be interested in the Minister's comments. If Finance Bills, because of how they are produced, are inevitably less clear, and if less time is available to make them consistent with the tax law rewrite project, is the Minister conceding that the project will be with us forever, constantly rewriting finance legislation?

I want to make one point in passing, as this is a Second Reading debate. What will the Government do to start making not just the language but the substance of tax law simple and clear? There is an example in the Bill. According to the committee, 5.7 million families who have to deal with the complexities of the tax credit system will be sucked in; I am not sure that the Government anticipated that. There are also the 4 million extra people who have been paying income tax over recent years under this Government and who therefore have to deal with the complexity of the direct tax system.

I understand that this discussion is probably too broad for our debate, but I merely note that Tolley's tax guide, which we all know is the bible of tax accountants, and which, I am sure, sits on the bedside tables of Labour Committee members, has grown by 30 per cent. under this Government and is now published in an extra-small print to take into account all the complexity produced by the Chancellor. Of course, that complexity encourages evasion, increases burdens on businesses and individuals, and distorts people's behaviour.

In this debate, it is probably too much to ask the Minister—or, indeed, the Chancellor—to give us a simple and clear tax system, so we will have to make do with simple and clear language. I welcome the Bill and wish it well.

Teddy Taylor (Conservative, Rochford and Southend East)

In view of the Minister's answer to my last question, I am scared to say anything at all. I am sure that if I do ask him anything, he will tell me that he has dealt with it already. However, I would appreciate some guidance on four minor points to do with volume III of the explanatory notes, because there is no doubt that significant changes are being made in the tax arrangements, and we should certainly look at some of them.

My first point is about the implications of devolution. Page 91 refers to the fact that the Interpretation Act 1978, which was introduced before devolution,

''means that it is not clear that 'enactment' covers''

Scottish statutory instruments. The devolved Scottish Parliament has the power to enforce certain taxes but it does not have the power to change taxation arrangements. It seems that, under this proposal, if the Scottish Parliament awards additional housing grants, they will now be covered, which means that they are covered by exemption from tax. Therefore, there is a change in the rules; if the Scottish Parliament gives additional housing grants, they would not in the past have been covered by the exemption from tax, whereas it appears that now they can be. That is a significant change in the powers of the Scottish Parliament, and I wonder whether the Minister can say why.

My second question is this: page 80 refers to a change in the rules for people giving business gifts. One of the nastiest things of which many of us are aware is the way in which some firms hand out large gifts. At present, they are restricted by the Treasury to a limit of £50 per gift, although it appears that there can be a large number of gifts of the same value. In this proposal, the power to include that in normal legislation is being taken away. Instead, provision is being made for the cost to be increased by standing order. In other words, it will be covered by a Treasury order, instead of being included in Budget arrangements and proposals. Why did the Minister do that, and why does he think it appropriate that a Treasury order should increase the amount that firms can give as business gifts?

Question three relates to caravans. One thing that worries many people is the way in which people who own land, who already get many advantages and will get even more under the changes in this legislation, are able to sell pieces of land used for caravans. I am worried about the definition of a caravan on page 73, which states that

''the letting of pitches for static or touring caravans, and any income from letting caravans where the letting does not of itself amount to a trade.''

Will the Minister say whether, if someone sells land that is being used by people as a residence either legally or illegally, that is a trade or a business?

My final question relates to page 33 of volume 1 of the explanatory notes, which clearly says that clause 53 stipulates that there can be no deduction for tax purposes from the trader's own social security contributions. If he makes such contributions for any members of his staff, they are covered, so why should his own contributions not be covered? I appreciate that it would be totally different if someone were to take out a private pension arrangement.

Those are quite significant changes in the law, which are described as being favourable in principle but not substantial in practice. Some are in line with current practice, but those were four minor items on which I should appreciate some advice. I know, from the excellent work done in great detail by Lord Howe, that some items relate to our membership of the EEC. Sometimes we agree to things and ask how we got ourselves into such a mess. Can the Minister give guidance on these four minor points, which I think are significant and important?

John Healey (Labour, Wentworth)

This is the third rewrite Bill and is in many ways a worthy follow-up to the Capital Allowances Act 2001 and the Income Tax (Earnings and Pensions) Act 2003. It has been warmly welcomed by the hon. Member for Tatton (Mr. Osborne) and in general terms by the hon. Member for Rochford and Southend, East (Sir Teddy Taylor). Those who have been involved will be encouraged by that. I welcome the continuing support of the principal Opposition and the remarks made by the hon. Member for Tatton. I do not know what the Liberals' view of the project is, and I hope that they continue to support it, as they have done in the past, but it is difficult to know, and we cannot ask them this morning.

I can tell the hon. Member for Tatton that I hope to play my part in the future of this project. Indeed, I hope to do so before 6 May 2005 as a member of the Joint Committee that will scrutinise the legislation, rather than playing a more prominent future role as a senior member of the steering committee. In keeping with the principles of the project, I hope that he found my explanation fair and easy to follow. He will have noticed that I did not use the term ''modernisation'' at any point. He asked about assessment of the minor changes on tax payers and on revenue. As he will appreciate, these are minor changes. We shall look at their potential impacts individually, but because we are not changing tax policy, the aggregate effect is negligible.

In terms of future plans, it is now recognised that the ambition when the project was set up of completing the entire rewrite of direct tax legislation in five years was somewhat optimistic. The hon. Gentleman asked about the next Bill, and a substantial amount of work has already been done. We aim to complete the rewrite of the income tax legislation base and to bring it in 2006. Beyond that, we intend, although we have no final decision yet, to move on to corporation tax. The project was set up by the former Chancellor, the right hon. and learned Member for Rushcliffe; it is a ministerial project. Final decisions about its future will be taken by Ministers.

The hon. Member for Tatton made a fair point about the previous Finance Act and schedule 22. We have certainly learned some lessons from the debate and the criticisms that we received of schedule 22. I can say only that it was introduced in circumstances that were not ideal, in large part to counter tax avoidance. In many ways, it is difficult to produce good-looking legislation, when it needs to be done to tackle that sort of problem and is produced in a fairly short time, under pressure. I assure the hon. Gentleman and other Committee members that we will do our best in Finance Bills to produce legislation of a good standard that measures up to the standard of the tax rewrite legislation.

George Osborne (Conservative, Tatton)

Will the Minister confirm that schedule 22 will be rewritten, perhaps in the next tax law rewrite Bill? As it is likely in future that Governments of whatever persuasion will bring forward legislation in Finance Bills to plug ''loopholes'' at short notice, will there be an ongoing process whereby new legislation will be produced in a way that is in tune with the rewrite process or be rewritten at a later date if there has not been time to do that to begin with?

John Healey (Labour, Wentworth)

I have given the hon. Gentleman the clearest indication that I can that the work is in hand. The likely next legislation under the project will deal with the principal remaining areas of the income tax code, which relate largely to personal reliefs. That is the work in hand. Outside the rewrite project, we will, as we do in Finance Bills, improve the legislation when we can. That is the best answer that I can give the hon. Gentleman on schedule 22.

The hon. Member for Rochford and Southend, East quite reasonably picked out four of the 159 minor changes that the Bill proposes. I attempted to outline the nature of those changes earlier. They are and have been subject to extensive consultation. At the next stage of the process, they will be subject to the detailed scrutiny of the Joint Committee. They are not changes in tax policy—they either clarify existing practice, codify extra statutory concessions or make clear what is not clear at present.

The Joint Committee will be best placed, at the relevant stage of the scrutiny process, to examine the detailed questions raised by the hon. Gentleman. He has marked that Committee's card with the four issues that he raised.

Teddy Taylor (Conservative, Rochford and Southend East)

The Minister said that there is no change. Yet page 91 says that the proposal widens the scope of the exemption. That is either true or not. In fact, it widens the scope of the exemption so that it covers decisions made by the Scottish Parliament. Surely that is a significant change in the law.

John Healey (Labour, Wentworth)

It is a change, but the rewrite project has not deemed it a significant change that would substantially rewrite tax legislation. If it were otherwise, it would not have found a place in this Bill. If the Joint Committee takes a different view and does not accept that it is a minor change, within the terms of reference of the tax rewrite project, it will not pass the next stage of the scrutiny process. Such questions can be dealt with in detail at that point and will be raised with officials and others, including myself.

The hon. Member for Tatton asked about the cost of the tax rewrite project: it is about £3 million a year. That has generally been the cost of the project to date and is the cost that we anticipate in future, and the regulatory impact assessment gives some indication of that. We take the view that the benefits of the project far outweigh the direct costs to the Government in sustaining it.

This is not a tax reforming Bill, but it is important. It will make things better for everyone who uses tax legislation and, indirectly, for those who are affected by it. I commend it to the Committee.

Question put and agreed to.

Ordered,

That the Chairman do now report to the House that the Committee recommends that the Income Tax (Trading and Other Income) Bill ought to be read a Second time.

Committee rose at twenty-six minutes to Ten o'clock.