27 APRIL 2004

Mr David Ramsden, Mr David Hartnett, Mr Chris Tailby, Mr David Hubbard and Mr Peter Hopkins

  Q100  Chairman: I am in a deep depression because, listening to all your stuff, I feel I have been in the wrong business all my life. Clearly, there are billions available doing that sort of thing without bothering to teach economics.

  Mr Tailby: I thought you wanted to come and join us.

  Q101  Chairman: Who is dealing with pension certification?

  Mr Ramsden: Chairman, on pensions, given that my background and training is in economics, there is lots that I can say about this from that perspective, but in terms of the direction your questioning is going to be taking today it is more appropriate if I hand over immediately to Dave Hartnett and Peter Hopkins, who has worked on the detailed Finance Bill legislation, to make some general comments.

  Q102  Chairman: Unfortunately our remit prevents us examining detailed economics, but we would then be here all day.

  Mr Hopkins: I want to concentrate on two things. One is the existing system that the proposals in the Finance Bill replace and I also want to talk through the process that we have been through that has resulted in the 150-odd pages in this year's Finance Bill because this project has been going on for about three and a half years. Tax approval of pension schemes goes back to the 1920s. There was lobbying by what became the National Association of Pension Funds to get tax treatment for occupational schemes that mirrored the tax breaks that went with statutory schemes. Over the years there have been changes to the tax treatment at approximately 30-year intervals, so 1947, 1958 and 1970. Since 1970 we have had one regime for occupational schemes that has been amended in 1987 and 1989, and we have had two regimes for personal type pensions—retirement annuity contracts and personal pensions. As we have made changes to each of these systems, we have left each existing system in place for people who had joined before that date of change, so you get to the situation where there are now half a dozen tax-approved schemes in existence, with different rules in each scheme, different rules on contributions, different rules on benefits, different rules on transfers, different rules on which regime applies to you. That is all backed up by about 350 pages of legislation, and that legislation is both primary and secondary, and about a thousand pages of guidance, which really does have the force of law because it is issued by the Inland Revenue in exercising the discretion granted to it by the existing Taxes Act for the approval of pensions schemes, and that discretion works its way into the rules of pension schemes that have been approved by the Revenue as an approved scheme. Overall, therefore, the administration of pension schemes runs to about 1,350 pages of legislation, guidance and discretionary practice. Even with all of that, occupational schemes have got the right to ring up the Examiners in Nottingham and say, "I want to change the rules of my scheme. Will you consider this?". There is very little room for appeal anywhere. The only thing that can be appealed is a judicial review of the administrative practices of the Revenue and the Revenue's remit therefore runs very closely across all pension schemes. For the last ten years or so ministers have been lobbied by the NAPF and others to do something about this because the layer upon layer that had built up had become unacceptable. Ministers announced a review in March 2001 and suggested that this would be a joint Inland Revenue and industry review, and I led a small team of civil servants and four secondees representing the National Association of Pension Funds, the Association of Consulting Actuaries, the Association of Pension Lawyers and the Association of British Insurers, in looking at what we might do to simplify the legislation. That resulted in a December 2002 consultation document. Consideration of the responses and further work resulted in the December 2003, technical document, and out of that we made some further changes and that has led to the Finance Bill that is before you. Therefore, although the 150 pages may look substantial, they are replacing a far bigger body of legislation and regulation, and for the first time pension schemes will be treated in the same way as other taxpayers the law will say how they act. They will act within that and then we will treat them as we do any other taxpayers. The whole idea of discretionary practice will go and in doing that we will bring a lot more certainty into the system, and also in doing that we will bring in a single regime that apples to everybody in and that is roughly what we are trying to achieve with the pension clauses.

  Q103  Chairman: David, do you want to add to that?

  Mr Hartnett: No.

  Q104  Lord Blackwell: I think everyone recognises that a simplification of tax law in this area is very welcome but I wonder to what extent what has been put forward in this set of proposals is part of an overall tax approach to savings as a whole. Increasingly, pensions as pensions are only one element of what people are using for long term savings provisions and they run in parallel to ISAs and, for many people with low incomes, ISAs can be as effective or more effective tax schemes for savings and savings in property. As you have thought about tax simplification in this area, is it part of a plan to bring coherence to the tax regime for savings as a whole or will that have to be a subsequent step?

  Mr Ramsden: Those issues to do with coherence of policy making and more generally, particularly in this area of assets, savings and pensions, are issues that we looked at in terms of organisation in the context of the O'Donnell review. We could discuss some of those issues of organisation and how the Treasury will be taking more of a strategic lead on policy development in those areas in the post-O'Donnell world, as it were. In terms of the issues of administration that we are discussing today, I think it goes rather broader. I am not sure of the extent to which Peter can answer that in terms of what the administration and detailed legislation on pensions can do to inform that answer.

  Q105  Chairman: It might be more appropriate if we raise it when we see Gus. We are trying to stick very much within the administration but it is not easy to draw a line between pure administration and developing the strategy because clearly in pension simplification both are in there. What you are doing is producing a new regime and I think your answer is that, in the end, it means you are treating the same way as all your other tax stuff because you do not have schemes; you have principles. Would that be a fair summary?

  Mr Hartnett: This package of legislation does simplify very significantly and with that simplification comes much greater accessibility for all advisers and some users of the tax system to enable people to make informed choices in a way that was quite difficult with the mass of guidance and legislation that Peter described earlier on. If I go further, I think I am going to trespass on the wrong side of the line.

  Q106  Chairman: That is why I am trying to keep us on the right side of the line but equally to understand what you are doing, which is essentially to have a set of principles, as I understand it, that will apply to all schemes. Would that be too simplified an interpretation?

  Mr Hopkins: That is what we are trying to do.

  Chairman: That takes in what David said. If you are the sort of person, as I was, having both an occupational pension and making some pension choices of my own, where I have never understood anything that happened during my life, if I were living my life again I would at least have a slight chance of knowing what was going on.

  Lord Freeman: Could I ask about the timetable for introducing this legislation which is a tremendous simplification on the volume of tax legislation in existence? Given the fact that the implementation date was postponed by the Chancellor by a year, would it not have been better to have introduced draft legislation and to put the final, amended, honed version to the Finance Bill next year?

  Q107  Chairman: Are you really allowed to answer that question? You might get the sack.

  Mr Hopkins: Can I read something from a website?[1] Somebody from the industry wrote this the day before the Finance Bill was published. I did check and he wrote something similar the day afterwards but I will quote the day before. This is from Steve Bede who writes widely on pensions matters and works for Scottish Life. "Tomorrow then looks to be very important. It will mark the beginning of a two year period when we will finally be able to talk about pensions with certainty again and people and companies will be able to make sensible, informed decisions regarding their pension arrangements. It is worth reflecting I think that we have got to where we wanted to be and at the time many of us asked for support to help us do our jobs properly. I think we should all be pretty pleased about that." If we said "We are delaying it by a year but we are going to put out the draft legislation and that might change as a result of consultation; you will not know what the legislation is going to be until Royal Assent to the Finance Bill in 2005 and there may well still be some regulations after that which will not be laid until September 2005 and it is going to come in on 6 April 2006", a lot of the industry would be very annoyed at us. They saw the extra year as time for them to get their systems right once the legislation had been put in place. What we have here now is a framework that sets out a framework with which the industry can work. We have some regulating the powers in there so that we can discuss the details of how it is going to work administratively, but for their systems people from Royal Assent to this Finance Bill they have 18 months or so to get everything ready for 6 April 2006. If we had not done that, we would have kept the uncertainty going for another year.

  Q108  Lord Wakeham: I think you make a good case for saying how you would simplify things but I am pretty certain we are going to get evidence given to us from, for example, the ABI who think you have not gone far enough on things like annuities and so on. Are you able to give us any of the arguments for and against where you have struck the line in this?

  Mr Hopkins: On the grounds that I want to keep my job, no.

  Q109  Chairman: There may be other chances yet. Your argument is presumably you went as far as you could in these circumstances.

  Mr Hartnett: Given his achievement in bringing this forward, I just want to say that his job is safe.

  Q110  Lord Sheppard of Didgemere: On the question of simplification, if I am overseeing a private sector pension scheme, first of all, this legislation does not apply retrospectively in the sense of pensions in payment and so on. Am I right in saying that I would still have to understand the previous schemes and regulations to make certain my scheme had been compliant right the way through to date? Would I still have to look at the eight schemes with hindsight, looking back through 20 years?

  Mr Hopkins: From 6 April 2006, if the legislation survives the process in the shape it is in at the moment, effectively the past finishes. You will have had to be compliant up to that date but after that date, as long as you have been compliant, the new rules will apply completely to you and all your employees or your members going forward and you can forget about the past. We sweep away all the discretionary practice, all the existing legislation, and replace it by what is in this Bill. It is that which everybody would work with, going forward. This is not another regime on top of the existing ones; this really is a replacement.

  Q111  Chairman: If we assume that this bit of the Finance Bill goes through unamended, what you end up with is a Bill which enables you to make regulations that will cause a new regime to come into existence in 2006?

  Mr Hopkins: No. I think there is a bit more substance to it than that.

  Q112  Chairman: What is set in stone as of the Finance Bill becoming an Act and what follows from the regulations?

  Mr Hopkins: The administration details will follow from the regulations. How do we deal with testing benefits against the limits? What do members have to be given by schemes? What has to be given to the Revenue? That will all be dealt with in regulations that come out over the course of 2004, and we will consult with the industry on those. But the lifetime allowance, the annual allowance and transitional protection will be on the statute book and the industry will be working and giving advice on the basis of that.

  Q113  Chairman: That is set in stone in the Finance Bill. Regulations will come and you used the words "consultation on the regulations" which are concerned with the detail. There is still room for the industry to come to you and say, "It is better to do it this way than that way."

  Mr Hopkins: Yes. The industry have been coming to us since the publication of the Bill, not so much the first week but last week we had phone calls, e-mails, letters and questions and ideas being fed in. We have worked this far in partnership with the industry and we will continue to do so.

  Q114  Chairman: The interesting thing was your joint working party. You had a meeting of minds and you made some progress.

  Mr Hopkins: Yes. Despite what my colleague said, I would say that the success of the policy is down to the involvement of private sector secondees.

  Q115  Chairman: Since the word "simplification" is of the essence, you say that this definitely will simplify this. There is no argument about that?

  Mr Hopkins: No argument; it definitely simplifies.

  Q116  Chairman: Perhaps we can proceed more quickly. Who is small business?

  Mr Ramsden: I will make a very brief framing comment based on some personal experience of policy development in this area, although I feel I should stress that, as with the previous topic that we looked at, we are in a position where the Committee of the whole House may be debating this as we discuss the administrative aspects of it here.

  Q117  Chairman: Do you mean the lower House?

  Mr Ramsden: Yes. There is quite a lot of detail that Dave Hartnett can usefully give you to inform your deliberations. There are two things I wanted briefly to touch on. There is one on the process of the policy development and one on the manner of the announcement, where I think there has been quite a lot of interest. Looking at this measure, you will be familiar with the context. The government is very committed to supporting small businesses and has introduced a number of measures to encourage growth in the sector, but over time the government was concerned about the increasing numbers of self-employed individuals who were choosing to adopt the corporate form to access tax incentives where there is not necessarily a commercial advantage to them doing so. There was no intention to use this transition to the corporate form as a step to growth in the business. In terms of the manner of the announcement and the handling, the government's intention to address this issue was signalled very clearly in the Chancellor's pre-Budget speech and in the pre-Budget report itself. This, the government thinks, is wholly consistent with the role of the pre-Budget report which has been developed by the government as a means of signalling policy intentions and allowing early discussion and debate on future Budget measures. The decision was taken to use the pre-Budget report to signal action in this area as it would allow the views of representative bodies and others with an interest to be aired, but it was not appropriate for there to be a formal consultation on this measure. Many representations were received by the Treasury and the Inland Revenue from a number of commentators and representative bodies. These were considered very carefully by ministers and by officials in the policy development process that led to the final decisions on the Budget measure and which you see in the Finance Bill. In terms of the framing discussions, that is all I wanted to say. I will hand over to Dave to give you more detail.

  Mr Hartnett: I will run through what the measure does and then pick up on two or three of the key  discussion points around the practical implementation. What the measure does is introduce the non-corporate distribution rate for corporation tax set at 19 per cent for 2004. It is intended to deny the benefit of the lower rate of corporation tax—that is the zero per cent rate for the first 10,000—and the marginal, small companies rate for profits between 10,000 and 50,000 to companies that distribute to their non-corporate shareholders instead of retaining them within the company for investment in the business. In essence, the company that retains all its profits would still be eligible for the lower rates of corporation tax. On the other hand, the company that does not retain profits for business reinvestment will pay a minimum rate of corporation tax at 19 per cent on its profits to the extent that they are distributed to non-corporate shareholders. There are special rules for dealing with companies which are in groups but the essential aim remains the same. In broad terms, this measure, we believe, will be relatively straightforward for more than 90 per cent of companies. It is worth quoting Mark Lee, who is chairman of the Institute of Chartered Accountants in England and Wales Tax Faculty. He said of the measure, "It seems that the government took note of many of the representations that were made after the pre-Budget report." We take that to be a rather welcoming comment. There have been one or two concerns which it may be helpful to mention. The first is that some people say that the rules could catch dividends paid out of accumulated profits before various dates that have been put forward. What the measure is really doing is providing a mechanism for working out what rates profits arising after 1 April 2004 are going to be taxed at. A distribution of profits earned before April 2004 might be taken into account in working out the appropriate rate of corporation tax. It is the rate of corporation tax we are looking at, rather than the distribution. Distribution is the mechanism by which the rate of corporation tax is determined. Another of the issues which has been raised with us is should there have been a transitional measure. Our answer is no because this is a simple mechanism to determine the rate of corporation tax from 1 April 2004. The next issue which a number of people have asked about is whether our guidance on our website is really right in relation to the interface between this measure and what has become known as IR35, the service companies' legislation. The answer is we think the guidance is good but, given that people have raised questions, we have gone out to talk to as many people as want to talk to us about this, normally through groups and representative bodies. One of the things we have particularly been able to do is go out to the key representative bodies of those who are within the scope of the service company legislation, IR35, and provide them with additional reassurance about how it will work.

  Q118  Lord Shutt of Greetland: My experience in practice as a chartered accountant was a humble practice in Halifax and this area is nearer to the sort of thing I dealt with at times. As I see it, there can be three ways in which someone is paid. You can have an employee. An employee, because of employment, has taxation and national insurance both at employee and employer level. You can have a sum of money raised from self-employment. You have taxation and the stamp at two or three pounds and then you have Class 4 national insurance. Thirdly, I am told that plumbers, painters and decorators have found that limited liability is a wonderful thing and they have been finding that they have been earning from dividends and there has been this great tax loss. In terms of the balance, with this figure of 19 per cent, are you certain that this balance is right? Where is national insurance in this? I have some reservation as to whether this balance is right. I assume that the endeavour is that there is a level playing field and if you happen to find limited liability a wonderful thing then so be it. I have some reservations as to whether that balance is there or whether this is going to be brought back in another two or three years' time. Indeed, there are many people who find that they are now employees but if you are starting a new piece of work I would form a company and offer my services as a company and I am wondering where this balance is.

  Mr Hartnett: I am going to have to tread an incredibly careful line here because you are tempting me to get into policy issues involving comparisons. What we saw happen was lots of people moving from self-employment into corporate structures because of the tax advantage. We had not previously seen tax make that huge difference to as many people as it did. I, for my sins, was a judge in an accounting competition this year where one of the categories was the small accountant. The winner incorporated over 2,000 milkmen in eight days after the Chancellor's announcement. Nobody is going to lose, as far as we can see from our calculations, as a result of the change that is happening here. If you go back to your practice in Halifax for a moment, historically, employed and self-employed, as well as those receiving dividends, have been taxed in rather different ways. This measure does not address those differences.

  Q119  Chairman: You did start by using the expression of people moving from self-employment to a corporate structure. In the days when I was a jobbing economist, I filled out that bit of the tax form as self-employed. I was not a business in any sense. If someone had come to me and said, "Why not get yourself incorporated?" I would have said, "It is too much trouble." He would have said, "No, there will be a tax advantage", under the regime that you have produced. It should not have surprised anybody that some people would do that. That takes us into the policy area, but if I have done it the least I would expect when you change is that you do not make me lose anything retrospectively backwards. I am not clear from the answers we have been given—and I kept getting lost between 2000, 2001 and 2004—whether someone who had done perfectly reasonable things but you did not want him to do them will end up paying taxes which he had no reason to believe he was liable for. Are you saying that there is no danger of that?

  Mr Hartnett: Self-employed incorporated because they saw an advantage in zero per cent dividends. The advantage has now substantially been taken away but our understanding is that nobody will be worse off as a result of this measure than they were when they were self-employed.