Hands up anyone who understood, on first reading, the finance bill rules on how tapering of capital gains interacts with current year losses, losses brought forward and the annual exemption (clause 119 and schedule 21, paragraph 3).
Actually, the rules are not that bad, as I realised on my tenth reading.
First, do everything the way it has been done: add up the gains, knock off current losses then the annual exemption, then losses brought forward.
Add back the annual exemption used. See what is left, attribute it to the gains you first thought of in the best possible way (use the gains with the biggest taper-reductions first) and do the tapering. Finally, take off the full annual exemption.
So what deterred the parliamentary counsel who drafted this legislation from such plain-speaking?
Learning from Lego
Whatever the problem, it was not a lack of intelligence: the finance bill is technically brilliant. It wriggles around in the tight and twisted confines of current law to produce a radical result without disturbing anything else. And that may provide the explanation.
Making the text clear would have meant ripping out the existing law and rewriting it from scratch – not just amending what is already there. But total replacement risks disturbing some other part of the law. Other sections may no longer interact with the replacement provisions in the right way.
On the other hand, there are parts of the finance bill where existing law has been ripped out and replaced. Take the new rules on group relief (schedule 5, paragraph 29). These were needed because of changes to the tax treatment of companies’ rental income.
The result succeeds because of its structure. First, an outline section lists the amounts that can be group-relieved and gives basic computational rules. Then, there is a section for each type of group-relievable amount (trading losses, excess capital allowances and so on).
This structure saves the reader getting lost: each section sticks to one topic and they are all linked by the outline section.
This approach has another advantage. It removes the risk that any future ripping-out and replacement of legislation may disturb other parts of the law. What we need is law like Lego; we should be able to pull off a red brick and clip on a lump of six green bricks without thinking about the rest of the structure.
We can get it if we develop the idea of each section doing one job, with an outline section in overall control.
Each section only comes into play when the outline section says it should.
Thus, if a company has excess capital allowances, the outline section asks the capital allowances section to work out how much can be group-relieved.
Otherwise, the capital allowances section keeps quiet.
That is enough to make the capital allowances section into a Lego brick that we can change at will. We know that it will not interact with any other bit of the law, because it only does anything at all when the outline section asks it to.
Anyone who has written computer programs will be familiar with this way of thinking. It is the idea of subroutines that are called up by the main program to do specific jobs, such as produce an invoice for a given sale.
If the subroutine needs changing, it can safely be changed in isolation from the rest of the program.
Time for a rewriting revolution
Not only can tax law be structured like computer programs, it could also be written in the same style. That is, it could tell you how to get to the right answer. For example: ‘add up the gains, take away the current year losses …’ This is, to my mind, a great deal clearer than the current style of merely describing the answer: ‘the taxable amount is the total of gains, reduced by losses, to the extent that it exceeds the annual exemption …’
There are people who would find the computer-program style unnatural.
The Inland Revenue’s Re-Write project therefore has reason to be cautious about breaking away from the old approach of merely describing the right answer. And its work to make the descriptions clearer and to impose a better structure is immensely valuable in itself.
But if the Re-Write project should ever want to mount a revolution in the writing style, I will be the first to stand on the barricades and cheer.
Richard Baron is deputy head of the policy unit at the Institute of Directors.
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