Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 400 - 419)



  400. Do you think you could let us have a note on that anyway? I note that on page 178, paragraph B48 it says "Receipts are expected to fall slightly in 2001—02 reflecting the taper reforms introduced in Budget 2000. For 2002—03 a larger reduction . . . is now forecast, arising in part from the maturing of the taper but also from the sharp fall in equity prices in 2001—02".
  (Mr Brown) I think these are the figures that have just been read out, which we will send to you, to make clear what the distinction is between what is the major loss of revenues that is purely estimated as a result of the fall in equity prices. We do not know exactly what is going to happen to equity prices next year, but our audited assumptions are to take a cautious estimate of what is likely to happen, and obviously the change that has been made in the Budget we can provide the figures for.

  401. The fear expressed by Mr Troup, and reflected in the Chairman's questions, is obviously that ingenious people—and there are many ingenious people in the tax planning world—will seek to transfer income into capital gains and, as a consequence, reduce their income tax liability. Have you made any assumptions in your Budget figures about the yield from the upper rate of Income Tax? Have you assumed any effect at all on that yield of the lower Capital Gains Tax rates?
  (Mr Brown) It is true to say that any other proposal for capital gains tax, such as the one Mr Troup puts forward himself of halving the rate of capital gains tax, would have the same effects and he would have to deal with that in his own argument. We have made the best assessment possible of what is likely to both happen to income tax revenues and to capital gains tax revenues and we have already taken a number of anti-avoidance measures but we will take any necessary further anti-avoidance measures so that the revenue is not reduced.

  402. Have you made any assumption, Chancellor, in your forecast for the yield of upper rate tax, that that yield will be damaged in any way by the lower rate on capital gains tax?
  (Mr Brown) We have made a whole series of assumptions about income tax revenue, that will be part of our thinking. I say to you that anti-avoidance provisions are already in place and if they were necessary we would take further anti-avoidance provisions. We do not anticipate losing revenue in that way through people misusing the reform that we have brought about.

  403. I am not sure whether you are answering the question, Chancellor. The question was whether or not you are assuming this will have nil effect on the yield from upper rate tax or whether it will reduce it in some way?
  (Mr Brown) We are assuming a whole series of things in relation to income tax and what is the revenue from the higher rate. That would have been taken into account in our calculations. I am saying to you we do not anticipate that happening, and if we did anticipate it would be happening I would be announcing to you further anti-avoidance measures today.

  404. You think it will have no effect at all?
  (Mr Brown) We do not believe that it will have a significant effect, no.

  405. Chancellor, you probably know that there is a habit in these areas of tax planners who are very sophisticated often being able to move on in advance of measures taken by the authorities to try to close loopholes and as loopholes close down in one area, and we had gold in the past, new ones open up. Are you not afraid that at a time when you are having to consider the possibility of raising taxes that may hit the average person in the street that it appears that you are opening up a very large loophole for a small number of incredibly wealthy people who may be able to reduce their tax liability by significant amounts as a consequence of these changes?
  (Mr Brown) No, and if it were the case we would take further anti-avoidance provisions. I would just say to you that since we came into Government we have taken a whole series of anti-avoidance measures. One of the first sets of measures we had to take was in relation to training tax incentives where we had to eliminate what had become the practice of rather wealthy people getting their golf lessons subsidised through a training tax incentive.

  406. Was that not your policy that set that up? It was the ILAs.
  (Mr Brown) No, we eliminated that. There was also a subsidy in tax relief that was going to night clubs and people were able to develop night clubs around the country on the basis of a business expansion scheme subsidy which we eliminated when we came into power as well.

  407. Is this not the point, Chancellor, that there is a risk that you will set up schemes that you will then have to create new measures for in a couple of years' time to close the loopholes that you have created?
  (Mr Brown) If we did not know that there was a danger of this and it happened then we would take action anyway. Now that you have emphasised the point we will be even more vigilant. I do say that we have already taken this into account and have already got in place a large number of anti-avoidance provisions in relation to capital gains tax. If there are more needed to be taken, and no doubt you and others will draw our attention to it, including Mr Troup I hope, then we will be in a position to take the action necessary and would certainly take the action that was necessary.


  408. Some of us are golfers, Chancellor, and we need innovative ways of helping us.
  (Mr Brown) I may say there were also subsidies for flying lessons, for diving lessons and for swimming lessons and we had to eliminate these as well.

Kali Mountford

  409. I think it is fair to say, Chancellor, that you have demonstrated you are at least as interested in changing behaviour as in collecting revenue. In Research and Development Tax Credits, which particular behaviour is it that you are hoping to see, is it the relocation of business to Britain in research and development or is it changed behaviour within companies?
  (Mr Brown) Basically the research and development share of national income in America and Japan is about three per cent; in Britain and Europe as a whole it is less than two per cent. There is a big gap in the amount of national income devoted to research, development, innovation and new technology in Britain and in the rest of Europe compared with Japan and America. We are trying to look at ways of bridging that gap. We are looking at how the European system of treating research can be changed because to see this as a state aid that is unacceptable when you are actually trying to help innovation seems to us a backward and less than modern way of looking at it. In Britain itself our Small Business Research and Development Tax Credit effectively funds one pound in every three of research and development done by small companies, and that I believe is going to be successful and is already showing signs of success. As far as large companies are concerned, obviously we have got to avoid a situation where we are simply subsidising what would be done anyway and it has got to be shown to be the case that we will make a difference to the amount of research and development spending. We clearly want more to be done in the United Kingdom, we clearly also want existing UK companies, including the medium sized as well as the large companies, to do more research and development themselves, so we are looking both for behavioural changes in terms of the way British companies do their own research and we hope to encourage more research to be done in the UK. That is why we want to invest more in our universities as well.

  410. You have anticipated my major concern. As you know, I am almost obsessed with the prospects of recovery for the textile industry. While I have seen some innovative responses to the R&D Tax Credit in some companies, overall some traditional industries have not responded well. What are your plans to try to encourage them to change or do you have some other policy that might encourage changed behaviour?
  (Mr Brown) The good textile companies are moving upmarket and they are developing niche, custom and fashion products in a way where they benefit not from low labour costs but from innovation and design and great British successes in terms of fashion. That is what we want to encourage obviously. If the textile industry has its own proposals about how we could work with them to increase the amount of expenditure on research and development we would obviously look at them.

  Chairman: Kali, could you take on Pensioner Credits?

Kali Mountford

  411. I am almost as obsessed with credits for pensioners as I am with the textiles industry. Chancellor, there is a whole raft of measures now available for a wide range of pensioners in different circumstances. I am concerned, as I think most of us are, about how successful we are in the take-up. I think there are take-up problems in a number of areas: take-up by businesses for stakeholder pensions but also take-up by pensioners of the benefits of tax credits. How do you view the success of the Government in that area?
  (Mr Brown) Clearly as far as pensions and the Minimum Income Guarantee is concerned, there has been an increase in take-up and we are making it easier for pensioners to get the benefits that they are entitled to. For example, a pensioner can now claim by telephone, the form has been made far less onerous and we are making changes in the way we treat capital so that it is a lot easier for pensioners to get the benefits they are entitled to, but clearly there is more to do. The Pension Credit is going to be introduced as a means of rewarding people who have savings and obviously we will do our best to get across to people the benefits of the take-up of that.

  412. Could you also touch on the stakeholder pension issue. There was a target, was there not, for businesses to establish stakeholder pensions and that target has not yet been met? What do you intend to do about it?
  (Mr Brown) It obviously may be because people have made provision in other areas. Equally, we have managed to cut the costs of administration in purchasing pensions. We have still got to encourage companies that they want to take this up. It is partly getting information to employers, it is partly getting more information to employees and it is partly showing people that this is a cost-effective way of saving for retirement. I think these are questions that Alistair Darling, who is the Secretary of State for Work and Pensions, is directing himself to so that we can have the higher take-up that we want to see.

  413. Can we anticipate a problem for savings for pensioners in that we are now in a low inflation, low interest rate economy and we are seeing this set against a whole raft of different pension measures? Can we be confident with the new set of regimes that pensioners are encouraged to save now for their old age? I am thinking of myself now.
  (Mr Brown) I think I should be more worried than you. The Individual Savings Account, which we introduced some years ago, has had a huge take-up. It has been a cost-effective way of people saving for themselves and possibly also in time for their retirement. The incentives for taking up that Individual Savings Account are greater than they were before. We have also given a guarantee that we will not cut the limit during the course of the Parliament. We have put in a number of measures that are designed to help the take-up of Individual Savings Account. As far as the stakeholder pension, perhaps I should write you a note on this but the ABI, the Association of British Insurers, now estimate that around three-quarters of eligible employers had designated a stakeholder pension by the end of October. It is moving upwards. I will send you a note on precisely that point.[7]

Mr Tyrie

  414. I would like to come on to Working Tax Credits and Child Tax Credits in a moment. First of all could I just ask you, Chancellor, if you could take a look at page 170 of the Pre-Budget Report. Right at the bottom of page 170 you have the additional PBR policy decisions and you have put in health at a billion pounds, that is the billion pounds for health, and you have funded it with reallocation from AME, which I assume is a reduction in debt interest. Why was that £1,000 million not added into the list of measures? What makes that billion pounds different from all the other measures?
  (Mr Brown) That is essentially a spending decision. Most of the other decisions, if you look down the column, are taxation decisions.

  415. These are measures and every year you have produced a PBR which has measures, which include spending and tax.
  (Mr Brown) But if you ask me what is the distinction between measures announced in the Pre-Budget Report, the measures—

  416. I am asking why is that one billion pounds not added to the £535 million? Why have you not published £1.535 billion?
  (Mr Brown) That is a DEL decision. In other words, it is a Departmental Expenditure Limit that has been changed in the Pre-Budget Report by adding a billion pounds. Everything above that is included as additionally managed expenditure or for taxation, which is different.

  417. I have to say that is a pretty recondite explanation for a billion pounds of what any reasonable person would conclude is a measure.
  (Mr Brown) Mr Tyrie, the money is not going missing, it is actually going to the health service.

  418. This is the headline number which any reasonable man would want to look at to determine the fiscal effects of these measures and you would say they are roughly fiscally neutral but we have an extra billion. Can I just turn to the Working and Child Tax Credits. You have announced that you are going to introduce them but you have not announced any numbers or given any indication of how much they will cost. Would you say why?
  (Mr Brown) As I said earlier, our consultation on the Child Tax Credit lasted until October. We had 170 representations, we are examining them in detail and, as I say in paragraph—

  419. 2.43?
  (Mr Brown) 2.43, that is right, "Consistent with the requirements of the Code for Fiscal Stability, the forecast does not take account of:. . ." and it includes the proposals including the Child Tax Credit, "Decisions on these and other issues will be taken in Budget 2002. . ."

7   See Ev 65 para 6. Back

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