Examination of Witnesses (Questions 400
TUESDAY 11 DECEMBER 2001
MP, MR ED
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 200102
reflecting the taper reforms introduced in Budget 2000. For 200203
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 200102".
(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 peopleand
there are many ingenious people in the tax planning worldwill
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
(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
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
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.
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
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.
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
415. These are measures and every year you have
produced a PBR which has measures, which include spending and
(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
(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
(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