Examination of Witnesses (Questions 200
TUESDAY 23 APRIL 2002
200. You mean yesterday?
(Mr Holgate) I mean a matter of days.
201. Can I ask Mr Holgate a question about Working
Families Tax Credit and Childcare Tax Credit which is going to
be superseded by Working Tax Credit and Child Tax Credit and in
the middle we had Children's Tax Credit. A lot of commentators
and some of my constituents think that these reforms have been
incredibly chaotic since 1997. Why so chaotic?
(Mr Holgate) That is not a word that I would associate
with what has happened. I think the position is this, that the
Government developed what it thought was the best possible scheme
for achieving three objectives: supporting families with children;
making work pay; and reducing child poverty. But, sadly, even
when the scheme is designed on the black board or the white board
202. You are talking about Working Families
(Mr Holgate) No, I am talking about the new tax credits
coming in next April. When you have a scheme designed, sadly,
Ministers cannot just click their fingers and the Inland Revenue
produces a workable system the next year or anything like that
quickly. Quite apart from anything else, there is legislation
to be passed before then. That means the Government has a choice.
Either it waits for a number of years and makes one very big change,
introducing what we are getting to next year, or it does the best
it can in order to help people it thinks are in very great need
as best it can over that intervening period. Subject to correction
from Nick (who was my predecessor) I think that the previous credits
have been the best that can be done within the constraints of
the existing tax and benefits system to produce as much help as
we can for those people in greatest need, and now we are on the
threshold of getting it right.
203. So it was a part of a master plan, was
(Mr Holgate) I think it proceeded in a series of stages
and we knew all the time that what was being developed it would
not be possible to bring into effect very quickly. So it is a
series of stages towards the steadier state that we will enter
from April 2003.
204. So it was planned in 1997 that you would
have a Working Tax Credit and a Child Tax Credit introduced in
legislation this year?
(Mr Holgate) I do not think I would say that we knew
exactly when the legislation would come about. And I also want
to answer your point in substance without trespassing on a restriction
of talking about internal policy advice and so on, but I can assure
you that, yes, new tax credits were being planned, being designed,
being debated within Government for a very long time.
205. In the current manifestation of Child Tax
Credit and Working Tax Credit?
(Mr Holgate) I think it has taken that form for quite
a while, yes.
206. A last question on the take-up of these
various credits that I have listed at the start. Are you happy
with the level of take-up?
(Mr Holgate) With respect to the Working Families'
Tax Credit, for example, we are now very close to the number we
anticipated when talking about its introduction. The take-up of
the Children's Tax Credit is very high and the challenge for us
is to make sure that when the new tax credits come in we have
successfully communicated with potential applicants, and that
communication process will start some time before April 2003.
I think the short answer to your question is yes but, of course,
because we are changing the system that provides a new challenge
for us, which is to improve on previous rates of take-up if at
207. When will you first report back on take-up
after they come in next year?
(Mr Holgate) I do not have a precise date in mind
but I do know that the Inland Revenue have issued take-up data
on the Working Families' Tax Credit quite regularly and I do not
see why we should be any less forthcoming with respect to the
new tax credits, subject to being corrected by somebody who knows
208. Just a few brief questions before we move
on to business taxes. What impact will the Working Tax Credit
have on low-paid jobs? Will it not be effectively subsidising
(Mr Holgate) I do not think that will be the effect.
Any such impact would depend on the balance of forces of supply
and demand at the lower end of the labour market. I do not think
we have seen that impact from other innovations so far, but what
it will do is provide quite significant help for people on very
low wages. We have of course the National Minimum Wage which is
some protection against that possibility.
209. The new tax credits will be awarded on
the basis of the income of the family. Is this going to undermine
the concept of individual assessment in the tax system?
(Mr Holgate) No, I do not think it will. Essentially
you are still perfectly able to have individual taxation of your
incomes, but if you wish to apply for extra help for the purposes
of these tax credits then, I am afraid, it makes eminent sense
to look upon your circumstances as a household not as one or two
individuals. So there is a point about the merger of systems there,
but certainly with respect to your earnings or your income as
an individual, individual taxation remains.
210. Lastly, although the additional funds made
available to the tax credits will no doubt be welcomed very much
by the recipients, on the margins they can give rise to high marginal
rates of deduction. What are the highest marginal rates in the
new system and what are you doing to try and reduce their impact?
(Mr Holgate) If we can take a typical case and a representative
case it would be someone who is a basic rate taxpayer who pays
employees' National Insurance Contributions and they may also
be on what we call the first taper, the first 37 pence in the
pound removal of tax credits as your income rises. That would
add up to a marginal rate withdrawal of 70 per cent. When you
ask about the prospects for reducing that, I would say that on
the whole they are limited because essentially we are at the central
point of choice in any of these systems between the level at which
you start tax credits, the rate at which you withdraw them, and
the affordability of the system as a whole. It is very difficult
to see how we will reduce that easily unless, of course, people
get on and up in the labour market and move off the tax credits
and thus we may find over time that the total costs fall. All
of that is quite speculative. At this stage it is difficult to
see the likelihood of a great diminution in that marginal rate
on affordability grounds.
211. So we could see a substantial number of
people paying a higher marginal rate than higher rate taxpayers?
(Mr Holgate) There is an increase in the numbers that
will pay marginal rates of withdrawal between 60 and 70 per cent
and that is mainly due to the introduction of the Working Tax
Credit which extends tax credits to couples or single people without
children, so there is such an increase, that is right.
(Mr O'Donnell) There are figures in Table 4.4 that
show you the changes in marginal tax rates.
212. Page number?
(Mr O'Donnell) Page 79. They show the reductions in
rates, so for example paying over 100 per cent marginal reduction
rates and over 90 per cent.
Chairman: Business taxes. Jim Cousins?
213. I guess my questions are for Mr Gibbs.
The Chancellor has announced a review of non-domicile tax status.
Can you tell us when that review will begin, what its terms of
reference will be, and the timetable for report?
(Mr Gibbs) I do not have much by way of specifics
on that in that we have not set a formal timetable or a framework
for review yet. The Chancellor said that the review will be looking
at the rules of residence and domicile, what the principles were,
namely, that the rules, which are essentially 200 years old, should
be brought into line with modern working practices, in particular
executive secondments and commuting across national boundaries,
and that the review should take account of fairness in the sense
that people essentially in similar situations should face similar
taxation, and that the rules should promote the UK's competitiveness
by supporting the international labour mobility to which currently
they do not match up well. But I do not have a timetable for the
214. There is a very high level of generality
in that, as I am sure you will recognise. Are you really telling
us that there are no details as yet for the timetable of the review,
who is going to conduct it, how it will be conducted? Does it
have a target for revenue product?
(Mr Gibbs) The review will be conducted by the Inland
Revenue in conjunction with the Treasury. I do not have a timetable
for it, no, I am sorry.
215. So there are no details about that review?
(Mr Gibbs) No.
216. Previous reviews have been what my father
would have called a stumer, which I think is a Yiddish word meaning
they do not amount to very much. Why should we have any expectations,
given the lack of detail this morning, that this review will not
be a stumer too?
(Mr Gibbs) I am not sure I can really add to what
the Chancellor has already said about the objectives of the review.
217. Thank you. The R&D Tax Credit, is that
a question for Mr Gibbs?
(Mr Gibbs) Sure.
218. Are you going to monitor it to see what
the actual changes are?
(Mr Gibbs) Absolutely. It is very important that we
do. We already have an R&D Tax Credit for smaller companies.
We do not yet have any data on its effectiveness but this is actually
quite an interesting one from the point of view of the policy
evaluation agenda because I think it is the first time that the
ONS have actually agreed specifically to widen their sample of
small business spending in order that a few years out there is
the database in place to do a proper evaluation of the economic
impact of the small companies' R&D Tax Credit and it would
be our intention to make sure that the large companies' Tax Credit
is evaluated in the same way.
219. So it could be several years before you
could assure us and our successors that, in fact, it has changed
the pattern of activity in terms of encouraging R&D here rather
than in other tax regimes?
(Mr Gibbs) I think it is bound to be several years,
yes, simply because if the credit comes in now you only start
to collect data on businesses' spending in a few years' time.
In any case a change like this, which is supposed to influence
behaviour, can only be expected to do so over a period of several
years. What I am saying is we have put the arrangements in place
so that in a few years' time when it should be possible to do
that assessment we are in a position to do so and we can be confident
that we are in that position.