Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 200 - 219)



  200. You mean yesterday?
  (Mr Holgate) I mean a matter of days.

Mr Ruffley

  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 Can I ask Mr Holgate a question about Working Families Tax Credit and Childcare Tax Credit which is going to be superseded by Working Tax Credit and Child Tax Credit and in the middle we had Children's Tax Credit.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 Tax Credit?
  (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 it?
  (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 all possible.

  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 better.


  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 low-wage employers?
  (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.

Mr Cousins

  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?

Mr 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 review.

  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.

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