Examination of Witnesses (Questions 420
WEDNESDAY 24 APRIL 2002
420. This Committee is receiving a lot of representations
from international financial organisations on this point. It is
very difficult to relate the increases in tax take which are protected
from this measure, which are £350 million in year 2003-4
and £650 million when it really gets going in 2004-5, and
what that really means unless you know the base from which you
start. Can you give us some idea of what the present tax take
from foreign company UK branches is?
(Mr Brown) The position is that there were rules being
applied in this country which were different from those being
applied in other countries. One of the results of what we are
doing is that companies that were paying tax in their home country
will pay less tax in their home country and some of that tax here,
and they may not lose a great deal of money as a result of that
because it is simply a transfer from the tax they are paying in
their home country to tax that is being paid here. But it was
wrong, and if I give the Committee a figure they will understand:
9 out of 10 of the top foreign branches were ending up paying
no tax at all.
421. If it is the case, then, that this additional
£650 million you are projecting starts from a base of almost
nothing, which is the implication of that last remark you made,
then this is a very considerable imposition on this particular
category of business?
(Mr Brown) I think you misunderstood me. This is creating
a level playing field, the playing field that exists in other
countries, and one of the effects of the decision will be that
some of the tax paid in the home country will not be paid there
but paid to us, and it is creating that level playing field with
the result that we who have not benefited from revenue when perhaps
we should have in the past will now get some of the revenue that
might otherwise go to another tax authority.
422. Chancellor, the Government is just now
introducing also in the Budget a very complex change on the taxation
of derivatives and exchange contracts?
(Mr Brown) That is one that is being discussed with
423. Absolutely. Although the tax take is considerable
and meaningful it is regarded as having been a model of consultation
which has got a broad consensus from the industry, even though
the tax take is, in fact, quite considerable, whereas when it
comes to the taxation of overseas branches people are saying there
is an enormous additional tax take on the basis of no consultation
(Mr Brown) Mr Cousins, I should say to you that there
has been wide discussion in the international community about
the rules applying to capital; that we are adopting a system that
is operated in America, France and Germany, and one of the officials
will correct me if I am wrong in saying that many countries operate
the same system, and one of the effects of it will be that some
of the tax paid to the home authority is now paid to us because
of the allocation of capital and the deductions for interest on
capital being different in future, and it is about creating a
level playing field that I think people should welcome once people
see the full details of what we are proposing.
424. What concerns me is that you cannot give
us a figure for the base from which we start, except it is clearly
(Mr Brown) I have given you the figure, because you
have pressed me, that 9 out of 10 of the top foreign branches
are not paying tax.
425. We can draw an implication from that but
we do not have the base figure. Mr Gibbs yesterday tried out on
us the remarkable idea that because the OECD had published a pamphlet
about this that was consulting the relevant enterprises, and the
assertion has been made both yesterday and today that there is
an off-setting tax benefit in other tax regimes, but can you produce
some indication of the figures involved in this? Are you sure
this is not compromising the City of London's role as a major
(Mr Brown) I would not do anything that would compromise
the City of London's role as a major financial centre, and I think
you will find, for example, when we pressed the European Commission
not to impose a withholding tax that would affect bonds in the
London market that we have been vigorous in upholding the interests
of the City of London. What we are talking about here is a recognised
problem where there is no level playing field and where other
countries operate a system that allows them to receive revenuerevenue
that we have been unable to receive because of the treatment of
capital in the United Kingdom. We are creating that level playing
field now and I think when most people look at this measure they
will see it to be fair and reasonable. Of course people will want
to raise questions about it but when people look at the details
I think they will come to the conclusion that we made the right
426. Do you accept that this is on the most
internationally mobile part of the operations of the City of London?
(Mr Brown) I accept that we are creating a level playing
field and I think that is the important thing: that this is only
doing something that is done in other countries, and the City
of London and Britain remains, and will remain, a very attractive
location for companies and we are determined that it continue
to be so, and we will fight very hard for the interests of the
City of London. But it is my duty to create a level playing field
where that is necessary for both the attainment of a fair revenue
and for the continued operation of the businesses.
427. Rounding up on my side, I am delighted
to see the prospect of the oil fraud strategy raising £550
million by 2004-5 transferred from the criminal community and
possibly the petrol price protest community to the general public,
but I am informed that the new euromarker, Solvent Yellow 124,
could be easier to launder than the present gas oil marker. I
recognise that it is a slightly technical question but are you
confident that this improvement can be achieved?
(Mr Brown) It is designed to make it easier to detect
vehicles using rebated fuel purchase for illicit use on the UK's
roads, so I could not agree with your assessment of what is behind
this change. It is intended and designed to make it easier to
detect vehicles using the fuel that has been rebated. Our estimate
is that mainland diesel fraud has accounted for 4 per cent of
the market. If we had not taken action that would have doubled
over the course of the next four or five years, and we estimate
that the strategy will reduce the market share to 2 per cent and
that is the basis on which we are planning.
Dr Palmer: I am delighted. I am just
querying whether it will be achieved.
428. Chancellor, in 1997 you introduced this
new tax relief for the British film industry with a certain amount
of fanfare. Now we discover in evidence from Mr Gibbs yesterday
that this is being very seriously abused and it appears that programmes
such as Coronation Street and Emmerdale, Ground
Force and They Think It's All Over are taking advantage
of your tax relief to subsidise down the cost of television programmes.
Is that true?
(Mr Brown) As you know, there is a problem here and
that is because of the definition of what is a film. As you know,
the film incentive was supported and introduced because we wanted
to encourage new British films and we wanted to make sure that
those people who were producing these films had sufficient capital
to move to the next film while still waiting for the success of
their previous film. It was a very successful relief; indeed in
a way it has almost been too successful. However, it is wrong
to say that this film tax relief was intended for television productions.
I do not think anybody would classify Coronation Street
as a new British film. It is a continuing serial that has been
going for 30 or 40 years and therefore it was never intended that
a television serial would benefit from this tax relief, nor do
I think you would want it to do so.
429. We know you cherish your popularity a great
deal but it seems to be going a bit too far to subsidise programmes
such as this, even if unintended. Could you not reasonably have
been expected in the Treasury, with all the very bright and brilliant
people that you have, not to allow this to get out of control?
The cost of it has gone up from the £15 million that you
first projected to £360 million in the year that we are looking
at now. All these people have done, we understand, is that producers
of shows such as Coronation Street have certified their
individual episodes as separate films. With people like Mr Gibbs
and Mr O'Donnell and others, surely the Treasury could come up
with a more competent way of managing a tax relief than this?
(Mr Brown) I think you would agree first of all that
it has been very successful in stimulating new British films.
Secondly, where a loophole develops you want to take action, and
we are taking action, and there is a lot of concern and opposition
to us taking action but it is the right thing to do. This was
never intended to subsidise TV films and we are going to close
that loophole now.
430. How long have TV film producers been using
(Mr Brown) The TV films were not initially, according
to the information I have, using this, but they came to see that
it was possible to change their affairs in a particular way to
allow them to do so. We are now closing the loophole.
431. Are you having an investigation inside
the Treasury as to the lessons that can be learned from this?
(Mr Brown) We are always learning lessons. We will
continue to learn lessons and we are taking action at the earliest
opportunity, having detected the problem.
432. Can I ask you a last question on this?
We have had a bit of a laugh at the programmes such as Coronation
Street and so forth getting this tax relief, but actually
it is quite serious because you could be using this money for
some of your other more socially worthwhile projects, including
the tax credits. Is not one of the biggest criticisms that has
been made of you as Chancellor that, amongst some of the flattering
things that have occasionally been said about some other aspects
of your management, you have complicated and continue to complicate
the tax system in a way that opens up precisely these loopholes?
We have got numerous other examples of this in the Budget. We
have got this special relief for the breweries and goodness knows
what else. Is this not precisely the kind of error and muddle
that you end up in if you do what you are doing to the tax system?
(Mr Brown) Hold on. What Mr Laws is asking me to do
in supporting the closing of this loophole is introduce more complex
(Mr Brown) Every time a loophole develops, to close
it you require
434. I am asking you to cut it down.
(Mr Brown) Are you against the film incentive in the
(Mr Brown) You want it abolished?
436. And the breweries relief.
(Mr Brown) You never wanted a brewery incentive?
Mr Laws: No.
437. I think there will be a division in this
(Mr Brown) I would just say that the film incentive
did achieve its purpose of stimulating and helping the British
film industry develop, but now that we have seen that there is
a loophole which has developed it is wise to close that loophole.
438. A massive amount wasted though.
(Mr Brown) It seems to me that you are making an argument
against the R&D tax credit.
(Mr Brown) And you are making an argument against
the measure, for example, of 100 per cent corporation tax relief
allowances for investment.