Examination of Witnesses (Questions 308
- 319)
TUESDAY 3 FEBRUARY 2004
HM TREASURY
Chairman: Thank you very much indeed
for coming to see us this morning. I am sorry we are running slightly
late but we will take a running jump at you with Mr Adrian Flook.
Q308 Mr Flook: I would like to talk
to you about the tax, Mr Healey, and the 12% rate and two main
aspects of it. We were told that the 12% rate came in in the mid-1990s
because it was neutral and within a range. We are told by the
clerk, who has interpreted your submission from the Treasury that
you are very much in listening mode, that the 12% is possibly
out of date. If it is out of date, how long has it been out of
date? Why is it out of date?
John Healey: Chairman, may I say
I am very much in listening mode, as the Government is. This is
a time when the contributions not only of your Committee but also
of the pre-legislative scrutiny on the Gaming Bill will play an
important part in the judgments and policy development that Government
takes, not just on regulation but also in fiscal matters for the
future. Can I say to Mr Flook, as I hope my memorandum made clear,
it is not the 12% that is out of date but essentially the approach
of looking for tax neutrality as the one and only reference point
for decisions about Lottery duty and its future. I have tried
to explain that is out of date. In a sense you are right, it was
a declared principle as far as I can see in 1993 in the Finance
Bill and when the Lottery was introduced in 1994. It was still
a serviceable principle when the Committee last looked at this
but it has become decreasingly relevant and increasingly difficult
to do reliable calculations of that. What I tried to explain in
my memorandum is that it no longer serves as the single best objective
and reference point in trying to make decisions about the future
structure or, indeed, rate of Lottery taxation in the future.
Q309 Mr Flook: Okay. What discussions
have you had to change that system of raising money? We are told
a gross profit tax might work, but how might that work?
John Healey: If I may say there
are a couple of perhaps separable issues here. The one is the
interest that Mr Flook raises about whether or not a gross profit
tax might serve the purposes across the board of the Lottery better
in future than the current Lottery duty. That appears to be the
case in the reforms we have put in place since 2000-01 for general
betting duty and it is likely to serve the purposes of the bingo
industry with similar reforms. On that question, as I think the
Committee may be aware, Camelot had expressed an interest in the
possibility of reforming the structure and approach to the taxation
by basing it on a gross profit tax rather than the current Lottery
duty. I am prepared to consider that. There have been discussions
with Camelot and with the National Lottery Commission, and of
course involving the Department for Culture, Media and Sport as
well as Customs and Excise who are the revenue department responsible
for this area of policy.
Q310 Mr Flook: In preparing to consider
it, what have you already considered? Have you come to any conclusions
in terms of what it might do in terms of the Treasury's tax take
or, more importantly, in terms of attracting people to play the
game and, therefore, raise more money for good causes?
John Healey: It is too early in
the process to draw any conclusions but I hope my confirmation
that I am prepared to consider it is useful to the Committee.
Camelot would argue based on the modelling that they have suggested
that their principal interest, I have to say, is in the efficiency
of the structure of the tax and its operation, not in changing
the effective tax rate. Their argument is if one looks at the
strategy for trying to develop the Lottery over the remainder
of their licence period they are interested in particular in developing
essentially high volume, low margin products as part of the Lottery
range and their argument is that this type of tax system does
not best support and suit that sort of development. Furthermore,
they argue if we were to move to a gross profit tax then this
is likely to have the impact of increasing the numbers of players
and they argue that, importantly, it would increase the potential
revenues to good causes as a result of that. Those are the factors
that are being put to us. It is early days in our consideration
but I would draw the Committee's attention to the second separable
issue that I discussed earlier on, which is in considering and
finally making such judgments what I have suggested in the memorandum
to the Committee is that this single principle of tax neutrality
is not a good basis in order to make such decisions and that we
ought to be setting out to see a consistent approach to policy
and methodology applied as we have done over the last two to three
years with reforms of other gaming duties. That is why I set out
in the memorandum a suggestion that instead we should be looking
at whether the tax earning potential changes might be fairer and
efficient, whether they are sustainable for the future and also
whether there are ways of making them more business friendly,
if you like, and less expensive and complex to administer and
to collect.
Q311 Mr Flook: Just on the 12% tax,
the Chancellor, and no doubt yourself as well, has been very good
in increasing the amount of tax that goes to charities by we,
as individuals, being able to claim that we pay the basic rate
of tax and claiming Gift Aid. Has the Treasury thought of trying
to take that principle of the 12% of tax or gross profit tax and
allowing individuals, or more correctly I would have thought charities,
to get some of that tax back on the assumption that in a number
of ways a lot of us who play the Lottery do pay income tax?
John Healey: I have to be honest,
I have not considered a potential link between Lottery duty and
a system of charitable Gift Aid. Gift Aid is, of course, largely
confined to charities; Lottery supports a wider range. If the
Committee wanted to develop that point and make recommendations
in its report it is clearly something that I would consider.
Q312 Mr Flook: Just to define it
further: if I operated a charity that was in receipt of some Lottery
money then I could claim for an element of the Lottery tax or
whatever it may become back and add that to the sum that I receive
from the Lottery. You would be willing for us to look at that
a bit further and make that as one of our recommendations, would
you?
John Healey: Clearly if this Committee
recommended such an approach we would give it due consideration.
Q313 Derek Wyatt: Good morning, Mr
Healey. When your predecessor, Andrew Smith, was in front of us
three years ago we tried to make some sense of the 12% and we
could not. Despite pages of notes from your economists we could
not make any sense of them either, we just thought it was a lot
of horlicks. I am glad that you are reviewing it. Can I say that
although you have taken five billion with the 12% since the Lottery
started, of course you have also taken 17.5% of all the new build,
so the take from the Treasury is probably three or four times
the five billion that has been admitted. Therefore, given that,
we are in a tight squeeze with the Olympics. Whether or not we
agree with the additionality factor, all of the Lottery heads
have been in front of us to say it is a squeeze and, depending
on who they are, they are going to lose 15 to 20% of the money.
Would it not be easier and would it not be a wonderful commitment
if the 12% could make up the Olympic Lottery bid so that all the
other funders could be maintained?
John Healey: You will be as aware
as anybody that the proposals in the Bill currently before Parliament
are essentially based on an assumption of the 12% Lottery duty
applying to any specific range of Lottery products that might
be there to support the Olympics. You will also be aware that
in addition to the funds for a potentially successful Olympic
bid and event contributed via the Lottery, the Government is clearly
putting in directly and indirectly very significant sums alongside
that. The question of whether or not Government should consider
and one can make a case for a duty rate that is different for
an Olympic designated Lottery from the main Lottery is one that
is possible to consider if we use the framework of principles
and methodology that I have set out in my memorandum. It is not
possible to consider that if our one and only reference point
is some conceptual idea of tax neutrality based on the counterfactual
proposition of what if the Lottery did not exist. That is all
the more important, if I may say so, when we look forward to the
sort of changes both to the market and to the regulatory system
that are in prospect through the proposals that this Committee's
main inquiry is considering because if we, post-2009, do have
more than operator, if we do in fact have separately licensed
Lottery products, then we must be capable of considering whether
or not there is a case for a differential approach in the taxation
system to that sort of change in the future.
Q314 Derek Wyatt: I know this is
not strictly your area but I am interested in the 12%, and Mr
Flook has raised that already. Given that although Camelot may
just have prevented sales going down further, it looks as though
sales of the Lottery have held just for a while, although we do
not know whether that is going to go down again or they have stopped
the downward trend of sales of tickets, nothing irritates people
more locally than if they cannot actually touch the Lottery and
say, "That is ours, we paid for that". It would be magnanimous
if the 12% could be made into a local community fund for each
district council so that they could apply quickly for money. It
costs £178 if you want to apply for the Community Fund at
the moment, even if you just want £500 for netball tags or
you want goalposts or something for football. That is an incredibly
expensive way of doing it and what we have got to do is push the
money down locally. Is there any way that you can push the Chancellor
into creating maybe the Chancellor's fund? I do not know what
it should be. I think the 12% hurts Camelot's sales.
John Healey: I do not accept the
specific point you are making but I accept the general point.
You will remember that it was a feature of the Labour Party's
manifesto in the 2001 election that there needed to be a better
alignment between those areas in which people played the Lottery,
devoted a significant part of their income to it, and the rewards
and reinvestment that they saw, and that has been a feature of
the way that this Government has attempted to encourage the Lottery
distributors to move their pattern of investments and project
approvals.
Q315 Chairman: Let me just put the
question that Mr Wyatt has put slightly more brutally. If the
Government believes in having the Olympics in this country, assuming
that we are successful in the bid, why should the Government not
fund that directly rather than raiding the Lottery thus (a) reducing
the amount of money available for good causes and (b) breaching
the additionality principle?
John Healey: I accept that with
the proposal to try and win the Olympics some do argue that it
should come entirely out of direct Government spending. First
of all, can I say that I do not accept that it breaches the additionality
principle and, secondly, point out that the Government will be
making a very significant commitment and investment in the preparations
for the staging of the Olympics if we are successful with the
bid anyway. Why I say in my view it does not breach the additionality
principle is that the Olympics is so clearly a once in a lifetime
event, it is so clearly additional to the ongoing business and
commitments of public spending and delivering of public service—
Q316 Chairman: That is a very, very
interesting new interpretation of the additionality principle.
John Healey: In a sense, the additionality
principle has consistently been that Lottery money should add
to, it should not substitute or supplant services that are already
provided by Government and it should allow things to happen that
would not happen if it depended simply on Government funding alone.
I would not suggest it is a different interpretation but is consistent
with that. The other important point, if I may say so, is in many
ways as we look at the huge challenge that first of all winning
and then successfully staging the Olympics would be for this country,
there is a good argument for harnessing what is clearly enthusiasm
from the public for supporting an Olympic project of this type
and to do so through the potential for introducing Olympic dedicated
Lottery products. This Committee has taken evidence from Mr Michael
Grade and he has made clear, as the Chairman of Camelot, that
he believes the introduction of an Olympic style Lottery with
a dedicated pot devoted towards the Games would have, as he says,
a very healthy effect on the National Lottery generally.
Q317 Chris Bryant: Just to pursue
the issue about the 12%, as far as I can understand the whole
point of the tax neutrality at the beginning, and I confess this
is only as far as I can understand, the Treasury was basically
saying, "We still want to take in so much money every year
from gambling and we are making an assumption about what the advent
of the Lottery has done to the overall gambling in the market".
Is that right?
John Healey: Obviously I am not
privy to the advice or analysis that was conducted or went into
the introduction but, as I explained in my memorandum in paragraphs
two and three, it appears that the Government at the time essentially
argued that the 12% meant that the Lottery duty was broadly tax
neutral. In other words, it would maintain tax revenues at that
time.
Q318 Chris Bryant: Basically that
means up until now, until the Government brings in reforms which
clearly everybody seems to think are a good idea, the assumption
is that so much money from the gambling market, which includes
the Lottery, should be taken by the revenue every year?
John Healey: As I tried to explain
in my memorandum, I think things have moved very significantly
in the last two to three years and this concept which was there
at the introduction in 1993-94 and was broadly serviceable in
2000-01 is a concept that has served its purpose now. I would
suggest to the Committee that the central question on which it
is based, which is what would the spending tax patterns in the
economy be like if the National Lottery did not exist, is increasingly
difficult to answer with any certainty and it is increasingly
less relevant to the main policy and tax decisions that we want
to consider for the future, precisely the sort of things the Committee
is directly interested in.
Q319 Chris Bryant: In essence now
there is no real principle behind taxing the Lottery at all?
John Healey: There is, and I have
set them out in the memorandum, a more broadly based set of principles
and judgments, just as we have done with—
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