Examination of Witnesses (Questions 80-99)
MR JOHN
WHITING, MR
ROBERT CHOTE
AND MR
MARTIN WEALE
9 DECEMBER 2004
Q80 Chairman: Yes, but you are not dim,
are you? You are pretty clever.
Mr Whiting: Thank you. I will
take that as a compliment, Mr Chairman.
Mr Chote: It was not intended
to be!
Q81 Mr Cousins: Do any of these ideas
for your clients involve recasting figures to the previous year?
Mr Whiting: No. We would never
go into something that would depend on concealment or on rewriting
history as that is not appropriate. You just cannot do that. What
we have to do of course now is if we think of an idea, if I bring
to you an idea, Mr Cousins, then I have to tell the Inland Revenue
about it, and I would be very pleased to bring you some ideas.
Q82 Mr Cousins: What—for free?
Mr Whiting: Possibly so, but we
would have to disclose it to the Inland Revenue within five days
and that gives the Inland Revenue the ability to close the device.
They have tax avoidance disclosure, they have all the information
that flows in there, and there is evidence from the Pre-Budget
Report statement that they are acting on that and acting comprehensively,
so one has to say why do we then need the threat of retrospective
legislation?
Chairman: I think you want to ask some
questions, Jim, but I would just like to know that we are getting
Mr Whiting for free this morning!
Q83 Mr Cousins: Just to follow up on
that, what is your view on the disclosure provisions of tax litigation
and tax avoidance schemes which were introduced in this year's
Budget. Are they working?
Mr Whiting: I think they are working.
It has taken a lot of work to make them work and I think we are
actually quite pleased with the way that the tax authorities have
engaged with us and I think there has been a very constructive
dialogue between practitioners, advisers, business and the tax
authorities to try and get a good working system. There are rough
edges within all of it and there are problems still and I hope
the dialogue will continue as to making it work, but disclosures
are going on and, as I say, the fact that there are a number of
blocking measures in this year's Pre-Budget Report, I assume that
shows that the tax authorities are happy the system is working.
Q84 Mr Cousins: Do you have any view
yourself or have you done some exercise that looks at the revenue
involved potentially in the group litigation order cases that
are being brought to the European Court of Justice?
Mr Whiting: Yes, we have.
Q85 Mr Cousins: What would the total
amount of revenue involved be, do you think?
Mr Whiting: Inevitably it is speculation
and I would stress that and it is back of the envelope, but that
is a very important feature. Again it is something that one wonders
why there is no comment on it, but a guess might be £10-20
billion riding on some of these cases, but of course it could
be beyond that spectrum.
Q86 Mr Cousins: So in these items, we
are talking about something that is non-trivial?
Mr Whiting: Very much so. That
is of course a potential one-off hit, but it is undoubtedly a
non-trivial amount of tax and might be something that I would
have expected to see commentary on within the Pre-Budget Report.
Q87 Angela Eagle: Surely you do not expect
them to comment on cases before the courts in the Pre-Budget Report?
That would be nonsensical.
Mr Whiting: What I would expect,
and I totally take your point in terms of you cannot comment on
litigation, but in view of the challenges, in view of the number
of areas where the UK corporate tax system does look to be out
of line with European law in terms of the freedoms in the European
Treaty, I would have expected to hear more about basically what
are we doing about it to make the system robust.
Q88 Mr Cousins: But you do recognise
that a sum like £10-20 billion, which you have given to the
Committee and which I think is an interesting one, is a significant
item in the tax base of the country?
Mr Whiting: Very much so.
Q89 Mr Cousins: And it would not be unreasonable
to expect the Government to attempt to defend its tax base?
Mr Whiting: I fully expect the
Government to do so and that guesstimate is on the basis that
the various challenges, and of course these are not just UK challenges,
but there are challenges to all, or virtually all, Member States'
tax systems and aspects of them, that was on the basis that most,
or all, would go against the State rather than against the taxpayer.
It is quite possible that some will be found in favour of the
State and, therefore, my £10-20 billion would come out considerably
lower.
Q90 Angela Eagle: I wonder what your
view is, Mr Chote, about the announcements on the ten-year strategy
for childcare, particularly if you could consider what you think
its impact will be on labour market flexibility, employment and
work/life balance?
Mr Chote: The key elements we
are thinking about are the extension of paid maternity leave,
the extension of free nursery provision, reforms to the childcare
elements of the working tax credit, more children centres and
improvements in quality of childcare and early-years provision.
I would say we are obviously concerned about the two things you
describe, but also—
Q91 Angela Eagle: And the increases in
nursery entitlement which are factored in as well.
Mr Chote: We are also of course
concerned for the outcomes of children as well, so we are taking
the balance of those things together. For example, the extension
of paid maternity leave, there is strong empirical evidence that
the sort of one-to-one care in the first years of a child's life
is an important determinant of future outcome, so in that sense
that would seem to be a sensible move. The ability to transfer
from mother to father would potentially be a more flexible arrangement
and transferability could presumably reduce the incentives for
employers to discriminate against women if it reduces the extent
to which they think they are more likely to take up that option
than fathers are. The extent to which in practice that balance
does change and whether that section changes is of course perhaps
rather more debatable, so it is not going to remove that entirely.
Obviously not all families would benefit there as some mothers
do not qualify for statutory maternity pay anyway if they gave
up work after a first child, so there would be limitations on
the extent to which people would benefit.
Q92 Angela Eagle: But presumably they
would, in theory, benefit from being able to think about getting
back into the labour market even with subsequent children and
with some of the support that is available?
Mr Chote: They will benefit, yes.
Q93 Angela Eagle: That ties into the
labour market flexibility and hopefully it gives them options
that they did not have before because of the impracticality of
maybe doing quite modestly paid jobs, but having high childcare
costs.
Mr Chote: As you say, you have
to see it as part of the overall package of measures. On the extension
of free nursery provision, there is an interesting issue there
about the extent to which you are trying to target these issues
specifically on those perceived as being most in need versus more
generally. That extension of free nursery provision is not a particularly
targeted measure.
Q94 Angela Eagle: No, I think it is for
everybody.
Mr Chote: Exactly, and it would
have a broader effect on families as a whole. It is not clear
necessarily what the costs of those reforms would be. Reforming
the childcare element of the working tax credit, so increasing
both the amounts of childcare that the childcare tax credit would
cover and also the proportion of subsidy, you would expect, I
think, that increasing the limits on childcare that can be supported
in this way might have a relatively modest impact because an awful
lot of people who are claiming the working tax credit do not exploit
the full amount of that anyway, so increasing it further—
Q95 Angela Eagle: Is that a supply problem
though?
Mr Chote: That is an interesting
question. I do not know to what extent that would be and if it
is obviously a supply problem, the supply problem is not addressed.
Q96 Angela Eagle: Well, the supply problem
is addressed surely in the new duty on local authorities to ensure
a sufficient supply of childcare to meet the needs of families
and there is a modernisation fund of £125 million a year
from 2006 which will give 150 local authorities the chance to
do that. That should begin to address surely some of the supply
issues. Obviously you have to train and recruit, but the supply
side is being addressed by that, I would have thought.
Mr Chote: Whether that amount
of money is large enough given the number of local authorities
you are looking at and whether extending the amount of time for
which childcare is supposedly being offered makes it more difficult,
for example, if you have a situation where a facility is used
for 3-year-olds in the morning and 4-year-olds in the afternoon
and whether that no longer becomes a viable model and, therefore,
there are significantly greater costs, so I think the question
of how quickly supply can be brought on and at what cost remains
an important one, notwithstanding the £125 million.
Q97 Angela Eagle: And what about in terms
of labour market flexibility and unemployment because we have
a tight labour market at the moment?
Mr Chote: Yes, we have not looked
specifically at the implications on that. Clearly there is the
issue over the labour market for the providers of childcare themselves
and, as you say, whether both in terms of physical capacity and
the capacity of available qualified people to do that, there are
obviously question marks there, but in terms of the general impact,
I do not know whether Martin might have any views on the wider
economic benefits of that, but my guess would be that they would
be very hard to quantify at this stage.
Q98 Mr Cousins: Could I just ask for
your views about the likely extension of the ISA, the present
higher ISA limits for a further 3 years—do you welcome that?
Mr Weale: Could I come to that
from the general proposition that taxes have to be collected and
one could imagine a society where people were subsidised to save
and subsidised to go out to work and, taken to its extreme, there
would not be any tax base, so I am rather nervous about this,
and the ISAs are an example, the existence of these tax reliefs
for particular activities which seem to be a good thing, but people
might be doing anyway. That said, given the way I drew attention
to the overall shortfall of saving, I am pleased that that is
being addressed to some extent, but I suspect that it would be
more fruitful to go to the root causes of why people are not saving
very much. For example, should the Government diversify the sort
of savings media that it offers and could offer at low charges?
I would rather see a more holistic view taken to address the questions
of what is it that deters people from saving, whether it is that
they cannot afford to save, whether it is that they are playing
essentially a game with the Government where they know that if
they do not save for their old age, then future generations will
have to bail them out and will bail them out, so there is rather
little incentive to save. Against that backdrop, the extension
of the current limit on ISAs I think is rather small beer. There
is of course the general observation at least with equity ISAs
that the only people who get benefit are those who pay 40% tax
because dividends are taxed at the standard rate anyway, so there
are questions about whether the distributional effects of it are
desirable or not. I would rather the Government took an overall
view of savings, savings structures and savings incentives instead
of this piecemeal approach.
Q99 Mr Cousins: When somebody says to
me, "I think we need a holistic approach", I always
translate that in my mind as meaning, "I don't know quite
what to do right now, but come back in three years'. In your earlier
remarks to the Committee, you see, it was a rise in the aggregate
savings rate in the country, if I understood your argument, that
was actually going to sort out the structural deficits on the
balance of payments, so I would have thought that this would have
been an important issue for you, and the only practical thing
that you have said, which is interesting of course, is an increase
in the range and robustness of National Savings products, if I
have understood you correctly.
Mr Weale: Well, could I air another,
and probably rather unpopular, suggestion, that until the early
1980s the charges on some financial media, say, unit trusts, were
regulated by the Department of Trade and since they were deregulated,
they have become much higher. I do not think the performance of
the products has improved relative to the market and there is,
therefore, a very substantial question whether, and how, the industry
is actually serving the saver. Now, people like Sandler have looked
to that to some extent and recommended simple products that can
be sold without giving people expensive advice about how they
work and so on, but I think fundamentally a look at why the industry
is so expensive and more expensive than it used to be, whether
the Government could introduce competition in the industry, say,
by selling index-linked pensions through post offices as just
another means of national saving, another way of financing government
borrowing, and I suspect that if you look at the sorts of charges
that appear in the industry, whether ISAs are extended or not
has relatively little impact except for the cash ISAs where the
amounts that people are allowed to save are relatively small.
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