Examination of Witnesses (Questions 120-139)
21 MARCH 2005
MR JON
CUNLIFFE, MR
DAVE RAMSDEN,
MR TONY
ORHNIAL, MS
SARAH MULLEN
AND MR
JOHN KINGMAN
Q120 Mr Heathcoat-Amory: Can I be specific?
Emboldened by your better than expected corporation tax receipts—and
I give you credit for that—you are expecting a 28% increase
in revenue next year. We know that there are some very big vulnerabilities
here in the legal sphere. The European Court of Justice is having
a shot at this and there are some important court cases pending
which may further undermine our ability to set autonomous tax
policy in this area. What have you built into your estimates on
these court cases? What are you expecting there?
Mr Ramsden: I will come on to
the court cases in the ECJ in a moment, if I may. As we set out
in the Budget document, the forecast for overall taxes in 2005-06
is very little changed from PBR time. You have drawn attention
to one of the forecasts where we have revised up our forecast,
which was the CT forecast, but there are other forecasts where
we have revised down our forecast for in year growth slightly,
such as VAT. These are our best estimates and we try to take account
of the very latest data. The CT forecast is very important going
forward because it contributes quite significantly to the rise
of over 8% in current receipts that we are forecasting for 2005-06.
The kind of figures we are talking about, a 26.5% growth rate
in non-North Sea corporation tax, and a 28% growth rate overall,
as we discussed with you at PBR time, are not unusual increases
in corporation tax at a time when both the economy overall is
growing strongly, when the financial sector is picking up very
rapidly and when we are also seeing considerable revenues from
the North Sea. That financial sector effect also is beneficial
to our income tax forecast and enables our best estimate of income
tax to be for significant growth. As to the effect of the ECJ,
as we point out in the Budget document in chapter five, we are
going to defend robustly any challenges to UK law that come from
the ECJ but at present what we are talking about is potential
future challenges. We see much discussion—I think you have
discussed it in this Committee—as to how these challenges
might manifest themselves. We are not even at the stage of having
an Advocate General's opinion in some of the high profile ones,
so we will have to wait. Our forecast is rightly based on recent
trends and on the forecast of the underlying economy and what
that implies for future trends for CT. To try to factor in some
hypothetical amount for potential outcomes from ECJ decisions
when we have made very clear in the Budget document that we will
defend robustly the corporation tax system would be a difficult
thing to do.
Q121 Mr Heathcoat-Amory: I am sure you
will defend it brilliantly, but this jurisdiction is in Luxembourg.
You seem to be saying that you are anticipating that we win all
the cases. I am asking you whether you are building in perhaps
a more realistic assumption that we may win some but we will lose
others and there may be a degradation of our tax base. Are you
taking an optimistic or a pessimistic view there?
Mr Ramsden: We are not taking
a different view from the one we were taking at the time of the
PBR. We are producing our best estimates of forecasts. We have
where possible taken action to remove the uncertainty which was
produced in the past by ECJ decisions. There were decisions that
we took in April 2004 in terms of changes to corporation tax after
the ECJ's decision on thin capitalisation. There was a response
there but in terms of our forecasts going ahead it would be extremely
difficult. These are very non-linear things. I am not quite sure
how you would do that through a fan chart or any of the ways of
estimating uncertainty that people come up with. You have to produce
your best estimate of the forecast and then recognise that there
is an ECJ process taking place, making very clear that we would
robustly defend the UK's corporation tax system.
Q122 Mr Heathcoat-Amory: Could I ask
about another vulnerability which is the entry into the EU of
east European countries with low, sometimes flat, corporation
tax rates? Germany is cutting its rate of corporation tax. There
could be another competition opening up here within the single
market. Given that the ratio of non-oil tax revenues to GDP is
going to hit an all time record next year, do you see that we
are vulnerable to migration of tax activity and do you factor
that in?
Mr Ramsden: Can I start on the
point about CT because I think next year we are forecasting that
non-North Sea CT as a share of GDP will rise to 3.1%. It has been
higher than 3.1% in 10 of the last 20 years so I do not think
that counts as a record for non-North Sea CT as a percentage of
GDP. It is a significant increase over this year and it is forecast
to continue rising and to stabilise at 3.5% but even that 3.5%
as we discussed with you at PBR time is below the kind of levels
that were reached in the late 1980s. I am using a different denominator
from you for this calculation. That is the share of non-North
Sea CT as a percentage of total GDP. That is the equivalent of
the figures that we publish.
Q123 Mr Heathcoat-Amory: I am talking
about all taxes here, not corporation tax.
Mr Ramsden: You were talking about
corporation tax in the context of Germany lowering its corporation
tax.
Q124 Mr Heathcoat-Amory: I have widened
the debate a little. At least one of our expert witnesses said
that, excluding North Sea oil, which hit a record some decades
ago, the rest of the tax revenue as a percentage of GDP was going
to reach a record in this country. We are increasing that burden
and a lot of other countries are reducing it. I am putting it
to you that this is going to create problems in an increasingly
globalised tax environment and I wonder if you factor this in
when you predict your tax revenues.
Mr Ramsden: We can certainly look
at what your expert came up with. The figure that we have always
published—and this is true of previous governments as well
I think—for net taxes and social security contributions
as a percentage of GDP—we have a very long back run in table
C24—that series is not rising to anything like a record
level next year. That series is rising to 37.3% on our forecast
and it was closer to 40% in previous periods. On the German point,
I know that the Germans are announcing that they are going to
cut their federal corporate tax rate from 25% to 19%. That is
an announcement that Chancellor Schroeder has made but you have
to remember in Germany that as well as a federal tax rate they
have a solidarity surcharge of 5.5% and state corporate taxes
which range from 13% to 20%. The overall average German corporate
tax rate will be 32%, whereas the UK's main rate of corporation
tax is 30%. You have to bear that kind of thing in mind rather
than just picking out one change announced in one rate at one
period.
Mr Cunliffe: The detailed point
is that it is not just corporation tax rates; it is tax bases
and the way it is applied. One of the things we found out when
we started looking in Europe as to fair and unfair tax competition
is that sometimes the headline rate does not tell you very much
about what is happening. There is a shift going on in the world
economy generally. The general point is that we have always said
in Europe we are in favour of tax competition. We have always
made clear that rather than a tax harmonisation approach we believe
in tax competition, because that is a way of allowing countries
to compete, provided they compete fairly—by competing fairly
I mean you do not offer tax breaks for foreign companies that
are not available to your domestic companies. Tax competition
is one of the ways that countries compete. Before investment decisions
are made and before people decide to put capital in one place
or another, they look at a range of issues. Economies compete
in that way for international investment, not just on tax. The
UK had the highest number of FDI projects last year on the normal
survey and the UNCTAD figures suggest that FDI is growing again
to make us the leading recipient in Europe. Our stock of FDI is
very high. Some of that is tax. If some countries want to run
a very low tax, very low spend economy, provided they do it in
a fair way, that is competition one has to live with. There are
also high tax economies—Sweden comes to mind—that
are very successful in attracting certain sorts of investment.
One has to broaden this out from the tax question and say where,
when there is a secular shift in global production, will the UK's
comparative advantage lie and how do we maximise that. Tax will
be an element of that but it is only one element.
Mr Heathcoat-Amory: Can I clear up this
issue with Mr Ramsden? I am looking at a table here from the pre-budget
report which is headed "Net Tax and NICs as a share of GDP."
It quite clearly shows that for the non-North Sea sector next
year will be an all time record. This is your table, B14 and B26.
Chairman: This is from Peter Spencer's
evidence.
Q125 Mr Heathcoat-Amory: It is a Treasury
table. We must get to the bottom of the fact here.
Mr Ramsden: I am very happy to
report back to the Committee to get to the bottom of whatever
Peter Spencer has provided you with.
Q126 Mr Heathcoat-Amory: It is not Peter
Spencer. It comes from the Treasury. It is one of your tables.
It is slightly alarming that you come here saying it has been
exceeded many times in the past when your table quite clearly
shows it has not.
Mr Ramsden: Which table?
Mr Heathcoat-Amory: The source is the
PBR, tables B14 and B26, Inland Revenue statistics. This is our
report but we did not make this chart up. It comes from you. The
non-North Sea sector is predicted to be a record.
Q127 Chairman: It is Peter Spencer's
chart but your data.
Mr Ramsden: Which page of your
report?
Q128 Chairman: It is just coming to you.
Evidence 82.
Mr Ramsden: It looks to me as
if he has derived the non-North Sea series from what he says are
PBR data so we will check on that derivation as quickly as we
possibly can.[1]
Q129 Mr Heathcoat-Amory: Assuming that
is right, we all know that things like the quality of our golf
courses is a factor in attracting Japanese investment but tax
is tremendously important and that was emphasised by our witnesses
again. Whichever way you look at it, we are becoming a high tax
jurisdiction here as a percentage of GDP. This is, according to
our witnesses, beginning to have a deterrent effect in investment
decisions being made at the minute on the basis of these projections.
To what extent do you factor in or attempt to calculate the possible
damage to the economy and to future revenues of highly mobile
tax investment decisions being made to the detriment of the United
Kingdom in view of this rising trend which, to some extent, conflicts
with what other countries are doing?
Mr Cunliffe: Of the EU countries,
our nearest geographical competitors, we are one of the lowest
in tax GDP share and one of the lowest in corporation tax. My
guess is it is taxes on capital that matter here, not overall
tax. Secondly, you have to look at all the things in the equation.
The thing I hear most of all about London—I apologise in
advance for a southern orientated view—is about investment
in London and the south-east into transport infrastructure. One
hears that in other major conurbations and that is also very important
to investment coming in. You hear also that the education system
is extremely important. It is difficult to look at just the tax
side of the equation. Our tax GDP share is fairly low in relation
to our European partners. The US is more difficult because you
have state taxes to add on to federal taxes. It is certainly lower
in most of the Eastern Europeans, I will grant you that, but you
have at the same time to say: what is that tax financing? Is it
financing the sorts of things that might actually make internationally
mobile companies want to come to the UK? Is it financing public
infra structure? Is it financing education? Is it financing the
things that actually allow you to compete? Otherwise you might
decide the best thing to do would be to reduce taxes to the absolute
minimum, but then, of course, you would have to do something on
the other side of the account.
Q130 Mr Mudie: Your DEL expenditure,
current expenditure, was two billion over the figure you gave
us at pre Budget time only three months ago. We will forgive you
for that, but what could we say.
Ms Cunliffe: Three months and
one week, I think.
Q131 Mr Mudie: There is some suggestion
that you have been leaning on departments over their spending
of end of year money so that that did not rise higher. Is there
any truth in this?
Ms Mullen: I will answer that.
Q132 Mr Mudie: Is this what you came
here to answer, Jon?
Ms Cunliffe: No. I will give you
a general answer, if you like.
Ms Mullen: Just to explain the
estimates that we now have in the Budget and the increase since
the PBR, 340 million of that increase was an increased allocation
to the special reserve to meet our costs for Iraq and other international
obligations. The remaining 1.7 billion was consumption of EYF
stocks by departments, and this is a result of the system we have
in place which allows departments to draw down that EYF and retain
it going forward. What has been happening historically is that,
in fact, although departments have drawn down significant stocks
of EYF at winter and spring supplementaries, the out-turn data
has shown that departments have under spent against their DEL
allocations. This year in the Budget we are making an estimate
that there will be an increase in DEL and some consumption of
EYF, but obviously we will not have the out-turn figures until
the out-turn white paper in July.
Q133 Mr Mudie: That was one of my questions,
what international commitments there were, because I could not
find them reflected in any departmental spending. Where would
I pick up that figure in a departmental figure?
Ms Mullen: In terms of money that
is then allocated from the special reserve to departments, are
you saying?
Q134 Mr Mudie: Yes.
Ms Mullen: It will appear in potentially
a number of different departments, DEL lines, obviously MOD, but
also some others.
Q135 Mr Mudie: Is the total explanation
for that international commitments?
Ms Mullen: It covers costs in
Iraq plus other international obligations, like Afghanistan, I
believe.
Q136 Mr Mudie: What has Iraq now come
out at? What are we spending extra in Iraq?
Ms Mullen: Let me see if I have
got the actual figure for that. I understand that the out-turn
figure for MOD has been 843 million in 2002-03 and 1,311 million
in 2003-04, and our anticipated out-turn this year is about 950
million. That covers resource and capital costs—the special
reserve covers resource costs—but again we will not know
the out-turn until July.
Q137 Mr Mudie: Apart from your first
figure, the big one, I am not sure I see those figures reflected
in the defence budget either as capital or revenue. Should I,
or have there been other savings that mask the fact they are spending
more in Iraq?
Ms Mullen: We do not give a detailed
break down of MOD's DEL, if that is what you mean.
Q138 Mr Mudie: No, I am just looking
at the figure along three years. If you put additional money in
it should show.
Ms Mullen: It may be there have
been some offsetting changes, but they should appear in the MOD
DEL line, I believe.
Q139 Mr Mudie: That detailed technical
explanation, wonderful as it was, takes me off my starting point,
which is on good authority from none other than the Daily Telegraph,
March 14, that you are leaning heavily on some of our defence
officials not to spend money. Is there any truth in this, Mr Cunliffe?
I cannot believe it.
Mr Cunliffe: I do not think that
is true. I do not think the Treasury ever leans on any department
not to spend money. It is a myth. Certainly, but more seriously,
I think we have an end year flexibility system that has been running
for a number of years. Personally, I think it is a good system
because it has enabled departments to—
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