Examination of Witnesses (Questions 100-119)|
11 DECEMBER 2006
Q100 Jim Cousins: If there was unlimited
retrospection rather than only retrospection of six years, what
money difference is there? What revenue difference is there? Are
we here talking billions or hundreds of millions, or perhaps not
very much at all?
Mr Whiting: I do not have a proper
estimate, I am not sure if my economic colleagues can help me.
The general estimate is that there are certainly billions at stake
but that is a gross figure, as it were, and it is not expected
that the biggest estimates will come to pass. The Government in
trying to restrict the amounts that are at stake has, for example,
a PBR measure of putting a cap as to how far back you can go.
It is a moot point as to whether that is valid under European
law because obviously this comes up against the issue that if
the law is found to be wrong then shutting the door after the
horse has bolted is not really valid under law. It is a very difficult
Q101 Jim Cousins: Can I ask you about
another thing. The attention of the Committee has been brought
to the managed service company issue and the Institute of Chartered
Accountants has made some points about this. How many workers
are we talking about who might be covered by the management service
company regime rather than the conventional employment regime?
Mr Whiting: You might also put
a third category in there of conventional employment, conventional
personal service company, which might or might not be under the
famous IR35, and then the management service company, the ones
that are definitely trying to sidestep the IR35 rule or whatever.
I have seen various estimates, certainly estimates of 100,000
or more employees or individuals under this regime. It is very
difficult to get an exact figure because very often these populations
by nature are transient and rapidly changing, which is why the
Revenue have found it difficult to tackle them in the past.
Q102 Jim Cousins: Is it likely that
the workers we are talking about would be much more likely to
be found, say, in this part of the country?
Mr Whiting: From what I know of
it I do not think there is any particular geographical area, it
can affect all areas. I have heard it mentioned in terms of the
oil industry, the IT sector, right through to contract cleaners,
teachers, health service workers, so you could say it is almost
anywhere and everywhere that this mechanism has been used.
Q103 Jim Cousins: I am grateful to
you for that. Turning to another area of tax avoidance, the so-called
"carousel" frauds, do you think the measures the Government
is taking to contain the potential of VAT losses there are effective
or do you think more is required?
Mr Whiting: The basic mechanism
of the reverse charge system, which the derogation has been applied
to Europe to bring in, is a good way forward but I do not think
I or any of my colleagues would say that is guaranteed to solve
it. If it stops certain areas, particularly if it is targeted
at certain types of goods, then the risk is that it moves on to
another type of goods to be subject to fraud. It is one where
the nature of VAT in some ways leaves it open to fraud, the basic
missing trader idea, and it is one that the tax authorities are
going to have to be continually vigilant on.
Q104 Jim Cousins: As I understand
it, that particular derogation, the reverse charge regime, has
Mr Whiting: I believe so by certain
other countries who want a more comprehensive solution. It is
not for me to speak of the UK attitude but I think the argument
is that we need to block what we know about whilst considering
the longer, wider range. I understand the French and certain other
countries have said "Well, we have to block everything in
Q105 Jim Cousins: Again if I could
ask you, the tax avoidance disclosure regime, about which there
is a great deal of
Mr Whiting: debate?
Q106 Jim Cousins: I was going to
say "hot air" but that is disrespectful to a great deal
of parliamentary controversy about the introduction of that. Do
you think that has been significant, do you think it has been
Mr Whiting: I think it has been.
I think it has been successful in the sense that it does give
the tax authorities two things. It gives them advance intelligence
of particular schemes and also shows something of who is devising
and using them. They are better equipped with intelligence and
you can see in this PBR and recent statements actual action being
taken. As a scheme it seems to be working tolerably well and thanks
to some quite good consultation we have a system which is not
too burdensome on the advisers and taxpayers who have to comply
Q107 Jim Cousins: I am grateful to
you. I am conscious of the fact I am directing my questions at
you, I do not want to prevent any of your colleagues from saying
something they wish to.
Dr Weale: Could I just say that
on the question of carousel fraud it seems to me that there ought
to be a review of the case for moving towards a point of sale
tax as the old purchase tax was and away from the value-added
tax because a point of sale tax looks to me to be much safer in
these circumstances. Of course it is a European Community issue
and not simply an issue for the British Government.
Q108 Chairman: I think the Commissioner
mentioned a while ago that the estimated fraud is going to be
something between 40 and 60 billion so it is a Community issue.
It seems a bit crazy that we are sitting back on this issue whilst
it is costing our own exchequer £2-3 billion a year, is it
Mr Chote: There is the irony,
Chairman, that one of the reasons the UK has been particularly
vulnerable to this is because it is relatively quick to set up
a company here and the tax authorities are relatively swift at
refunding VAT. Our modest regulatory burdens and rapid and responsive
tax authorities may be contributing to the problem.
Q109 Jim Cousins: You can come again!
Mr Chote: I will not reply.
Q110 Chairman: Maybe John could help
me on this because of that comment about the authorities being
quick to refund VAT. Anecdotal comments made to me by City people
would suggest that the relationship between HMRC and companies
is not as good as it should be and there is an aggressive approach
by HMRC. Are you picking up those views? Do you think when David
Varney has been appointed to serve this transformation that will
help the situation?
Mr Whiting: There are a few threads
in there. The VAT point of course tends to affect the very smallest
companies, the speed of registration and repayment. There has
been certainly a feeling that there has been a more aggressive
tone coming from HMRC in recent years, that it has been applying
its powers with a slightly heavier hand. That said, I think you
would say that during the last 6 to 12 months that has reversed
somewhat and the tone, for example, of the Varney Report is very
positive in recognising that HMRC, advisers and businesses very
much have to work together to make the tax system work.
Q111 Chairman: Okay. Robert, would
it be naughty for us to say to the Chancellor you want this liberalisation
process to stop?
Mr Chote: Yes!
Q112 Chairman: On environmental taxes,
just one question on that, the Office for National Statistics
states that the proportion of total tax revenues made up from
environmental taxes has fallen almost every year since 1999, from
a peak of 9.8% down to 7.7% in 2005, so it is the lowest figure
for a decade. In terms of the Budget, does it seem as if environmental
taxes that the Chancellor has imposed will go any way or far towards
addressing the trend? What would be the single most effective
tax instrument for that, either a change to an existing instrument
or an entirely new instrument that the Chancellor could utilise?
Dr Weale: I think it probably
would be a road fuel duty because that is a very large source
of tax. It is one whose importance declined as oil prices went
up. We know the escalator ended and to reintroduce the escalator
would be a means of offsetting the change that has taken place
in the last few years.
Mr Chote: As Martin says, road
fuel duty and the VAT on fuel duty is by far the largest and the
most important green tax and it has explained why there has been
a fall in the share of GDP raised. It is basically all down to
the decision to have only one nominal increase since 2003 until
the latest one we have now. Our estimate is that the APD change
and no longer giving away money on fuel duty will just increase
the share of GDP from green taxes by 0.1%.
Q113 Chairman: Road fuel duty, that
is minimal impact that particular increase, is it not?
Mr Chote: Yes, in this case, that
is right. Effectively that is what explains why it has fallen
from its peak since 1999; it is basically the movement in fuel
duty, real fuel duty falling in size.
Mr Newmark: A brief question: part of
the motive I am assuming for the Chancellor increasing air passenger
duty for example should be to change behaviour. Do you think it
is really just simply a tax raising exercise or is it genuinely
to change behaviour?
Q114 Chairman: You must remember
we asked him to do it last year!
Dr Weale: I think the answer is
that all taxes
Q115 Mr Newmark: Not by that small amount.
Dr Weale: all taxes have
some change on people's behaviour. Small tax changes or changes
which are small compared with the overall cost of what they are
buying, you would expect to have only a small change and I think
that is probably what we are seeing, particularly if you look
at the fuel duty as the cost of a trip rather than just the cost
of the air fare.
Mr Whiting: I think I would go
along with that, that it is very much at the level where it is
just an additional tax rather than really going at changing behaviour.
Just coming back to the Chairman's point, if you look at what
business would like out of the environmental taxes, I think what
I would say is they would like a clear framework as to where these
taxes are going. Are they to change behaviour? Are they to raise
taxes? Let us have a proper framework and let us go there because
that would allow business to plan and respond in the way that
is wanted. 
Q116 Chairman: As a Committee we are
going to look at that issue in the light of the Stern Report.
Professor Talbot: Just a point
about the process issues that I raised at the beginning which
I think is useful here. To take a step back from the discussion
you have just been having, and think for a moment about the situation
that we are in, which is that the Chancellor insists on making
partial announcements about tax and partial announcements about
spending in the Pre-Budget Report and then there is a full-scale
debate about environment policy and whether or not the tax balance
is right in relation to environment policy, when he clearly is
not going to announce all the decisions about all of the taxes
affecting environment policy in a Pre-Budget Report. We get into
this ludicrous situation where we are having a debate about a
major policy area, which it is important to have a debate about,
on the basis of half announcements, partial announcements, something
being announced and other things not being announced rather than
doing it in the context of either the full Budget or the full
Comprehensive Spending Review.
Q117 Chairman: Do you think maybe
what is going to happen is in the next 12 months the Chancellor
could be willing, if we asked him, for this to be his last Pre-Budget
Professor Talbot: It is possible.
Dr Weale: On the issue of environmental
taxation, it is suggested that carbon trading is in some sense
an alternative and at one level it is an alternative but I think
what has been missed from the debate is that from the point of
view of the consumer we will have to pay more for our petrol because
there will be a carbon charge on it. From the point of view of
the final consumer I think there will not be very much difference
between carbon trading and environmentally-focused taxation. The
suggestion that one is easier to achieve than the other I think
Mr Chote: Colleagues maybe able
to help on this anyway. Listening to the speech and reading the
text within the PBR I had assumed that this increase in APD was
a one-off doubling and that was the end of the story. I note that
in footnote 4 of table 1.2 on page 10 it says "The costing
of the APD measure assumes revalorisation annually from the 1
April 2008". I am not clear whether that means that APD is
now going to rise in line with inflation, whether that is the
Government's policy, or not. You might like to ask them.
Mr Whiting: That is how I read
Mr Chote: That of course was not
in the speech. It is not referred to other than in that footnote
so you might like to ask officials for their interpretation of
Q118 Chairman: Any other points?
Professor Talbot: Just one small
point you might want to ask the officials when you have got them
in which is that there are announcements about the changes to
the public service agreements and the introduction of these new
delivery agreements which are going to underpin them. It might
be interesting to ask about that but given that we have now got
five departmentsDWP, Revenue & Customs, Treasury itself,
Cabinet Office and the Department for Constitutional Affairswhich
have already agreed their settlements for the spending review
period, you might like to ask them whether or not they have got
public service agreements with all of those departments and delivery
agreements. I know what the answer is, it is no. You have a very
interesting contracting process going on here where we agree what
we are going to pay for things, apparently, before we discuss
with the departments what they are going to deliver in return
for the money that they are getting, which I thought was supposed
to be the opposite way round according to the Chancellor's statements
on how PSAs were supposed to operate.
Chairman: We will certainly ask that
question of them.
Q119 Jim Cousins: You put a question
into my head, Professor Talbot, when you mentioned it much earlier,
you made reference to regionally flexible pay and of course this
is about to be introduced into the Department for Constitutional
Affairs which is a slightly odd place to start, it seems to me.
Do you think that regionally flexible pay could achieve considerable
Professor Talbot: Fairly obviously
yes in the sense that outside of London where you have got London
weighting if you start to have regional pay determined by regional
labour marketswhich has always been the Holy Grail of the
Treasury, they have been pursuing this for the last 20 yearsto
my knowledge, you would obviously have some areas of the country
where pay would be considerably lower than it would be in London
and the South East, excluding London weighting. Yes, potentially
you could do that, and I do not at all find it strange that they
have gone for the Department for Constitutional Affairs in the
first instance. I am not aware that the trade unions in the Department
for Constitutional Affairs are a mighty force to be reckoned with.
I can think of other departments where it would be rather more
of a challenge.
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