Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 100-119)

MR ROBERT CHOTE, PROFESSOR COLIN TALBOT, MR JOHN WHITING AND DR MARTIN WEALE

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 situation.

  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 been blocked.

  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 one go".

  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 effective?

  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 with it.

  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 not?

  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. [1]

  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 Report?

  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 is incorrect.

  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 it.

  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 that.

  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 departments—DWP, Revenue & Customs, Treasury itself, Cabinet Office and the Department for Constitutional Affairs—which 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 expenditure savings?

  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 markets—which has always been the Holy Grail of the Treasury, they have been pursuing this for the last 20 years—to 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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