Broadband - Business, Innovation and Skills Committee Contents

5 The 50 pence Levy


71.  The Government has proposed a 50 pence per month levy on all fixed telecommunications lines to fund the Final Third project. The levy will be paid, by consumers, on a monthly basis. The levy is expected to raise £1 billion over the course of seven years, which represents a rate of between £150 million and £175 million per year..[80] The levy will be paid per line, so households with more than one line will pay the levy on each connection.[81] The Government intends to introduce the levy in the 2010 Finance Bill.

72.  The Department told us that the levy should be:

  • relevant, in that there is a clear link between the source of the tax and the purpose to which it will be put;
  • simple and transparent, such that consumers are clear how much they are to be charged and the tax can be applied in a straightforward way; and
  • affordable, in that set against the context of overall telecoms, and other demands on household budgets 50p is a modest amount. [82]

The context of the levy had been set out in Digital Britain:

Such a supplement needs to be set against the historic fall in telecoms prices. Unlike all other utilities or, indeed media services, telecommunications prices have fallen significantly and steadily in real terms over many years. Today the UK retail telecommunications market is among the most competitive in Europe.[83]

73.  This point was reinforced by the Minister who argued that the levy needed to be considered in the context of falling telephone bills.[84] He cited Ofcom data which indicated that the average household phone bills had gone down by more than 50 pence per month in the past year, and argued "one needs to set the proposed increased of 50 pence a month against that trend."[85]

A Regressive Tax?

74.  In evidence to us the Minister noted that the proposed levy has not been universally welcomed. The focus of the evidence submitted to us was that the 50 pence levy was unfair and that it discriminated against the less well-off in society. Consumer Focus believed the levy was likely to constitute a "tax on a specific demographic, and one that is reducing because of the increasing movement towards mobile phones and PDAs for communications."[86] In evidence Mr Jonathan Stearn, Head of the Disadvantage Programme, Consumer Focus, argued that:

if you look at the age profile of people with landlines, you will find it is older people. The majority of younger people, I think 75%, use mobiles and do not have a landline.[87]

Consumer Focus favoured a mechanism by which the additional funding be absorbed by industry, "on the basis of their proportion of the mobile phone market".[88]

75.  The Communications Consumer Panel also argued that older people would be the hardest hit as they were "more likely to have fixed lines and less likely to have broadband than other groups".[89] The result would be that this section of society would therefore be subsidising the roll-out of services that they may not use.[90]

76.  Mr Heaney, Executive Director of Strategy and Regulation at TalkTalk, agreed that the less well-off, whether older people or not, would be:

paying a tax to allow the relatively richer people to take this service, because we know the people who take broadband today and the people who pay premium prices for the better broadband today are the richer ones. The reality of this tax is that everybody will pay for a relatively richer group in society to have what today is, frankly, not an essential service and probably a bit of a luxury. That seems unjust in today's society.[91]

77.  When asked about the affordability of NGA to lower income families Dr Whitley, speaking on behalf of BT, explained that his company's entry level products cost around £7.50 per month rising to around the £20 mark. He hoped that in the "fullness of time we will be offering [NGA] in that sort of area, but it is early days in terms of our commercial pricing."[92] Mr David Williams, Chief Executive of Avanti Communications, expanded on this:

Right now there are plenty of low-income families that cannot afford broadband or mobile phones or other products in similar price points.[93]

78.  Furthermore, Digital Region, which is already delivering a South Yorkshire municipal NGA network, gave a regional appraisal of the impact of the levy. It pointed out that:

The sub region [of South Yorkshire] is contributing significantly to the development of the Digital Region NGA network, including end user customers through their local taxation and normal service charges. We do not believe it is right that the people of South Yorkshire pay an additional levy to provide NGA in other parts of the UK.[94]

79.  The Communication Workers Union was in favour of government intervention, but argued that the levy would be better placed on Internet Service Providers.[95]

80.  When challenged with the argument that the levy was, in effect, a regressive form of taxation the Minister denied that it was because it had been set at a "sufficiently low level for that not to be the case"[96] and that the lowest incomes would be protected.[97] Furthermore, he highlighted the fact that there would be a number of exemptions from the levy:

people, for example, receiving the pension credit guarantee will not pay the levy, or people on Jobseeker's Allowance; and other very low income households will not be affected. So I think we would be able to design this in a way that does protect those on the lowest incomes.[98]

Digital Britain acknowledged that there would be exemptions from the levy, in particular those families or individuals on social telephony schemes.[99]

81.  The Minister also asserted that the levy would deliver the benefits of NGA to everyone:

We will see a growth of new businesses; we will see an increase in prosperity; we will see better public services and everybody will benefit from that, and I hope increasingly that we will see people who write to me as well and say they are not planning to use broadband actually able to take advantage of the services and enjoying them.[100]

Levy vs general taxation

82.  When pressed on why the Government had decided on a levy rather than funding the programme though general taxation, the Minister acknowledged that it was "an unusual approach" but claimed that "the particular circumstances of this case do justify a different approach".[101] Those particular circumstances include the present economic situation. He argued that it would be very difficult given the current fiscal consolidation:

to commit credibly to support from general taxation to this particular purpose. I think the great strength of this proposal is that it gives us a ring-fenced pot that one could be confident would continue to be available throughout the period we are talking about, and therefore confidence for investment.[102]

83.  The Minister's answers gave the impression that the levy would be a hypothecated tax, but supplementary evidence from the Department has cast doubt on this. When asked to clarify whether the funds raised by the levy would be ring-fenced for the delivery of Digital Britain's objectives, the Department responded:

We expect the amount raised by the landline duty to be made available for the delivery of the NGA objectives through the Next Generation Fund. Few taxes are formally ring fenced.[103]

We find this a somewhat Delphic response. Either the levy will be hypothecated or not, and the Government needs to be give clarity on this before it brings proposals before the House to introduce the levy.

84.  The Minister was of the opinion that this was the case, whichever party was in power after the next general election:

I think that the commitment of the current Government and indeed the Opposition to funding for the Health Service, together with all the other public services, is going to absorb the resources that are going to be available realistically to governments over the next few years". [104]

Therefore, in order to make progress, he believed that a separate funding mechanism was necessary.[105]

85.  He acknowledged that the proposed levy had not been universally welcomed but was of the view that the importance of the infrastructure to the country as a whole warranted this form of revenue raising.[106] He believed it to be a "modest levy" which would give assurance to industry that the necessary funds would be provided, something that other forms of funding would not achieve.[107]

86.  We questioned the Minister about the possibility of directing the levy to users of broadband. Unfortunately the Minister discounted that suggestion believing it to be a "very, very difficult thing to do"[108] because "how does one identify who they are?"[109]

87.  We agree with the Minister that NGA is an important infrastructure project that is vital both to the competitiveness of the UK economy and the wellbeing of UK citizens. We do not agree, however on the mechanism by which it will be funded. All other infrastructure projects, for example hospitals and hospitals, are funded through general taxation at a level far in excess of the £1 billion proposed for NGA. Even those taxes which nominally go towards the transport infrastructure such as road tax, are not hypothecated but are used as a general resource.

88.  We believe that a 50 pence levy placed on fixed telecommunication lines is an ill-directed charge. It will place a disproportionate cost on a majority who will not, or are unable to, reap the benefits of that charge. The levy is a regressive tax under which a minority of users will receive enhancements to their services paid for by a majority who appear unlikely to access these services. The Government must look again at this proposal. If the Government persists with its proposal for a levy, it will need to set out, in unambiguous terms, whether or not the levy will be hypothecated and proceeds used to fund solely Next Generation Access. The fact that this remains uncertain undermines the credibility of the Government's position.

89.  We do not support the 50 pence levy as a means of raising revenue to assist in the roll-out of Next Generation Access. The programme for delivering Next Generation Access is important, but if public funds are required, they should be raised in the same way as for any other national infrastructure programme. We reject the proposal for a 50 pence levy and recommend that Next Generation Access, to the extent that publicly funded support is necessary, be supported out of general taxation.

After the 90%

90.  The Internet Service Providers Association raised with us the question of what would happen to the levy after the objective of delivering NGA to 90% of the population had been achieved. [110] The Minister accepted the logic that a levy for a particular purpose should be removed once that purpose had been completed,[111] and asserted that funds from the levy could not be used as a contribution towards general taxation.[112] However, he left a door open to the possibility of the levy remaining after 2017:

The point we can debate, I think, is whether it should carry on beyond 2017 to contribute to the cost of the final 10% next generation broadband.[113]

91.  We have already made clear our opposition to the 50 pence levy. It would therefore follow that we see no need for a debate to take place at a later date on the merits of continuing an unfair levy to complete the last 10% of the NGA infrastructure. Taxes have a habit of enduring; if the Government presses ahead with the levy it must set an end-date for it.

Application of VAT

92.  The applicability of VAT to the 50 pence levy was first raised in the press when the Times newspaper received documents suggesting that "ministers have decided to charge VAT on top of the new levy, essentially creating a tax upon a tax."[114] This was later confirmed by the Government which stated: "VAT will apply to the landline duty, as it does all other excise duties."[115]

93.  The application of VAT to the levy should have been made clear at the outset. The Government should not have relied on its argument that VAT will apply "as it does to all other excise duties". The 50 pence levy is an unusual proposal and as such it should have been made clear from the start that VAT would be applied. We believe the application of VAT represents a tax on a tax that is itself unfair, and its imposition only serves to reinforce our opposition to the levy.

80   Department for Business, Innovation and Skills, Digital Britain, July 2009, p 65 Back

81   Department for Business, Innovation and Skills, Digital Britain, July 2009, p 64 Back

82   Ev 46 Back

83   Department for Business, Innovation and Skills, Digital Britain, July 2009, p 65 Back

84   Q 201 Back

85   Q 201 Back

86   Ev 95 Back

87   Q 90 [Mr Stearn] Back

88   Ev 95 Back

89   Ev 87 Back

90   Ev 87 Back

91   Q 37 [Mr Heaney] Back

92   Q 37 [Dr Whitley] Back

93   Q 37 [Mr Willams] Back

94   Ev 98 Back

95   Ev 91 Back

96   Q 199 Back

97   Q 198 Back

98   Q 197 Back

99   Department for Business, Innovation and Skills, Digital Britain, July 2009, p 65 Back

100   Q 217 Back

101   Q 222 Back

102   Q 204 Back

103   Ev 47 Back

104   Q 218 Back

105   Q 218 Back

106   Q 213 Back

107   Q 221 Back

108   Q 220 Back

109   Q 219 Back

110   Ev 116 Back

111   Q 227 Back

112   Q 228 Back

113   Q 229 Back

114   "£6 broadband levy may be trebled for homes with multiple line", The Times, 26 November 2009 Back

115   Ev 47 Back

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Prepared 23 February 2010