5 Individual measures
Dynamic effects of taxation
62. At the time of the Autumn Statement, the Government
published a study into the dynamic effects of taxation. This assessed
how tax policy changes might lead to wider economic behavioural
changes, for example increased business investment in the case
of corporation tax. The Treasury study focused, in particular,
on the long run dynamic effects on growth of the Government's
corporation tax cut from 28 per cent to 20 per cent.[120]
The Treasury's analysis suggests that the tax cut could lead to
a 2.5 per cent to 4.5 per cent increase in investment, a 0.6 per
cent to 0.8 per cent increase in GDP, and higher wages and increased
consumption.120
63. The results of the modelling exercise, as with
all economic modelling, are subject to some degree of uncertainty.
The Treasury's paper states:
The CGE model is subject to some uncertainty.
This is principally around the parameters included, for which
sensitivity analysis is carried out. Economic uncertainty, not
captured by the model, could also impact on the results in the
short term. Nevertheless, the results are broadly consistent with
the wider academic literature which finds that reductions in Corporation
Tax boost investment leading to higher GDP and partial revenue
recovery. 120
Mr Emmerson of the IFS also emphasised the uncertainties
involved:
Clearly you have to be very careful, because
if you change those assumptions, you could get a different answer
and the pay-off is over a very long time. It is not like you can
do the change and then see a year later whether it has worked
out. You have to wait 20 years before you get the full response
if the model is correct. Clearly there are risks there and there
are a lot of uncertainties.[121]
64. However, given the limitations of the model itself,
Mr Emmerson said that the "assumptions they have made certainly
do not look unreasonable" and that it was a worthwhile exercise.[122]
65. The Chancellor said that his rationale for asking
the Treasury to produce the paper was:
It is something I had said needed to be done
when I was in Opposition and it reflects a debate that is had,
I would not just say on the centre right of British politics,
but primarily on the centre right, which is that lower taxes can,
at least in part, pay for themselves through the additional investment
and economic growth they bring.
I did want to move the debate and begin a quiet
revolution in the way people think about these things and so I
started with corporation tax and commissioned this study.[123]
However, the Chancellor was clear that the existing
"static scoring" system used by the Office for Budget
Responsibility would continue for at least the near future, and
stated that the purpose of the paper was purely to add to the
existing debate:
We have a static scorecard and an established
system of costing things, and of course now a major innovation
in this Parliament, we have an Independent Office for Budget Responsibility
that audits those things.
I would certainly envisage for this Parliament
continuing to use the static scoring as the basis of the budgets
in Autumn statements, but these studies of individual taxes are
what I think helps shift the debate in a positive way.[124]
Mr Chote agreed, stating that "the work they
are doing in that area we read with interest and we will look
and see how it informs our own", [125]
but also making it clear that the OBR had not certified the model
and that the outcome of the study had not influenced the OBR's
forecasts.[126] Mr
Chote also noted that a number of the modelled outcomes of the
paper were already taken into account in the OBR's existing "static
scoring" system:
You have outlined a number of the interesting
effects there, one of which is the reduction in corporation tax
reduces the cost of capital, encourages business investment with
a potential knock-on effect on GDP. That is in the forecast. We
make adjustments for that effect when we have included corporation
tax measures in the past. We have pushed up business investment
by, I think, roughly the same proportion, 3 per cent or so, as
this paper would suggest.
The paper also points out that you need to look
at the impact of profit shifting. Again, our forecasts have made
an adjustment for profit shifting, which reduces the direct static
cost of the measures. The area where I think this analysis suggests
more impact than we would include is the fact that it does more
to boost consumer spending than it does to boost investment.
It is important to bear in mind that this paper
is not a comparison between the way we treat these things and
an alternative way. Quite a lot of the stuff that they are highlighting
as potential effects are things that we take into account when
we are doing our forecast anyway.[127]
66. The Treasury's analysis of the dynamic effects
of the Government's corporation tax cut is subject to great uncertainty.
Nonetheless, there is some merit in continuing to study the dynamic
effects of policy decisions. It is important to emphasise, however,
that the OBR took account of some of the effects of the Government's
corporation tax cut discussed in the Treasury's paper in its own
forecasts, including the effects on business investment and profit
shifting. The OBR has stated that the Treasury's analysis has
not affected its official economic forecasts. We will expect the
OBR to continue to reach its own independent judgement on the
effects of tax changes on the yield.
UK-Swiss tax co-operation agreement
67. The UK-Swiss tax co-operation agreement became
effective on 1 January 2013. The agreement, originally signed
in 2011, ensured that deposits of UK residents held in Swiss bank
accounts became subject to a one-off payment to clear past unpaid
tax liabilities, and a withholding tax on future income and gains.[128]
68. The OBR provided indicative costings for the
policy in its December 2012 EFO, putting its likely total yield
at £5.3bn from 2012/13 to 2017/18.[129]
The Treasury Committee, in its report on Autumn Statement 2012,
concluded that:
the proceeds [of the agreement] may not meet
expectations if assumptions about the potential tax liabilities
and expected behaviour of those affected prove not to be valid.[130]
69. In its response to the Treasury Committee's report
on Budget 2013, the OBR highlighted some of the key uncertainties
surrounding its costing of the policy, and confirmed that it would
revisit its analysis at the time of the Autumn Statement:
The key uncertainties for the UK-Swiss tax agreement
are the value of UK financial assets in Switzerland and the
behavioural response of those individuals with funds in Switzerland. (Indeed,
we made a lower estimate of the likely yield than that originally
made public by ministers and HMRC because we preferred a
lower central forecast for the pool of assets.) We will re-assess
the yield from the agreement in our Autumn 2013 forecast [...].[131]
The Treasury Committee said in its report on Budget
2013:
We will monitor closely whether the agreement
with Switzerland produces the receipts the OBR has forecast for
this financial year.[132] Table
6: Costing of UK-Swiss Tax Co-operation Agreement
| £bn
| 2012-13
| 2013-14
| 2014-15
| 2015-16
| 2016-17
| 2017-18
| Total
|
| Autumn Statement 2012
| 0.3 | 3.1
| 0.6 | 0.9
| 0.2 | 0.2
| 5.3 |
| Autumn Statement 2013
| 0.0 | 1.1
| 0.3 | 0.3
| 0.1 | 0.1
| 1.9 |
| Reduction
| 0.3 | 2.0
| 0.3 | 0.6
| 0.1 | 0.1
| 3.4 |
Source: Office for Budget Responsibility Economic
and Fiscal Outlook, December 2013
70. When the OBR came to re-assess the likely yield
from the UK-Swiss tax agreement in its December 2013 EFO, it reported
a reduced projection of £1.9bn over the forecast period.[133]
The reasons for this reduction were linked clearly to the uncertainties
the OBR pointed out in its March EFO:
At the time [of the original costing], we stressed
the uncertainty of the original costing due to the lack of hard
information about the value of UK individuals' financial assets
in Switzerland, and how these individuals would respond to the
policy. Both receipts data and the July announcement from the
Swiss Bankers' Association (SBA) indicate that the yield from
the one-off levy (Swiss capital tax) will be significantly lower
than estimated in the certified costing. [...]
The lower-than-expected yield is likely to reflect
both a smaller initial tax base and a larger behavioural response
than was estimated. The smaller tax base is likely to reflect
some combination of: fewer assets held by UK individuals in Swiss
banks; more of the assets belonging to non-domiciles or people
who are already compliant; and the failure of Swiss banks to identify
UK individuals holding assets; or circumvention of the deal. The
SBA announcement suggested a high number of individuals with non-domicile
status. The extent of capital flight to other offshore centres
is likely to have been greater than expected. [134]
71. The OBR has previously conceded that there are
uncertainties in forecasting income from anti-avoidance measures
generally. In its response to the Committee's Budget 2013 report,
the OBR noted:
We agree that the yield from anti-avoidance measures
is generally more uncertain than that from other policy measures
[...]. Key uncertainties include how much avoidance is currently
taking place and the extent to which firms or individuals have
opportunities for other avoidance routes. Many avoidance costings
allow for attrition, in other words an expectation that revenue
from the measure will decline over the forecast period as new
avoidance routes are discovered. We are working with HMRC to improve
the evaluation of anti-avoidance measures. We hope this will help
improve future costings, for example the attrition rates adopted.[135]
The OBR added that it is not easy to learn lessons
from the success or otherwise of past anti-avoidance measures:
When we receive costings for anti-avoidance measures,
we routinely ask whether there is evidence on the likely
yield from similar measures in the past. But unfortunately there
is a limit to what can be learned from examining past anti-avoidance
measures, as there is always considerable uncertainty regarding
what the path of receipts would have been in their absence.[136]
New tax avoidance and evasion
measures
72. In Autumn Statement 2013, the Government announced
it would continue to "take further steps to close down avenues
for both tax avoidance and evasion, bringing in more than £6.8
billion of new revenue over the forecast period—more than
any other fiscal event this Parliament".[137]
73. The Government's 'Autumn Statement 2013: policy
costings' document sets out the key areas of uncertainty surrounding
each of these policies. In virtually all cases, these areas of
uncertainty are those that led to the overestimated yield of the
UK-Swiss tax agreement: the size of the tax base, and the behavioural
response.[138] Attention
was given by the OBR to two of the policies in Table 7 owing to
their heightened uncertainty:
In respect of the specific policy costings at
this Autumn Statement, the OBR identified the following areas
of particular uncertainty:
· CGT - amending final exemption period
for private residences: The aim of this measure is to reduce
abuse of the final period exemption by reducing the time period
from 3 years to 18 months. The extra uncertainty arises from HMRC
not having a centralised record of the amount this relief
currently costs the Exchequer, nor the number of transactions
that use it. As with anti-avoidance costings, it is difficult
to estimate individual behaviour in response to policy changes.
· Information Sharing Agreements with
Overseas Territories: The estimated revenue raised by these
measures is uncertain as there is little hard information about
the value and nature of UK individuals' financial assets
in these Overseas Territories. There is further uncertainty
in the costing around how individuals affected will respond
to the policy. Experience with the UK-Swiss tax agreement has
illustrated the uncertainties involved in such costings. Table
7: Costing of 'avoidance, tax planning and fairness' policies
| £m | 2013/14
| 2014/15
| 2015/16
| 2016/17
| 2017/18
| 2018/19
| TOTAL
|
| Accelerated payments in follower cases
| 0 | +135
| +660 | -35
| -40 | -45
| +675 |
| Onshore employment intermediaries
| 0 | +520
| +425 | +380
| +415 | +445
| +2,185 |
| Dual Contracts
| 0 | 0
| +85 | +60
| +60 | +65
| +270 |
| Compensating Adjustments
| 0 | +60
| +125 | +120
| +115 | +110
| +530 |
| Venture Capital Trusts: share buy-backs
| 0 | +50
| +35 | +10
| +20 | +25
| +140 |
| Avoidance schemes using derivatives
| +40 | +40
| +20 | +10
| 0 | 0
| +110 |
| Oil and gas: offshore chartering
| 0 | +140
| +115 | +100
| +90 | +80
| +525 |
| Partnerships: confirming extension to Alternative Investment Funds
| 0 | 0
| +680 | +430
| +410 | +400
| +1,920 |
| Automatic Exchange of Information agreements with Overseas Territories
| 0 | 0
| 0 | +25
| +10 | +5
| +40 |
| Double taxation relief: closing loopholes
| +10 | +20
| +5 | 0
| 0 | 0
| +35 |
| Capital gains tax: amending final exemption period for private residences
| 0 | 0
| +65 | +90
| +100 | +105
| +360 |
| Capital gains tax: application to non-residents
| 0 | 0
| 0 | +15
| +40 | +70
| +125 |
| Corporation tax: change of ownership rules
| -30 | -10
| 0 | 0
| 0 | 0
| -40 |
| TOTAL
| +20 | +955
| +2,215 | +1,205
| +1,220 | +1,260
| +6,875 |
Source: HM Treasury, Autumn Statement 2013, December
2013
74. Every year estimates have to be made of the
yield of anti-avoidance measures, in the face of great uncertainty
about the outcomes. The OBR itself points out that there is a
limit to what can be learned from previous policies in determining
whether such costings are suitable. The Treasury Committee warned
in 2012 that the proceeds of the UK-Swiss tax agreement might
not meet expectations. The Government has reduced its estimate
of the expected yield of the UK-Swiss tax agreement by almost
two thirds over the course of a year. Given the great uncertainty
that surrounds the fiscal effects of tax avoidance measures, the
reduction in the estimated yield of the UK-Swiss tax agreement
should not be a great surprise.
75. The Government has now announced a series
of further measures designed to close down avenues of avoidance,
each vulnerable to similar uncertainties of their own. In the
Government's own words, though, these further measures "will
bring in more than £6.8 billion of new revenue over the forecast
period—more than any other fiscal event this Parliament".
Therefore this perennial problem has now assumed particular fiscal
importance given the size of the revenue being forecast. The OBR
should do all it can to report on whether yields were attained
as originally costed. Where that is not possible, it should limit
the extent to which the Government may account for such projected
gains.
120 "Analysis of the dynamic effects of Corporation
Tax reductions," HM Treasury and HM Revenue and Customs,
5 December 2013, p 3 Back
121
Q254 Back
122
Q254 Back
123
Q59 Back
124
Q59 Back
125
Q42 Back
126
Q43; Q 46 Back
127
Q 42 Back
128
HMRC, 'The Swiss/UK Tax Cooperation Agreement and HM Revenue & Customs (HMRC)',
October 2012 Back
129
Office for Budget Responsibility, Economic and Fiscal Outlook,
December 2013, Cm 8748, p114, Box 4.3 Back
130
Treasury Committee, Seventh Report of Session 2012-13, Autumn Statement 2012,
HC 818-I, para 77 Back
131
Treasury Committee, Second Special Report of Session 2013-14,
Budget 2013: Government and Office for Budget Responsibility Responses to the Committee's Ninth Report of Session 2012-13,
HC 370, p20 Back
132
Treasury Committee, Ninth Report of Session 2012-13, Budget 2013,
HC 1063, para 64 Back
133
Office for Budget Responsibility, Economic and Fiscal Outlook,
Cm 8748, December 2013, p115, Box 4.3 Back
134
Office for Budget Responsibility, Economic and Fiscal Outlook,
Cm 8748, December 2013, p115, Box 4.3 Back
135
Treasury Committee, Second Special Report of Session 2013-14,
Budget 2013: Government and Office for Budget Responsibility Responses to the Committee's Ninth Report of Session 2012-13,
HC 370,, p21 Back
136
Treasury Committee, Second Special Report of Session 2013-14,
Budget 2013: Government and Office for Budget Responsibility Responses to the Committee's Ninth Report of Session 2012-13,
HC 370,, p21 Back
137
HM Treasury, Autumn Statement 2013, Cm 8747, 5 December 2013,
p9 Back
138
HM Government, Autumn Statement 2013: policy costings,, December
2013, pp22-33 Back
|
