Examination of witnesses (Questions 220
THURSDAY 15 MARCH 2001
and MR CLIVE
220. In your paper on increasing innovation,
you make these comparisons with the tax credits in other countries.
How valid are those comparisons when you have differences in company
(Mr O'Donnell) I agree it is quite difficult to get
exactly comparable measures. That is why in that paper we have
looked at the econometric estimates that have been done in rather
careful studies that have gone into great detail as to what the
counter factual is. They provide very interesting information.
I would not regard them as definitive because you have to think
about the context in which any of these tax changes are taking
place. Their tax systems are different but the results I think
are quite suggestive of quite a strong evidence base that R&D
tax credits are fairly effective. The precise form is something
that is out there for consultation, as you say.
221. You are extending this to large firms because
you assume, I presume, that this will increase R&D.
(Mr O'Donnell) Yes.
222. The IFS estimate that about £180 million
will be the effect of this, which is about 1.5 per cent additional
R&D would be done as a result of that. Is that about right?
Is that your estimate?
(Mr O'Donnell) We have not produced an estimate yet
because in part we are out there for consultation. As Mr Troup
said in his evidence, you will get very different effects if we
go for a complete volume measure or if we go for an incremental
measure. In the end, I think he said he thought incremental was
better targeted but created some complications. We will need to
think both about how well we can get round the complications because,
obviously with an incremental one, one would assume first principles
would give you much lower dead weight.
223. You do not have your own estimate of how
much more R&D you are aiming to achieve?
(Mr O'Donnell) No, because we have not done the consultation
yet. When we start honing down as to what precise ones we will
have, we will be able to firm up estimates. What we have done
in the paper is simply present the estimated impact that other
studies have found in other areas.
224. Does the IFS study sound about right?
(Mr O'Donnell) I honestly do not know.
225. I wonder if Mr Gibbs could just give me
a quickie on where the VAT on specs did come from if it did not
come from the Budget?
(Mr Gibbs) VAT on specs is essentially the outcome
of what is a very long running court case. If I can briefly summarise
the history, in 1990 the previous government decided to pursue
a court case in the area of insurance which raised legal issues
about products like spectacles, which can be split into different
parts: the lenses, the frame, the eye test and so on. This court
case was launched in 1990 in the context of various insurance
products. This January the process came to an end with a House
of Lords' Appeal Hearing which was lost by Customs. As a result
of losing the case, Customs are required to bring the supply of
dispensing services by opticians
226. I am sorry?
(Mr Gibbs) I am trying to read this to get the language
227. I am missing the full flavour!
(Mr Gibbs) Customs are required as a result of the
House of Lords' judgment to bring the supply of dispensing services
by opticians back within the scope of VAT, which reverses a 1995
judgment which forced the previous Government to exempt them from
VAT. This is a very long-running saga.
228. I am assisted by my colleague who has just
pointed out that it would be very unfair to characterise that
as a "stealth tax".
(Mr Gibbs) It is certainly not a measure that is anything
to do with this Budget.
229. It is an automatic outcome of a legal action
which has been going on for over ten years?
(Mr Gibbs) Since 1990.
230. That will assist us in writing letters
to opticians who are writing to us all, thank you. Double taxation
relief; who deals with that?
(Mr O'Donnell) Which specific aspect of double taxation
relief are you interested in?
231. It has been a complete shambles, has it
not, the constant changes of proposals, the constant changes of
emphasis, the fact that we have consultation going on to 19th
March with the view to implementing measures at the end of March.
This is not government consultation as it normally takes place,
(Mr Gibbs) The consultation that is going on until
19th March is very much a final safety back check. It is a simple
technical regulation which rather than simply implementing in
one go has been put out there for a little while to allow people
to comment on it. I do not think there is anything surprising
in that. It is very much what business is expecting to see. We
are not consulting until 19th March on any of the substantive
changes which have been proposed since the last Budget.
232. As a history of a policy measure it is
pretty dismal stuff, is it not? It was introduced and then it
has had to be corrected on several different occasions since.
Do you think you have got it right now?
(Mr Gibbs) Perhaps I can recap a bit of the history.
233. Not too long.
(Mr Gibbs) I will try to give you the brief version.
Last year's Budget essentially introduced restrictions on the
use of mixer companies for achieving double taxation relief. During
the course of the Finance Bill amendments were introduced to allow
some on-shore pooling of income from different foreign jurisdictions
and in this Budget we are confirming that we are going ahead with
some technical amendments that were trailed at the PBR and made
in response to representations made from business. I think while
the process might not have been the smoothest, we do now have
a system which should prove stable. We have protected our revenue
base. We have removed an artificial incentive in the tax system
for companies that have no other reason to do so to set up offshore
subsidiaries for firms to channel their profits through. We have
given a benefit to smaller multi-nationals that can benefit from
on-shore pooling but who were not inclined to go to the trouble
and expense of setting up complex offshore arrangements. We have
a regime that in overall terms is fairly generous in the way it
treats multi-nationals based in the United Kingdom in terms of
the credit they get for tax for overseas subsidiaries. The answer
to your question about whether the DTR package is finished is,
yes, it is but there are other measures which we are consulting
on further which will also be of substantial benefit to business.
There is the proposed tax relief for companies' capital gains
on disposals of substantial shareholdings. It is a measure we
have been consulting on in one form or another for a while in
the form of allowing them to defer the tax when they sell those
shares. The process of consultation has led to other options being
considered including whether there should be an exemption for
such disposals, which in turn raises wider issues about how companies'
interest incurred on investment overseas is treated. This is a
very complex set of measures. One of the things that we have been
told in consultation by Edward Troup and others is that it is
very important to get it right and not to rush into further change
here. That is why we have announced this further period of extra
consultation. We are going to publish a paper on the issues I
have just been describing in the summer and there will be further
consultation with business with a view to extending the tax relief.
234. Would both the changes that are being made
and the changes that are in prospect lead to a reduction of revenue?
(Mr Gibbs) Much would depend on the precise design
and the nature of the proposal. We are not at that stage yet.
We are going to publish a paper in the summer that will set out
some broad options, but they will not be specific enough to cost.
235. If you look at page 150, line 9, where
these changes are set out, the changes in double taxation relief
eventually feed through in a reduction of revenue.
(Mr Gibbs) Yes, that is correct.
236. But it is not the intention that the other
changes you have in mind on the shareholdings issue, and however
you might deal with that, is to produce a further loss of revenue?
It is intended to be revenue neutral?
(Mr Gibbs) We have not set the objective that the
relief will be revenue neutral as a constraint to the policies
we are consulting on, no.
237. So you have not made up your minds yet
as to whether it will be revenue neutral or not?
(Mr Gibbs) We have said that we are going to consult
on further options for further relief for companies on disposal
of substantial shareholdings. To the extent we are proposing to
issue some form of relief you would expect that to have some revenue
cost. What we have not yet done is design the relief in a specific
enough way that we can attach costings to it. We are still at
the stage of broad options that we have yet to put on the table,
but we will be doing that in the summer.
238. This is something we may come back to should
we have the good fortune, all of us, still to be here. My last
point concerns limited liability partnerships and whether they
are tax neutral. There is a commitment given in the Budget Report
that it will be tax neutral and that limited liability partnerships
will not offer an escape route from tax liabilities.
(Mr Gibbs) I am not familiar with the precise reference.
239. Page 138, half-way down, limited liability
(Mr Gibbs) I am not sure what the cost, if any, is
that is attached to that measure.
240. In that case I will not pursue it now but
I would like to have more information particularly about the extension
of limited liability partnerships to the property investment arena,
which comes from being, I am afraid, a distinctly sad person who
has taken an interest in limited liability partnerships. I would
really like to know where property investment limited liability
partnerships sprung from.
(Mr O'Donnell) We can provide you with a note on that.
241. Thank you very much for the way you have
answered our questions.
(Mr O'Donnell) Thank you, Chairman. Thank you for