Examination of witnesses (Questions 420
TUESDAY 20 MARCH 2001
O'DONNELL and MR
420. Chancellor, you have just mentioned the
Myners Report. How much do you think the implementation of the
Myners recommendations is going to affect productivity growth
and economic performance?
(Mr Brown) The Myners Report has now been published.
We have said we support its main recommendations. There is obviously
a period in which there is going to be consultation on some of
these detailed proposals that he has put forward. We have said
that we would consider legislation if necessary, but obviously
many of the changes can be introduced by the companies, the institutions,
the organisations themselves and we look forward to that happening.
I think the debate that is now taking place in the media and elsewhere
shows the importance of some of the measures that he has put forward.
421. Do you expect them to have a significant
impact on productivity when they are implemented?
(Mr Brown) I do believe that the role of the big institutions
and an enhanced role in the economy could lead to greater productivity,
422. If legislation may be necessary, for instance,
to deal with the Minimum Funding Requirement, when may the legislation
(Mr Brown) The legislation in the areas where we are
committed to legislation will obviously happen as soon as possible.
I would like to see some of the other changes that he has recommended
coming in by voluntary agreement.
423. Chancellor, we also took evidence on double
taxation relief which was in last year's Budget and attracted
a barrage of criticism from a number of British companies, including
Vodafone who said you had got it completely wrong. You then had
to change it during the Finance Bill last year. Now in this year's
Budget you had further regulations, and the period of consultation
expired yesterday I think, and your Mr Gibbs told us that this
was a "final safety back check". Given that you made
a complete horlicks of double taxation relief, have you got it
(Mr Brown) It was a change on double taxation relief
that has been made actually in relation to moving from offshore
holdings in this matter to dealing with it on-shore and I think
that is an improvement. As far as the Vodafone case you are referring
to, that was not essentially double taxation relief, that was
about the use of controlled foreign companies, CFCs. That was
a change that we recommended that I think most people have accepted
424. If you have got it right now, your own
Red Book shows on page 150 that you are gaining five million next
year, five million the year after and then losing 15 million in
the third year. What is all that about?
(Mr Brown) We never said that the purpose of these
changes was simply revenue. The purpose of these changes was to
create a better system for multinational companies operating in
the United Kingdom. We are discussing the improvement of the system
continuously with them. When you look at changes as far as revenue
is concerned, the whole problem of controlled foreign companies,
and to some extent of DTR, is the protection of revenue that might
otherwise have been lost if we did not take action and I think
you have omitted that when you read out these figures.
425. But if you are trying to protect revenue,
why have you got a net loss of five million over three years?
(Mr Brown) Because the danger was, particularly with
the CFCs, that if the practices that had been devised by accountants
continued there would be a massive loss of revenue over a period
of time. So the measures we took were to protect revenue. I think
people who have worked in the Treasury know that a lot of the
measures we have to take in Budgets are measures to stop a loophole
developing that leads to avoidance and, therefore, to the loss
of revenue. These are measures to protect revenue that might otherwise
426. I understand that but, if they are to protect
revenue, why is the net loss five million?
(Mr Brown) Because we are looking at an improved system
for dealing with the treatment of what are essentially the big
international companies in the United Kingdom. The purpose of
the measure was not just to either protect revenue or, indeed,
to increase revenue; the purpose of the measure was to create
a more modern system for multinational companies operating in
the United Kingdom. That is why we are discussing with them, for
example, the treatment of intellectual property. We need a more
modern system of taxation to deal with this issue of intellectual
property. We are also discussing with them, and there are detailed
documents, the treatment of capital gains when there are the sales
of subsidiaries. Again, that is a modern issue that has got to
be dealt with properly so that we can have a more attractive system
and make us the best environment for international companies to
operate in throughout the world. So the change is, yes, to protect
revenue but, yes, also to create a more modern system for international
companies to operate in.
427. You keep calling it modernisation but there
is a net loss of five million over three years.
(Mr Brown) But if you are modernising the tax system,
for example, giving a tax relief for intellectual property, which
is one of the things that we are proposing, then you will not
get additional revenue from doing that. You are prepared to sacrifice
revenue to get a more modern system of taxation. This is what
the companies want and this is what we think is the right thing
for Britain to be the best environment for international companies
to locate in.
428. Chancellor, I wonder if I could ask you,
in the Budget there is a very helpful proposal to raise the VAT
threshold on small business but overall have you made any calculation
both in terms of tax and the regulation that goes with tax of
the impact of the Budget on small business?
(Mr Brown) The small company taxation as a whole has
been cut from 23 pence to 20 pence and there is a new ten pence
rate for small company taxes. Therefore, over a period of time
the tax burden on small companies has been reduced by something
of the order of 20-25 per cent. The additional measures that we
are introducing in this Budget are essentially helping even smaller
companies that are not registered for corporate tax, they are
often just registered for income tax. There is a proposal to raise
the VAT threshold initially and then to deal with a simpler system
for VAT requirements of companies with turnovers of less than
half a million pounds. I believe that this could make it a lot
easier for companies to operate. It is itself a measure of deregulation.
We are consulting with the companies now on introducing it and
we will be able to report back later on the progress we make on
429. Do you have any idea when you will be able
(Mr Brown) I do not know if we have got a timetable
for that but these discussions are taking place now. I can write
to the Committee and tell you.
430. Can I just point out that I am going to
ask the Chancellor a question about life assurance, which is in
the proposals for the Finance Act, and then go on and ask a question
about Equitable Life. I am drawing the attention of colleagues
on the Committee to that, if it might be helpful to do so. The
suggestion is, according to an Inland Revenue Budget Notice, that
there will be legislation in the Finance Bill to simplify the
tax treatment of shares and life assurance products and to require
insurance companies to give details of life policy gains to their
policy holders. That clearly must be a helpful thing, that policy
holders are going to be kept informed of the gains in the life
policies that they have.
(Mr Brown) Yes.
431. But do you not think that perhaps other
information as well should be disclosed, for example about the
policies on reserving and things like free asset ratios?
(Mr Brown) I think you are absolutely right to draw
attention to these very important issues that sometimes we do
not have time to discuss in detail. It is true that we have taken
a number of initiatives. There are proposals on greater transparency
and we have had the introduction of these better standards, CAT
standards, that I think are a means by which we can protect people
with policies. Can I just bring the Committee up to date. The
FSA has obviously told this Committee itself that it is going
to carry out a review of with-profits business. It has a report
into an issue that you may want to raise about Equitable Life.
We are commissioning an independent review of capital and information
flows regarding personal investment products. That is a broader
scope than the FSA review. The FSA review will concentrate on
the amount of discretion management should have over with-profit
funds and about greater transparency in how they work. We are
going to look with an independent review at capital and information
flows regarding personal investment products as a whole. I hope
that the Committee will welcome that as a sign that we are taking
seriously these issues in the modern context in which they arise,
and that is the protection of consumers.
Mr Cousins: Thank you very much, Chancellor,
for that information. Turning now to Equitable Life itself, and
I am conscious of the time and I am also conscious of the fact
that the Committee is engaged in a number of excursions already
and I do not want to launch into another one, and I also think
there is a distinction to be made between scrutiny and knockabout.
Chairman: Which has perhaps not always
been observed this morning.
Mr Cousins: That is for you to say, Chairman,
I make no comment on that.
Mr Plaskitt: You just have done.
432. The Committee finds itself in a genuine
dilemma here which Sir Howard Davies has described as being "new
constitutional waters". You have previously reproved the
Committee, in my view correctly, for not inviting ministers to
comment on the report on the Treasury. Coming to Equitable Life,
there is a genuine dilemma for the Committee. The FSA is conducting
an inquiry into its own record on regulation with the Treasury's
record on regulation up to the point where the FSA took over as
background. Mr Roberts and Mr Allen, who were originally at the
DTI, then went to the Treasury and are now at the FSA and throughout
were responsible for the regulation of insurance companies. Mr
Roberts has absolutely explicitly and directly refused to answer
questions from the Committee about what happened prior to him
moving to the FSA on 1 January 1999. Sir Howard Davies intervened
to say that in his view the Committee could not put questions
to Mr Roberts about that and described this as being "uncharted
constitutional waters". I do not intend to press you on this
point this morning but could I at least invite you to consider
the situation in which the Committee finds itself which is a difficult
one. We must be in a position to make some enquiry into the regulation
and its effectiveness prior to the FSA assuming responsibility
on 1 January 1999 and yet Mr Roberts, who was responsible for
it in a practical sense, is refusing to answer the Committee's
questions because he regards that as being part of advice to ministers
which he cannot disclose to the Committee. I do not intend to
pursue the substance of this this morning but you will readily
see the dilemma that the Committee finds itself in. If you could
see a way in which you could assist the Committee to find a way
through that dilemma I think we would all be grateful.
(Mr Brown) Can I thank you for the way you have put
this question because we are dealing with quite a detailed issue
here and it goes back a number of years. The Treasury was responsible
for the prudential regulation of insurance companies from 5 January
1998 to 31 December. Then it went to the FSA under contract to
the Treasury and now, of course, to the FSA under the Financial
Services and Markets Act. The inquiry that the FSA is conducting
is into the events surrounding the problems that Equitable Life
have had. I can just report to the Committeeand this may
help Sir Michael in the issues that he raised with the Economic
Secretary when she came to the Committee on 1 Marchthe
Economic Secretary has replied to Sir Michael today, I do not
know if he has got the letter yet, saying that "the FSA Report
will, according to the information that we have, set out the background
and events leading up to the point at which responsibility for
prudential insurance passed to the FSA".
So that issue is not ignored in the report that is being conducted.
I have also said to you that the Treasury is going to look in
future with an independent review at capital and information flows
regarding personal investment products. That is a more general
issue, not precisely about individual companies. There is no suggestion
that the issues that have been raised are going to be left without
any further investigation.
433. I do understand that and I do think that
is helpful, particularly, if I may say so, the last point. However,
if it wishes to enquire into the effectiveness of regulation of
Equitable Life, which is an issue of genuine public interest,
before the period of the FSA's takeover, the Committee has effectively
been prevented from asking those questions by Mr Roberts. I fully
understand Mr Roberts' position, I am not in any way criticising
him, but there is a dilemma for the Committee.
(Mr Brown) Can I put it another way. We must await,
and I think it would be to the Committee's benefit also to await,
the report of the FSA and then we can draw conclusions once we
have seen what that report has said. What I want to point out
to you this morning, which I think deals with at least part of
your point, is that the FSA Report will set out the background
and events leading up to the point at which the Treasury and then
the DTI passed over its regulatory responsibilities to the FSA.
434. And you would at that point
(Mr Brown) I think it is then for the Committee, having
seen the report, to consider what action is next appropriate.
I just say on a more general issue that we are looking at some
of the general points, as are the FSA, that arise from this instance.
Sir Michael Spicer
435. Two quick unrelated points. Chancellor,
have you had any second thoughts about IR35 in view of the disastrous
effect it is having on small contractors, particularly in the
(Mr Brown) The IR35 proposals were subject to a considerable
amount of consultation and then they were amended in the light
of the representations that were made. I see no case for making
a complete shift in the policy of the Government. We will, of
course, continue to listen to what people say. We did analyse
the effects that were likely to follow and it is not our evidence
that there have been large scale movements out of the country
and I do not believe that to be the existing position.
436. The other question, if I might, is just
to ask you whether you will lend your weight to publication by
Customs and Excise of the Rocques Report into the management of
vast losses of revenue which seem to be apparent there now? Particularly
in the Sub-Committee we have been pressing very hard on Customs
to publish their report, and so has Mr Rocques himself. I just
hope that ministers will put their weight behind it as well.
(Mr Brown) I think you should know the background.
The Chairman of Customs and Excise has already made a full disclosure
of the revenue losses in the trust statement to the 1999-2000
accounts. As far as the Rocques Report is concerned, ministers
are considering this report. No decision has yet been made on
publication but I hear what you have to say on that. Let us be
absolutely clear, so that the Committee does know, this is dealing
with losses of excise duties in the years 1994, 1995, 1996, 1997
and 1998 that amounted to the figures that were set out by the
National Audit Office. So we are dealing with a period that started
quite a long time before we were in Government.
437. That may or may not be relevant, but the
fact is there are management practices within Customs which the
Committee has been quite critical of and which relate to what
we understand to be some of the Rocques Report recommendations
and the quicker these reach the light of day the better for the
future I would have thought.
(Mr Brown) Appropriate action has already been taken
by Customs to deal with the lack of controls. Obviously I hear
what your proposal is. Ministers are considering the report at
the moment but the actual findings, in fact, of the report as
far as the losses are concerned are contained in the reports that
have been made by the Chairman of Customs and Excise and by the
National Audit Office.
438. I do not want to pursue this at this time
of day but "appropriate action" are words that have
been given to us by Customs and Excise on many occasions and we
have found that the action has not been quite as appropriate as
they have said. I hope that this report will reach the light of
day very soon.
(Mr Brown) Just so that the background is fully understood,
when these losses were reported to the National Audit Office and
to the Paymaster General, she immediately commissioned an independent
inquiry into the matter and it is that independent inquiry we
are now looking at.
439. Again, I do not want to pursue this but
it was indicated that the report would be published very early
in the new year and it has been about for some time now. I repeat,
I hope that you will give your weight to publishing this as soon
(Mr Brown) Ministers are considering the report at
Chairman: Thank you very much, Chancellor.
1 See Seventh Report, Session 2000-01, Government Actuary's
Department, HC236, Appendix 8. Back