Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 420 - 439)



Mr Beard

  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, yes.

  422. If legislation may be necessary, for instance, to deal with the Minimum Funding Requirement, when may the legislation happen?
  (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.

Mr Fallon

  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 right now?
  (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 is necessary.

  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 be lost.

  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.

Mr Cousins

  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 that.

  429. Do you have any idea when you will be able to report?
  (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.

Mr Cousins

  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 Committee—and this may help Sir Michael in the issues that he raised with the Economic Secretary when she came to the Committee on 1 March—the 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"[1]. 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 computing industry?
  (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 as possible.
  (Mr Brown) Ministers are considering the report at the moment.

  Chairman: Thank you very much, Chancellor.

1   See Seventh Report, Session 2000-01, Government Actuary's Department, HC236, Appendix 8. Back

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