Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 100 - 103)

MONDAY 22 APRIL 2002

MR JOHN APPLEBY, MR ANDREW DILNOT, MS MARY O'MAHONY, MR EDWARD TROUP, AND PROFESSOR STEVE WILCOX

  100. Having experience in Northern Ireland as the Minister and knowing about the border problems I think a lot of people were colour blind, but there we are. On business taxes what is the overall impact of the Budget on business, by sector and overall?
  (Mr Dilnot) It depends what you think about employers' National Insurance contributions but let us put that on one side. Even ignoring that, the net effect of the Budget on business is to raise the tax burden by around £1 billion because although there are tax reductions with the R&D tax credit, intellectual property and financial shareholdings, there is a range of tax increases some of which are described as anti-avoidance measures, some of which are taking away prior reliefs, ie the North Sea change, the change to the taxation of foreign companies' UK branches, so the overall impact of the Budget is to raise tax.

  101. Okay. We are pressing up against time at the moment. As you know, the Chancellor holds to the view of the non-domiciled tax status. Again as we know, previous reviews came to nothing and ended up in dust. Is it the same prognosis for this one?
  (Mr Troup) You have to break this down into two parts. Every jurisdiction has a favourable tax regime for temporary residents, ie foreigners who come to the country for a limited period of time who do not bring everything with them, and, by and large, what you do with those individuals is you only tax them what they have in the jurisdiction and what they have left outside you do not tax. We have such a regime. By historical accident the determination of what counts as a temporary resident for income tax purposes is not based on period of time here, it is based on a concept which is nothing to do with the tax system, which is domicile. We therefore have a slightly arbitrary and rather old-fashioned test of temporary residence. In a rational world or a sane world if we set up the tax system now we would introduce a test which would say after you have been here, say, ten years. Most jurisdictions have such tests. However, having had this test and it being well-enshrined, is there any purpose in changing it? We definitely would need a temporary residence test of some kind. There is no real fiscal gain in changing the test. Although it is probably a sensible thing to do, quite frankly, in the short, medium and probably in the long term it would make no difference to the tax collected because there are relatively few individuals affected and they do make their choice very much on where they pay taxes and their net contribution to the economy tends to positive. Given there is very little short or medium-term revenue to be gained but there is quite a lot of political damage to be done with an important (although not over-important) section of the economic community, I would hope there will not be any substantial change because it will send out the wrong messages about the UK. That is not saying in a sane world if we were designing the tax system from scratch we would have the system we have. I cannot predict whether there would be any change or not but I think it would be unfortunate if a scare were created about the likely effect or scope of this change over the coming months. The Government has been sensitive to the risk of this scare because this is not a terribly important issue.

  102. The Chancellor promised to modernise taxation of foreign companies and I note from Page 155, Table 1, that he hopes to put £350 million in 2003-04 and £650 million in 2004-05. How do you view the changes in taxation policy issues?
  (Mr Troup) If these numbers are correct (and from what I understand the Inland Revenue estimated the numbers may be somewhat higher than this) it seems to me that this is a very significant hit on foreign companies. It may be that this is justified in the sense that there may be financial companies who have been exploiting I would not say loopholes in the rules but a computational issue and deficiency in the rules which would suggest that on a like-for-like basis they should be paying more. However, there are two main comments, one on consultation. There is a big exercise going on on this topic at the OECD at the moment. There was a round table meeting which was very useful on the Thursday and Friday before the Budget on this and there was general agreement by all those participating that no OECD member state should bring forward changes without bringing them forward together with all other OECD members, in order to ensure that no company rocked the boat for inward investment. The United Kingdom five days later did introduce measures, albeit subject to consultation, and it seems to me that the timing can be characterised as slightly opportunistic for the purpose of getting the number in the Budget. Secondly if this number is correct to the extent tax rates cannot be offset in other jurisdictions, which a lot unfortunately will not be able to, it does seem to me this is not sending, together with the National Insurance changes that employers face, a very good signal to the financial community in the City of London. It is very unfortunate that this has been announced in such short order. The financial community is not entirely clear how it will be affected but it is clearly not a positive message.

  103. You could say this place is a less attractive place for foreign banks and we could see some of them moving from here if this proposal went ahead?
  (Mr Troup) I am not saying we will see them moving. It is certainly true that this must make the UK less attractive. Whether this is an appropriate change we have not got the detail yet, but I do not think it has been appropriately introduced and I think it should be challenged both on its numbers and its effect.

  Chairman: Can I thank you very much for your appearance here. We only had 50 minutes but I think we got through quite a lot and it will be very helpful to us later on in the week. Thank you.





 
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