Examination of Witnesses (Questions 160
TUESDAY 23 APRIL 2002
160. I think we will leave the macro side now
and go on to the micro. There are a plethora of personal tax measures
introduced in the Budget by the Chancellor, but are there any
measures in the Budget designed to simplify the income tax regime,
particularly for those subject to self-assessment systems?
(Mr Gibbs) I do not think there are any measures on
self-assessment simplification specifically. There are a lot of
measures in the Budget which will, I think, quite significantly
simplify the tax system, but primarily on the corporate side.
I would be happy to talk about those.
(Mr Holgate) On the personal tax side perhaps I could
add that the tax credits coming in next year should be simpler
than the credits they replace. It is a wholly redesigned system.
For example, it takes three child elements and merges them into
one. Another example is that it is now going to be based on tax
years, not on one-off applications every six months.
(Mr Gibbs) I should just add for completeness that
I should have mentioned there are someadmittedly fairly
modestmeasures which will simplify the capital gains tax
system as far as it applies to employees who acquire shares through
161. Professor Steve Wilcox was providing evidence
to us yesterday along with others, and he certainly was not impressed
by the concept of simplicity to the extent that I asked him if
he could provide us with a paper which we will send to you, but
we are far from convinced that simplicity remains herein
fact, we suggest it is complexity rather than simplicity. Your
answers do not seem to give us any indication that that was at
the heart of the thinking in the Budget. It seems a bit disappointing
for those subject to the self-assessment system, certainly from
Mr Gibbs' answer just now that little or no consideration was
given to simplification.
(Mr Gibbs) We keep all taxes under review, as we have
said before, and a lot of the tax measures in the Budget will
substantially simplify different parts of the tax system. The
self-assessment system is also part of our continuous review and
we will carry on looking at it.
162. You say "continuous review".
Will you share what you mean by that?
(Mr Gibbs) Yes. Discussions with tax practitioners
where we have regular meetings with the Chartered Institute of
Tax, both in the Treasury and jointly with the Inland Revenue.
I have to say that none of the specific proposals we have had
have been terribly useful or of the sort that we have felt able
to implement through the system in a way that is consistent with
its underlying objectives but, as I also said, I would be very
happy to talk about a wide range of quite dramatic simplifying
measures on the corporate tax side.
163. Are you aware the Treasury Sub-committee
is looking at the self-assessment system? You are not writing
off our report already, are you?
(Mr Gibbs) Certainly not.
164. Very quickly on that: has the Treasury
over the last few years tried to obtain figures for the burden
placed on the private sector of given tax regimes, for example,
by making estimates of the total accountancy fees paid by private
firms and by individuals to collect various taxes?
(Mr Gibbs) There has been some work going on under
the auspices of the Inland Revenue looking at compliance costs.
As you know, both Inland Revenue and Customs have PSA targets
for the reduction of compliance costs in the tax system, and work
has been going on which is still in progress and still being assessed
in the revenue and in Customs, jointly with the Treasury.
165. Is the compliance cost going up or down?
(Mr Gibbs) I do not think the work that I have seen
shows a clear answer to that one way or the other.
166. Do you not think it might help to try and
(Mr Gibbs) I think all research in this area, especially
if it can help shape policy, is very worthwhile, yes.
167. Come on, let us get past general phrases
of keeping things under "general review" and all research
being "worthwhile". We are talking about very substantial
sums of money going into what is effectively a frictional cost,
which is the cost of compliance by firms and individuals to administer
the tax regime and to changes in the tax regime?
(Mr Gibbs) I certainly do not want to belittle the
issue; equally I do not think that there has been any work done
that has been able to show that there is a clear trend one way
or the other. I do not think the research is that clear-cut. This
Budget, coming back to the measures in the Budget itself, contains
some quite radical simplifications. The changes to the foreign
exchange regime will remove at a stroke one whole set of tax law;
the changes to capital gains tax for substantial shareholdings
will hugely simplify corporate restructurings and the tax implications
of those: the VAT flat rate scheme will save large numbers of
the smallest businesses from having to account for VAT on individual
transactions. I do not have research which shows the aggregate
sum of these measures and what effect they are having on the tax
system, but these are illustrations of the fact that, in developing
policy, we take compliance costs and simplification very seriously.
168. But the new tax credits announced will
obviously bring many more people within the scope. Does that not
result in more complexity for more tax payers in the country?
(Mr Holgate) Because more people are eligible for
the tax credit, it is certainly true there will be more people
who have the option of filling in another form each year. Because
we have separated reward for being in work from the costs of supporting
children we expect employers' costs to fall by some £11 million
a year through the introduction of the new tax credits, so you
are quite right to say that, as the numbers eligible have increased,
there will be more people who have another form to fill, but it
is our task to make that form as simple and as accessible as possible,
and to give applicants as much help as possible through the Inland
Revenue tax credit office.
169. I wonder if you could provide us with a
note on the thinking that has gone on deep in the recesses of
the Treasury regarding simplification of the system as a result
of all these measures?
(Mr O'Donnell) Yes.
170. A Budget press notice says "the Government
believes that general taxation and national insurance contributions
are the best way of ensuring that the costs of investment in the
health service are spread as widely and as fairly as possible.
. .". However, National Insurance contributions only affect
earned income. Would you not feel that it might have been even
fairer to spread it across unearned income and other forms of
income as well?
(Mr Holgate) The virtue of raising National Insurance
contributions compared to other forms of general revenue raising
is set out in paragraphs 6.41-6.45 on page 124 of the Budget document
and, as we say there, unlike indirect taxes and because the new
one per cent will extend beyond the upper earnings and profits
limits, NICs are a fairer way of raising money for the health
service than indirect tax. Then the big distinction between National
Insurance contributions and income tax is that pensioners are
not subject to National Insurance contributions and, as a result,
the vast majority of pensioners are not being expected to contribute
to the increase in spending on health.
171. So it was an explicit objective to protect
pensioners from the extra cost that would be required for the
(Mr Holgate) The great majority of pensioners. There
will be a few who are affected by the freeze in the personal allowance,
that is quite true, but the great majority are, yes.
172. Most of us around this table are among
those who are affected by the 1 per cent rise in contributions
which is uncapped, and I think most but perhaps not all of us
share the masochistic enthusiasm of the general public for this.
Can we anticipate that this might be a precedent? Obviously you
cannot project future budgets, but was it an explicit objective
of the Budget to set the precedent that this limit is no longer
(Mr Holgate) You cruelly anticipated my answer which
is that we cannot anticipate future budgets.
173. That is correct, but you would agree that
this is a significant change in direction from previous budgets?
(Mr Holgate) Well, I think the trouble is phrases
like "change of direction" carry a lot of slightly vague
freight with them so I am slightly reluctant to sign up to that
formulation. As we say, we are planning to increase health spending
by I think 7.4 per cent in real terms each year over five years,
and you could say that is quite a departure, both in the extent
of the rate of increase and the period over which that guarantee
has been made. That has to be funded honestly within the strict
fiscal rules; therefore we need a way of raising it and, as your
previous questions explored, National Insurance contributions
is the method of spreading that cost as widely and fairly as possible.
(Mr O'Donnell) What is unusual here, and it is driven
by the fiscal framework, is that you have a situation where the
Government decides it wants to increase spending and, therefore,
fiscal rules imply that you have to do something on the revenue
side. It is not a situation where in the past, quite often, there
have been revenue increases in budgets in order to correct a deficit
or perceived future deficit problem.
174. Yes. That comment prompts me to inquire
about your view of the National Institute's comment that the rule
about financial investment over the cycle has drawbacks because
the length of the cycle is undefined, and they have suggested
that you might be better off with something equivalent to the
Bank of England's objectives where you have an objective of equality
between income and outgoings and then a statement if it is substantially
different from them in a particular year.
(Mr O'Donnell) I am not quite sure I am with the analogy
with the Bank of England there.
175. The Bank of England is required to give
a symmetric statement if it varies significantly from the inflation
(Mr O'Donnell) The open letter system, yes. We have
a set of fiscal rules and, like I say, the fact is, if you go
back over the period the last four or five years, actually the
cycle is really quite small so the cycle is not dominating factors
here. As it happens, growth has been very close to trend. If you
look going forward, for example, it is certainly true that our
rule talks about current surpluses over the cycle but, in fact,
this Budget and all previous ones have shown current surpluses
every single year, and the net debt rule is also met with some
margin every single year, so we are overperforming quite substantially
in that sense.
176. That is very much to the credit of the
Government but I am not sure it is to the credit of the rule.
The comment of the National Institute is that, if the cycle had
a life of five more years, then the Government could have chosen
to run the deficiency of £10 million a year and still met
the rule, so I think we probably all agree it would have been
a good thing. Do you feel the rule requires another look?
(Mr O'Donnell) No, I do not. I think the important
things about rules are that they are sensible rules and that you
stick to them. If you want to change them, to take the analogy
of the inflation target, it is important that you announce a regime
and an inflation target and then stick with it for a while. We
have certainly had periods where we have had fiscal rules and
we have amended them in the past, and I quite like the idea of
having a set of fiscal rules which, when they were first put in
place I remember people saying we would never meet. Now they are
saying we meet them comfortably, and that is fine by me. That
is where I like to be.
177. Coming back to the breach of the upper
earnings limit and the uncapped nature of the 1 per cent rise,
when the Chancellor says in the House, "save for this 1 per
cent contribution the ceiling remains in place", how do you
defend that kind of sophistry?
(Mr Holgate) I would say that he has described exactly
the situationthat is to say that employees will not be
paying the rate they are currently paying above the upper earnings
limit, and the same with the self-employed. They will not be paying
the full rate they pay on earnings or profits up to the upper
profits limit, but merely the 1 per cent rate above.
178. But how can the ceiling remain in place
if it is breached?
(Mr Holgate) It is a question of whether by "breaching"
you mean it is abolished or whether, in order to fund the Health
Service, people are asked to make a contribution on all their
earningsnot just the earnings which qualify for contributory
179. How would you define "breached"?
(Mr Holgate) "Breach" in my mind implies
a major on-rush of water, and I do not think that is appropriate.