Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 160 - 179)




  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 some—admittedly fairly modest—measures which will simplify the capital gains tax system as far as it applies to employees who acquire shares through share schemes.

  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 here—in 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.

  Chairman: Good!

Mr Tyrie

  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 find one?
  (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.

Dr Palmer

  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 NHS?
  (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 inviolate?
  (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 targets.
  (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.

Mr Fallon

  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 situation—that 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 earnings—not just the earnings which qualify for contributory benefits.

  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.

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