Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 420 - 439)



  420. This Committee is receiving a lot of representations from international financial organisations on this point. It is very difficult to relate the increases in tax take which are protected from this measure, which are £350 million in year 2003-4 and £650 million when it really gets going in 2004-5, and what that really means unless you know the base from which you start. Can you give us some idea of what the present tax take from foreign company UK branches is?
  (Mr Brown) The position is that there were rules being applied in this country which were different from those being applied in other countries. One of the results of what we are doing is that companies that were paying tax in their home country will pay less tax in their home country and some of that tax here, and they may not lose a great deal of money as a result of that because it is simply a transfer from the tax they are paying in their home country to tax that is being paid here. But it was wrong, and if I give the Committee a figure they will understand: 9 out of 10 of the top foreign branches were ending up paying no tax at all.

  421. If it is the case, then, that this additional £650 million you are projecting starts from a base of almost nothing, which is the implication of that last remark you made, then this is a very considerable imposition on this particular category of business?
  (Mr Brown) I think you misunderstood me. This is creating a level playing field, the playing field that exists in other countries, and one of the effects of the decision will be that some of the tax paid in the home country will not be paid there but paid to us, and it is creating that level playing field with the result that we who have not benefited from revenue when perhaps we should have in the past will now get some of the revenue that might otherwise go to another tax authority.

  422. Chancellor, the Government is just now introducing also in the Budget a very complex change on the taxation of derivatives and exchange contracts?
  (Mr Brown) That is one that is being discussed with the industry—

  423. Absolutely. Although the tax take is considerable and meaningful it is regarded as having been a model of consultation which has got a broad consensus from the industry, even though the tax take is, in fact, quite considerable, whereas when it comes to the taxation of overseas branches people are saying there is an enormous additional tax take on the basis of no consultation at all.
  (Mr Brown) Mr Cousins, I should say to you that there has been wide discussion in the international community about the rules applying to capital; that we are adopting a system that is operated in America, France and Germany, and one of the officials will correct me if I am wrong in saying that many countries operate the same system, and one of the effects of it will be that some of the tax paid to the home authority is now paid to us because of the allocation of capital and the deductions for interest on capital being different in future, and it is about creating a level playing field that I think people should welcome once people see the full details of what we are proposing.

  424. What concerns me is that you cannot give us a figure for the base from which we start, except it is clearly very small—
  (Mr Brown) I have given you the figure, because you have pressed me, that 9 out of 10 of the top foreign branches are not paying tax.

  425. We can draw an implication from that but we do not have the base figure. Mr Gibbs yesterday tried out on us the remarkable idea that because the OECD had published a pamphlet about this that was consulting the relevant enterprises, and the assertion has been made both yesterday and today that there is an off-setting tax benefit in other tax regimes, but can you produce some indication of the figures involved in this? Are you sure this is not compromising the City of London's role as a major financial centre?
  (Mr Brown) I would not do anything that would compromise the City of London's role as a major financial centre, and I think you will find, for example, when we pressed the European Commission not to impose a withholding tax that would affect bonds in the London market that we have been vigorous in upholding the interests of the City of London. What we are talking about here is a recognised problem where there is no level playing field and where other countries operate a system that allows them to receive revenue—revenue that we have been unable to receive because of the treatment of capital in the United Kingdom. We are creating that level playing field now and I think when most people look at this measure they will see it to be fair and reasonable. Of course people will want to raise questions about it but when people look at the details I think they will come to the conclusion that we made the right decision.

  426. Do you accept that this is on the most internationally mobile part of the operations of the City of London?
  (Mr Brown) I accept that we are creating a level playing field and I think that is the important thing: that this is only doing something that is done in other countries, and the City of London and Britain remains, and will remain, a very attractive location for companies and we are determined that it continue to be so, and we will fight very hard for the interests of the City of London. But it is my duty to create a level playing field where that is necessary for both the attainment of a fair revenue and for the continued operation of the businesses.

Dr Palmer

  427. Rounding up on my side, I am delighted to see the prospect of the oil fraud strategy raising £550 million by 2004-5 transferred from the criminal community and possibly the petrol price protest community to the general public, but I am informed that the new euromarker, Solvent Yellow 124, could be easier to launder than the present gas oil marker. I recognise that it is a slightly technical question but are you confident that this improvement can be achieved?
  (Mr Brown) It is designed to make it easier to detect vehicles using rebated fuel purchase for illicit use on the UK's roads, so I could not agree with your assessment of what is behind this change. It is intended and designed to make it easier to detect vehicles using the fuel that has been rebated. Our estimate is that mainland diesel fraud has accounted for 4 per cent of the market. If we had not taken action that would have doubled over the course of the next four or five years, and we estimate that the strategy will reduce the market share to 2 per cent and that is the basis on which we are planning.

  Dr Palmer: I am delighted. I am just querying whether it will be achieved.

Mr Laws

  428. Chancellor, in 1997 you introduced this new tax relief for the British film industry with a certain amount of fanfare. Now we discover in evidence from Mr Gibbs yesterday that this is being very seriously abused and it appears that programmes such as Coronation Street and Emmerdale, Ground Force and They Think It's All Over are taking advantage of your tax relief to subsidise down the cost of television programmes. Is that true?
  (Mr Brown) As you know, there is a problem here and that is because of the definition of what is a film. As you know, the film incentive was supported and introduced because we wanted to encourage new British films and we wanted to make sure that those people who were producing these films had sufficient capital to move to the next film while still waiting for the success of their previous film. It was a very successful relief; indeed in a way it has almost been too successful. However, it is wrong to say that this film tax relief was intended for television productions. I do not think anybody would classify Coronation Street as a new British film. It is a continuing serial that has been going for 30 or 40 years and therefore it was never intended that a television serial would benefit from this tax relief, nor do I think you would want it to do so.

  429. We know you cherish your popularity a great deal but it seems to be going a bit too far to subsidise programmes such as this, even if unintended. Could you not reasonably have been expected in the Treasury, with all the very bright and brilliant people that you have, not to allow this to get out of control? The cost of it has gone up from the £15 million that you first projected to £360 million in the year that we are looking at now. All these people have done, we understand, is that producers of shows such as Coronation Street have certified their individual episodes as separate films. With people like Mr Gibbs and Mr O'Donnell and others, surely the Treasury could come up with a more competent way of managing a tax relief than this?
  (Mr Brown) I think you would agree first of all that it has been very successful in stimulating new British films. Secondly, where a loophole develops you want to take action, and we are taking action, and there is a lot of concern and opposition to us taking action but it is the right thing to do. This was never intended to subsidise TV films and we are going to close that loophole now.

  430. How long have TV film producers been using the loophole?
  (Mr Brown) The TV films were not initially, according to the information I have, using this, but they came to see that it was possible to change their affairs in a particular way to allow them to do so. We are now closing the loophole.

  431. Are you having an investigation inside the Treasury as to the lessons that can be learned from this?
  (Mr Brown) We are always learning lessons. We will continue to learn lessons and we are taking action at the earliest opportunity, having detected the problem.

  432. Can I ask you a last question on this? We have had a bit of a laugh at the programmes such as Coronation Street and so forth getting this tax relief, but actually it is quite serious because you could be using this money for some of your other more socially worthwhile projects, including the tax credits. Is not one of the biggest criticisms that has been made of you as Chancellor that, amongst some of the flattering things that have occasionally been said about some other aspects of your management, you have complicated and continue to complicate the tax system in a way that opens up precisely these loopholes? We have got numerous other examples of this in the Budget. We have got this special relief for the breweries and goodness knows what else. Is this not precisely the kind of error and muddle that you end up in if you do what you are doing to the tax system?
  (Mr Brown) Hold on. What Mr Laws is asking me to do in supporting the closing of this loophole is introduce more complex legislation.

  433. No.
  (Mr Brown) Every time a loophole develops, to close it you require—

  434. I am asking you to cut it down.
  (Mr Brown) Are you against the film incentive in the first place?

  435. Yes.
  (Mr Brown) You want it abolished?

  436. And the breweries relief.
  (Mr Brown) You never wanted a brewery incentive?

  Mr Laws: No.


  437. I think there will be a division in this Committee, Chancellor.
  (Mr Brown) I would just say that the film incentive did achieve its purpose of stimulating and helping the British film industry develop, but now that we have seen that there is a loophole which has developed it is wise to close that loophole.

Mr Laws

  438. A massive amount wasted though.
  (Mr Brown) It seems to me that you are making an argument against the R&D tax credit.

  439. Yes.
  (Mr Brown) And you are making an argument against the measure, for example, of 100 per cent corporation tax relief allowances for investment.

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