Select Committee on Treasury Appendices to the Minutes of Evidence


APPENDIX 8

Memorandum submitted by HM Treasury following the evidence given by the Chancellor of the Exchequer

SIMPLIFICATION OF THE TAXATION SYSTEM

  The Government wants the tax system to be as simple as possible consistent with meeting its other objectives. To this end it:

    —  reviews policy measures as they are developed to ensure that all options are fully considered;

    —  publishes regulatory impact assessments of measures which seek as far as possible to assess the impact on stakeholders;

    —  builds on the experience of existing taxes and initiatives such as the tax law rewrite to develop simplifying measures.

  In this Budget a number of measures will simplify the tax system.

  These include:

    —  modernisation and simplification of the tax regime for loan relationships, derivative contracts and foreign exchange gains and losses, which repeals 200-odd pages of existing legislation and provides certainty and stability for businesses;

    —  a corporation tax exemption for gains and losses on substantial shareholdings, which will allow important decisions on restructuring and reinvestment to be made for commercial, rather than tax, reasons benefiting 5,000 UK groups;

    —  tax relief for intellectual property, goodwill and other intangible assets, which will follow the accounting treatment as far as possible benefiting 30,000 companies;

    —  a package of measures to simplify the capital gains tax system, designed to help employees and businesses and typically reduce the tax compliance cost;

    —  further reform of the rules on deducting tax at source from corporate interest and royalty payments to reduce the number of occasions when tax has to be withheld at source;

    —  increasing the annual taxable turnover limit, which determines whether a person must be registered for VAT, in line with inflation to £55,000, keeping 4,000 small businesses out of the VAT net and maintaining the UK's VAT registration threshold as the highest in Europe;

    —  a new optional flat rate scheme to simplify the way small businesses account for VAT. Businesses with a taxable turnover up to £100,000 will no longer have to keep records of the VAT charged on each individual purchase and sale and will instead be able simply to calculate their net VAT liability by applying a flat rate percentage to their total turnover. This will offer compliance cost savings of up to £1,000 per year for more than 500,000 businesses;

    —  changes to simplify the VAT annual accounting scheme, including simplified payment patterns for all participants in the scheme and the removal of the existing 12 month qualifying period before firms can join the scheme for businesses with an annual turnover of up to £100,000; and

    —  simplifying the arrangements for VAT bad debt relief, removing the requirement for supplier business to send letters to their debtors notifying them that they are claiming relief.

  The new Child and Working Tax Credits will bring together support currently provided through three tax credits (the Working Families' Tax Credit, Disabled Person's Tax Credit and Children's Tax Credit), as well as support for children provided through income related benefits (Income Support and Jobseeker's Allowance). Those currently receiving both the Children's Tax Credit and the Working Families' Tax Credit will receive support from one system rather than two. For Working Families' and Disabled Person's Tax Credit recipients, there will be only one renewal a year rather than two and the renewal process itself will be streamlined. In addition, payment through the wage packet will be simpler to operate for the Working Tax Credit. In total, the new tax credits are expected to reduce the burdens on business by around £11 million a year.

FILM TAX RELIEFS: EVALUATION AND MONITORING STRATEGY

  Section 48 film relief ("the relief") allows all British productions costing less than £15 million to write off 100 per cent of the costs of production as soon as the film has been certified as British.

  The case for the tax relief is based upon a recommendation of the 1996 Middleton report on Film Finance, which documented the structural problems of the British film industry. The enhanced tax allowances introduced in 1997 aimed to allow the UK film industry to develop to the point where larger production companies could produce a slate of films thus spreading risk, achieving economies of scale and competing effectively in the global market.

  In preparation for Budget 2001 we collected data on the number of films being made in the UK before and after 1997. 1999 is the first year that the relief (introduced in July 1997) could be expected to show any significant impact on films produced because film production often takes two years. There is a further time lag between films being made and data becoming available for analysis and at the time of the 2001 Budget we did not have complete data for 2000.

  There was evidence that the total production spend on films that qualify for the relief had increased and it was reasonable to conclude that it had helped to boost the average budgets of British films. Inward investment figures did show a substantial increase in investment in films in the UK, with a record in 2000 of over £500 million.The film industry cited the relief as a major confidence factor in securing that investment.

  The Inland Revenue and the Department for Culture Media and Sport (DCMS) will undertake a joint evaluation of the success of the Section 48 reliefs, using the data that has now become available for the rest of 2000 and the whole of 2001.

  At the time of Budget 2001, no data was available on the costs of television programmes qualifying for reliefs, though it was believed to be small. The data now available has shown a rapid increase in the amount of television qualifying for section 48 reliefs.

  The television industry does not suffer from the same structural disadvantages as the film industry and it has become apparent that television production companies use sale and leaseback schemes to provide an additional slice of tax relief worth about 5 per cent of the production cost to the Production Company and 5 per cent to the broadcaster.

  Without the relief the return to investing in television in the UK would be reduced relative to other locations potentially leading to some of the more internationally mobile television production taking place elsewhere e.g. Ireland. Similarly it would be likely that there will be some fall in the number of television programmes being made. However, a significant number of programmes would continue to be made in the UK, both because of the skilled labour force and viewer preferences.

CONTINGENT LIABILITIES

  The Committee asked for a note on the scale of contingent liabilities and their implications for public finances in the long-term. The planning and control processes operating on public expenditure aim to ensure that there is sufficient and adequate warning of the impact of contingent liabilities on public finance because:

    —  with the introduction of resource accounting and budgeting, contingent liabilities are fully reported transparently, through accounts (as required by UK generally accepted accounting practice) in addition to the information in the Supplementary Statements to the Consolidated Fund and National Loans Fund Accounts;

    —  departments also have to report those outside normal course of business (in line with the guidance in Government Accounting) by way of a departmental Minute to Parliament. Before reporting in this way, departments must have HMT approval.

  Where a contingent liability is likely to crystalise, the department must budget for it and seek provision in its Supply Estimates. A department must seek Treasury and parliamentary approval for its Estimate containing the provision and ultimately for the associated cash. The department will charge the provision to its operating cost statement, show it as a liability on its balance sheet. In addition, departments must budget for movements in provision and reflects those movements in their accounts. These procedures ensure that the necessary steps are taken to mitigate the impact of the liability on public finances.

  Contingent liabilities are reported in:

    —  Resource accounts (see appendix 1). Figures in 2000-01 accounts are shown below:

    —  the supplementary statements to the Consolidated Fund and National Loans Fund Accounts (see appendix 2 for definition);

    —  separately the NAO receives a report of all those contingent liabilities reported in confidence to the PAC (because of market or security sensitivity).

Department
£ millions
ECGD
29,727
DFID
8,715
DETR
6,256
Health
3,844
DTI
325
MAFF
254
MoD
205
DFEE
139
DSS
37
Home Office
12
FCO
12
IR
9
Lord Chancellors Dept
6
OFSTED
5
HMT
5
DCMS
3
HM Customs
3
N Ireland Court Service
0.6
CPS
0.5
Cabinet
0.3
N Ireland Office
0.1
OFTEL
0.08
Food standards
0.08
Total (ex Scotland and Northern Ireland)
49,559
Scottish Exec
942
N Ireland Assembly
5
Nat Assembly for Wales
7
Total
50,513


  Note: this table does not include unquantifiable amounts. The notes to the accounts do not have to indicate when the liabilities are likely to crystalise.

  Appendix 1: The Resource Accounting Manual defines a contingent liability as:

    (i)   a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the entity's control, or

    (ii)  a present obligation that arises from past events but is not recognised because either:

    —  it is not probable that a transfer of economic benefits will be required to settle the obligation, or

    —  the amount of the obligation cannot be measured with sufficient accuracy;

  In addition, the Resource Accounting Manual states that unless the possibility of any transfer in settlement is remote (in which case nothing needs to be done), a department should disclose for each class of contingent liability a brief description of the nature of the contingent liability and, where practical:

    (a)  an estimate of its financial effects;

    (b)  an indication of the uncertainties relating to the amount or timing of any outflow;

    (c)  the possibility of any reimbursement.

  Appendix 2: The parliamentary reporting requirements (whereby departments should report contingent liabilities in advance of their being incurred) have a different definition. The main differences (as set out in Government Accounting—GA) between the two definitions are:

    —  GA requires only items with significant back-end costs or outside normal course of business to be reported above a threshold of £100,000;

    —  items which would be accounted for as a provision in departments' operating costs statement are reported to Parliament as contingent liabilities: and

    —  those contingent liabilities which would be so remote as not to require notation in accounts are reported to Parliament if they fall within the parliamentary reporting criteria.

RESOURCES FOR SCHOOLS

  In his Budget statement 2001, the Chancellor referred to the amounts of direct funding that the smaller and larger primary and secondary schools would receive. In his Budget statement 2002, the Chancellor referred to the amounts that `typical' primary and secondary schools would receive.

  In 2001-02, direct payments to schools increased from £26,500 to £33,700 for a typical primary school and from £79,000 to £98,500 for a typical secondary school. Direct payments to smaller primary schools increased from £10,000 to £13,000, and to larger primary schools from £50,000 to £63,000. Smaller secondary schools from £57,000 to £68,000. Larger secondary schools from £92,000 to £ 115,000.

  Budget 2002 increased direct payments to all schools in 2002-03, to £39,300 for a typical primary school and £114,700 for a typical secondary school. Comparable figures for smaller and larger primary and secondary schools are £16,000 for a smaller primary and £72,000 for a larger primary; £74,000 for a smaller secondary and £134,000 for a larger secondary.

THE NEGATIVE TAX PROPORTION OF THE NEW TAX CREDITS

  The Committee asked for a note on the proportion of the new Child tax Credit (CTC) and Working Tax Credit (WTC) that will score as negative tax when calculating net taxes and social security contributions as a proportion of GDP, as shown in chart C3 and table C10 of the April 2002 Financial Statement and Budget Report (FSBR).

  2.  As explained in Box C2 of the FSBR, the CTC and WTC will score as negative tax to the extent that credits are less than or equal to the tax liability of the household. This treatment is consistent with OECD guidance, and has also been adopted by the Office for National Statistics (ONS) for use in the National Accounts, as explained in their press release of 20 February 2002. There is therefore no difference between the treatment of the CTC and WTC in the 2002 FSBR and in the National Accounts.

  3.  The latest available estimates are that about 10—11 per cent of the new tax credits will score as negative tax in 2004-05 and later years. The proportion will be slightly higher, at about 13½ per cent, in 2003-04. As part of the transitional arrangements child allowance payments (at enhanced CTC rates) to Income Support and Jobseeker's Allowance recipients will still count as social security benefits in the first year of the new credits, and are not included in the tax credit total until 2004-05. As these recipients are likely to have much lower income tax liabilities than other WTC and CTC recipients, the proportion scoring as tax falls in 2004-05.

  4.  Working Families Tax Credit (WFTC) will still be treated differently in the FSBR and National Accounts measures. As with the new tax credits the figures in the FSBR follow the OECD guidelines in respect of WFTC. This means that around 12 per cent of WFTC will now score as negative tax. However, ONS will continue to score all WFTC as public expenditure in the National Accounts. This would add around 0.1 percentage points to the tax-GDP ratio, for each year from 1999-2000 to 2002-03.

29 April 2002


 
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