Memorandum submitted by HM Treasury following
the evidence given by the Chancellor of the Exchequer
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
builds on the experience of existing
taxes and initiatives such as the tax law rewrite to develop simplifying
In this Budget a number of measures will simplify
the tax system.
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
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
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
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.
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
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.
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
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).
|Lord Chancellors Dept||6
|N Ireland Court Service||0.6
|N Ireland Office||0.1
|Total (ex Scotland and Northern Ireland)
|N Ireland Assembly||5
|Nat Assembly for Wales||7
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
(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
(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 AccountingGA) 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.
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 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
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 1011
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