27 APRIL 2004

Mr David Ramsden, Mr David Hartnett, Mr Chris Tailby, Mr David Hubbard and Mr Peter Hopkins

  Q120  Chairman: That was not my question. My question is will they lose what they gained by becoming incorporated.

  Mr Hartnett: It is not retrospective.

  Q121  Chairman: They will just go back from 2004.

  Mr Hartnett: The advantage they receive will be reduced.

  Lord Wakeham: Is not the problem that we are dealing with the part of the profits of the company with zero rate corporation tax which was then used as a means of getting a lower rate of tax. How long have we had the zero rate of corporation tax? Has it gone back a long time?

  Lord Sheppard of Didgemere: Two years.

  Q122  Lord Wakeham: That is the essential problem which is being put right?

  Mr Hartnett: Yes. One ought not to lose sight here of some of the advantages which come to businesses through corporate form.

  Q123  Lord Sheppard of Didgemere: This is a question which demonstrates that I do not understand the issue. Say we get one of those very scarce animals, a plumber, who has decided to follow this process. Surely when a distribution comes from the company probably to his wife and himself that becomes part of his/her personal income and is taxable, is it not?

  Mr Hartnett: Yes.

  Q124  Lord Sheppard of Didgemere: If, for example, the plumber was earning quite high levels of pay at any moment they would be paying 40 per cent tax on some of that distribution.

  Mr Hartnett: It is not 40 per cent in relation to distribution. The taxation of dividends is a little more complicated.

  Q125  Lord Sheppard of Didgemere: It is a marginal benefit rather than a 100 per cent benefit.

  Mr Hartnett: It is marginal but relatively substantial in terms of the margin. The important thing here as well is that for those who reinvest in their company the zero per cent rate and lower rates of corporation tax remain. If this is seen as a way of getting reward from the company without that reinvestment, it is not going to be as advantageous as it was over the last two years.

  Q126  Lord Barnett: Leaving aside the big, artificial schemes, which I recognise is absolutely right, it is the small businesses that may be concerned here. For example, say somebody has set up a small firm and in that firm one of the directors has a wife who plays no part whatever in the company. Then he distributes substantial dividends to the wife or children. Will he be caught now under this?

  Mr Hartnett: That is not a distribution to a corporate; it is not a reinvestment into the company so the rate of corporation tax for that company will be 19 per cent from 1 April 2004. The taxation of the individuals will not change. I am a little nervous about what you are going to say about the wife having no significant involvement because I do not want to stray into that lively issue.

  Q127  Lord Sheppard of Didgemere: I suppose one has to be careful that wives do not become incorporated so that they are then corporate distributions.

  Mr Hartnett: I do not think I dare comment.

  Q128  Lord Blackwell: Just one question on the practicalities. I understand the need for this is closing off the unintended consequences of the new legislation but I am struck by the fact that the definitions here, in order to try and define what we are talking about, the schedule is seven pages of explanations and definitions. As you have gone through this with the various people you have dealt with in representations, is there any fear or any question in your mind that in applying these definitions the risk is that small businesses, the people we are trying to make life simple for, will end up getting caught up in complicated decisions on what is or what is not allowable and will end up breaking the law?

  Mr Hartnett: I mentioned earlier that we thought that around maybe 95 per cent of corporates will find this relatively straightforward. Only about a page and a half of the legislation applies to straightforward, small corporate. Where the slightly longer legislation applies is to companies that have been grouped. There are opportunities to plan in various different ways to escape the new approach and most of the legislation is around the application to groups rather than to individual corporates. As a broad generality, groups will be pretty well advanced. Those definitions which relate to groups will be things that professional advisers will be working on.

  Q129  Chairman: We still have two topics to touch on. Are you going to give us the background on Stamp Duty Land Tax or is David?

  Mr Ramsden: Since Stamp Duty Land Tax was an issue that, I think, you had extensive discussions on last year, my Lord Chairman, I am duty bound to hand over to one of the veterans of last year.

  Mr Hartnett: I will just look at the five or six main outputs from Stamp Duty Land Tax. I believe you have an interest in partnerships, so I will touch on that as well.

  Q130  Chairman: Where it gets technical, it is probably better if you send us something.

  Mr Hartnett: I will. Stamp Duty Land Tax, we believe, was successfully implemented on 1 December. Forms are coming in. Certificates are going out. We have had more than 600,000 forms in. We have sent out around half a million certificates. We have seen no significant evidence of disruption to the conveyancing system in the UK. There have been niggles but we have worked with law societies in England and Scotland and others to sort them out. We also have evidence that the new system is beginning to curb avoidance, which was one of the big areas we talked about last year. In one of the relevant journals, an anonymous adviser said that statutory land tax was now paid in around 80 per cent of commercial transactions and he thought that, before the introduction of Stamp Duty Land Tax, it was only paid in 40 per cent of commercial transactions. Thirdly, the new compliance powers which came in with the Finance Act 2003 are working. Some of our inquiries have already resulted in additional tax being paid. One of the most important things is that there has been really constructive dialogue with stakeholders.

  Q131  Chairman: The dialogue which we talked about last year has just been going on?

  Mr Hartnett: Yes. It has enabled us to identify areas where further reliefs have been appropriate without undermining the integrity of the legislation approach. The approach to lease duty which we touched on last year does not seem to have damaged the property market. One of the organisations which represents the property market has said that to us directly and that has been on the basis of survey evidence. At the time the Finance Bill last year was published, in the surrounding papers it was made clear that there was a lot of thinking going on about partnerships and Stamp Duty Land Tax and that there would be draft clauses released for consultation and there would be active consultation. That has happened. It has met the government's guidelines for consultation and the consultation has been, I think everyone would agree, very useful in that it led to a change in approach for Stamp Duty Land Tax and partnerships. Partnerships have been a concern to us as an area where we have seen both avoidance and scope for more avoidance. There are a couple of other things that I thought I would mention. The first is that last year you were as a committee concerned that we might not be ready for the 1 December 2003. We got there. As I have suggested, we think it is working, but one of the more important things for us is that we launched with, on our side at least, a substantially manual process, and that was important because, like the introduction of any new arrangements, some people do not quite get there at the start and having manual arrangements has enabled us to pick up telephones to solicitors and licensed conveyancers and talk to them about the forms they have sent in, fix or repair forms and process them and get the certificates out, which would have been that much more difficult with the full blown IT system. I finally want to say something about the length of the legislation this year and the 50-plus pages. The most important thing to say is that more than half of that legislation re-enacts—I hope that is the right technical word—regulations made last November, as the government said would happen, so it is transferring from secondary legislation into primary legislation. A lot of the remainder is about new reliefs for charitable trusts, clarification of the relief in relation to deceased estates and various other things, but inevitably with a body of legislation the size of Stamp Duty Land Tax we have had to fix a few things as well. I would not like the committee to think though, if it is thinking it, that the 50 pages suggest that we got a huge amount wrong last time out.

  Q132  Chairman: Just to reassure you, our approach had not been that you had been doing anything wrong. Our approach was very much that, though we liked the idea of the tax, our concern was very much, as you know, the timing of that sort of thing. To somebody sitting in their Lordships' House 50 pages seems nothing these days in terms of legislation. That is how the law has gone. Thank you for that.

  Mr Hartnett: I hope that is helpful.

  Q133  Chairman: That is very helpful. You have referred to avoidance and all of that, and one of the achievements was going to be that more people who ought to be paying would be paying. Your judgment at the moment is that we are moving in the right direction?

  Mr Hartnett: We think that we are moving in the right direction. It has not been long enough for us to assess the real evidence but the fact that commentators in the private sector are saying this is heartening.

  Q134  Chairman: It is and, as you know, we will be hearing from some of them ourselves. One thing more generally which comes within our broad remit, although it is not specific to any Finance Bill, is that it is clear these days that the Treasury and the Revenue and Customs do keep their eye on how things are going all the time rather than saying, "That is done now, so let us forget about it". Do I understand that this is an example of an area where you will keep monitoring what is happening for quite a while?

  Mr Hartnett: We will do a lot of that and, as David was suggesting earlier on, monitoring this legislation on stamp duty is an example of how the Treasury and, in this case, the Revenue work in partnership on these things.

  Q135  Lord Sheppard of Didgemere: As regards magnitude, if the 80 per cent and the 40 per cent you indicated somebody had quoted are right, how much money will that be? It would be quite a lot of tax revenue, would it not?

  Mr Hartnett: I may need to send you a note if I go astray. The indications are that there is about a 20 per cent increase in stamp duty. What we have not got the data to analyse or, if we have got the data, we have not been able to analyse it yet, is the extent to which that is from more people paying or for some other reason. If I have got my numbers wrong, I will write.

  Q136  Chairman: We have a few moments for the last topic, which I did tell the committee I thought was a bit of a lark and I was reprimanded by my colleagues. But I do find it small but interesting, if I may say so. David, you were going to give us a few words on this. Is that what is going to happen?

  Mr Ramsden: Absolutely, Lord Chairman, to give you some more detail on the administration and again on the way that consultation has been handled in this area in which you are interested.

  Q137  Chairman: Duty or tax stamps will provide a clear identifier on, in this case, bottles of spirits that UK duty has been paid?

  Mr Hubbard: Lastly, we go from stamp duty to duty stamps. Duty or tax stamps will provide a clear identifier on in this case bottles of spirits that UK duty has been paid. Therefore, in our view they will radically restrict both the opportunities for and the profitability of spirits diversion fraud. Perhaps, Lord Chairman, I should be brief in my introduction given the time and also given that we have explained a great deal of the detail in the regulatory impact assessment, which I know you have seen and which will be available to other members of the committee. On the question of process and consultation, the decision to proceed with the implementation of tax stamps does follow a long period, about three years, of intensive discussions with the industry on the best way to tackle in particular spirits diversion fraud. As you will hear if you are seeing other witnesses, this has not brought about consensus with the industry on the merits of duty stamps, but it is the government's firm view on this detailed examination that all of the alternatives to tax stamps have been thoroughly explored and that tax stamps remain the most effective and proportionate response to the scale of the problem we are facing.

  Q138  Chairman: Last year I learned about VAT fraud and wondered why I was not in that game. Now I am learning about all these avoidance measures. Surely, the business one ought to be going into now is producing fraudulent tax stamps? Is that not the most obvious way forward for British enterprise?

  Mr Hubbard: That is certainly one of the two acknowledged down sides of tax stamps, the other being the costs imposed on the industry. But there is a counterfeiting fraudulent market for all sorts of products and that is a risk which any anti-fraud agency has to counter. Anti-counterfeiting component measures of tax stamps, and also improved technology and our discussions with potential suppliers, have led us to have some confidence—although no doubt there will be some counterfeit tax stamps—that that will not be on a significant scale.

  Lord Sheppard of Didgemere: I was going to declare an interest, that I was Chairman and Chief Executive of Grand Met, now a substantial chunk of Diaggio, so we are the Number One supplier of spirits in the world. I am a bit concerned about the fact that you are very concerned about the future of small companies. We should also be concerned about the Scottish export industry, and there is some sign of that. And, although I am not allowed to mention rates of tax, at least you have not put whisky duty up in the last couple of years.

  Chairman: You are so out of order that I am having difficulty controlling you. None of those is a topic we are allowed to talk about.

  Q139  Lord Sheppard of Didgemere: I have no links now with Diaggio other than being a pensioner—I think I am still a pensioner. Do you think the industry will be telling us that the consultation has gone on and has worked well? If so, it will be a first, of course.

  Mr Hubbard: I think they would be disappointed at the decision that was ultimately reached but I hope that they would have no argument that there was long and adequate consultation on tax stamps, such as in 2001 and 2002. The Chancellor in the 2002 Budget decided at that time not to proceed with tax stamps while exploring alternatives, and while allowing industry and Customs ideas of joint co-operation a chance to see what impact they would have. We had another formal consultation with them in the summer of 2003 on other possible regulatory changes, setting aside tax stamps, which yielded a number of minor measures but no major alternative which would have an equivalent impact to tax stamps. So then, in the pre-Budget Report 2003 the Chancellor came back to the idea of tax stamps but gave the industry what in effect was a last chance, between the pre-Budget report in December and the Budget which has just passed, to come forward with an equally effective alternative. The industry did put forward a package of 17 alternative measures, which are evaluated in the regulatory impact assessment. In the government's view those measures taken as a package would have delivered less than half of the revenue benefits of tax stamps and, therefore, the decision was confirmed in the Budget to proceed.