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Orders Of The Day

Volume 931: debated on Thursday 12 May 1977

The text on this page has been created from Hansard archive content, it may contain typographical errors.

Finance Bill

(Clauses Nos. 4, 15 and: new clauses relating to value added tax, subcontractors in the construction industry, benefits from employment (motor cars) and capital gains tax.)

Considered in Committee [ Progress 10th May]

[Sir MYER GALPERN in the Chair]

4.20 p.m.

:As the Government amendments to the Opposition's New Clause I have been selected, it will be in order for the new clause, the Government amendments and New Clause 8 to be discussed together.

I remind the Committee that the amendments themselves cannot formally be moved unless and until the Second Reading of the new clause has been agreed to.

New Clause 1

Value-Added Tax—Threshold Of Registration

(1) Paragraphs 1 and 2 of Schedule 1 to the Finance Act 1972 (liability to be registered) shall be amended as follows.

(2) In paragraph 1, in the provisions before the Table, for "£5,000" (in both places) there shall be substituted "£10,000" and in the second column of the Table for "1,750", "3,000", "4,250" and "5,000" there shall be substituted respectively "3,500", "6,000". "8,500" and "10,000".

(3) In paragraph 2 for "£4,000" (in both places) there shall be substituted "£8,000" and for "£1,250" there shall be substituted "£2,500".

(4) This section shall not come into force until 1st September 1977'.—[Mr. David Howell.]

Brought up, and read the First time

I remind the Committee that with this we are to take New Clause 8—Value-added tax registration threshold

Our new clause proposes that the annual threshold of taxable supplies at which it is necessary to register for VAT should be raised to £10,000 from the £5,000 which was fixed when the tax first came into operation in April 1973. Our view is that if £5,000 was right then £10,000 is right now. Strictly speaking, up to April this year the indexed amount would have been about £9,600, but it can be argued that by the time the Bill becomes law in August £10,000 will be the more accurate figure.

That is our view, and it was also the view of those on the Liberal Bench. They have an amendment on the Notice Paper which, unfortunately for them, you did not find yourself able to select, Sir Myer. That amendment indicates that they hold a very similar view as it contains the figure of £9,600. It is presumably still their view, as they have rightly pledged to be unswerving, as one would expect a political party to be, in their principles and beliefs. We look forward to their support when we press our new clause.

Our view also used to be the view of the right hon. Member for Heywood and Royton (Mr. Barnett), who told the Standing Committee considering the 1972 Finance Bill:
"I consider that there is an overwhelming case for the figure of £10,000".—[Official Report, Standing Committee E. 24th May 1972; c. 163.]
If the present Chief Secretary thought then that there was an overwhelming case for £10,000, he presumably thinks that there is an overwhelming case for a much bigger figure now, although I suppose that it would be naive to imagine that we could get consistency from him on this matter or anything else.

The hon. Gentleman has obviously been doing a great deal of research. Would he care to tell us what the then Conservative Financial Secretary said?

I could read all that the then Conservative Financial Secretary said, as reported in Hansard, but we are looking for consistency from the right hon. Gentleman in this matter and we are finding something very different.

I am sorry that the hon. Gentleman cannot answer that question. I thought that he had read the whole debate. I am always consistent in these matters and am very consistent in listening to arguments and being convinced by them. I have now been convinced.

We hope to convince the right hon. Gentleman a little more. Indeed, we think that we shall do so before we are through. Anyway, for the moment the right hon. Gentleman has changed his view, and that cannot be disguised. But we hope that the Liberal Party is still with us, in line with its principles and beliefs.

Surely the then Financial Secretary was entirely consistent, because he thought that the figure should be £5,000 then and he now thinks that it should be nearly £10,000, which is exactly the indexed increase of £5,000. The Chief Secretary thought that it should he £10,000 at that time, and if he were consistent he would argue that it should now be exactly £20,000.

My hon. Friend illuminates all too painfully clearly the point I am trying to make about the Chief Secretary's stance on this matter, but the Chief Secretary can be reassured that we expect very little else.

We shall soon come to amendments tabled by the Government to raise the threshold, not to the £10,000 that we think to be the right level consistent in real terms with the original £5,000 but to £7,500. That amendment is a rather late arrival on the Notice Paper and occasioned some surprise. I have heard it suggested that it has something to do with the Liberal Party. If that were true, it would be a frustration of the majority concern of Parliament and of an objective that we could attain if we had a vote.

It would be a great pity if the hon. Member for Cornwall, North (Mr. Pardoe) persisted in claiming that that amendment was a fruit of the Lib-Lab pact. If it is, it is a very withered fruit. It is considerably less than we should have achieved in open and above-board debate and vote. If that is claimed to be an achievement, we seem to have reached a new law of parliamentary dynamics in that what the majority want and can achieve if the matter is put to a vote is prevented by the Lib-Lab pact, or the pact ensures that we achieve something less. That is a pity from the point of view of the workings of Parliament.

If the threshold were raised to the £10,000 that we want and that the Liberals wanted until last week, it would help many self-employed people in particular. I agree with those who say that it would not help many traders because their turnover or taxable supplies are usually in excess of this figure. But there is no doubt that many self-employed people, such as freelances, and people doing part-time work over and above a salaried job, have taxable supplies or a total taxable income in about this area, and if the sum were raised to £10,000 a great deal of heavy work falling on those people and on the Customs and Excise would be reduced.

If the figure is raised to the £7,500 that the Government want, it will obviously help many fewer people. Let us take, for example, a case where expenses are, say, £3,000 for a self-employed man running a business. That is a price at which he can hardly obtain a good secretary. If we add on income of £100 a week, we are already over £7,500. Therefore, the truth is that the £7,500 proposed by the Government is not very much. It is no more than a tiny concession to the Lib-Lab arrangement. It is not in line with what would be achieved on the Floor if the Committee were allowed to press the matter to a genuine vote and the Liberals were allowed to break away and follow their principles.

Will the hon. Gentleman confirm that it is, in fact, current Conservative Party policy, as stated in Conservative Party documents and as promised to the National Federation of Self-Employed, that the threshold must be raised to £20,000? Why has the Conservative Party compromised these sacred principles?

The hon. Gentleman is wrong. That is not Conservative Party policy. We have said that the threshold should be at least £10,000. We also argue that it should be reviewed in line with inflation thereafter. The figure of £20,000 comes from inside the hon. Gentleman's mind, not from Conservative Party documents or official Conservative Party policy.

But perhaps I shall carry the hon. Gentleman with me when I say that the need to raise the threshold at all, or to have this debate, would be much reduced if the VAT administration were less formidable than it has become in recent years; if we were to return to the single positive rate instead of the 8 per cent. that the Chancellor felt obliged to go to, for reasons that we all recall, in 1974, and the 12½ per cent. at which he eventually arrived by way of 25 per cent.; if we had a simpler accounts basis for smaller traders on the lines proposed by the Conservative Party in a recent document; if we simplified the VAT 100 form, again on the lines we have proposed; and if there were a better means than at present of calling to public account the administration of our tax system, both the Inland Revenue and Customs and Excise, possibly through a Select Committee procedure. There would then be less worry about entering the VAT labyrinth and more readiness to participate in this kind of discussion, without feeling that one will be caught up in impossible bureaucratic tangles and weighed down with appallingly heavy statistical returns.

There is a very important point to which I hope Ministers will one day give attention. They have not yet given a great deal of attention to improving the public accountability of tax administration, including in particular VAT but also the Inland Revenue. When that is tackled, the worries about dealing with VAT, for example, will be reduced.

4.30 p.m.

If all these things were done, there would be less pressure, although there would still be some, to raise the threshold. As it is, in the absence of these things and in the recognition that not everyone will be happy wherever the threshold is drawn, we think that the case stands and we therefore commend New Clause 1 to the Committee. We are entitled to look to the support of all those who believe it right in principle to adopt the sort of level we propose. They include the Liberal Party and the Scottish National Party, which has put down an amendment seeking a rather higher figure. Those who believe it right used to include the Financial Secretary himself, but he has modified his views in the light of events. That is perhaps the best way to put it. If we had half a chance, they would, indeed, include a majority of hon. Members. That is why we put this proposal before the Committee, and I commend it.

Value added tax was introduced in 1973. It was heralded, when we debated it in 1972, as a broad-based comprehensive tax, free from anomalies. Those who made that claim were perhaps exceeding reality, but VAT has become an established part of the fiscal structure and obviously cannot remain unchanged for ever.

While I supported a number of the provisions of the 1972 Finance Act which gave birth to VAT, I accepted that we might come to regret the loss of some of the advantages that we had under the old purchase tax system. This is not a suitable time to mourn once again the loss of the purchase tax structure, under which one had to deal with limited numbers of rather more knowledgeable people on taxation matters, because they were large-scale traders. Nevertheless, some difficulties arose from the creation of VAT, which deals with very many more people than the old purchase tax system did. While, therefore, mourning the virtues of the old system, we have had to learn to live with the new.

New Clause 1 seeks to double the turnover level of £5,000. That is the level above which an unregistered trader has to register. It would also double the £4,000 below which the turnover must fall before he is able to deregister. The proposal forms part of the general system that the Conservative Opposition have tried to put forward in their belief that many of these allowances and limits ought to be indexed in some way.

Of course, VAT needs to be reviewed from time to time—all limits based on financial grounds must be examined afresh from time to time—but without the precise policy of indexation. Indexation in this case is particularly inappropriate. I give an example stretching back to purchase tax days.

When purchase tax was introduced in 1940, it was fixed at the level of £2,000—a large sum in those days. Soon after, it was reduced to £500, and there it remained until the end of the purchase tax system in 1973. In other words, it remained at the same figure for over 33 years, during which the annual inflation rate was not as large as it has been recently, although overall inflation was substantial.

The present level for VAT was fixed in 1972, at the beginning of the system. Only those who sought to explain that it was the most perfect system devised by man could maintain that that was a figure against which all changes should be indexed. The reality is that any sensible person would accept that the figure reached was an attempt to get the tax started. It is a guide in a mathematical equation. We should have a few years' experience of VAT and how people react to it before an alteration is made.

That was the principle under which purchase tax was introduced, and subsequently altered, and that is the principle under which VAT should have been introduced. This is not a question of dogma. It is experience that should be the guide as to how VAT could be varied over a time. But so intense was the pride of parenthood of those who introduced VAT that they looked at it in this rather narrower way.

New Clause 1 is far from being an ideal way of making these changes. Continental countries have, in general, had longer and wider experience of VAT than we have, and they have considerable variations. None of them, however, comes near either the limit that we have imposed or the one which the new clause seeks to bring about. West Germany has a threshold of less than £3,000; Denmark has a threshold of less than £500; in Belgium and Italy virtually all traders have to be registered.

There is, of course, the problem of unfair competition which these other countries and we have to take into account. For example, we have received representations from the construction industry, among others, expressing concern about the possibility of unfair competition between registered and unregistered traders.

I am not clear what point the right hon. Gentleman is attempting to make. Is he saying that it is Government policy to bring the threshold for VAT registration closer to the thresholds in use in the European countries to which he has referred? If that is not Government policy, what is the point of his remarks?

I was seeking on a philosophical basis to show that New Clause 1 does not have the validity that the hon. Gentleman may, or may not, accept. He is not always at one with his Front Bench, so his position is anomalous, making it difficult for us to know the status of his interventions at any time. I was trying to show the range of thresholds applicable in Europe. The hon. Gentleman knows that, during the discussions on the sixth directive of the Commission relating to VAT, I sought to provide as open an opportunity as I could to bring about this increase.

Nevertheless, it is not a bad idea to look at the experience of other countries, because, even if one does not need to accept that experience, one can learn from it in a way which those who thought out this tax for introduction here did not necessarily always follow. My belief in these matters is less based on dogma than the Opposition's was when they introduced the tax. My attitude has been formed in the light of our experience since the introduction of VAT.

I agree with the high sentiments of the Financial Secretary in aiming to make comparisons. Does he agree that it is also not a bad idea to look in detail at the situation in other EEC countries? If he did so, would he not admit that there are a number of schemes and arrangements which very much modify the effect of the threshold figures that he has stated and which, in some cases, make the effect of the figures that he has quoted totally different from that which would prevail in this country? If he is making the argument in those particular terms, he must set all the facts before the House, and not just those that suit his argument.

The hon. Gentleman will know that in this country we have a number of schemes for small traders. We have a wide range of such schemes, but they are limited by the need to make them readily available and readily comprehensible. There is no a particularly important point that the hon. Gentleman can make in that respect.

However, we are considering what the threshold should be and how it should take account of the experience that we have gained in the four years since the introduction of the VAT system.

I am not quite sure what the gist of the Financial Secretary's argument is. Is it that the original threshold, when set at £5,000, was set too high in real terms? Is that what he is saying?

I was maintaining that so far from being the consequence of an understanding as to what it ought to be, it was necessarily set at a fairly arbitrary level, even though it was sought to be defended by those concerned. But we now have the advantage of seeing in practical terms the experience of what the level of the threshold ought to be, and of being able to come to the House of Commons giving the benefit of the experience of Customs and Excise in carrying out the obligation to keep a close watch on these and other matters relating to VAT.

The tax has been in operation for four years now. In the lifetime of any tax as important as this that is not a long time. One of the more important elements of this matter, because of the complexity of this new tax, to which the hon. Member for Guildford (Mr. Howell) and many others have frequently drawn attention, and because of its effects upon large numbers of people, is that there is a need for a considerable period of stability.

This has been advantageous. At the beginning there were many problems. They have now either been resolved or been diminished because of the greater understanding. Ideally, I should have preferred a period of stability even longer than that which we have had up to now and to retain the threshold. However, I understand the widespread support for the increased threshold, and the representations that have been made to us. I am prepared to accept that it is time for an increase of a moderate nature. That is the reason for the Government amendments.

Concerning the practical arguments for limiting the change, there are a number of procedures that will be involved in the deregistration and a number of problems that have not so far been met by Customs and Excise. That is because we are dealing here not with the odd number of deregistrations and registrations that have obviously been a feature year by year, but with what could be a substantial number of deregistrations over a very short period.

It is because of that and because I believe that we should allow VAT to continue in much the same form until greater experience is obtained by those who operate it that we are proposing that the new registration threshold limit should be increased by 50 per cent., from £5,000 to £7,500, and that the deregistration limit should be increased by the same percentage, from £4,000 to £6,000.

The purpose of these two levels, the registration level and the deregistration level, is obviously to prevent a kind of see-saw effect as traders come above the threshold and then fall below the threshold, deregister, and then come above the threshold subsequently. Therefore, one wants an interval between those two limits of the kind that we have had previously. I know that the new clauses take this matter into account. We are grateful for the widespread understanding of this important factor.

4.45 p.m.

It is not possible to forecast the exact number of traders who will seek to deregister, because a number of such traders obtain net payments of VAT themselves, and we must assume that they will remain registered. A number of others obtain their business through the supply of goods or services to registered traders, and they may well decide on commercial grounds to retain their registration because it is useful for their customers.

The Government amendments will enable more than 50,000 traders to apply for deregistration if they believe that it would be worth while. The revenue reduction that we expect to arise from this will be a figure somewhere between £5 million and £10 million.

We have put forward 1st October as the date for the Government amendment to take effect. That is to allow for these changes to become operative in that period, as a new clause will be needed at a later stage to relax the current provision for the payment of tax on stocks and assets, which we shall obviously be having to take into account.

Is the Financial Secretary saying that he estimates that the annual cost will be between £5 million and £10 million and that 50,000 traders may well avail themselves of this opportunity? If so, will he say why, despite letters to his right hon. Friend and several Questions, culminating in a Question six weeks ago when this specific question was asked, I was informed that the information was not available and that it was impossible for the Treasury to calculate how many traders would benefit?

As I have mentioned, it is a tentative estimate. In the light of the new clauses and the Bill, obviously a considerable amount of effort had to be put into establishing the effects of these proposed changes. I mentioned at the outset that the figures that I was giving were only very broad estimates. I hope that the hon. Gentleman will accept the nature of the accuracy of the figures that I am providing.

I intervene on a point of information. The Government have obviously looked into this matter in order to table their amendments. What proportion of the total is 50,000? How many are registered at present, and what proportion will it mean? Also, if the limit were raised somewhat higher, has the right hon. Gentleman any figures to indicate how many more traders would fall into this position?

Yes, but perhaps I may reply to the whole debate and come up with more figures which should be of help to the Committee. At this stage I want to give an indication of the Government's attitude.

I believe that the new clause, as amended, will be able to provide the means of maintaining some of the advantages that Opposition Members claim for traders. I myself feel that the most important aspect of VAT is the level of comprehension that is possible for the ordinary person using it. I think that that is increasing with time. Everything that we can do to make this a more readily understandable tax and one that people can operate in a more practised way will be to the advantage of the VAT system and of those concerned in trade generally.

I do not believe that this debate on the new clauses and the Government amendments need cause either side of the Committee to get very up tight. It seems to me that what we are dealing with basically is the application of the de minimis principle to VAT. With the small exception of those hon. Members whom I regard as belonging to the hair shirt brigade—I notice that they are not present for the debate—there is nothing in principle that need divide us. The hair shirt brigade consists of those who regard all forms of taxation as a salutary form of penance and who, when they see a happy shopkeeper, assume that he is being under-taxed and is putting his fingers in the till. No hon. Member currently present falls into that category, because I see that the Labour Benches below the Gangway are empty. Therefore, we can assume that we are at one and agreed that it is perfectly proper to apply the de minimis principle to the VAT threshold.

I should like briefly to put to the Committee some important reasons in favour of raising the threshold as part of the de minimis principle. This principle was established when VAT was brought in at £5,000 a year in 1973. First, my hon. Friend the Member for Guildford (Mr. Howell) has already shown that to bring the threshold back to its real value in April 1973 the figure should be nearly £10,000. The latest figure that I have from an answer to a parliamentary Question this week is that, to be at the April 1973 value, it should be £9,750. My hon. Friend said £9,600. Therefore, his argument that by the time it is implemented £10,000 is not an unrealistic figure should be accepted by all of us. I believe that the Financial Secretary supported my hon. Friend's figure, because he pleaded for stability and said that the Government amendment would stabilise the tax.

I shall be interested to hear from the hon. Member for Cornwall, North (Mr. Pardoe) why the figure should be £20,000. I have some sympathy with that view. However, the new clause fulfils the proposition adumbrated by the Financial Secretary regarding what he and his Treasury colleagues want. I believe that he should accept the new clause now in order that we may move on to the next new clause without further argument.

Secondly, I believe that moving from £5,000 to £10,000—in 1973 terms, from £2,500 to £5,000—will relieve the Customs and Excise—the tax gatherers—of a great deal of work.

We know from answers to questions earlier this year that there are about 250,000 VAT payers, each with an average tax liability of only £160 a year. Acceptance of the new class would make a positive contribution to the cost effectiveness of tax gathering. I suspect that the Financial Secretary has a sneaking regard for this argument because, in a somewhat nostalgic throw-away line, he talked about the advantages of the old purchase tax when the Treasury dealt only with larger and more clerically sophisticated companies.

We know that VAT gives rise to "aggro" between the taxpayer—above all, the small business man and the self-employed—and the tax gatherer. Therefore, I should have thought that the Customs and Excise and the service generally would be greatly relieved if the new clause were accepted.

Thirdly, there is the unofficial tax gatherer—the taxpayer who pays VAT. I have no doubt that this form of tax is particularly difficult for the small business man and, above all, for the independent self-employed. We all know that these taxpayers have the greatest difficulty in coping with the necessary bureaucracy involved.

Those, then, are three substantial reasons for supporting the new clause.

The only ground upon which the new clause could be opposed and the Government's amendment preferred would be one of cost. Again, I had an answer to a question on this matter earlier this week. I shall give the figures, because we have not had the relevant Hansard this week. I asked what would be the loss of revenue in 1977–78 if the exemption limit were to be raised to £10,000. The reply was that it would cost an estimated £45 million. If the limit went up to £15,000, it would be £75 million. The hon. Member for Cornwall, North may care to note that if it went up to £20,000, it would be £95 million.

On what rate of inflation are these estimates made? One of the features of VAT is that it is a buoyant tax. Therefore, it rises with inflation. If the rate of inflation is higher than the figure upon which the estimates were made, the tax will produce more revenue to the Treasury that it is anticipating getting this year. There are good grounds for assuming that this will happen, because inflation continues to increase.

Looking at the Financial Statement and Budget Report 1977–78, we see that the Budget forecast for value added tax in 1976–77 was £3,650 million and that the outturn was £3,750 million. Therefore, last year the Treasury got £100 million more coming in from VAT than it had budgeted for. I suspect that was because the rate of inflation was higher than was forecast at the time.

I suggest that we shall have a similar situation this year. In the first four months of this year the rate of inflation has been higher than was anticipated by the Government. Therefore, I conclude that, without any charge of being reckless or having little regard for the fiscal consequences, we can accept the new clause.

As we know from the figures that I have quoted, the Government estimate that if the exemption limit were raised to £10,000, itwould cost £45 million. I have calculated that if they are 2 per cent. out on the rate of inflation, the reduced revenue produced by raising the threshold will easily be covered by the higher revenue arising from the extra inflation. Therefore, if the Financial Secretary is to convince the Committee that his lower figure is to be preferred to the higher figure in the new clause, he must tell us, first, on what rate of inflation these estimates are made. Secondly, does he wish to revise that estimated rate of inflation in the light of current experience? I suggest that if he answers those two questions directly, we shall have a clear justification for accepting the new clause. Indeed, as always in these matters, I am astonished at our moderation.

I apologise to the Financial Secretary for not being present for his opening remarks. That was due to a phone call that I was taking.

I declare a vested interest as someone registered for VAT who has probably already committed many criminal actions by accidentally failing to recall in my declarations some broadcasting fee or a fee for a newspaper article. Anyone who is registered for VAT in a small way knows the complication and worry involved in keeping the appropriate records and making the returns in the proper way.

When the Conservative Party decided to set up a committee under the chairmanship of my hon. Friend the Member for Guildford (Mr. Howell) to look into ways not only of streamlining and improving the administration of VAT, but of taking the burden away from as many people as possible, I was delighted. I hope that the final work and conclusions of that committee will result, when given the opportunity, in some positive action.

I apologise if any of the matters that I wish to raise were made clear before I came into the Chamber. If the new clause is accepted, how many people would have some option of deregistration under VAT, as opposed to the 50,000 to whom the Financial Secretary referred? Presumably some estimates have been given to him. I realise the difficulty of calculating how many of the 50,000 will take advantage of the option, but a tolerably intelligent guess can be made. Surely the Customs and Excise has already calculated the impact that this proposal, if accepted, will make on its workload.

I should also like to know how many people could opt for deregistration if the higher figure of £20,000 were utilised. I think that the more people who can remove themselves from the liability for this tax, the better. The compensation of simplification and, indeed, revenue to the Government by going for a flat rate at a somewhat higher level than the lowest rate now makes good sense. One of the complications in the administration of VAT is the double level.

5.0 p.m.

Since, in the amendment the Government, are showing some desire to simplify and eliminate the process for a substantial number of people, surely they must have considered a higher rate to obtain all the revenue of last year, as opposed to this relatively small increase in the threshold. How does the Minister see the balanced argument in terms of small businesses? Many small businesses in the early days found reason to complain about the manner in which various inspectors were examining their books and demanding to see them. There were many complaints about the attitude adopted. In fairness to the Customs and Excise Department many complaints were taken up, and the situation has improved. There has been a smaller volume of complaints in recent months. I welcome that improvement.

A case concerning a constituent of mine was reported in the Press today. If the evidence given by the business concerned is correct, alarming attitudes have been adopted by the inspectors. Many small business men who read of such visits to private houses are genuinely frightened and anxious about the tax. It causes a great deal of anxiety to those small businesses that cannot employ professional staff to supervise the tax. I hope that the Government will go for the option to lift the threshold to the maximum level and relieve that anxiety.

I welcome the Government's compromise amendment to the new clause. The Conservatives sounded pretty miserable about the amendment. They do not think it is a concession of any merit. Well, they would not, would they? The hon. Member for Guildford (Mr. Howell) is usually quite a cheerful soul, but in this debate he has had a hangdog look. His voice has sunk further and further into his boots. He must try to cheer up. He says that far from having achieved anything by getting the threshold raised from £5,000 to £7,500, the Liberal Party has somehow sold the pass.

According to various Press reports the hon. Member for Guildford blamed me for the whole thing. The Financial Times states that he said:
"This is another fruit of the Liberal Party deal with the Government."
The Daily Mail and The Guardian do not agree with that. The Guardian states that
"The Liberal Party won another Budget concession from the Government yesterday, when Treasury Ministers decided to raise the VAT level to £7,500 from the present £5,000."
The Daily Mailstates that
"The Chancellor Mr. Denis Healey, gave in to pressure for the change after Liberals made it clear that they would insist on the turnover levels being raised."

Will the hon. Member explain clearly which level he prefers—£9,600, which is the level in the Liberal new clause, or £7,500 which is the level in the Government amendment to the Conservative new clause?

The answer is £9,600. But, I actually prefer a higher level. I should really prefer a threshold of £20,000.

I want to give the hon. Member for Blaby (Mr. Lawson) a lesson in parliamentary arithmetic. There is no certainty that the new clause will have the majority approval of the Committee—however I and my hon. Friends vote. There was no certainty that there was a majority in favour of a reduction in petrol tax. On recent occasions when the members of the Liberal Party and members of the Conservative Party have voted against the Government, the Government have won, partly because of the absence of the Ulster Unionists.

Order. That matter does not arise on the question of the threshold of VAT.

I am arguing why I am prepared to accept a bird in the hand rather than two birds in the bush. I am entitled to argue why I think it is unlikely that the new clause will go through, whereas the compromise agreed with the Liberal Party and the Government will go through. I think that I am entitled to adduce figures—

The hon. Member should not forecast the result of the vote. He has made his point. I do not see why we should go over what happened yesterday after a debate on agriculture. Let him keep his argument to the minimum.

I am arguing that the amendment involving £10,000 would not be carried. That is why I prefer the Government amendment. I was challenged by the hon. Member for Blaby about a vote that took place last night. I do not see why I should not use figures from that vote to illustrate my point.

A total of 32 Conservative Members were absent paired last night. Three Liberals were paired. But the Liberals were paired with the sick. That is better than pairing with those who want to go out to dinner. The Ulster Unionists were absent. That is why the new clause will not be carried. That is why I prefer to accept the amendment involving £7,500 which has been agreed by negotiation, than take a risk on the £10,000 proposition.

The Liberal Party cannot by itself change this tax threshold. Indeed, the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) during the Second Reading of the Finance Bill said
"The hon. Member for Cornwall, North spoke as though he were going to get this tax knocked out of the Bill by himself, but he has to persuade 285 Conservatives to feel that they should lend him their support in what he seeks to do. It is not Just a question of his persuading himself."—[Official Report, 28th April, 1977; Vol. 930, c. 1627.]
I do not think that I can convince that number of Conservatives to turn up and vote tonight, or any other night. If I had been able to do that two nights ago we should have established the principle that no one in this country should pay more than 50 per cent. of his income in tax. Unfortunately that amendment failed.

It is possible that there are some monetarists in the Conservative Party who would decide not to increase the public sector borrowing requirement by voting for a reduction in petrol tax nor, indeed, vote for the increase in the VAT threshold. That is why I have taken the view that I have taken on the amendment.

I say to the hon. Member for Blaby and other Conservative Members that a new clause involving £9,600 appears on the Order Paper in my name. I would rather have that threshold than £7,500 but I do not think that I could achieve it.

I think I am correct in saying that the first vote is likely to be on the Second Reading of the new clause. That is likely to go through. Presumably the Government will not oppose the first vote. The vote on the amendment is the one that is likely to be in dispute.

The hon. Gentleman may be slightly misleading the House. The first vote will be on the Question "That the clause be read a Second time". That is all.

I think that is quite correct, with respect, and I was assuming that that vote will be carried because the Government will not oppose it. The first opportunity for the hon. Member for Cornwall, North (Mr. Pardoe) to demonstrate any disagreement with either the Government or the Opposition will come on the vote which will follow that, on whether the clause as read a Second time should be amended. He can vote with us on that to oppose the Government's amendment and leave it at £10,000. If there is not a majority for the Conservatives and Liberals and anybody else voting together, the figure will revert to £7,500. The hon. Member is not in a dilemma about choosing. He can vote with the Conservatives with equanimity.

When the hon. Gentleman has finally twisted himself around parliamentary procedure, he will find that his version of events is not quite what will happen.

I advise the hon. Member to wait until the votes are cast. In any case, the main point of the debate is not just about what the actual level of threshold should be.

It is not. Some far more important questions are being raised, because we are dealing with a very bad tax. We are dealing with the left-overs of a very bad Government—the Conservative Government—for even with a threshold of £10,000 there would still be a very large number of the problems which were dealt with in earlier speeches.

In general, one would like to say "Let us leave the tax alone", but major changes have to be made. It cannot be left alone. The tax is far too bad for that. If we leave it alone it will be subject to the random law of perversity that things get worse the longer they are left.

In an ideal world, taxes should not be introduced other than for reasons of efficiency and sound economics. The first question which should be asked of any tax—and we have to ask it again this afternoon in dealing with threshold—is whether the tax is an efficient revenue raiser. Next, will it have beneficial economic effects? Thirdly, would people prefer to pay their taxes in this way rather than in another way? The best tax is one to which the answer to all those questions is "Yes". I am afraid that VAT, at whatever level of threshold—and we are only patching it up by changing the threshold—is a bad tax on all those counts.

It might be worth while recalling what the Conservative Government said was the purpose of this tax when they produced their Green Paper back in 1971. They said:
"The existing pattern of indirect taxation in this country is open to the objection that it is selective and is based on too narrow a range of expenditure. Selective taxation gives rise to distortion of trade and personal consumption patterns, and can lead to the inefficient allocation of resources."
The Green Paper went on, quite rightly, to argue that there should be a more broadly based structure which, by discriminating less between different types of goods and services—

Order. I think that the hon. Member for Cornwall, North (Mr. Pardoe) is now going pretty wide of the purpose of either the new clause or the amendment. He is now seeking to discuss the whole question of value added tax and whether it serves its purpose. I have to rule that all we are discussing is the threshold and not the actual existence of value added tax.

5.15 p.m.

The fact is that the anomalies which we are trying to put right by raising the threshold are very important anomalies, and they are anomalies to which I intend to address my speech. If you, Sir Myer, say that that speech cannot be made in the House of Commons I shall quite understand. If you did say that, however, it would make the House of Commons an even more fatuous place than I believe it to be now.

How does VAT fulfil the promise? It is not and has never been able to replace the revenue that—

The hon. Member for Cornwall, North has indicated that he is prepared to accept my ruling. If he wants to make that speech he will make it outside the House and not in the Committee stage in the House of Commons. I am ruling that particular aspect of his speech out of order.

I hope that the hon. Member is not imputing to me any ulterior motives. All I am doing, as the custodian of the Standing Orders of the House, is to see that these Standing Orders are kept to strictly.

I am debating anomalies which have been caused as a result of problems arising out of the present threshold of the tax. Will you please tell me, Sir Myer, whether I am entitled to argue that the threshold of the tax should not be raised ideally to £10,000 but to £20,000 or £50,000?

That is precisely the argument that I am attempting to make, but it is taking rather a long time to get to it.

We have to look, therefore, at the whole question of compliance costs and administrative costs for people at the lower end of the taxpayers' scale. I am now talking about a very large number of VAT payers—not just those who are in the range of £5,000 to £7,500 or up to £10,000, but people way above that, certainly up to a level of about £50,000.

I am indebted for evidence of this to two studies. The first is a survey of the compliance costs of VAT for 29 Bath retailers carried out by Michael Godwin of the Centre for Fiscal Studies at Bath University, and reported by him in an article in the September 1976 issue of Accountancy. The second study of the collection and administrative costs is by E. W. Sweeting, who was until recently Director of Accountancy Services for the Ministry of Defence Procurement Executive. This study was reported by him in an article in the Accountant of 24th March 1977. These surveys show that successive Governments have not taken the compliance costs sufficiently into account.

In the amendment we are as much dealing with compliance costs as we are with the direct administrative costs of collecting this money. Indeed, Governments never seem to recognise that these compliance costs exist at all. Certainly no attempt has ever been made by Government to estimate them.

It would be an excellent thing if in future all new taxes or changes of taxes were accompanied by a memorandum from the Treasury estimating the effect on the taxpayer of the compliance costs, just as we insist on being told the revenue effect and the effect on the number of civil servants and the administrative costs of legislative changes. All these questions have been legitimately put to the Minister during the course of the debate so far.

Compliance costs are, broadly speaking, those costs over and above the liability for the tax itself which are incurred by a taxpayer in paying the tax. They include the cost to the taxpayer of collecting the tax, accounting for it, preparing tax returns, and actually making the payment itself. The Bath study is a terrifying and damning indictment of VAT as it was devised and introduced by the last Conservative Government and as it now operates with our present threshold.

I am not here concerned with commencement costs, Sir Myer, because in any case that would be out of order. I am concerned with the permanent and continuing costs of compliance as shown in the study of the Bath retailers. For 25 of these 29 retailers in the city of Bath, the average estimated compliance cost in the year 1973–74 was £140 and the average liability for tax was £179. To have to undertake £140 worth of extra work in order to pay the Government £179 of tax must be some kind of record in lunacy. It means that the compliance costs of these retailers were 78 per cent. of their total tax liability. That is really crazy. But there is worse to come, for 10 of these retailers actually spent on average £115 in compliance costs in order to claim back from the Government an average of £842. And they call this a tax. It is a sort of inspired madness.

The deeper one delves into the survey of the compliance and administrative costs the worse it gets. The compliance cost of seven grocers in this sample are estimated at £1,428. Yet their total liability for tax was only £98. What kind of Government was it that imposed on sonic harmless, inoffensive and hard-working grocers a tax which in 1973-74—the latest period for which we have the figures—cost them 14 times as much to collect, account for and pay, as the Revenue actually derived in tax? No wonder retailers and small business men are angry about the tax. It is only because the British are a peaceful and long-suffering people that they have not marched on the House or perhaps on Conservative Central Office long ago.

The Minister may say what Governments always tend to argue when they are urged to adopt a higher threshold, that the system seems to work on the Continent with very low thresholds. I believe that the Minister mentioned that today. On the Continent VAT is a good tax with a low threshold because there is virtually no zero rating. But the zero rating of food and other items in this country has been regarded as a political necessity by Governments who believe that an across-the-board tax such as was first envisaged, though not applied to food, was a political impossibility. Zero rating made the tax very inefficient, and for that reason I do not believe that the tax should have been introduced.

Let us consider whether something can be done with the threshold level to try to improve the tax. In his article in the Accountant on 24th March, Mr. Sweeting tries to link compliance costs and the direct administrative costs of the Customs and Excise to establish a total cost of collecting the tax from smaller and not-so-small retailers. Let us consider some of the horrors that he exposes. He makes it clear that he is not blaming the Customs and Excise Department, but that the nature of the tax and its present threshold are to blame. The article says:
"What accountant with the best interests of his clients at heart would automatically recommend sales and purchases day books and ledgers for businesses with an annual turnover of less than £50,000? Only an unimaginative pedant. They are costly and time-consuming to run."
He is not commenting on some super-collectivist scheme dreamed up by centralising State Socialism. This tax was introduced by the supposed lovers of efficiency and enemies of bureaucracy—the Conservative Party. According to the Customs and Excise, there were 1,250,800 persons registered as VAT payers on 1st March 1976. They paid a net amount of £3,385,000 in tax. But it is when we come down the scale that we run into difficulties, because 367,000 of them—29·4 per cent. of the total of taxpayers—received refunds of £618 million, and those refunds cost the Customs and Excise Department a farther £20 million to administer.

Therefore, 367,000 businesses or persons are made to go through the whole costly business of filling in VAT forms and keeping VAT books simply to enable the Government to repay them £618 million. It may be said that refunds are essential as a part of the tax and must not be confused with collection or compliance costs, I accept that to a certain extent.

Let us turn to Mr. Sweeting's calculations on retail distribution which is where the real impact comes because these costs are laid obscenely bare. On 31st March 1976 287,000 retailers were registered as VAT payers. Of these, 143,000 had annual turnovers below £20,000. They paid tax of £18 million which cost the Customs and Excise £8 million and Heaven knows how much "aggro" to collect, and that does not seem very sensible.

If we then add the problem of compliance costs which admittedly are difficult to estimate, but it can be done, to the direct administrative costs we can see that the whole picture is even worse. Those with a turnover of less than £20,000 paid £18 million in tax, and in addition to the £8 million that it cost the Customs and Excise to collect the money, there were compliance costs of £23 million. That is absolutely crazy. Compliance and collection costs were greater than the tax paid for 216,000 retailers with turnovers of less than £50,000 in 1973–74.

Of course it would be impossible to raise the threshold to £50,000. For one thing, our European partners would not stand for it. In addition, there would be a great outcry from those with turnovers of more than £50,000 complaining of unfair competition. I am less impressed by that objection than others might be. I see nothing to be lost and everything to be gained by discriminating positively in favour of small business, and this kind of action would be such discrimination. Of course, we should have to put up with the objections of those above the threshold, but that would apply whether the threshold was £10,000, £50,000, or any other figure.

It is, however, certain that we cannot allow such an argument to outweigh the sheer nonsense of levying a tax which costs more—in total administrative and compliance costs to the taxpayer—to collect than it yields in revenue from all those below the £50,000 threshold.

We could do many other things to simplify the tax. The Financial Secretary referred to a study which is being carried out by the Conservative Party. We in the Liberal Party have been involved in an intensive study too, and many others are doing the same. Many changes could be suggested to the structure of the tax to enable a lower threshold to be administered profitably both in terms of compliance and direct administrative costs.

It seems, however, that we must go in one direction or the other. Either we must change the tax virtually out of all recognition—that means abolishing the input and converting the tax to a straight sales tax—or raise the threshold substantially. That is the basic choice which is more important than the question of whether the threshold should be £7,500 or £10,000. An increase on that scale would not take many people out of the net and would not solve the basic problem demonstrated by the figures I have quoted.

I hope that the Government will look at the studies which have been done. I hope they have done their own studies of compliance costs. They have detailed figures from the Customs and Excise about direct administrative costs. I hope they will put these together in a major study before next year's Finance Bill so that we can either make the tax a profitable and efficient revenue raiser or decide that we must raise the threshold substantially.

5.30 p.m.

I wish to refer to new Clause 8, which has been grouped with new Clause 1 and stands in the name of my right hon. Friend the Member for the Western Isles (Mr. Stewart).

This is a matter that has often exercised members of the Scottish National Party. I have noted what the Financial Secretary said about the need to maintain stability, but there is not much stability in business when inflation rates are running at 15 per cent. to 20 per cent. The Government may have moved a little on this issue, but they have not moved enough and they have moved grudgingly.

An amount of £5,000 in 1973 is not the same as £7,500 today; in fact 1973's £5,000 is much nearer today's £10,000 and it could be that 1973's £5,000 will be next year's £12,500. Hence our selection of our threshold. There is not another Finance Bill until 1978, and it is possible that even £10,000 will be eroded by this time next year.

I am sorry that the Liberals have gone back on their original proposal of a threshold of £9,600. After hearing Northern Ireland Questions today and knowing the mood of Ulster Unionist Members, I would have thought that with Liberal support the Government could perhaps have been defeated on this.

The cost of raising the threshold to £15,000 is £75 million, and presumably the cost of raising it to £10,000 would be in the region of £50 million. VAT may or may not be a good tax, but the methods of assessment impose a huge burden on small business men.

I take the point that the Financial Secretary made about fair competition and realise that any cut-off point must be arbitrary. I am sure that we have all been approached from time to time by small business men with truly horrific stories about the unconscionable amount of time they have to spend filling in forms in order to cut a swathe through the bureaucratic crop that the VAT regulations represent.

I have been approached by constituents who are in near despair in their efforts to contend with four tax rates—zero, exempt, 8 per cent. and 12½ per cent. They spend far too much time filling in forms. It sometimes takes up the whole of a Saturday or Sunday morning—time that should have been spent in leisure.

Despite what the right hon. Member for Worcester (Mr. Walker) said, there is, on the other side of the coin, bureaucracy among the VAT-men themselves. It is not unknown for VAT inspectors to spend a great deal of time going through the books of small companies with small turnovers, and the cost of that must be prohibitively high. I have had personal experience of this. One is prompted to ask if the VAT-men are compensating for their inability to police the large companies by taking it out on the smaller ones. Our amendment will not remove this inequity but at least it will alleviate it to some degree.

It cannot be repeated too often that the small business sector is one of the most important in the economic firmament—important per se, and also because it is today's small companies that sometimes contain the seeds of tomorrow's large companies. Tall oaks from little acorns grow.

The purpose of taxation should be to maximise revenue, and revenue can be maximised only if businesses are left as free as possible from bureaucracy and allowed to get on with creating wealth—making two blades of grass grow where there was only one before. Excessive interference by the VAT-men, especially in small companies, does not greatly assist the creation of wealth.

As long as Scotland remains joined to the economic and political union of the United Kingdom, it will continue to suffer from raging inflation. This is why we seek to raise the threshold to £10,000, or £12,500, or even more. We shall vote against this niggardly concession that the Government, in concert with the Liberal Party, have produced.

I hope that we shall have support and that not too many unpaired Tories will be getting themselves into further fumbles over devolution at the annual conference in Perth. I hope that the Conservatives will turn out in force to support us tonight.

I support the new clause moved by my hon. Friend the Member for Guildford (Mr. Howell) and I welcome the suggestion that the threshold level should be raised to £10,000. I think that it would be sensible to raise it to a much higher level.

I intervened about half an hour ago when the Financial Secretary was speaking, because I had a series of Questions, all directed to him, which were tabled in January this year. I asked him for the annual cost, in terms of lost revenue, of raising the threshold from £5,000 to £20,000 and £50,000. The answer I got, to paraphrase the Financial Secretary, was that it was unrealistic to assume that persons registered for VAT who would be entitled to substantial repayments would not wish to remain registered voluntarily.

It is a pity that I should receive that sort of blocking reply to a Question that was tabled in the usual way on the Order Paper. This is the only way that hon. Members can have access to information, and when Ministers give this sort of rather curt blocking answer it tends to bring Parliament and the whole Parliamentary procedure into disrepute. This is especially so when, four months later, the same Minister gives the House the information in great detail. He has given us the cost of raising the threshold to the levels that I suggested, and to other levels, and has indicated the number of persons involved. That was all that I sought to ascertain when I tabled my questions.

There is an enormous difference between a parliamentary Question, when one is limited by the actual cost incurred in undertaking a thorough study about the amount of revenue lost, and a decision made by the Government, with the necessary requirement for us to tell the House how much our amendment will cost. One proposition is quite unacceptable in terms of cost, because of the amount of study that would have to be undertaken. The other is an essential part of an undertaking of any Government. The hon. Member should know that normally I give a great deal of attention to trying to give as much information as possible in parliamentary answers.

I fully agree with what the Minister has said about his attention to parliamentary answers. That is why I was surprised at what had occurred. His record in the past had been good. I was even more surprised when I sought an elucidating answer from the Chancellor and I received a similarly negative reply from him. This was positively discouraging.

I have sought to raise this matter on a number of occasions because of the representations that I have received at a number of meetings that I have attended, held by the National Association of Independent Businessmen. These meetings, entitled "Survival of Small Businesses" have been held throughout the country in recent months and have indicated that one of the causes for the decline of small businesses in recent years has been the incidence of VAT, and in particular the present very low level of the threshold at £5,000. I am attending another of these meetings shortly, in the Midlands, and there will be, as in previous meetings, almost unanimous representations from all over the East Midlands requesting that the VAT threshold be raised not to £10,000 but to £15,000 or £20,000.

My hon. Friend the Member for Guildford (Mr. Howell) has emphasised that a considerable burden has been added to the tasks of small business men. The hon. Member for Cornwall. North (Mr. Pardoe) made some very good points resulting from a document showing an analysis of what happened to retailers in Bath. Some of those points were extremely telling. I do not have a document of that nature on which to draw. However, I have evidence that is almost as telling—namely, the records of small concerns that are going out of business completely because of the many burdens placed upon them by the Government. They are having to cope with masses of paper work, and they have been very much hit by the incidence of VAT and certainly by the present level of the threshold.

I am sorry to see one of the occupants of the Government Front Bench laughing at my comment. It is nothing to be amused about. It is an undoubted fact that since the Government came into office small business men and traders are finding it difficult to keep their heads above water. The work has not increased merely marginally, but has multiplied to a considerable extent. That has been one of the main causes of the difficulties faced by such businesses.

I wish to refer to the campaign which has been waged in the East Midlands in recent weeks to raise the VAT threshold from £5,000 to £20,000. I have received many letters complaining of the impact of the present low threshold on the viability of small businesses. It has been pointed out that the smallest firms do not have the clerical capacity to work out these complicated figures or to handle the VAT paper work in a proper manner. This also causes a disproportionate amount of work for the Inland Revenue officials who have to administer the scheme. This point was underlined by the hon. Member for Cornwall, North.

Further evidence has come to light on this matter, and I should like to put it before the House. It has been discovered that many people are now being deterred from setting up their own businesses by the prospect of having to become involved in VAT administration. From the very beginning, they do not have a chance to breathe before they face the nightmare problems posed by the ramifications of VAT. I have already said that I have unsuccessfully tried to obtain some information from the Treasury showing the total cost to the Exchequer of raising the VAT threshold. Many of those who have approached me on this subject have given evidence about their experiences and the difficulties they have faced in compiling VAT returns on businesses with very small turnovers. This has definitely affected the viability of such concerns.

In one case, even though the burden of VAT resulted in the failure of the business concerned, a fine was imposed. There are side effects of the present threshold level. The smaller business is not competent to handle the paper work that is part of the VAT system. Far too great an amount of bureaucratic and court time is taken up in dealing with trivial amounts.

5.45 p.m.

I had hoped that my hon. Friend the Member for Guildford would be a little more forthright in the line he took in moving his new clause, but I have every confidence that when we move to the Government Benches we shall take a more vigorous and energetic line on the VAT threshold. I am confident that it will be raised to a higher level than is now proposed.

Even if the clause is accepted, it will only just keep pace with the decline in the value of the pound since the present £5,000 was introduced. Although I shall vote with my colleagues tonight, I know that we shall have another go at raising the level to a much more realistic one to give some relief to those who are acting as tax collectors. When we occupy the Government Benches, one of the first things we shall do is to raise the VAT threshold in a realistic manner.

I wish to refer to the contribution made by the hon. Member for Cornwall, North (Mr. Pardoe). It appears that part of the rigours of the new regime that we now have to suffer involves having to listen to long lectures delivered by Liberal spokesmen as a substitute for any effective information about their policies. The hon. Gentleman, by a series of winks and nods, suggested that the Liberals will tonight vote on our clause. It was accompanied by other shakes and nods of the head indicating that they had done a deal with the Government which would set the threshold below the rate that we propose in the clause. It is ironical that by so doing the Liberals can have it both ways. I suggest that the Committee is entitled to know what the Liberal Party will do in this respect. Since all I have been given is yet another wink and a nod, we shall obviously have to wait and see.

I wish to take up the Financial Secretary's plea about stability. The right hon. Gentleman is a little like Canute asking the waves to stay back—after the right hon. Gentleman had been drowned rather than before. In the period under consideration between 1972 and the present, we have experienced inflation of 100 per cent. This explains why it is logical to press for a 100 per cent. increase in the threshold. That would give stability because in real terms it would return the threshold to the level which, for better or for worse, it occupied in 1972.

The Financial Secretary suggested that there was no reason for him to accept the level that was proposed and agreed in 1972. He then set out the arguments. That led me to intervene to ask whether he was arguing for a reduction in the threshold. He appeared to deny that he was asking for a reduction, but that is certainly what he will achieve if the Government's amendment to our clause is accepted. In real terms there will be a considerable reduction from the original rate proposed and accepted in 1972.

In replying to the right hon. Gentleman, I would adopt the argument put forward by my hon. Friend the Member for Harborough (Mr. Farr) and also by the hon. Member for Cornwall, North—namely, that there are very good reasons, far from reducing the threshold, for raising it to a considerable extent. I join my hon. Friend in hoping that a future Conservative Government will raise the threshold in real terms.

The classic example on the fundamental problems of turnover is shown by what happens in garage concerns. In most cases they are small businesses which often have an annual turnover—I do not know the average figure—of between £50,000 and £100,000 per year. Such businesses find it extremely difficult to comply with VAT regulations. I agree that the logical conclusion of that argument would be to raise the threshold well beyond £10,000 a year to £15,000 or £20,000. Far from reducing the current threshold, the Government should be considering raising it, a least marginally. They are not doing that tonight.

One of the problems in debates on allowances and thresholds is that the figures are not usually given in real terms. The Government usually present their case by saying that they are giving an increase and making a generous step. In fact, as we see tonight, it is usually not generous. The increase that the Government are apparently giving is, in fact, a considerable reduction. I ask the Government at least to consider keeping the threshold at the level proposed in real terms in 1972, otherwise the argument that the Financial Secretary put forward about reducing the rate does not hold good.

We should be grateful for small mercies in that the Government are going some way along the road that we have suggested. However, we should look this particular gift horse in the teeth carefully. We should consider it from an arithmetical point of view.

As is often the case when we put down such amendments, my hon. Friends have obtained figures by putting down parliamentary Questions, and more figures have been given by the Minister in his speech. The Financial Secretary said that 50,000 traders would probably be taken out of the VAT net by the Government's proposal to set the threshold at £7,500. He also said that the cost of that to the Government was estimated to be between £5 million and £10 million.

I shall give some more figures later, but the figure of 50,000 that I gave referred to the number of people who could claim deregistration.

I apologise. I do not wish to mislead the Committee, and I shall come back to the figure of 50,000. I accept that that is the number of people who might claim, but we do not know that they will do so. The Government said that the cost, if they all claimed, would be £5 million to £10 million, and that means £100 or £200 of VAT saved by each trader. Of course, in introducing that figure of £5 million to £10 million, the Government have obviously taken into account—it is a big spread—various assumptions about the number of people who would come out of VAT on that basis. However, we also know from a parliamentary Question put down by my hon. Friend the Member for Eastleigh (Mr. Price) that 250,000 traders pay £160 or less in VAT. That figure, of course, falls into the bracket of £100 to £200 that was given by the Financial Secretary in his calculations. There seems to be some divergence there that I hope can be cleared up during a later intervention from the Financial Secretary. It has been said that 50,000 traders might be able to come out, but a much higher number of 250,000 traders seem to be paying such a small amount of VAT. Of course, the £100 or less in VAT that is paid by those 250,000 traders is their gross payment.

We know from figures that were given to us by the hon. Member for Cornwall, North (Mr. Pardoe), who has now left the Chamber and who referred to an article by Mr. Sweeting in the Accountant saying that at that level it cost £8 million to collect £18 million, that out of the £160 that is paid by each of the 250,000 people only £100 arrives net at the Treasury. We need to be clear about these figures when taking a decision on the limits proposed in the new clause and in the Government's amendment. The hon. Member for Cornwall, North was right in what he said about compliance and administrative costs for the Customs and Excise. That is the key to the decision that the Committee must shortly take.

There must be a point—it is certainly above £7,500, and probably above £10,000—at which this tax begins to be negative to the economy. There must be a much higher point at which it must have a more or less negative effect and certainly little positive effect for either the economy or the revenue. It would be helpful if the Financial Secretary could tell us whether the figure of £5 million to £10 million that he gave was a net or gross figure. It may be gross—although from what the right hon. Gentleman said I have assumed that it is net. It would be helpful for the Committee to know the gross figure. Of the £20 million of tax that the Government will collect, will £10 million be spent in order to collect a net figure of £10 million?

The big leap forward in simplification that is sought by the hon. Member for Cornwall, North might be achieved through a major increase in the threshold limit. It is more likely to come from a move to the accounts basis that we shall be discussing later in Committee when we debate two new clauses which have been put down—one of them in my name—on that subject. However, I cannot follow up that point now.

The hon. Member for Cornwall, North has now returned to the Chamber, so I should like to reiterate the paint that I tried to make in an intervention to his speech because I do not think that he grasped it. I see that the hon. Member is taking some high-powered advice from my colleagues on the Opposition Front Bench, obviously on procedural matters.

On this occasion the Liberal Party can have its cake and eat it. After the Liberal Party has voted, as we and the Government shall do, for the Second Reading of the new clause—which would be doing nothing out of the ordinary—it must then decide whether to vote for the amendment. If it votes for it, it will be voting against the £10,000 limit and for the £7,500 limit. Presumably, if the Liberal Members vote for the amendment with the Government, if they all turn out in force and there are no slip-ups in the machinery, the amendment will be carried However, if the Liberal Party votes with us, the limit will not be £7,500 but will be higher than that. There is no practical question whatever of the limit being less than £7,500 by the end of the evening. The only question is whether it will be £10,000, and the Liberals must direct themselves to that question. We shall see in due course, since they are not prepared to tell us now—as apparently, they are not—what decision they will make.

6.0 p.m.

I suppose it is something that the Government have seen the light, even if they have seen only a little light. Certainly I and my colleagues have been pressing for this threshold to be raised during the last two years. We should have liked to see it raised by a greater amount, but at least what has been done shows some measure of increased sense and good will on the part of the Government.

I cannot help wondering how the figure of £7,500 was arrived at. It seems a strange figure to choose. How small are the businesses affected by the exemption supposed to be? This is the key question. Are they supposed to be one-man or two-man concerns—or has that not even been considered by the Government?

Do the Government want more employment? If so, the exemption limit should be set at a figure that allows one-man businesses to take on a second man. We have heard that 250,000 firms and self-employed people would be freed from VAT if the present limit were doubled. Even if only a segment of those businesses took on a second man, this would go a long way towards helping with our unemployment problem.

However, the Government have fixed the exemption at £7,500 and that is just too low to allow a second man to be taken on without the discouragement to the firm of entering the VAT net. The average output per man in this country in terms of gross domestic product was about £4,300 last year. This is arrived at by taking the GDP per head of the population according to the latest issue of "Economic Trends" and adjusting it for the total employed labour force in mid-1976. That is an approximate figure—no doubt the Government could give us the precise sum—but it is accurate enough for us to see that the output of two men last year would have averaged £8,600—£1,100 more than the proposed exemption.

Is it the Government's intention that the exemption should apply only to the one-man bands? It is at this stage of growth in tiny firms—the first step to expansion—that there are the biggest fears and anxieties in the owner's mind. When he considers whether to take on a man or perhaps two women, part-time, he wonders about the economy, as well he might. This is the wrong place from every angle to put any impediment in his way by taking him out of the class that is exempted from VAT.

Help and encouragement should be given at this first point, yet the Government are giving notice that the discouragement of enterprise starts when a firm takes on its first help. The paper work starts here. The head of a tiny firm will have heard much about bureaucracy, about paper work, about the troubles that he will have to face as the firm grows and about the endless legal paraphernalia that Parliament has passed that he does not understand. He knows nothing of solicitors, and he has probably never read an Act of Parliament, yet it is at this moment, when he wants to take a step forward and to provide a job for someone, that the Government ring the warning bell that he will go into the VAT network if he dares to give one man a job.

The Government should consider setting the threshold at a level above the normal anticipated output of two men at work. There would not have to be a very great increase and it would be an encouragement to the provision of a number of jobs. The small business sector is likely to be proportionately more helpful in providing jobs than is large industry, because the owners of small firms have always had to work near the limits of their capacity. In industry generally the position is different. For example, output is now little different from the levels during the three-day week. There is vast spare capacity and often substantial overmanning. That is not the case with tiny firms, and that is why the VAT limit should be lifted. Even the smallest upturn in economic conditions will find many of these small firms thinking of expansion. They are ready. They do not have the spare manpower, and they will therefore be the fastest sector in taking on new men.

On a point of order, Sir Myer. Would it not be appropriate for the sitting to be suspended until the Government Front Bench spokesman returns? Surely the courtesies of debate demand that Ministers should at least listen to contributions from the Opposition.

I expect that there is a good explanation for the Financial Secretary leaving the Front Bench. However, the Government Whip is there to acquaint him of the important contributions that have been made.

Further to that point of order, Sir Myer. Ah!The Minister has returned. Now we can have a proper debate.

I am sure that the Minister has been away for no longer than was necessary.

I am grateful that my colleagues feel that the Financial Secretary should be here to listen to what I have to say. I hope that the points he has missed will be conveyed to him by the Government Whip and that he will do me the honour of reading that part of my speech that he has missed.

The two Front Bench speakers are anxious to take part in the debate shortly, and I do not wish to hold up our proceedings by going back over what I have said. The Government ought to enable small firms to take on a second man and to encourage them to do so by raising the VAT threshold above the figure of two men's average output. That would have meant a limit of £9,000, or more now allowing for inflation. The Government should not stick to helping the one-man bands but should encourage the two-man bands as well.

To show that I had taken the hon. Gentleman's argument fully on board before I had to leave the Chamber, for obvious reasons, for no more than one minute, may I point out that his suggestion would not meet his objective? He gives the salaries to be expected by two men but has not taken account of other expenses, and even modest expenses would be almost certain to result in the gap between the salaries and a turnover of £10,000 a year being exceeded.

The Minister is under a misapprehension. The figure of £4,300 to which I referred is the contribution of the average working person to the GDP for 1976. It is, therefore, a fair figure for the average firm. Of course there will be a wide spread of figures in various firms, and not all firms would be freed if my proposal were accepted. However, many firms would be freed from VAT. I appeal to the Government to try to meet this point and, if there is any error in my figures, to calculate for themselves the figure required to allow a second man to be employed in these firms. It would be a great shame for any Government to give discouragement at the first creative moment of a tiny firm's expansion.

This is a clause of considerable importance and I am gratified that the Financial Secretary has returned to listen to the contributions that I and my hon. Friends hope to make. The clause can be justified by the inexorable ravages of inflation, and there is no need for me to add to what my hon. Friend the Member for Guildford (Mr. Howell) said about the characteristic inconsistence of the Chief Secretary to the Treasury. Those of us who have had the privilege of taking part in Finance Bill debates in previous years have had occasion to notice them.

The principal justification, however—the one that I wish to concentrate upon—is the number of people that will be taken out of the VAT net, which will result in a simplification of the administration and an easing of the taxpayers' burdens. The Financial Secretary was disposed to resist the new clause, citing the need for stability. Would that he had shown those sentiments in his approach to capital transfer tax, income tax, capital gains tax and the whole battery of direct taxes, and the amendments to them, that we have had to debate over the past three years.

The right hon. Gentleman and his right hon. and hon. Friends have in the past been frantically radical in their rapacity. So this is a novel change of heart, a change of front. But, in fact, I assume that it is only a piece of blatant officialise written into his brief by the Customs and Excise. VAT is a broadly-based indirect tax. By its very nature it is hound to affect a great number of people and turn a great number of people into involuntary tax gatherers.

Some of my hon. Friends have exemplified the various categories affected—the small individual trader, the small professional man, the small business man, the small shopkeeper, the old lady, perhaps with a weekend paper round, or the person with the small sweet shop. All these have been swept into the net. That is not to say—I turn to the hon. Member for Cornwall, North (Mr. Pardoe)—that the tax is bad in itself. I now recall the attitude that the Liberal Party took in the bright days of 1972, but I assume, since the Liberals voted with such conviction for our adherence to the Common Market, that they must also have supported the necessary and inevitable consequences—indeed, almost a precondition—of our entry into the Common Market. It may be that the hon. Member for Cornwall, North will seek to catch the eye of the Chair and explain the inconsistency of the Liberal Party on this theme.

The hon. Member for Cornwall, North (Mr. Pardoe) may wish to intervene, but at the time the Liberal Party was solidly in support of VAT and the hon. Gentleman described it as "magnificently efficient revenue raising" which would enable us to go from replacing the two taxes to replacing many more and which would be a redistribution of income and wealth. I am as surprised as my hon. and learned Friend that the Liberal Party appears to have changed its attitude.

I am grateful to my hon. Friend, who has done a rapid piece of research and confirmed my suspicions. It may well be that the hon. Member for Cornwall, North has been reading the Accountant, which he did not previously read.

I was about to intervene just before the hon. Member for Guildford (Mr. Howell) did so. Yes, I did support VAT and I do so now in principle. What I was arguing was not that it was a bad tax in principle—it is a very good tax in principle—but rather that, because it does not have as wide a base as it has in Europe, it has become. a bad tax. It is for that reason that the people at the lower end of the scale will be paying less revenue to the Government than they are paying out in administrative costs and compliance.

As always, the hon. Gentleman wants it every way. But I shall leave him with his portentous responsibility to explain to the country at large, and his constituents in particular, why he would like an extension of VAT to food, children's clothes, shoes and other such items. There may be a good case, but—

6.15 p.m.

Order. The hon. and learned Gentleman is now going wide of the matter under discussion. He should come back to the question of the threshold that we are discussing in relation to VAT.

I am deeply apologetic. I was tempted by the rather ill-judged and ill-considered intervention of the hon. Member for Cornwall, North to go rather wider than I had intended.

All I wish to say is that I do not wish to find myself on any platform with the hon. Gentleman defending his particular position. In fact, the tax affects such a wide number of people, in small businesses or in a small professional way, that the Committee needs to be assured that the threshold is no higher than it need be and that the administration is as sensitive and humane as it possibly can be. We know from bitter experience that nothing for which the Chancellor is responsible is either sensitive or humane. But we shall hope perhaps to detach the Customs and Excise from him in due course.

Let me make it clear that nothing I am saying this evening is intended as a criticism of that devoted body of men, the officers of the Customs and Excise. It may well be that individual officers are too zealous, but that will always be so in a great organisation. It may even be that individual traders are a little too quick to resent criticism and investigation. There was a sad case in my constituency where certain traders refused to discuss their affairs with a certain Customs officer. I hope that that kind of difficulty can be ironed out. I hope that the Financial Secretary will be quick to receive representations from individual hon. Members on that kind of problem.

The hon. Member for Cornwall, North—I apologise to the Committee for again returning to him—spoke so ponderously and at length. Some of his points were a most peculiar kind of Liberal gobbledegook and can be left unanswered and unlamented. He regurgitated a great deal of raw material prepared for that useful and important study on which Professor Sandford of Bath University is engaged into the compliance cost of VAT. That work was well worth undertaking, and I hope the Financial Secretary will pay attention to Professor Sandford's conclusions. I hope that on another occasion we shall be able to amplify the debate to deal with the compliance costs of taxes generally. This is a subject on which not enough has been said either in this Committee or in the House as a whole.

The Government's amendment is a curious compromise. It is, of course, the product of that loveless and immoral alliance. The many imperfections of that alliance are already evident, because from time to time we have had to scrutinise with distaste its products. The hon. Member for Cornwall, North embarked on intellectual contortions at massive length to justify an act of calculated pusillanimity. By every kind of logic and common sense he should be voting for the new clause. It will be interesting to see how he and his right hon. and hon. Friends vote when put to the test, unless the Financial Secretary allows the new clause to go through without a Division.

I myself cannot understand this newfound timidity of the hon. Member for Cornwall, North and his hon. Friends. It must be that he has in mind his newfound friends on the Government Front Bench and is frightened that he might just tilt them over the edge and provoke them to call a General Election. That is the only justification for the course he has advocated tonight. I preferred the rather lighter touch that the hon. Gentleman had before he engaged in this alliance. Indeed, his words now fall like lead on an apparently empty Chamber.

Where are the hon. Gentleman's hon. Friends or the hon. Friends of the Financial Secretary? [Interruption.] The Financial Secretary can turn to the Patronage Secretary's representative, but the hon. Gentleman does not add much in numbers to the hon. Members supporting the Financial Secretary.

If there is any logic in the position of the hon. Member for Cornwall, North he must surely support the clause moved by my hon. Friend the Member for Guildford. It would take out a calculable number of people who are unable to cope with the complexities of VAT. They have to cope with the administrative work, often after hours, during weekends or in their holiday period. I know of one such constituent who calculated that he had to spend one working day a month—probably his calculation was a modest one—dealing with these matters. If we can relieve him of those burdens, we shall have done a good night's work.

I hope that at the end of the day the Financial Secretary will not be too proud to admit that there is possibly more to be said for the new clause than he at first appreciated when he discussed it with his devoted civil servants. Let him rise to heights to which he has sometimes—rarely, I regret—risen in Committee, throw away his notes, which no doubt say "Resist", and say that this is something which, in the interests of good administration, humanity, indulgence if you like—

The Financial Secretary advised the Committee to reject the Opposition's new clause, using the argument that we needed some stability in the handling of value added tax. We hear a great deal nowadays about stability. We heard about it from the Leader of the Liberal Party. Stability was supposed to come when the pact came—since when, we have had nothing but political chaos and economic instability of a scale far in excess of anything that we have seen before.

Now the Minister tells us that he opposes our new clause on the grounds of stability. If he will forgive me, it is a bit much to be treated to lectures about stability from a Minister whose colleagues in the Treasury gave us first the 25 per cent. luxury rate of VAT, discovered that they had made a terrible mistake, changed it to 12½ per cent. and claimed that as a solid achievement for industrial strategy. We do not accept that argument. I heartily agree with my hon. and learned Friend the Member for Dover and Deal (Mr. Rees).

Other than that, the arguments from this side, from all parties, have been put excellently both by the hon. Member for Perth and East Perthshire (Mr. Crawford), representing the Scottish National Party, and by the hon. Member for Cornwall, North (Mr. Pardoe), speaking for the Liberal Party, who obviously has done a lot of work on this and who put the case very well for raising the thresholds substantially.

I was surprised, however, to hear the hon. Member for Cornwall, North talk about a rotten tax from a rotten Government when, as we have now reminded him—perhaps he did not need reminding—he was strongly in favour of VAT and argued at the time of its introduction that it had been Liberal policy for 10 years, saying that he regarded it as a "major and significant advance" and so on. Perhaps those two positions can be reconciled, but the Committee has not yet heard how.

As I have said before, we accept in good faith the problems and the position of the Liberal Party and the hon. Member's judgment that £7,500 is the best that he can get as a threshold—although he added that he wanted something higher. As my hon. Friend the Member for Gloucestershire, South (Mr. Cope) has perceptively reminded the hon. Gentleman, he can now put his beliefs precisely to the test. If Liberal Members—those who are not properly paired, if I may mention that kind of arrangement—vote with us, we might get the £10,000 that the Liberal Party wants, as the hon. Gentleman told us in an interesting and forceful speech.

If we fail and the Government get their amendment, we shall still have the £7,500, which is the compromise that the hon. Member for Cornwall, North judges to be the best he can get. Therefore, a very favourable prospect is opening up for the hon. Gentleman in which he can have it either way. I appeal to him to give it a swing. Let him see whether he can actually use the votes available to him and his right hon. and hon. Friends to support us and the figure of £10,000. There is a sporting chance, and he will still get his compromise.

The hon. Gentleman is making out that he is anxious to win the vote on this clause and to defeat the Government's amendment and thus achieve the full £10,000 threshold. In that case, why is the Conservative Party today on only a two-line Whip, and how many of the 285 Conservative Members will vote tonight?

The hon. Gentleman knows something about the whipping system. We shall have here our full complement of those who are not properly paired, and I hope that the Liberal Party will have the same. We look forward to seeing them in our Lobby. They support the £10,000 level, and the Leader of the Liberal Party has pledged that the Liberal Party will not compromise their principles and beliefs.

Here is an excellent chance for them to stick to that pledge, unless they want to compromise the pledge that they will not compromise their principles and beliefs. I appeal, therefore, to Liberal Members and I remind them that there is a sporting chance. This will not harm their precious pact with the Labour Party. I do not think that Ministers will be too cross with them. Even if they are, the Chief Secretary and the Financial Secretary are not too bad even when they are cross, so Liberal Members should not be too nervous.

I have heard that the hon. Member for Cornwall, North, who has taken a constructive part in this debate, is a swashbuckling chap. I have never seen that side of his character, but if he goes around buckling swashes or whatever he does in his constituency let me appeal to that side of his character. This is a gambling situation, and he has a real chance to show that his party is on the side of a free Parliament and on the side of a parliamentary system which will deliver a majority in favour, if the thing is fairly put to the test, of raising the threshold by this amount.

Some of my hon. Friends have said that £10,000 is not enough, and they may be right. Others have said that wherever we have a threshold there are always difficulties and problems on either side. Nevertheless, if £5,000 was right when this thing started, in logic £10,000 must be right today. I believe that if we can vote this matter out open and above board, to use the phrase used by the Liberals about their pact, we will win. I hope that the Liberals will come along.

I hope also that the Scottish nationalists will come along. Their spokesman spoke feelingly about the matter, and they have a new clause on the subject. I hope that the Ulster Unionists will join us. No part of the United Kingdom would benefit more from the raising of the threshold than Ulster. There is no part of the United Kingdom where small business has been more magnificent in more appallingly adverse circumstances and where it deserves more to have every possible help. I hope that the Welsh nationalists will join us too.

Together we can push a Government who do not really have an interest in or love for the self-employed and for small and independent business into doing something which they do not want to do but which would help far more than merely raising the threshold to the compromise level of £7,500.

I therefore ask hon. Members to support the new clause and to reject the Government's amendment. I ask them to raise to £10,000 the threshold for the annual limit below which it will be unnecessary to register.

The hon. Member for Guildford (Mr. Howell) asked the Liberals—I think I got his words right—not to compromise their beliefs. I took fully the point made by the hon. Member for Eastleigh (Mr. Price), who did not see it in those terms. He said that there was no dogma in these matters. We are talking only about what the thresholds should be. To judge from the speech of the hon. Member for Guildford and others, however, there may now be such things as the high threshold party and the low threshold party. They would have a limited political platform.

6.30 p.m.

We are discussing sensible arrangements that should be undertaken to assist traders and at the same time ease the problems of those moving into and out of the scope of VAT, as well as to retain revenue and to have a system that we can defend in the House. I see these matters in the same way as the hon. Member for Eastleigh. It is a pity that we have not had more speeches of the sort made by the hon. Gentleman. Such speeches could have been more usefully applied to the problem before us.

The hon. Member for Gloucestershire, South (Mr. Cope) asked me whether revenue of £5 million to £10 million was the net figure. I confirm that I gave the net figure of revenue that will be forgone if the Government's amendment is carried.

The right hon. Member for Worcester (Mr. Walker) complimented—

I asked the right hon. Gentleman to supply the gross figure. Is he able to tell us what it is?

I have not forgotten that. Of course, the figures are extremely speculative. I believe that the hon. Gentleman understands why that must be so. It is hard to estimate in advance the number of traders who will deregister when they are able to do so and what number may feel that they might lose some of their clients, especially the larger ones, who will not wish to lose the benefits of dealing with traders registered for VAT.

The right hon. Member for Worcester complimented Customs and Excise officials on their handling of VAT. I am sure that almost all sections of the Committee will accept that. Customs and Excise started off the tax, and it was a difficult tax to introduce. It has undertaken its task very well.

I recognise the fear of VAT inspectors that the right hon. Gentleman described. It is a subject that I have before me a great deal of the time. That is not because there are many such cases but because I consider that they are important for the reasons I have given. I make a point of going into the cases that are brought to my attention personally. By and large, I believe that they are in fact handled with the degree of delicacy that we would wish to see maintained. At the same time, we must understand the problems that are bound to exist in a system that deals with 1¼ million people.

In the operation of the VAT system there is not the close relationship that was possible under the purchase tax system, in which traders met Customs and Excise officers as a matter of course and were able to build up some sort of relationship with them. Each would know the mind of the other, to the advantage of both sides. That is not possible when there are so many traders and visits are more infrequent. However, a close scrutiny is maintained. I believe that the administration of the tax is being handled with the efficiency and understanding that we would wish.

The hon. Member for Cornwall, North (Mr. Pardoe) talked about compliance costs. The Government are increasingly sensitive to these costs. They cannot always be quoted in this place, but they form a part of the economic cost of the maintenance of any form of taxation. By their very nature the figures cannot be very accurate, but we reckon that the compliance cost of VAT is about 2p in every pound.

I am aware of the University of Bath study. I remind the Committee and the hon. Member for Cornwall, North, who went into the matter in some detail, that it was a pilot study, interesting though it may be. A fuller study is to be undertaken. The Government have authorised Customs and Excise to give assistance to the University of Bath in the further study, and I answered a Question on this subject fairly recently.

Is 2p in the pound the compliance cost for Customs and Excise alone? Has any calculation been made of the average compliance cost for the registered trader, which is the figure with which I am more concerned?

This is the compliance cost of the trader. Perhaps the hon. and learned Gentleman has failed to comprehend. We are talking about the cost of complying with VAT regulations. By its very nature it can be only an approximate figure.

I think that the right hon. Gentleman has it wrong. Surely 2p in the pound is not the compliance cost. It would help if we made a distinction between the compliance cost to the Treasury and the collection and administrative cost to Customs and Excise. The 2p in the pound is the Customs and Excise cost.

I have given the latest figure for Customs and Excise VAT costs. I have quoted the official compliance cost of 2p in the pound. That is the way in which I thought I had expressed it to the Committee.

The right hon. Member for Worcester went into the numbers that would be involved if we changed the deregistration limit. The Government's amendment proposes a registration limit of £7,500 coupled with a deregistration limit of £6,000, which would mean that between 50,000 and 55,000 regular taxpayers would come out of the VAT system. If the deregistration limit were £8,000, as proposed in the new clause, the number moving out of the system would be 125,000. If it were £7,000, the figure would be 80,000. I have more figures, but perhaps those I have given are sufficient to meet the purpose of the question.

The hon. Member for Guildford said that if a registration exemption limit of £5,000 was right in 1972 it should be £10,000 in 1977. That begs a number

Division No. 134]


[6.40 p.m.

Allaun, FrankColquhoun, Ms MaureenEvans, Ioan (Aberdare)
Archer, PeterCook, Robin F. (Edin C)Ewing, Harry (Stirling)
Ashton, JoeCorbett, RobinFaulds, Andrew
Atkinson, NormanCowans, HarryFlannery, Martin
Barnett, Guy (Greenwich)Cox, Thomas (Tooting)Fletcher, Ted (Darlington)
Barnett, Rt Hon Joel (Heywood)Crowther, Stan (Rotherham)Foot, Rt Hon Michael
Bates, AlfDavidson, ArthurFraser, John (Lambeth, N'w'd)
Beith, A. J.Davies, Bryan (Enfield N)Garrett, John (Norwich S)
Booth, Rt Hon AlbertDavies, Denzil (Llanelli)George, Bruce
Bradley, TomDavies, Ifor (Gower)Gilbert, Dr John
Brown, Hugh D. (Provan)Davis, Clinton (Hackney C)Gould, Bryan
Brown, Robert C. (Newcastle W)Deakins, EricGraham, Ted
Buchan, NormanDean, Joseph (Leeds West)Grant, George (Morpeth)
Callaghan, Rt Hon J. (Cardiff SE)Doig, PeterGrant, John (Islington C)
Carmichael, NellDouglas-Mann, BruceGrimond, Rt Hon J.
Cartwright, JohnDunn, James A.Grocott, Bruce
Castle, Rt Hon BarbaraDunnett, JackHamilton, James (Bothwell)
Clemitson, IvorEadle, AlexHardy, Peter
Cocks, Rt Hon Michael (Bristol S)Edge, GeoffHarper, Joseph
Cohen, StanleyEllis, John (Brigg & Scun)Harrison, Walter (Wakefield)
Coleman, DonaldEnglish, MichaelHart, Rt Hon Judith

of questions. The first and most obvious one is whether we can be sure that the figure was right in 1972. It was the figure laid down when the VAT system started. Those who took part in the proceedings in Committee on the Finance Bill 1972 will know the extreme assurance—at times it amounted almost to arrogance—of those who felt that they had the system exactly right and had produced the perfect tax system. Others realised that these matters were subject to error and failure to understand the possible future changes that might be necessary. They adopted a much more pragmatic outlook.

I say in the light of experience that matters have not turned out in quite the way that those who introduced the tax anticipated. I think that we should see how the £7,500 limit works out. We shall learn something from the removal of a large number of traders from the VAT system. There will be a large amount of work for the staff of Customs and Excise in undertaking the change. The experience gained will be useful in considering where the future of the tax should lie, and particularly the question of thresholds.

Question put and agreed to.

New Clause read a Second tune.

Amendment proposed to the proposed new clause: In subsection (2), leave out '£10,000' and insert '£7,500'.—[Mr. Robert Sheldon.]

Question put, That the amendment be made:—

The Committee divided: Ayes 167, Noes 146.

Hooley, FrankMarks, KennethSilkin, Rt Hon S. C. (Dulwich)
Hooson, EmlynMarshall, Dr Edmund (Goole)Silverman, Julius
Horam, JohnMarshall, Jim (Leicester S)Skinner, Dennis
Hoyle, Doug (Nelson)Maynard, Miss JoanSmall, William
Huckfield, LesMendelson, JohnSmith, John (N Lanarkshire)
Hughes, Rt Hon C. (Anglesey)Mikardo, IanSpearing, Nigel
Hunter, AdamMillan, Rt Hon BruceSpriggs, Leslie
Irvine, Rt Hon Sir A. (Edge Hill)Miller, Dr M. S. (E Kilbride)Stallard, A. W.
Jackson, Colin (Brighouse)Miller, Mrs Millie (Ilford N)Steel, Rt Hon David
Jackson, Miss Margaret (Lincoln)Mitchell, Austin Vernon (Grimsby)Stewart, Rt Hon M. (Fulham)
Janner, GrevilleMoonman, EricStrauss, Rt Hon G. R.
Jay, Rt Hon DouglasMoyle, RolandSummerskill, Hon Dr Shirley
Jenkins, Hugh (Putney)Mulley, Rt Hon FrederickTaylor, Mrs Ann (Bolton W)
John, BrynmorNoble, MikeThomas, Jeffrey (Abertillery)
Johnston, Russell (Inverness)Ogden, EricThomas, Mike (Newcastle E)
Jones, Dan (Burnley)Orbach, MauriceThomas, Ron (Bristol NW)
Kaufman, GeraldOrme, Rt Hon StanleyThorpe, Rt Hon Jeremy (N Devon)
Kelley, RichardOvenden, JohnTinn, James
Kerf, RussellPalmer, ArthurWainwright, Richard (Colne V)
Kilroy-Silk, RobertPardoe, JohnWalker, Harold (Doncaster)
Kinnock, NeilParry, RobertWalker, Terry (Kingswood)
Lamborn, HarryPhipps, Dr ColinWatkins, David
Lamond, JamesRees, Rt Hon Meriyn (Leeds S)White, Frank R. (Bury)
Latham, Arthur (Paddington)Richardson, Miss JoWhitehead, Phillip
Leadbitter, TedRoberts, Gwilym (Cannock)Whitlock, William
Lee, JohnRodgers, Rt Hon William (Stockton)Williams, Rt Hon Shirley (Hertford)
Lyon, Alexander (York)Rooker, J. W.Williams, Sir Thomas (Warrington)
Lyons, Edward (Bradford W)Rose, Paul B.Wilson, Alexander (Hamilton)
Mabon, Rt Hon Dr J. DicksonRoss, Stephen (Isle of Wight)Wilson, Rt Hon Sir Harold (Huyton)
McCartney, HughRyman, JohnWilson, William (Coventry SE)
McDonald, Dr OonaghSandelson, NevilleWise, Mrs Audrey
McElhone, FrankSedgemore, BrianWrigglesworth, Ian
MacFarquhar, RoderickShaw, Arnold (Ilford South)
MacKenzie, GregorSheldon, Rt Hon Robert


Madden, MaxShore, Rt Hon PeterMr. David Stoddart and
Magee, BryanSilkin, Rt Hon John (Deptford)Mr. Peter Snape.


Alison, MichaelGoodhew, VictorMeyer, Sir Anthony
Arnold, TomGoodlad, AlastairMiller, Hal (Bromsgrove)
Atkins, Rt Hon H. (Spelthorne)Gorst, JohnMills, Peter
Awdry, DanielGow, Ian (Eastbourne)Morgan, Geraint
Bain, Mrs MargaretGray, HamishMorrison, Charles (Devizes)
Baker, KennethGriffiths, EldonMorrison, Hon Peter (Chester)
Banks, RobertGrylls, MichaelNeave, Airey
Bennett, Sir Frederic (Torbay)Hall, Sir JohnNelson, Anthony
Benyon, W.Hamilton, Michael (Salisbury)Neubert, Michael
Berry, Hon AnthonyHavers, Sir MichaelNewton, Tony
Biggs-Davison, JonnHenderson, DouglasNott, John
Blaker, PeterHeseltine, MichaelPage, Rt Hon R. Graham (Crosby)
Body, RichardHodgson, RobinPage, Richard (Workington)
Boscawen, Hon RobertHolland, PhilipPercival, Ian
Bottomley, PeterHordern, PeterPrice, David (Eastleigh)
Bowden, A. (Brighton, Kemptown)Howell, David (Guildford)Rees, Peter (Dover & Deal)
Brocklebank-Fowler, C.Hunt, David (Wirral)Reid, George
Brooke, PeterHunt, John (Bromley)Rhodes James, R.
Bryan, Sir PaulHutchison, Michael ClarkRidley, Hon Nicholas
Buck, AntonyJames, DavidRidsdale, Julian
Budgen, NickJessel, TobyRoberts, Wyn (Conway)
Chalker, Mrs LyndaJohnson Smith, G. (E Grinstead)Rossi, Hugh (Hornsey)
Churchill, W. S.Kershaw, AnthonySainsbury, Tim
Clark, Alan (Plymouth, Sutton)Kilfedder, JamesShaw, Giles (Pudsey)
Clark, William (Croydon S)Kimball, MarcusShelton, William (Streatham)
Clarke, Kenneth (Rushcliffe)King, Evelyn (South Dorset)Shepherd, Colin
Clegg, WalterKing, Tom (Bridgwater)Silvester, Fred
Cope, JohnKnight, Mrs JillSims, Roger
Costain, A. P.Knox, DavidSmith, Dudley (Warwick)
Crawford, DouglasLamont, NormanSmith, Timothy John (Ashfield)
Crouch, DavidLawrence, IvanSpeed, Keith
Dodsworth, GeoffreyLawson, NigelStanbrook, Ivor
Drayson, BurnabyLe Marchant, SpencerStanley, John
Edwards, Nicholas (Pembroke)Lewis, Kenneth (Rutland)Steen, Anthony (Wavertree)
Emery, PeterLoveridge, JohnStewart, Rt Hon Donald
Ewing, Mrs Winifred (Moray)Luce, RichardStewart, Ian (Hitchin)
Fyre, ReginaldMcAdden, Sir StephenStradling Thomas, J.
Farr, JohnMacCormick, lainTemple-Morris, Peter
Fell, AnthonyMacfarlane, NeilThomas, Rt Hon P. (Hendon S)
Finsberg, GeoffreyMacGregor, JohnThompson, George
Fisher, Sir NigelMarshall, Michael (Arundel)Townsend, Cyril D.
Fookes, Miss JanetMales, MichaelTrotter, Neville
Forman, NigelMaude, AngusVaughan, Dr Gerard
Fowler, Norman (Sutton C'f'd)Maudling, Rt Hon ReginaldViggers, Peter
Gardiner, George (Reigate)Maxwell-Hyslop, RobinWakeham, John
Goodhart, PhilipMayhew, PatrickWalker, Rt Hon P. (Worcester)

Warren, KennethWiggin, Jerry
Watt, HamishWigley, Dafydd


Weatherill, BernardWilson, Gordon (Dundee E)Sir George Young and
Welsh, AndrewWinterton, NicholasMr. Carol Mather.

Question accordingly agreed to

Amendments made to new clause: In subsection (2), leave out "3,500", "6,000", "8,500"and "10,000" and insert

"2,625", "4,500", "6,375"and "7,500" in subsection(3), leave out "£,"8000" and insert "£6,000"
In subsection (3), leave out "£"2,500"and insert "£1,875".
In subsection (4), leave out 'september' and insert 'October'[Mr Robert sheldon]

New clause, as amended added to the Bill.

New Clause 2

Subcontractors In The Construction Industry

'Subsections (2) to (5) of section 70, and Schedule 12 of the Finance (No. 2) Act 1975, shall cease to have effect on 1st June 1977.'—[ Mr. Ridley.]

Brought up, and read the First time.

I beg to move, That the clause be read a Second time.

The new clause deals with arrangements in the construction industry in relation to tax certificates. The effect would be to remove the conditions in the Finance (No. 2) Act 1975 upon which a subcontractor may or may not be granted a 714 licence. This change is proposed by the Opposition because the evils that have resulted from the administration of the 714 scheme have become so damaging and so unfair that we feel that some way has to be found to right the grievances of those who have been held up, or not given certificates, or in many ways abused by the system brought in by the Government.

That is not to say that we in any sense wish to condone tax evasion. The Financial Secretary would do well to avoid any argument of that kind, for the reasons that I shall give. We believe just as much as he does that it is important to stop tax evasion.

The solution which we are offering to the Government to get them off their hook should not make it easier for tax evasion to take place or make the construction industry sub-contractor on all fours with any other self-employed person. Indeed, it would mean that sub-contractors in the construction industry would still be treated less favourably than most self-employed persons, because we accept that there should be a certificate. If it comes to that, I concede that it might be desirable to have a photograph appended to the certificate. But that certificate should be granted as of right to anyone who wants to practise his trade, and it should be possible for the Inland Revenue to trace tax evaders and tax offenders through the possession of the certificate.

If it is argued that on any occasion someone could flee the country having not paid his tax, I remind the Committee that any self-employed person who is paid gross, and accounts for his tax later, is in a position, if he so wishes, to flee the country. It is wrong to single out the construction industry as being one in which that sort of thing is more liable to happen than in any other profession or industry. It is wrong to make a special case in the way that the Government have done in the past.

Without going through the legislation, which is long and complicated, it is fair to say that the conditions that the clause seeks to remove can be boiled down to five. The first is that there should he a three years' experience before a tax certificate can be granted. In practice, this rule has worked extremely hardly. We have examples of men who have been abroad for a year or two, then come back, skilled and reliable people, but who have been refused certificates simply because they have been away. We have examples of people who have been in prison, and on release, far from being rehabilitated back into activity, have been refused certificates for that reason. We have examples of people who have been unemployed who, far from being helped back to work, when they got a contract to carry out were prevented from doing the work by not being allowed a certificate.

This cannot be right. It simply cannot be a necessary condition that the three-year rule should apply. Today, I heard of the case of a man who had been working abroad. When he came home, he was unable to get a certificate because he did not have a three-year qualification. He was then unable to draw unemployment benefit, because he was self-emyployed as opposed to employed. He had to move out of the family home and leave his wife in order to qualify for unemployment benefit. To do that sort of thing to skilled craftsmen in the building industry must be wrong, and the Financial Secretary must know that it is wrong if he has any sense or compassion to bring to bear on the problem.

Next, there has to be a bank account. That condition seems to be totally unnecessary. It has not caused the maximum of difficulties, but there have been a few cases in which the failure to have a bank account has resulted in the refusal of a certificate.

7.0 p.m.

Next, proper records have to have been kept, and then there have to be proper premises, stock and equipment. There have been many cases in which certificates have been refused on these grounds. I should like to quote only one. It came into my hands this afternoon. It is the case of a Mr. F. J. Lynn, of South Park Road, Wimbledon, who was a general foreman who worked as self-employed and went on to various contractors' sites in order to manage the job for them on a contract basis—a very skilled and senior man in the industry. Because of a mix-up by the Revenue in past year, he lost his earlier certificate.

The story will be coming to the Financial Secretary from the wretched man's Member of Parliament, my hon. and learned Friend the Member for Wimbledon (Sir M. Havers). It is one of Revenue muddle and confusion, resulting in the man being unable to work, over a year ago. When it came to his wanting to apply for a new 714 certificate he was unable to do because—I quote—
"I do not employ anyone, nor have to supply any materials or have any capital outlay, to enable me to carry on my work. I simply was employed by various firms as a freelance general foreman."
As such, he is outwith the conditions, and he did not believe that he would be given a certificate if he applied. He concludes,
"I am left to wonder, as the bills mount up, and the situation gets steadily worse—how can it be that a competent, skilled man is in this position, with work available at this very time, is prevented from doing it and is left a burden on the State, living on a minimal amount, when all I ever wanted was to continue working in the capacity for which I have trained and worked for since I was 15 years of age?"
This really is not good enough.

The final condition, as the Committee will know, is the quizzical one of whether there have been tax irregularities in the past. The first point that I want to make about this matter is one that shocks me profoundly. There have been a number of cases that have come my way and to some of my hon. Friends. With greater or lesser diligence, according to the time at our disposal, we have corresponded with tax inspectors and the Financial Secretary about these cases. I must say that in my own case, where I have pressed a case, I have nearly always succeeded in getting the person concerned a certificate. I think that my hon. Friend the Member for Eastbourne (Mr. Gow) has had a similar experience with a case about which I hope he will tell the Committee.

There is prima facie evidence that if a Member of Parliament makes a stink about the refusal of a 714 certificate it is likely to result in a certificate being granted, whatever the tax irregularities. I am only sorry for the thousands of people who have been refused who have either not had Members of Parliament who would take the trouble to fight their case or not had the knowledge and bravery to involve their Member of Parliament in fighting it. That seems to me to be a most unsavoury position to have reached.

I have succeeded in one or two cases. I am interested to ask the Financial Secretary at this stage about one case that I think it justified that I should name. I quote the Financial Times of Monday 9th May in relation to the J. Murphy company. It says:
"In March, 1976, Murphy and its subsidiary, J. M. Piling, were fined a total of £575,000 in connection with payments to labour only contractors following the 54-day 'lump' trial at the Old Bailey. Three executives were each fined and given gaol sentences."
That is a large company that employs over 2,000 people. I ask the Financial Secretary whether it is to be given a 714 certificate, because if ever there were tax irregularities this clearly is proven to have applied to that company? I do not wish it ill, but it will be very difficult for the Financial Secretary to justify to very many small men why they should be refused certificates for alleged improprieties when a company against which a case has been proven in the courts is to be given one. I hope that everybody will be given one.

If we fail in the clause, I hope that we shall return to the matter in Standing Committee upstairs in order to move new clauses that will at least reduce the onerous nature of these conditions and that will also provide a channel of impartial appeal—particularly on the tax aspect, which is another unsavoury feature of the whole matter.

However, I must point out that with the experience of a few weeks of operation since the scheme came into force, the worst fears of Opposition Members have been fulfilled. The injustices are rife. Moreover, our allegations that the refusal of a 714 certificate was the denial of the right to work, and that the certificate was in fact a licence to work, have been proved more and more true.

I should like first to tell the Committee that it has recently come to my notice that the big ready-mixed concrete companies have started refusing to supply ready-mixed concrete to people who have not got 714 certificates unless they pay either in cash or in advance. Further, all sorts of suppliers in the building industry are starting to treat the refusal of a 714 certificate as a sign of uncreditworthiness, and some of the credit rating agencies are putting such people on their lists, for no other reason whatsoever than that they have been refused a 714 certificate.

The same appears to be true of the suppliers of diesel oil, who have interpreted the refusal of a certificate as the existence of doubt about the financial stability and the creditworthiness of people who have not got such certificates.

That is a very sinister development. It proves not only that the denial of a certificate makes it harder for people to survive financially but that all sorts of extraneous factors may be brought up against them by the private sector as well as the public sector, making it very difficult for them to get work.

Another example that I have is a specification for a tender, sent out by Lambeth Borough Council—a bill of quantities. Condition 17 provides that
"The Contractor shall only engage bona fide Sub-Contractors who comply with the Declaration of Intent as set out in the terms of the National Joint Council for the Building Industry and the Contractor or his Sub-Contractors shall under no circumstances engage self-employed operatives."
There it is. There is a local authority doing exactly what the Government told us a month or two ago when we last raised this matter that local authorities would not do. Is the Financial Secretary going to make sure that this sort of thing is stopped immediately, or will he allow councils who so misinterpret the position as to do things like that to persist in their wrongful ways?

The effect of all this is not to suppress the small man. It is not to make him, overnight, into that horrible concept of the Financial Secretary's—a good taxpayer. It is to drive him underground. More and more of these people are resorting to earning their livings in the only way that they can, which is by continuing their trade but not working for local authorities, and working for cash only. Probably the effect of what the Financial Secretary, in his foolish way, has done is to increase tax evasion, because if a man does not get a 714 certificate and goes moonlighting the Revenue gets precisely no revenue at all. It may well have had the effect of reducing the amount of revenue and increasing the amount of evasion.

My hon. Friends and I have considered deeply what to do about this matter. As I have said, we do not believe that we should do anything that increases the chance of evasion. That is one of the reasons why, as I have just said, I attack the present situation.

If, by granting a certificate automatically and as of right, we can get away from all the unpleasant and undemocratic stuff that I have been talking about on this occasion and on previous occasions, it will be a redress of the grievance that the 20,000 people who have been refused certificates quite rightly feel, as do my hon. Friends and I. If that can be done without putting the Revenue at a disadvantage in the proper collection of tax due, why not?

It is up to the Financial Secretary to tell us, if he can, why the solution that I propose would not work. I am certain that he will simply flannel and rely on the fact that he believes that it is necessary to have these conditions. That will not be acceptable. The right hon. Gentleman must prove to the Committee, if he is to resist the new clause—which I hope he will not—that to rely upon the certificate only and to use that as a means whereby the Revenue can trace tax dodgers and evaders is satisfactory.

The Financial Secretary must convince the Committee that there are grounds for arguing that, because these people are in the building industry, more onerous conditions should be imposed upon them than on, say, accountants or other self-employed people. If not, he will have the clause pressed upon him and, I hope, attached to the Bill.

When we last debated this matter—before the disastrous spate of by-elections, which cut the Government down to size—the Liberal Party, the Scottish National Party, Plaid Cymru and the Ulster Unionist Party, so ably and fully represented here at the moment, found it right to vote with the Conservative Opposition. Members of those parties are no doubt so convinced of the case that none of them has felt it necessary to refresh his memory about the rights and wrongs of it. I think that the Financial Secretary will find himself in a tight corner. Therefore, I hope that he will do his best to persuade us that we are wrong. If he fails to do so, I assure him that we shall press the clause to a Division.

It would perhaps be reasonable for the Government to persist in their onerous and arbitrary demands on sub-contractors in the building industry if they were able to persuade the Committee that many large contractors within the industry were prepared to offer permanent, regular employment to those who are otherwise driven on to social security as a result of being denied 714 certificates. But it must not be forgotten that, among the great industries that have suffered from the recent recession and have least benefited from the various forms of arbitrary and discretionary Government handouts which have been showered upon the more-favoured sectors of the economy, unhappily the construction industry generally has suffered most of all during the last two years. Therefore, it can properly be said that those who are denied 714 certificates are in a difficult position.

The general position in the construction industry is uncertain. It started—I have to add a note of some criticism here against the Conservative Party—by being grossly over-stimulated during the period 1971 to 1973. The industry was then hit by cuts in public expenditure at the end of 1973. It was hit again by the introduction of the development gains tax, the Community Land Act, the development land tax and, again, recent cuts in public expenditure which, although in general I welcome them, concentrated overwhelmingly on the capital side. The construction industry has been hit, hit and hit again.

7.15 p.m.

Let us understand who is being hit. I see my hon. Friend the Member for Folkestone and Hythe (Mr. Costain) nodding in agreement. If he will forgive my embarrassing him in this way, the great company which bears his name has been extremely successful in contracting in the Middle East. That is splendid for the architects, for the surveyors and perhaps for those who lend money to that great company. However, it does not help the chap in Wolverhampton who wants a 714 certificate to do a bit of plastering. That kind of chap will not be employed on a large contract, perhaps in Dubai. Essentially, the professional and middle-class people benefit from that kind of work.

I agree with my hon. Friend. Does he realise that many artisans and foremen who go out to Dubai in the Middle East to get some capital free of tax with the object of coming back and starting small businesses are completely stopped from doing so because of this problem?

I appreciate what was said by my hon. Friend. This evening I am making a plea not so much on behalf of foremen but on behalf of those who would otherwise be employed—persons who do not have many skills.

For example, my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) referred to the chap who has just come out of prison and who in the past would have been employed as a bricklayer's labourer on a building site. Today, if he goes to Tarmac in my constituency and asks for a job, it has to be explained to him that, because the overhead costs of employing a man are so high and the uncertainty of the trade is so great, while the company might be able to give him some work as a sub-contractor it dare not introduce him on to the payroll generally as an employee.

Let us consider the overhead costs which have been added to employing a man. I make no criticism of the concept of redundancy payments. However, when employing a man today a company must contemplate the possibility that he may become redundant, in which case he will have to be paid a substantial capital payment, largely at the expense of his employer.

It is necessary to make proper provision for a pension for a man who may be employed by a construction company—again, in an uncertain trade climate. The Employment Protection Act makes it difficult for an employer to respond to changing conditions in the trade. The minimum wage legislation is often referred to by Labour Members. Minimum wage legislation, at a time of high unemployment and when that legislation is fiercely and vigorously forced upon employers, creates more unemployment. The consequences are to make it more expensive for the big construction companies to employ men on a permanent basis. Therefore, the only way in which many men—men who are weakest in the job market—can get any work is to become self-employed, to work for themselves and to sub-contract out their work.

These men—many of the weakest people in society who most need help—are being harried at a time when they might reasonably say to themselves "The social wage, or whatever that silly expression these stupid people on the left wing of the Labour Party talk about, is so high that we might as well sign on the labour." They possibly would not understand the clever economist's term, but they would know that the social wage was indexed. They would know that most other people did not have wages or receipts which were indexed. A man in that position could say "I am better off signing on the labour than going through the agony of trying to register as a sub-contractor in the building industry, in which people like myself who do not have too many skills have traditionally found work."

That is not the position in today's world. We now find that those self-reliant people are an affront to the Socialist concept of having most of the building work within the great companies or, better still, no doubt, within the direct labour organisations. That concept is also an affront to the Labour Party's masters in the trade unions.

Tonight the Conservative Party should once again be the party that stands up for the little man. Most of all, we should stand up for the little man who is trying to rehabilitate himself. We should stand up for the chap who has no skills or who has just come out of prison and wants to do better for himself and his family than signing on at the labour. Those people are among the thousands who are unemployed as a result of the uncertainties in the construction industry. Our fight is on behalf of economic sanity and compassion for some of the weaker sections of our community.

I support the clause, for many of the reasons that were so eloquently given by my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley). It affects small sub-contractors trying to earn a living in difficult times, but the present situation also affects some of the major sub-contractors. Some substantial companies must abide by these regulations. In some cases, when they are working for overseas principals on contract in this country, they must go through all this rigmarole. That is damaging to the standing of some British companies, which should be well above having to deal with tax evasion. They, too, must produce certificates. Nobody could seriously think that they should be included in this scheme.

I turn to the central question. I ask the Financial Secretary whether all this is worth while. I asked him a question on this subject in our last debate. The Financial Secretary said that we were talking about tax evasion, which is costing the Revenue about £10 million. I wonder whether the whole process is worth while. There are substantial arguments against it. The Financial Secretary owes it to the House to give a clear indication why he believes that a tax loss of £10 million justifies all the extra bureaucracy, the attacks on personal freedom and the many undesirable activities about which we hear.

The same principle is at stake as was at stake in the previous debate. We should consider the compliance costs—the costs to the honest taxpayer and to the Revenue of administering the new scheme. A modest assessment of the cost to the taxpayer is about £25 per head. If about 400,000 certificates are involved, I calculate that to cost about £10 million—the total amount of revenue that is being lost. The Inland Revenue costs must be similar. It appears from those calculations that the scheme will cost about twice as much as the amount of tax lost. We would all like to see that revenue saved, if it were practicable.

I hope that the Financial Secretary will consider carefully any compliance costs that he may be given. The compliance costs that he gave in the last debate did not stand up to one minute's examination. The Financial Secretary said that the costs of compliance were 2p in the pound. That means that a trader with £10,000 worth of output would have compliance costs amounting to £16. I do not think that is correct.

There has been a misunderstanding about this issue. Compliance costs represent the cost to the trader. I was talking about official compliance costs. I am sorry about the jargon, but there is a difference between the cost of collection and the other aspects. I was talking of the official compliance costs and comparing them with the total costs of administration. The hon. Member for Maldon (Mr. Wakeham) is talking about the cost to the trader in terms of the paper work required of him.

I must be careful not to stray back. In the previous debate our case was that the cost to the taxpayer must be considered when justifying any legislation. Some of us accepted the information that we were given, but I did not fully understand at the time.

I hope that the Financial Secretary will tell the House the true cost to the country as a whole—that is, the cost to the honest taxpayer and others, as well as the cost to the Revenue for administering the scheme. I say that the cost is twice as much as the revenue loss. I base that conclusion on the Financial Secretary's figures.

We shall return to the subject in other debates. It is a much neglected side of our Revenue practice and taxation. The cost of compliance with complex legislation is becoming more of a burden. We must consider not only the uncertainty but the cost of compliance. I ask the Financial Secretary to try to justify the amount of revenue and the compliance costs and to see whether the sums add up. I do not think that they do.

I support the new clause. As my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) said, I have had a number of years' experience in the building industry. I recognise the effective role of the labourer in that industry. All my life I have found a prejudice, particularly by trade unions, against self-employed labourers. The trade unions feel that they are losing members. That is not true.

I shall explain to the House the necessity for labour-only sub-contractors. Well over half the new houses in this country are built by contractors who never build more than 25 houses per year. Maintenance is usually carried out by small firms. Only when one recognises that can one appreciate the need for labour-only sub-contractors.

A firm building 25 houses per year cannot keep a permanent gang of bricklayers on its staff. There are not enough bricks with which they can build. One man could build one house per year, but in each house 15 to 20 different trades are involved. A lavatory pan could probably be fixed in a day, but small firms must rely on labour-only sub-contractors to do that job. If they did not they would have permanently to employ such labour. That would increase the costs of houses.

I know that there have been tax evasions. I was a member of the committee that exposed the so-called Luton evasions. Large sums of money were involved. The evasions started because it had not been made easy for a small contractor to understand the machinery required for tax collection. He started off without the proper machinery and the evasions went from bad to worse.

7.30 p.m.

My hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) apologised on behalf of the Conservative Party for an overheated economy. But what overheated the economy in 1971–72 was the legislation brought in by the Labour Government to give grants for alterations and improvements to hotels. It started with the very best of intentions but it concentrated the specialised labour for plumbing. The grants given for bathrooms to be put into hotels concentrated plumbers and individual craftsmen into this activity and put the whole thing out of balance. That is where the overheating started.

There is another factor that has altered in my lifetime in the building industry, and that emphasises how essential it is to have the small labour-only sub-contractors. When I was a youth, building labour expected to travel all over the country. Men expected to follow their employers throughout the country. Nowadays, because of the shortage of housing and the effects of the stupid rent legislation—I should be out of order if I were to elaborate on that—people want to live near to their place of work. Travel is now so expensive that they want a job as near as possible to where they live.

The labour-only sub-contractors can concentrate and spread their work over 10, 15 or 20 small firms in an individual town. I recently had a flat altered for myself in my own constituency. I wanted to employ as much local talent as I could. I employed a small contractor to do the work but I do not think there was ever more than one man in his permanent employ.

The Treasury ought to make it extremely simple for a man to set up in business and get on the register. What did the Government do in the case of gun licences? They did not make it difficult for people to get licences. They made the cost of the licence extremely cheap—five shillings for three years—in order to get people to register. Then, once they were on the register, they could follow it through and see what was happening.

Many artisans—bricklayers, carpenters and plumbers—have all their lives had the ambition to set up in business for themselves. Most of the large firms, including my own, started as labour-only sub-contractors. Sir Malcolm McAlpine used to tell how his first job was as a labour-only sub-contractor building a signal box at the time when the railways were being constructed. All these big firms have developed in this way.

Artisans go abroad on a three- to four-year contract and, because there is no tax deducted, they can save £6,000 or £7,000. That is enough to enable them to come back to this country and start a business. But, unfortunately, because they have been away for three years, the regulations prevents them from commencing.

I should like to have a definite reply from the Minister about the position in terms of the Common Market. I understand that we are bound to give equal employment to, say, a French contractor who wishes to come over to this country and start in business, employing two or three men. But how is he able to get a start? Our regulations prevent him from starting up. Is not this contrary to the treaty? As I understand the position, unless a man has been operating for three years in this country he cannot start a business.

If the Government were to look at this question again and accept the clause they could achieve a good deal by it. If they fail to accept it, these small gangs of men will do moonlighting, going round from house to house in the manner of window cleaners. They will be employed by housewives to carry out small extensions to houses, they will be paid in cash, and the Revenue will lose all the tax. The Government are following a very short-sighted policy. I hope that the Minister will accept the clause. It is the sensible thing to do.

If the Government were to agree to the clause, it would remove the pernicious Schedule 12 from our legislation with effect from the first of next month. Schedule 12 applies to four categories of sub-contractor—individuals, partners, firms and companies. There are separate parts of the schedule which refer to those four categories of sub-contractor.

My hon. Friend the Member for Maldon (Mr. Wakeham) talked about the effect of the schedule upon the larger sub-contractors. I want to concentrate solely upon the individual sub-contractor, the smallest man—the very man in the category in which we are most likely to have an expansion in employment. For the small man in particular, the granting or withholding of a No. 714 certificate is literally crucial to his right to work. For the small man, the single operator, a 714 certificate means that he can work. The withholding of a 714 certificate means that he cannot work.

If, therefore, through our tax legislation we are to make it a condition, so clearly and so unequivocally, that the whole right to work depends upon the issuing of this certificate, we must be absolutely certain that we frame our tax legislation in such a way that it gives every encouragement to employment and every discouragement to unemployment.

There is common ground about that between the Financial Secretary to the Treasury and my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley). If I may say so, I thought that my hon. Friend was a little unfair to the Financial Secretary, because what has happened this evening is what has happened so often before. The Financial Secretary does not have his heart in the speech that he will be making in a few minutes' time.

No. That is the tragedy. The Financial Secretary does care about this, but he now has to go through the journey of extricating the Government from a position which is totally indefensible. He has to make the journey from the Finance (No. 2) Act 1975 to reality. Some concessions will be announced this evening. There will be an undertaking that the Government will look at it again. There will be a reference to the courtesy with which he writes to Members of the House who take up issues with him.

The objectives of my hon. Friend here are the same as those of the Financial Secretary—to get back to sanity. The difficulty is that we shall not do that until my hon. Friend the Member for Cirencester and Tewkesbury is occuying the ministerial position now occupied by the right hon. Gentleman.

When we had our earlier debate on 9th February on the subject of the 714 certificate, I explained the amazing case of one of my constituents who had been refused a 714 certificate because he had grown a moustache. Happily, following representations that were made to the Inland Revenue, despite the fact that he had grown a moustache, the decision to withhold a certificate was subsequently reversed. I am glad to say that my constituent is now working productively with others and has been able to reduce the unemployment in South-East England.

But there is another case to which I wish to draw attention because it shows how the Government have produced regulations which fly in the face of their objectives. Schedule 12 sets out some of the requirements which have to be met before a 714 certificate can be issued. The regulations about moustaches appear in the Statutory Instrument, and I am concentrating on the schedule.

One of the conditions for the issue of a licence to work is that the business is carried on from proper premises. It should not be for the inspector of taxes to decide whether the premises are proper. What does the word "proper" mean? A small sub-contractor may have all the tools of his trade in his own back garden. If my hon. Friend's clause is passed, it would not be up to the Inland Revenue to decide whether premises are proper.

I come to the next requirement which has an effect which, it appears, the Government did not intend to introduce through the regulations. It is that no certificate shall be issued to an applicant unless he has been in employment for three years before the date of the application. That, too, is provided for in the schedule.

In March this year a constituent of mine, a Mr. Knight, who is a painter and decorator, received a letter from the Inland Revenue which stated:
"It is a requirement of the Finance (No. 2) Act 1975 that the applicant must have been employed or self-employed throughout the three-year period preceding application. As you were unemployed for 26 weeks in 1974–75, this requirement is not met."
So Mr. Knight, who had undergone the misfortune of being unemployed, suffered from a further burden. Unemployment is a misfortune which has afflicted many of our citizens since 28th February 1974. I predict that it will afflict still more of them and that it will therefore become increasingly difficult to meet that requirement. In 1975, when we were debating that Finance Bill, the number of unemployed was significantly lower than it is today. As this Government have proceeded, so the number has risen. I do not believe that when the Government passed the Act they envisaged its pernicious effects.

Having inflicted the misfortune of unemployment—which, one might say, was an involuntary action on their part—on certain people, they are now inflicting a further burden by denying these people the right to work even though they could do so. I do not believe that that is he Government's intention, but that is how the inspector of taxes sees it.

I have with me a courteous letter from the Financial Secretary—and I must say that all the correspondence from the right hon. Gentleman is of a most courteous nature—dated 9th May in which he apologised for the decision in that case. The 714 certificate has now been issued to Mr. Knight in spite of his period of unemployment in 1974–75. The worrying aspect of the case is that if representations had not been made by a Member of Parliament Mr. Knight and the man who grew a moustache would both still be out of a job, because they would not have had their 714 certificates.

Will my hon. Friend explain how in law it was possible for the Inland Revenue to grant that certificate to Mr. Knight when so plainly his constituent did not conform to the admittedly ridiculous regulations which are laid down?

7.45 p.m.

My hon. Friend has raised an important point. if the regulations were interpreted strictly, as the inspector pointed out to me in justifying his decision, my constituent would not have got a certificate. This, therefore, is what would be described as an extra-statutory concession.

In that case, the inspector of taxes was unlawfully making the law and abrogating to himself the role of the Queen in Parliament.

My hon. Friend will know well that a number of extra-statutory concessions are granted by the Revenue. I am not complaining that that power was exercised in this case by the Inland Revenue. I am complaining that we should have had these absurd regulations in the first place. My hon. Friend's new clause would remove them.

In his letter of 9th May, the Financial Secretary explained this to me. He said:
"At the same time, however, it has been recognised that the three-year requirement"—
that is, the requirement of employment—
"could bear hardly in some instances, and Inspectors have been authorised to ignore short periods of unemployment or absence, when these car, be fully documented and when the applicant's credentials are fully satisfactory in other respects."
Again, I emphasise how courteous the right hon. Gentleman was in his letter. He concluded:
"I would, however, once again extend my apologies to you and to Mr. Knight."
The difficulties to which my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) referred could be removed at a stroke by the Financial Secretary accepting the amendment. We know that the new regulations, brought in understandably to try to end a certain amount of tax evasion, have proved sweet to the taste but have caused indigestion most sour. They have soured the small sub-contractor. They have eroded the ability to find work at the very time when we should be increasing the opportunities to do so. They have put one more nail in the coffin of mistrust between taxpayer and Inland Revenue, between Government and governed, and between people and Parliament. The regulations are recognised more and more by those who have to operate them as being unjustified, unjustifiable, complex and unfair.

I rise to intervene briefly in the debate. It is worth commenting that this is the second time in three months that the House has had occasion to return to these regulations which conceal the particular aims and principles that are being forced into the open by the activities of Conservative, Members. It is noticeable that no single hon. Member from the Labour Party, the Liberal Party or the Nationalist parties appreciates what is at stake in these regulations.

I agree with my hon. Friend the Member for Eastbourne (Mr. Gow), although I cannot match his eloquence. I was struck by the metaphor that he used—"the nail in the coffin". What is being laid to rest in this coffin is the confidence between the general body of taxpayers and the Inland Revenue.

It is obligatory to start our interventions in debates like this by saying that we have no truck with tax evasion. I shall also make that declaration. It is no part of our public duty in this House to hold any brief for evasion, but it is right to consider whether the remedy on occasions may not be worse than the disease.

It is amazing, in fact almost grotesque, that the party opposite has at last discovered that evasion and avoidance are not the monopoly of one particular economic or social class. With the tax structure and the rates of taxation that exist at present—and we debated this fully earlier this week—there is a pressure to avoid, and I am afraid that at the margin there is a pressure to evade right throughout the country.

I may be out of order in saying this but I think that the real remedy is for the Government to take a fundamental look at the whole tax structure and the rates of taxation. Only when we get the top rates down to 30 per cent. and the lower rates down to 5 or even 2 per cent. perhaps—and it is just perhaps—there may be a change in the attitude of taxpayers. There may be a return to the simpler arcadian era of the 19th century when it was almost a matter of national pride to pay taxes. But I must admit if we look back to the 18th century we find that individuals of every class in the community were concerned with avoiding excise duty—I am afraid it is a sad commentary on human nature.

I do not wish to add to what my hon. Friend the Member for Folkestone and Hythe (Mr. Costain) said in his analysis of the problem. He speaks with direct experience of the construction industry. I speak with only second-hand knowledge which I have gleaned from talking to friends in the business. I add this interesting little statistic in the vain hope that it may evoke a flicker of response from the Financial Secretary. I was talking to a representative of a distinguished construction company—perhaps what my hon. Friend the Member for Folkestone and Hythe would admit as being in the higher echelons of the industry—and he said that in normal years—and we are talking about an industry that is in recession, but may be poised for an upturn depending on the outcome of this debate—one-third of his turnover would be paid in wages to direct employees, one-third would be spent on materials and one-third on payments to self-employed sub-contractors. That demonstrates the scale of the problem unless the Government devise an acceptable solution.

When the next upturn in the economy comes—and the Government are desperately pinning their hopes for electoral survival on economic upturn—it must certainly start with the construction industry and then work its way through the rest of the economy. If we cramp the style of genuine construction companies we may find that one of the consequences will be to divert work to direct labour departments of local government. This may be the effect underlying these regulations. One is compelled to look past the fiscal scene and consider just how disinterested, in a political sense, the Financial Secretary is in supporting these regulations. It may be that he feels that this is a suitable way of diverting business to direct labour departments. Whether he will be successful in the light of the recent local government election results remains to be seen. I hope that with the benevolent connivance of the Chair we may debate this important question again.

The alternative to diverting work to the direct labour departments will be the formation of a twilight or underworld of individuals or small groups operating exclusively for cash, outside the law regardless of what happens, and offering a service to those who are prepared to take a chance. This would be a desperate situation and for a marginal loss of tax it is not one that we should lightly contemplate.

I have focused for a moment on the details of the conditions required for a certificate, which is, in effect, a licence to work—let us be under no illusions about that. These are the conditions imposed by statute. It will be interesting to see in practice how readily the conditions can be met or how necessary it will be for the individual Inland Revenue inspector to bend the law.

My sympathy goes out to the individual inspector. The vast majority of inspectors are men of humanity and practical experience and they know that the world of commerce and industry must go on. They know that unless wealth is generated in the construction and other industries, what we do here in this House is a matter of irrelevance. We should not put them in the position of having to introduce on their own authority what I might charitably call "extra-statutory concessions" but which are, in fact, flat breaches of the law.

In the last debate on 9th February I put a variety of rather precise questions to the Financial Secretary and he did not have time to answer them then. But with his habitual courtesy he wrote me a full letter, and I pay tribute to him for his courtesy and thoroughness in answering my points. However, I must confess that I remain doubtful. Perhaps the Committee would allow me to uncover the points that I raised with him then.

The requirement in the Twelfth Schedule of the Finance (No. 2) Act 1975 is that business should be carried out on proper premises with proper equipment and other facilities. One understands the general drift of that. If proper premises can be identified, one can reasonably infer that the business is being properly conducted. But we are not talking about companies such as Taylor Woodrow and Costain. We are talking about small groups of men who may have to move across the country to find work—that is their utility. Will the tax inspector be satisfied when that man says that he has a house in Deal but his business takes him to Newcastle because that is where work is booming and he is looking for work? Will the inspector be prepared to accept that the man has premises at his home in Deal but he is operating nearly 400 miles away? This is a question of delicate judgment for the individual inspector. Will the man be required to produce the title deeds for his house in Deal? Will he have to demonstrate that he has a proper lease with the full panopoly of the law, or is this just a sham to terrorise people? These are practical questions. It may be that they are the sort of questions my constituents will ask me. They have to be answered by the individual inspector across the table to the individual applicant. I hope that the Financial Secretary will give us up-to-date figures of the number of applications waiting to be processed and the length of time these are taking.

There is a question of plant. The Financial Secretary, with his usual acumen, said in his letter to me:
"Clearly, some trades require substantial premises, including a yard (and anyone who, for example, said he was running a plant-hire business but had no yard and no plant would have difficulty persuading the Inspector that he was genuinely self-employed)."
We can all produce extreme examples but it is examples at the margin with which we are concerned. How will the inspectors act? Will they go round examining premises? Will the plasterer arrive at the inspector's office with his plastering equipment? These are practical problems that do not admit of a glib answer.

In the case I quoted to the Committee involving the gentleman who is a self-employed foreman, how can he acquire either premises or a yard?

8.0 p.m.

My hon. Friend's question is both to the point and unanswerable. I suppose he comes to the inspector's office and shows him the callouses on his hands and says "Look at my hands, look at my face which is etched deep with lines of anxiety and responsibility. I am a centurion, a leader of men, and you must take it from me that I am doing this work."

The man will probably arrive in a donkey jacket with a contractor's name written on the back.

This discussion exemplifies the fact that, however unregarded we may be by millions outside, on any topic, however technical, there is always some hon. Gentleman who can speak from direct experience. I am grateful to my hon. Friend the Member for Folkestone and Hythe for drawing on his experience. That will provide the inspectors with the kind of overt symptoms they can look for.

I also raised with the Financial Secretary following the previous debate the question whether the unfortunate applicant will he able to convince the inspector that his tax affairs were in order. The Financial Secretary blandly replied that where the Government felt there was a genuine difference of opinion between taxpayers and inspector, and where the liabilities had not been settled for that reason "that in itself will not be a reason for delaying the issue of a certificate".

But what constitutes a genuine difference of opinion? The genuineness of the situation apparently is to be judged by the Inland Revenue. I must confess to a slightly partisan view. I do not believe that a person should be judge and jury in his own case. I am not utterly persuaded that our tax gatherers, with their well known integrity but also with their zeal for public service, can be relied upon in every case to detect a genuine difference of opinion.

The Financial Secretary may say that these matters can readily be determined by the appeal commissioners, but I understand that this matter will not be within their discretion. Therefore, there is no remedy on that score. All an applicant can do is throw himself on the mercy of the inspector and say "I implore you to accept that there is a genuine difference of opinion between us".

I come finally to the most outrageous matter introduced in Schedule 12—namely, that the applicant should have minimum insurance cover against public liability for £250,000. In the previous debate I adduced the case of a plasterer in Sandwich, Deal or Dover in my constituency and I asked how such a man would obtain cover. This is an immense burden to place on the small man or the small gang. Are they expected to go to a Lloyd's broker or to an insurance company and to say "We want this cover—what will be the charge in premiums?". The Financial Secretary in his letter replied:
"I accept that there will be some, such as plasterers, whose occupations expose them to far less risk of incurring claims to damages than others, but insurance companies take this into account when fixing the level of premiums, and I would expect a plasterer to be able to get the necessary cover at relatively low cost,"
I wonder why the Government have tried to slip this provision into what is essentially a fiscal matter. This induces in me the perhaps unworthy suspicion that this is not essentially a fiscal matter, but is aimed at the self-employed—those who are operating on the margins. I suspect that this is being introduced at the behest of the big battalions in labour, the trade unions who wish to see these people gathered into the fold, such as the Transport and General Workers' Union. This is a Jack Jones benefit measure. I appreciate that he is having his day and that he has his friends on the Government Front Bench, but he should not use them in this way.

At the end of the day it appears that the Government would prefer to exact the last penny in taxation than to take steps to help the construction industry. The test is whether we want to see the construction industry ready and able to take advantage of the next upturn in the economy, or whether we wish to see a queue of disgruntled applicants outside the offices of the local Inspector of Taxes and eventually outside the Social Security offices. I am sure that the Financial Secretary who is a reasonably modest man—I shall not say a humble man—will recognise that there is some force in our arguments. I do not claim any direct experience, but we have had direct experience given by Opposition Members this evening. I therefore hope that the Minister will recognise that it is worth sacrificing a little tax at the margin, and that it is worth affronting Mr. Jack Jones in order to give a small measure of justice to those who on the whole have made their small contribution in the market places of this country.

Mr. Robert Wilson, the President of the National Federation of Building Trades Employers, said in a speech the other day:

"We believe that the whole thing has got out of control".
He was referring to the 714 certificate system. If anybody should know how the system works, surely it is the President of the NFBTE.

My hon. Friends have spoken eloquently about the conditions that have to be met under Schedule 12 of the Finance (No. 2) Act 1975—the schedule that the new clause seeks to obliterate. They have pointed to the extraordinary situation in which a person who wants to set up business on his own account is placed in view of the conditions set out in paragraph 1 of Schedule 12—for example, where the business
"consists of or includes the carrying out of construction operations or the furnishing or arranging for the furnishing of labour in carrying out construction operations".
Who would have thought that that provision would apply to carpet layers and landscape gardeners? Indeed, it has been so applied. The inspector says that they are substantial contractors, and therefore the view is taken that they are carrying out the terms of paragraph 1.

Mention has been made of proper offices or premises at which a business must be carried on with proper equipment, stock and other facilities. But many successful small businesses are carried on from a man's own house, or involve the use of a room in that house. Are those to be regarded as proper premises? I am sure that the Financial Secretary will say "These regulations have been applied reasonably by the inspectors". But the examples given have shown that they have not been reasonably applied.

I wish to draw attention to a statement issued by the Board of Inland Revenue relating to its policy on the issue, withdrawal and renewal of sub-contractors' tax certificates. Let me say for the record that I am quoting from the Income Tax Construction Industry Tax Deduction Scheme Appendix C. The statement says:
"In the first place the Board wish to dispel any fear that the threat to withhold or withdraw a certificate may be used to encourage agreement with the Revenue's views in matters unrelated to the deduction scheme".
Since that is said in that statement, it must show that the Board recognises that there is some fear and that that fear has been based on some sort of fact—some application of the system that has given rise to a fear in the mind of the public.

The statement is trying to dispel the fear that the system will relate to matters unrelated to the system. It goes on:
"When they are considering the entitlement of a business to the issue or renewal of a certificate, the Revenue are bound by the Finance (No. 2) Act 1975 to have regard to the extent to which there has been failure to comply with tax obligations."
It says just the word "tax", not tax payable under this system or the tax that would be deducted if the certificate is not given, but any tax obligation. Having said that the scheme will consider merely the issue of the certificate it goes on to say that what must also be considered is the way in which a person has dealt with his tax affairs, and that if an inspector does not like it he can refuse the issue of the 714 certificate. This is enlarged on in paragraph 4, which says that:
"Apart from irregularities in connection with the deduction scheme itself, examples of non-compliance with this order include failure to account for PAYE tax deducted"
I am sure that a great number of right hon. Members have, in the course of their business or professional careers in or out of this House, occasionally omitted to account for PAYE deductions, perhaps for a month or two.

The statement goes on:
"continued failure to pay the business's own tax once the amount payable has been agreed, deliberate or reckless failure to meet normal obligations (including the settlement of accounts) or to answer inquiries".
If one fails to answer an inspector's inquiry he may say that one is doing it deliberately and recklessly, and because one has done that in the past, perhaps a year or two ago, he may refuse to issue a 714 certificate. I give one further quotation. It comes from the last paragraph of the statement, which deals with the withdrawal of the certificate once it has been issued, and when it may be withdrawn during its period of validity. Many people do not realise that this can be done. An inspector can withdraw a valid certificate. The statement says:
"it would be usual for the certificate holder to receive some form of preliminary warning."
Can we believe that the Board of Inland Revenue could be so heartless as to withdraw a certificate without warning? The Board may do so. The statement says:
"There may, however, be exceptional cases where immediate action, without warning, to withdraw the certificate will be the only way in which the revenue can be protected."
Is that a reasonable way to apply these conditions? The Financial Secretary may say that if it is not reasonable one can appeal against it. I am not sure what the inspector had in mind in the case quoted by my hon. Friend the Member for Eastbourne (Mr. Gow), referring to his constituent, Mr. Knight. My hon. Friend made representations on behalf of his constituent. They were considered and, I gather, turned down by the inspector. However, later, because of pressure, the inspector wrote a letter. I have borrowed this letter from my hon. Friend the Member for Eastbourne, because it is quite extraordinary. It is a letter from the inspector of taxes to my hon. Friend's constituent, and it says:
"If you do not accept the decision, written notice of appeal may be made to me within 30 days receipt of this notice. Arrangements will then be made for your appeal to be heard before the General Commissioners or, if you so wish, by the Special Commissioners, both of whom are independent bodies."
One would have thought from that assurance that my lion. Friend's constituent could have gone before the general commissioners or the special commissioners if he had so chosen in order to put his case about having been refused a 714 certificate because he had not complied with the conditions under Schedule 12, and that he would have been heard. I certainly understood that to be the meaning of the letter.

8.15 p.m.

However, either the inspector who wrote that letter was trying to mislead my hon. Friend's constituent or he had not read the Act. If he had read Section 70(6) he would have seen that a person aggrieved by the refusal of an application for a certificate may give notice of 30 days—as the inspector said in his letter—and choose whether to go before general or special commissioners. He would have seen that:
"the jurisdiction of the Commissioners on such an appeal shall include jurisdiction to review any relevant decision taken by the Board in the exercise of their functions under this section "
However, we then come to the vital words:
"other than a decision that an individual, a company or a firm is or is not to be treated as satisfying a condition set out in any Part of Schedule 12 to this Act."
It is about those conditions that we complain, and that is why I support my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) in moving the new clause.

There is no remedy for a man who applies for a 714 certificate and who is unfortunate enough to be refused because he is, like me, very bald and a year ago had a mass of hair. I could not go to the commissioners and say that that was a most unreasonable application of the conditions under Schedule 12. That is the real danger of the system.

I am grateful to my right hon. Friend the Member for Crosby (Mr. Page), because he has drawn the attention of the Committee to a most important point, namely, do the commissioners have power to consider whether a refusal under the provisions of Schedule 12 is reasonable? My right hon. Friend has told the Committee that in his opinion and interpretation of the Act they have no such power. My right hon. Friend is right, but is he further aware that that interpretation is not the one that is being put upon the Act by the inspector of taxes? Further to the letter of 15th April that my right hon. Friend has just read out, the inspector of taxes wrote to my constituent to say that he had arranged for his appeal to be heard by the commissioners at their meeting on Thursday 5th May. Of course, it was only after the Minister intervened that we were able to withdraw the appeal, because the certificate was granted.

I wish to draw the attention of my right hon. Friend to the fact that the inspector misunderstood the law.

I am much obliged to my hon. Friend the Member for Eastbourne. It seems that hon. Members must act as advocates and as general commissioners in these cases. There is no one else who can conduct or hear the appeal except the Minister so it is for us to persuade him—and not the general or special commissioners—by means of evidence so that he will give his blessing to the refusal of an application by an inspector because of some condition under Schedule 12.

Of course, the inspector was quite right in saying that one can appeal to the general commissioners and that they will arrange for the case to be heard. The general commissioners can hear an appeal as long as it is not an appeal against the condition wrongly applied under Schedule 12. The inspector may lead an aggrieved applicant before the general or special commissioners believing that he will have the whole of his case heard. He may go there with counsel and solicitors, only to find that he is precluded under Section 70(6) of the 1975 Act from putting the very point that he wants to put.

I do not say that the whole problem could be cured by removing that proviso, but this does show how unreasonable the application of the system as it stands can be. It demonstrates that it needs a complete revision, and I hope that the Financial Secretary will give an undertaking tonight to accept the clause. If necessary, it can be tidied up at a later stage. I hope that the Financial Secretary will accept what was stated by the President of the National Federation of Building Trades Employers—that the whole system has now got out of control.

This has not been a brief debate, and I do not complain about that even though we have debated the subject before. However, no one has mentioned the previous scheme that this system seeks to replace. Our system has only just come into operation, and one could be excused for wondering whether every hon. Member is aware of what is being replaced.

The last Conservative Government tried to meet the problems that arise in this rather special industry with its rather special practices. During the 1960s, with the growth of evasion, attempts were made to trace people who regarded themselves, because of traditional practice, as self-employed and who were untraceable as they moved around the country pursuing their occupation.

Faced with these difficulties, the Conservative Government produced a scheme to account for the tax paid by such people and it came into force in 1972. Its approach was the same as the approach of the present scheme, namely, to secure the deduction of income tax from those self-employed people.

The sub-contractor's tax certificate that we have introduced is purely a response to improve provisions that were manifestly failing and were generally known not to be producing the results expected by the Conservative Government. We have tried to replace the inadequate certificates that led to considerable forgery, theft and impersonation and we have tried to cover all the categories affected. The previous certificates did not cover companies. Our scheme, which came into operation last month, provides for certificates that are proper security documents. They ask for proof of the taxpayer's reliability over the past three years. The requirement is to ensure only that people have been meeting their obligations in that period and are running bona fide companies.

Everyone else undertakes to pay tax in accordance with the laws and regulations that we pass. We are trying to obtain tax from these sub-contractors, the majority of whom are individuals rather than companies. In other industries they will usually be employees, but in this industry they go around the country undertaking various tasks and we have to make special arrangements for them.

Even if the people concerned are not able to meet the requirement of being able to show that they have paid taxes over the past three years—a requirement that every other citizen has to meet—the certificate still does not become a certificate to work. The man concerned could become an employee—though if he does not wish to do that we have no intention of forcing him to work for someone else. He could go to a contractor who has a deduction scheme—we hope that many contractors will operate such schemes—or he could do various building jobs for firms or individual householders. The worst fears of Opposition Members will not be fulfilled. There are many opportunities for these people to use their skills.

The hon. Member for Cirencester and Tewkesbury (Mr. Ridley) said that he did not wish to put the Inland Revenue at a disadvantage. Other hon. Members have echoed that view and said that the needs of the Inland Revenue should apply to these people just as they apply to anyone else in the community. The hon. Member for Cirencester and Tewkesbury said that he put a high priority on this point.

I wish only to ensure that every individual pays the right amount of tax. If the new clause produced that result, I should be happy to accept it. It is because I have some doubts about whether that would happen that I am not able to accept it. I imagine that the hon. Member for Cirencester and Tewkesbury will not be surprised to hear that.

The hon. Member for Maldon (Mr. Wakeham) asked about the cost of the scheme. The new scheme will cost about £2·3 million, compared with the £2·8 million cost of the old scheme, and according to our best estimates the new scheme will result in a substantial saving of staff of about 220.

The hon. Member for Folkestone and Hythe (Mr. Costain) asked about the EEC aspect. I can assure him that there is no conflict with the Community.

The clause would undermine the whole basis of the scheme by giving sole discretion to inspectors to decide whether a person should have a tax certificate. It is almost unbelievable that such a proposal should come from an hon. Member who believes in the liberty of the individual and in set rules with which the ordinary individual can comply rather than his being at the mercy and sole discretion of another individual. The House of Commons should not consider that to be a satisfactory way of obtaining tax from members of our community, and that is my main argument against the clause.

It is proposed that the clause should come into effect on 1st June, but as Royal Assent is not given to the Bill until early in August I am at a loss to know how we could implement its provisions in June. I can see no question of retrospection. A rather odd mistake seems to have been made here.

If the clause were to come into effect when the Finance Bill received Royal Assent, would the Financial Secretary be disposed to accept it?

The hon. and learned Gentleman does not seem to have understood what I said. The clause provides that the system comes into operation on 1st June. I do not see how a system can come into operation on 1st June of this year when the Bill is not passed into law until August.

Hon. Members who know me will know full well that I never make a point about drafting that may not be particularly accurate. I know the problem under which Opposition draftsmen labour. But this seems to be more than that. There may be some peculiar reason for the date of 1st June 1977 that I am unable to understand, or perhaps it may be a piece of nonsense as I have already suggested

My hon. and learned Friend the Member for Dover and Deal (Mr. Rees) asked whether the Financial Secretary would be favourably disposed towards the clause if it came into effect when the Finance Bill received Royal Assent. In answering that, perhaps the right hon. Gentleman can indicate what will happen to the 220 people who are being displaced under the new scheme that he has described.

8.30 p.m.

The hon. Gentleman may not have heard me earlier give reasons why I disagreed with the clause. Perhaps the hon. and learned Member for Dover and Deal (Mr. Rees)—who came into the Chamber and made a speech, went out and returned only while I was winding up—

did not hear my point either. I said that I did not accept the clause.

The hon. Member for Maldon asked about the number of applications received. Perhaps I can give him the latest figures. I have given figures of this kind before, but while we are discussing the clause perhaps I may give the latest figures that I have. They cover the period up to 14th April. I am sorry that I have none later than that.

The applications totalled 316,000. Those that were approved and received certificates numbered 241,000. About 28,000 applicants were refused, although they could have made a subsequent application with success. Of the number outstanding, 16,000 did not pursue their applications; some of those may no longer be in business. Of the rest, late applications total 9,000. That presents no problem, and they will be processed in the normal way. There are 16,000 applications pending which will be successful when action is taken to put their tax affairs in order, and we believe that 6,000 are unlikely to qualify. That is the latest breakdown that I have at present.

I am puzzled by what the right hon. Gentleman said about "putting their tax affairs in order" Having regard to the statement published by the Board of Inland Revenue, which I read out, that it would not deal with the deduction scheme as a means of blackmailing a man into paying his ordinary tax, what does the Financial Secretary mean by saying that these 9,000 applicants have to put their tax matters in order?

I dealt with this matter in a previous debate, but I am happy to explain. If their record over the past three years is in order, that means that they have met their obligations for tax in the same way as other citizens of the country are required to do. They will then have met their tax in full, and there will be no question of their failing to qualify for the certificate and they will obtain it.

If the right hon. Gentleman doubts that, I shall be happy to deal with any particular constituency case as, indeed, I have dealt with a number so far. I might say that there have not been as many cases as the hon. Member for Cirencester and Tewkesbury sought to inform the Committee as a result of the introduction of this scheme. I believe that certain changes have taken place in the industry as a whole. Perhaps I might briefly refer to them.

I must admit that was not reassured by the Financial Secretary's answer to my right hon. Friend the Member for Crosby (Mr. Page). The Financial Secretary will appreciate that the initiative must lie with the Revenue and that it must raise an assessment on the applicant which, presumably he must satisfy. The Revenue could endlessly delay raising a final assessment. What exactly does the Financial Secretary mean by saying that these people have to put their financial affairs in order? Does it mean that there could be an endlessly prolonged wrangle with the inspector of taxes and that ultimately, three years from now, lie may raise an additional assessment which the applicant must satisfy? The Financial Secretary owes it to the Committee to be a little more explicit.

If there is a dispute with the Inland Revenue over the amount, as sometimes happens, certain sums outstanding which are the consequence of the dispute can be left over and the affairs of the person concerned will normally be regarded as being in order. In the majority of cases the total tax will be paid, but in some cases there can be disagreement. That will not preclude the granting of the certificate.

These people in the industry had two years notification of the changes that were coming, and it is more than 18 months since the legislation was passed. They have had time to undertake to pay their tax liabilities in the same way as other citizens and to accept the changes that were coming.

As I said, the major problems of this industry lie in the mobility of labour and in the historical fact that the ties to one employer or a particular area have been less strong than in most industries. In seeking to make this change, we have not tried to change the operations of the industry. We have been concerned with tailoring the need to obtain the required tax revenue from such individuals to the peculiar relationships between the self-employed and their industry.

I have given the undertaking, which I am happy to renew, that I intend to continue this close watch on the operation of the scheme. I believe that the worst fears of the hon. Member for Cirencester and Tewkesbury have not come close to being fulfilled. It is too early to say what problems may yet arise, but so far this matter is going a little better than many of us expected when the changes were introduced.

I think that that was the worst speech I have ever heard from the Financial Secretary—and that is saying something. He did not address himself to the points raised in debate. He went through the worst refuge of a parliamentary scoundrel in relying on drafting objections to shoot down a matter of substance. He did not understand that what is on trial here is his attitude to the right to work of these people.

Apart from that, this has been one of the best debates that I have heard for some time. My six hon. Friends who spoke, who unfortunately were not challenged by any Labour Member, made speeches based on experience, each complementing one another, and added even greater weight to the case that is building up against this iniquitous scheme.

The help that we received from my hon. Friends the Members for Wolverhampton, South-West (Mr. Budgen) and for Folkestone and Hythe (Mr. Costain) in relation to the building industry showed that they knew more about the matter than did the Financial Secretary. The cases described by my hon. Friend the Member for Eastbourne (Mr. Gow) and others showed deep concern and great knowledge of this scheme.

The Financial Secretary was wrong to suggest that the new clause was defective on drafting grounds. There is no reason why the inspector should not grant a certificate to everybody under the clause. Secondly, if the clause were carried there is no reason why it should not come into force on 1st June. Everyone would know that it would, and as soon as the Finance Act had become law that would be possible.

When one is reducing the burdens on the taxpayer, there is no reason to wait until the Act receives Royal Assent. Indeed, the Minister could drop the whole scheme now if he wanted to. All that he would have to do would be to say that he will no longer require certificates to be gathered.

My hon. and learned Friend the Member for Dover and Deal (Mr. Rees) was perhaps referring to the Financial Secretary when speaking of the froth on the surface of public life. If the right hon. Gentleman can do no better than rake over the past history of the way in which he introduced the scheme, when this was

Division No. 135]


[8.43 p.m.

Alison, MichaelEwing, Mrs Winifred (Moray)Knight, Mrs Jill
Arnold, TomEyre, ReginaldKnox, David
Atkins, Rt Hon H. (Spelthorne)Farr, JohnLamont, Norman
Bain, Mrs MargaretFinsberg, GeoffreyLawrence, Ivan
Baker, KennethFisher, Sir NigelLawson, Nigel
Banks, RobertFookes, Miss JanetLewis, Kenneth (Rutland)
Bennett, Sir Frederic (Forbay)Forman, NigelLuce, Richard
Berry, Hon AnthonyFowler, Norman (Sutton C'f'd)McAdden, Sir Stephen
Biggs-Davison, JohnGardiner, George (Reigate)MacCormick, Iain
Blaker, PeterGoodhart, PhilipMacfarlane, Neil
Body, RichardGoodhew, VictorMacGregor, John
Boscawen, Hon RobertGorst, JohnMackay, Andrew James
Bottomiey, PeterGow, Ian (Eastbourne)Marshall, Michael (Arundel)
Bowden, A. (Brighton, Kemptown)Gray, HamishMates, Michael
Brocklebank-Fowler, C.Griffiths, EldonMaude, Angus
Brooke, PeterGrimond, Rt Hon J.Maxwell-Hyslop, Robin
Bryan, Sir PaulGrylls, MichaelMayhew, Patrick
Budgen, NickHall, Sir JohnMeyer, Sir Anthony
Chalker, Mrs LyndaHenderson, DouglasMiller, Hal (Bromsgrove)
Clark, Alan (Plymouth, Sutton)Hodgson, RobinMills, Peter
Clarke, Kenneth (Rushcliffe)Holland, PhilipMoate, Roger
Clegg, WalterHordern, PeterMoore, John (Croydon C)
Cope, JohnHowell, David (Guildford)Morgan, Geraint
Costain, A. P.Hunt, David (Wirral)Morrison, Charles (Devizes)
Crawford, DouglasHunt, John (Bromley)Morrison, Hon Peter (Chester)
Dean, Paul (N Somerset)Hutchison, Michael ClarkNeave, Airey
Dodsworth, GeoffreyJames, DavidNelson, Anthony
Drayson, BurnabyJessel, TobyNeubert, Michael
Durant, TonyKershaw, AnthonyNewton, Tony
Edwards, Nicholas (Pembroke)King, Evelyn (South Dorset)Nott, John
Emery, PeterKing, Tom (Bridgwater)Page, Rt Hon R. Graham (Crosby)

done, when that was done and when the other was done, when ordinary working people's livelihoods are at risk, my hon. and learned Friend's remark must ring true. The right hon. Gentleman has complained of inadequate certification in the past. The clause seeks to ensure that he has adequate certification but that he removes the intolerable position into which he has put the tax inspector; namely, making him the judge of the question whether a citizen has a good record in respect of these conditions.

The right hon. Gentleman said that contractors had two years' notice of the scheme. I shall give them very much shorter notice. The notice is as short as the time that is necessary to get rid of this miserable Government, with their miserable attitude to those who want to get on with the job. When we return to office we shall review these conditions and remove from the statute book all the evils about which we have been complaining. Contractors can look forward to a proper deal under the next Conservative Government.

In view of the fatuous response of the Financial Secretary, I suggest that my right hon. and hon. Friends vote against the Government and support the clause.

Question put, That the clause be read a Second time:—

The Committee divided: Ayes 133, Noes 138.

Page, Richard (Workington)Sims, RogerWakeham, John
Percival, IanSinclair, Sir GeorgeWarren, Kenneth
Price, David (Eastleigh)Smith, Dudley (Warwick)Watt, Hamish
Rees, Peter (Dover & Deal)Smith, Timothy John (Ashfield)Weatherill, Bernard
Reid, GeorgeStanbrook, IvorWelsh, Andrew
Rhodes James, R.Stanley, JohnWiggin, Jerry
Ridley, Hon NicholasSteen, Anthony (Wavertree)Wigley, Dafydd
Ridsdale, JulianStewart, Rt Hon DonaldWilson, Gordon (Dundee E)
Roberts, Wyn (Conway)Stewart, Ian (Hitchin)Winterton, Nicholas
Rossi, Hugh (Hornsey)Stradling Thomas, J.Wood, Rt Hon Richard
Sainsbury, TimTemple-Morris, Peter
Shaw, Giles (Pudsey)Thomas, Rt Hon P. (Hendon S)


Shelton, William (Streatham)Thompson, GeorgeMr. Spencer Le Marchant and
Shepherd, ColinTownsend, Cyril D.Mr. Carol Mather.
Silvester, FredViggers, Peter


Archer, PeterHarrison, Walter (Wakefield)Palmer, Arthur
Ashton, JoeKooley, FrankParry, Robert
Atkinson, NormanHoram, JohnPavitt, Laurie
Barnett, Guy (Greenwich)Hoyle, Doug (Nelson)Phipps, Dr Colin
Barnett, Rt Hon Joel (Heywood)Hughes, Rt Hon C. (Anglesey)Richardson. Miss Jo
Bates, AllHunter, AdamRobinson, Geoffrey
Booth, Rt Hon AlbertIrvine, Rt Hon Sir A. (Edge Hill)Rodgers, George (Chorley)
Bradley, TomJanner, GrevilleRodgers, Rt Hon William (Stockton)
Brown, Hugh D. (Provan)Jay, Rt Hon DouglasRooker, J. W.
Brown, Robert C. (Newcastle W)Jenkins, Hugh (Putney)Rose, Paul B.
Buchan, NormanJohn, BrynmorSedgemore, Brian
Carmichael, NeilJohnson, James (Hull West)Shaw, Arnold (Ilford South)
Cartwright, JohnJones, Dan (Burnley)Sheldon, Rt Hon Robert
Castle, Rt Hon BarbaraKaufman, GeraldShore, Rt Hon Peter
Clemitson, IvorKerr, RussellSilkin, Rt Hon John (Deptford)
Cocks, Rt Hon Michael (Bristol S)Kilroy-Silk, RobertSilkin, Rt Hon S. C. (Dulwich)
Cohen, StanleyKinnock, NeilSilverman, Julius
Coleman, DonaldLamborn, HarrySkinner, Dennis
Colquhoun, Ms MaureenLamond, JamesSmall, William
Cook, Robin F. (Edin C)Latham, Arthur (Paddington)Smith, John (N Lanarkshire)
Corbett, RobinLee, JohnSmith, Timothy John (Ashfield)
Cowans, HarryLuard, EvanSnape. Peter
Cox, Thomas (Tooting)Lyon, Alexander (York)Spearing, Nigel
Crowther, Stan (Rotherham)Lyons, Edward (Bradford W)Spriggs, Leslie
Davies, Denzil (Llaneill)Mabon, Rt Hon Dr J. DicksonStallard, A. W.
Davies, Ifor (Gower)McCartney, HughStewart, Rt Hon M. (Fuiham)
Davis, Clinton (Hackney C)McDonald, Dr OonaghStoddart, David
Deakins, EricMcElhone, FrankStott, Roger
Dean, Joseph (Leeds West)MacFarquhar, RoderickSummerskill, Hon Dr Shirley
Douglas-Mann, BruceMacKenzie, GregorTaylor, Mrs Ann (Bolton W)
Dunn, James A.Madden, MaxThomas, Ron (Bristol NW)
Dunnett, JackMagee, BryanTinn, James
Eadie, AlexMarks, KennethWalker, Harold (Doncaster)
Edge, GeoffMarshall, Dr Edmund (Goole)Walker. Terry (Kingswood)
Ellis, John (Brigg & Scun)Maynard, Miss JoanWatkins, David
Ennals, DavidMendelson, JohnWhite, Frank R. (Bury)
Evans, Ioan (Aberdare)Mikardo, IanWhitehead, Phillip
Ewing, Harry (Stirling)Millan, Rt Hon BruceWhitlock, William
Faulds, AndrewMiller, Dr M. S. (E Kilbride)Wilson, Alexander (Hamilton)
Fletcher, Ted (Darlington)Miller, Mrs Millie (Ilford N)Wilson, Rt Hon Sir Harold (Huyton)
George, BruceMitchell, Austin Vernon (Grimsby)Wilson, William (Coventry SE)
Ginsburg, DavidMoyle, RolandWise, Mrs Audrey
Gould, BryanMulley, Rt Hon FrederickWrigglesworth, Ian
Graham, TedNoble, Mike
Grant, George (Morpeth)Ogden, Eric


Grant, John (Islington C)Orme, Rt Hon StanleyMr. James Hamilton and
Grocott, BruceOvenden, JohnMr. Joseph Harper.
Hardy, Peter

Question accordingly negatived.

New Clause 3

Benefits Of Employment (Motor Car Mileage Option)

'Paragraph 3 of Schedule 7 to the Finance Act 1976 shall have effect and be deemed always to have effect with the addition at the end of sub-paragraph (2) of the following:

"(3) Provided that in no case shall the cash equivalent exceed the personal proportion of the aggregate of the costs incurred by the employer in respect of the car on petrol, oil, diesel fuel, maintenance and repair, car tax, insurance, garage rent, car parking, and depreciation (at the rate laid down in section 63(5)(6) of this Act).

(4) For the purposes of this paragraph 'personal proportion' means the number of miles which an employee did not use the car preponderantly for business purposes in the year of assessment compared with the total number of miles for which the car was used in that year.".'—[ Sir John Hall.]

Brought up, and read the First time

It will be convenient to take at the same time New Clause 4—Taxation of directors and others in respect of cars, which also appears in the name of the right hon. and learned Member for Surrey, East (Sir G. Howe) and the names of his hon. Friends.

Both clauses deal with the benefits of employment and the assessment for private use of car mileage, as calculated under the Finance Act 1976. New Clause 3 is intended to give the taxpayer the option of being taxed either on the flat-rate cash equivalent laid down in Schedule 7 to the Finance Act 1976 or on a sum calculated by reference to the probabality of private use, whichever is the lower.

As an expert, the Chief Secretary to the Treasury knows that under the existing law a director or employee whose total emoluments are above the magic £5,000 ceiling and who has a company car but whose private use of that car might be very small finds himself penalised by an arbitrary assessment which bears little relationship to the benefit he might get from the private use of the car. Indeed, in many cases the additional tax penalty which is imposed thereby largely offsets the very modest reduction in income tax that the executive might hope to get under the provisions of the Bill.

Prior to the 1976 Act, those who used their cars preponderantly—to use that awful word which is employed in the 1976 Act—for business purposes generally managed to agree with their inspector at the end of the year the proportion of the mileage for which they used the car for legitimate private use. I find on inquiry among the employees of companies with which I am associated that many of those who have cars, such as salesmen and others like them, in general manage at the end of each year to agree with their inspector a figure which varies between 10 per cent. and 20 per cent. of the total mileage covered by the car during the 12-month period.

I notice from a memorandum that the CBI has recently issued that it has carried out an examination of 12 major companies and finds that the average private usage of company cars by employees of those 12 companies was about 15 per cent. It is not very much different, therefore, from the experience I had in the inquiries I made in my own companies.

It is 15 per cent. of the total mileage covered by the car during a 12-month period. I hope I make myself clear.

New Clause 3 is designed to restore that position in part. It reintroduces a variable basis by which the tax is based on the personal proportion of aggregate running costs defined by the proportion of private mileage to total mileage. The running costs include depreciation calculated on the basis of Section 63(5)(b) of the Finance Act 1976—that is, 20 per cent. of the original market value, or 10 per cent. if the car is over four years old.

The proposal in New Clause 3 seems to me to have the merit of relating the private use of the car very closely to mileage—a factor on which last year the Financial Secretary laid very great stress during debates in Standing Committee and on the Floor of the House.

I turn to New Clause 4. This reopens the debate that we had in July last year on Report, although the clause goes a little further than the amendment that was then moved by my hon. Friend the Member for Norfolk, South (Mr. MacGregor). However, the arguments remain the same. Indeed, they are strengthened by the representations that we have received since that date.

There is little doubt that to set a figure of 25,000 miles for business travel before one can qualify for the 50 per cent. reduction in the flat-rate cash equivalent is to set it unrealistically high. I have been provided with the results of examinations of a number of companies, which are included in tables provided for me by the CBI, to which I made earlier reference. However. I have preferred in this case to carry out my own examination into some companies—three, in fact—with which I have been personally concerned over the years. I should like to give the Chief Secretary the results of my research.

On a point of order, Mr. Godman Irvine. The hon. Gentleman has just referred for the third time to companies with which he is associated. Would it be in order for him to declare an interest in supporting the new clauses, as the clauses are obviously based on information from companies with which he is associated and, presumably, he has an interest in their success?

My interest in companies is well known in the House. No personal benefit accrues to me from anything that I am now debating. I do not possess a company car, so I have no personal benefit.

9.0 p.m.

Further to that point of order, Mr. Godman Irvine. Will you confirm whether interests are supposedly well known? There is an obligation on Members to declare their interests every time they participate in proceedings in the House.

There is a resolution of the House that Members should declare their interests, and that is normally done. I should add that certain hon. Members who regularly take part in proceedings in Committee on Finance Bills from time to time declare interests which are fairly well known.

Perhaps I may make two points. First, many Opposition Members and, indeed, Labour Members frequently talk about matters of vital concern to trade unions without declaring that they are members of the unions concerned. Secondly, regarding the companies to which I was referring, I said that I was at one time personally concerned with them. I am no longer concerned with them. Indeed, I have retired from active participation in two of the three companies to which I referred as having been investigated.

When making my inquiries, the chief executives and financial directors kindly supplied me with the information for which I asked. Of the total staff who have company cars, most are salesmen. However, there are many other categories as well.

The average mileage covered by salesmen varies between 15,000 and 18,000 miles. No salesman at any time within the records of the company reached 25,000 miles, except on one occasion when I was an active executive with one of the two companies. One salesman did over 25,000 miles. At the time I said that we should rearrange his duties and area because it was wrong that a man should spend three to four hours a day driving. It was uneconomic. It meant that he had to drive 130 miles a day. Therefore, he could not make the calls that he should make, and it was an uneconomic use of time for that individual. We rearranged his duties to ensure that his mileage was drastically reduced. That was the only occasion in the last 10 years when I can remember anyone achieving 25,000 miles in one year. That is the experience of only three companies. Others may have different experience.

It would be helpful, as we have been told the approximate percentage that is used for private use and the total average mileage, if we could be told, on a percentage basis, the total costs of running the car, taking into account depreciation, petrol and oil and the rest, so that we may compare it with the schedule.

That is a little difficult, because the cars varied in size from 1,100 up to 3,000 I have not got the breakdown of the cost of individual cars. I cannot help the right hon. Gentleman in that way.

In addition to those figures, one company has staff technicians and chemists who are regarded as trouble-shooters and advisers and who visit factories within the group and customers' plants. They must have cars available for their individual use each day of the week. They might be called out to a factory at any time during the week. Their mileage is considerably less—between 8,000 and 13,000 miles, depending on the individual.

About 55 per cent. of these people with company cars have second cars, because without them their families would be completely marooned. We all know about the problems. Labour Members laugh at that. We had a debate not long ago about the problems not only of rural transport but of urban transport. For example, many people in High Wycombe cannot rely on getting to work at the right time if they do not have the use of a car, because the bus services are so unreliable.

The hon. Gentleman and I participated in the debate on rural transport. I am sure that he does not want to mislead the Committee. There were expressions of grave concern by Labour Members about poor people who live in rural areas. In many cases, because the husband had the use of the car during the day, the wife and family were marooned at home because they did not have access to a second car. That concern was expressed strongly by Labour Members.

That does not invalidate my argument. Some 55 per cent. of the people with a company car must for one reason or another have a second car, because without it their families would be marooned. That situation exists in all parts of the country.

All those who were classified as being among the higher paid, who were caught by the provisions of the 1976 Act and who had a second car, made little private use of their company car—with one exception. All of them complained that they were now being assessed at too high a figure, and they believe that the change is unjust and penal.

The present position arose because last year the Financial Secretary did not appear to understand the difference between exceptional business use of cars and exceptional business mileage. Few people, particularly the higher paid, reach an annual business mileage of 25,000 miles. They should not be allowed to reach that mileage. Far more people make exceptional business use of cars without coming within striking distance of 25,000 miles a year. A salesman covering an urban area works as hard as, if not harder than, a man covering a sparsely populated area because he makes more calls. One is to be penalised and the other may escape penalty. A senior executive engaged in customer liaison, for instance, may need a car each working day, and on occasion seven days a week. His mileage would be modest.

A number of letters have been sent to me by constituents. I have picked out two from salesmen from the top of the pile. I shall quote only the relevant paragraphs because I do not want to bore the Committee. The first letter states:
"As a field sales manager I need a motor car and incur some expenses on behalf of my employer, whilst performing my job…. In my case, the car and expenses are not a 'perk', but are essential to the pursuance of my job…. The provision that the amount to be included in reckoning my gross income should be halved, if I do 25,000 business miles per year, does not bear any relationship to the business miles covered by the average field sales manager of a national company."
That constituent is right. The letter continues:
"12,000 miles is much nearer the true average, and should be the point at which the amount is halved. This act is a discriminatory, iniquitous piece of legislation which penalises a section of the community for the way in which it earns its living."
I received a similar letter from an area salesman covering Buckinghamshire, Hertfordshire, Middlesex and North London. He says:
"In my opinion, 10,000 miles would have been sufficient to distinguish between those for whom the car is a perquisite and those for whom the car is a necessary tool for their job. In general, this aspect of the Finance Act will add a further burden to that group of people whom have benefited less than any others, those earning around the £5,000 per year. Already we are seeing differentials being whittled away.
Other hon. Members will have received similar complaints.

I think that the Financial Secretary knows me well enough to realise that I am right. I am opposed to fringe benefits in principle. But, there has been an alarming and rapid fall in the real incomes of middle and senior management because of the combination of the severe restrictions on growth and the penal tax. It is a wonder to me that there has not been a greater attempt to increase the number of fringe benefits rather than reduce them.

When someone gets a benefit which normally he would expect to pay for out of taxed income, it is right that he should be assessed. No one would disagree with that. No one would complain, except perhaps at the level of taxation, if the assessment were done fairly. I believe that the new system is unfair, and its impact will fall especially on those who are most likely to be the men or women on whose initiative, ability and drive we depend. It was clear from the debates last year during the Report stage that insufficient thought had been given to the effect of the measures which are now in the Finance Act 1976.

For those reasons I commend the new clauses to the Committee. In particular, commend New Clause 4 to the Chief Secretary.

In view of the obsession of the hon. Member for Sowerby (Mr. Madden), I shall declare an interest at the outset. I have no company car, I am not talking about anyone in the single company with which I am associated, and I am mainly concerned with the interests of constituents who have written to me on this matter and of other companies with whom I have had discussions over the past year. That arises from the fact that during last year's debates on the Finance Bill I was very much involved.

As my hon. Friend the Member for Wycombe (Sir J. Hall) was kind enough to remark, I proposed an amendment last year to bring the figure down to £15,000. The Chief Secretary will also recall that in the debates upstairs, largely due to the Opposition's concentration on the problem of very extensive business use, the Government introduced the concession in the first place, and we were grateful for that.

I had hoped, from the debates we had last year, and particularly from the response of the Financial Secretary, that the Government would be prepared to look again at their figure of 25,000 miles and, in the light of experience, to adjust it, because I believe that experience has shown that that figure is too high.

I have sympathy with the Inland Revenue's desire to produce simplification in the whole area of taxation on car fringe benefits. For that reason I much prefer New Clause 4 to New Clause 3, because I think it is another step towards simplification, whereas New Clause 3 would slightly complicate the present laws.

I am bound to say that the way in which the Inland Revenue is interpreting these new clauses in relation to cars does not exactly suggest that it is wholly concerned with simplification. There have been some interpretations, in which perhaps the Chief Secretary has not even been involved, which have created a great deal of muddle.

One example of this is where an individual pays for his petrol himself for private or other use and asks his company to reimburse him, or, alternatively he reimburses his company for the private use of a car. In such a case the cost of the petrol will be added to the total, whereas, if a company credit card is used for the petrol, that rule will not apply. That is the sort of technical muddle that we seem to be getting into already in the interpretation of these clauses.

I appeal to the Chief Secretary to make sure that the Inland Revenue carries out the original objective of these fringe benefit clauses on company cars, and, even if it means rough justice, tries to make sure that there are simple rules to follow.

With regard to the main point on New Clause 4, the whole burden of our argument last year is that those who use their cars for very substantial business mileage will find that under the new rules they will be taxed more heavily. I think that that is doubly unfair, first, because an element of tax is being added—which is entirely due to business expense—to an executive's already highly-taxed income, in many cases. It is also discriminating against those who are using their cars entirely for business and not for private use at all.

I well remember, last year in Committee upstairs, quoting a letter from a constituent. I shall not bore the House by quoting it again. The effect was that the writer hoped that Government Ministers did not believe that at the end of a very tiring week, driving many thousands of miles round the country, the people concerned were only too delighted to go out during the weekend on private mileage. The writer emphasised that he was only too pleased to see the car in the garage, rather than having to drive another mile during the weekend.

9.15 p.m.

There are many salesmen and executives in that situation for whom the car is essential for business and who use it very little for private purposes. The problem is that the Government have set the top limit on their concession far too high. The limit of 25,000 miles means that a salesman must travel about 100 miles every working day. That is a level that most of them do not achieve.

So whereas the Government were right to accept the concession that we pressed last year, they have still not achieved the correct level, and they are still discriminating against those who use their car predominantly for business purposes, who are therefore incurring only business expense, and who are finding that they are therefore being taxed more highly.

I have been talking to travellers or salesmen in various companies about this matter. Only this weekend a deputation of ICI salesmen came to see me in my constituency. All of them use their cars mainly for business purposes. None of them actually achieves the 25,000-mile figure, even though they all operate in a rural area. All the experience shows, therefore, that the Chief Secretary has set the limit too high.

One point struck me about the circumstances in East Anglia. Many of these travelling salesmen, who work for all sorts of companies, run two cars. They have the company car, which they use every working day. They probably leave home early in the morning and return fairly late in the evening. Therefore the wife has to have an old "banger" to get the children to and from school and to do the shopping, because in a rural area that is the only way in which she can get about. In those circumstances it is ludicrous to assume that these travelling salesmen are using their business cars a great deal for private purposes. The car is an essential tool of business for them. I believe, therefore, that last year's concession should apply for all these cases.

We can argue whether the limit should be 12,500 miles or 15,000 miles, as we suggested last year. Whichever figure we settle on there can be no doubt that 25,000 miles is too high. Personally, I would prefer to be generous. We are here talking about people earning between £4,000 and £6,000 a year, but because of the way in which total remuneration is calculated for last year and the forthcoming year, and because of the business expenses they incur, they are put into the category of the higher paid. They are not among the higher paid, but they are among the most hard-working members of the community.

We were talking about such people on Tuesday, although on that occasion our remarks were directed primarily at those in the higher tax range. These are the people who are getting a raw deal and are becoming completely dispirited in their work, and who find that the combined effects of their not getting last year's concession and the change in the car rules mean that they will be taxed more heavily this year than in the previous year. They will ask themselves why they are in the business at all. I do not blame them taking that attitude. They use their cars almost entirely for business purposes, and the Chief Secretary would therefore be well advised to take another look at this matter and, for the sake of giving this group sufficient motivation, accept the concession we are suggesting in New Clause 4.

I end by quoting from a letter from one of my constituents which emphasises the sort of problems presented by the demotivation of executives in industry. This constituent is precisely in the category that we have been discussing. This year his tax bill has increased by £60 because of the way that the rules operate. He receives a comparatively modest salary but recently he declined an offer of promotion and an extra £1,000 a year because it would have meant transferring to another part of the country, and he worked out that it was not worth accepting. He says:
"How sad it is that people in positions similar to mine should be so dispirited and depressed. Is it any wonder that I find myself unable but to advise my son, who is just completing a postgraduate course at Cambridge after gaining a first class honours degree at another university, that he should seek employment beyond the shores of the United Kingdom."
The Chief Secretary raises his eyebrows, but he must accept that this is the kind of problem occurring in British industry from time to time. This is not a bleat about tax levels, as it might well have been. It is a despair that has been brought about because the lines were drawn too high last year, and this is the final straw for that executive. The clause would make a comparatively small change, but I urge the Chief Secretary to think again and accept it.

I want to speak very briefly, and, not surprisingly, in favour of the new clause—and not only from the straight taxation point of view. I am sorry that the Labour Benches are depleted, because I should have loved to declare my interest, which comes from a background of many years in the motor industry.

The clause goes part of the way towards alleviating the problems that will be created by this part of the Finance Bill. There is a possibility that if this part is not changed there will be an increased threat of unemployment in the motor industry and its associated suppliers.

The majority of companies that run company cars have strong pro-British and "Buy British" policies for their fleets. The vast majority of company-owned cars are British-manufactured. On the other side of the coin, private individuals are tending more and more to buy foreign imports. I am concerned about the rigidity of the Government's proposals and the depressing effect of tax levels on the individual in the section of our society that really needs every incentive and motivation to get up and make this country a better place.

I am afraid that companies will consider paying their employees a mileage allowance and allowing them to run their own cars. This will increase the foreign vehicle demand, and the number of registrations of foreign imported cars will climb, month by month, to 30 per cent. or more. This will put pressure on home production. There will be a reduction in the number of registrations and sales of British cars. Obviously there will be job losses, and the increased import costs will affect our balance of payments.

I wish to back up the points that have been made already about the 25,000-mile figure. We are told that this figure has been introduced to take account of the commercial traveller. I cannot follow the reasoning behind the fixing of that figure. The commercial traveller does a job the same as anyone else. He or she is no different in that respect from a bus driver or a train driver. His personal mileage—if he feels like it after a long hard day of driving—is personal to him, just as personal mileage is personal to anyone in any other occupation. One might just as well argue that because a bank clerk is handling and counting money all day he is qualified for a reduction in his taxation.

I also wish to take up the point about the second car. In some country districts there is appalling local transport, and a person should not be penalised for having one car for his own use and another for his wife. For this reason the figure of 25,000 per year for predominantly business use is nonsense, and is far too high. The average recorded mileage is about 12,000 a year. That figure is produced and substantiated in practice, and it is borne out by Glass's Guide which is a trade manual and a fairly discerning publication on these matters.

The figure of 12,000 miles includes personal and business use. It is a figure that is being achieved in practice. Therefore, it seems logical that the figure of 12,500 miles per year, as we propose, should be adopted as the starting figure.

If this proposal is accepted, it will be of special benefit to small business men, who are being hard hit in the present business climate. They comprise a section of the community looking for expansion and growth to help mop up the unemployed. A change to a figure of 12,500 miles per year will help such a man, because he is under pressure and strain, as is shown by the present level of bankruptcies.

I wish to draw attention to the rigidity of the present flat-rate proposal. I do not want to go into all the details or to plough through the examples, because no doubt Finance Committees have heard them many times before. The calculation divides proportionately between business use and insubstantial non-business use. The first half of the calculation relates to flat-rate benefit plus any private element. The second part is a percentage of original market value plus running costs. There is a looseness in the definition of the word "insubstantial" in the Finance Act, although the Inland Revenue has stated that the business rate of over 10 per cent. a year will be regarded as insubstantial.

There is an additional and perhaps minor point, but it is relevant in this context. No provision is made in the Bill for vehicle use by companies engaging in the manufacture, promotion or sale of a specific product. This will mean a locked-in position for those concerned and will cause difficulty in negotiation.

I believe that our proposals in New Clause 3, coupled with the mileage reduction to 12,500 will enable a contribution to be made for personal mileage use. The contribution will relate to actual cost and will be a means of evaluating personal use within the limits of the Bill. The present proposals could lead individuals to pay far more tax than they should under the flat-rate proposals. I support the clause because I believe that it will eliminate this injustice.

I have listened to the debate with great interest. Two issues arise. The first relates to New Clause 3, which seeks to add to the half-scale in the schedule to last year's Finance Act a proportion of the actual cost in certain circumstances. The second matter which is dealt with in New Clause 4, would reduce the figure of 25,000 miles per year to 12,500 miles per year in the assessment of half the scale instead of the full scale.

Let me seek to deal first with New Clause 3, which seeks to return to the old system of calculating a private proportion of total motoring costs in the circumstances of a figure of 12,500 miles. The hon. Member for Wycombe (Sir J. Hall) said that that figure would embrace the great majority of business users. We were given figures showing that that was an average mileage for business use. Therefore, we would be back to the old system of calculating the private mileage assessment.

I have had some experience of dealing with these matters in a former life. I was reminded of those halcyon days when I heard the hon. Member for Norfolk, South (Mr. MacGregor) talk about someone who had written to him saying that he would be only to happy never to see his car again. That is what clients used to tell me in the past. I naturally assumed that they were telling me the truth and that that was the situation.

9.30 p.m.

However, it is a little difficult to imagine that private use would be an average of only about 20 to 30 miles a week, including evening, weekend and holiday motoring. That is the impression one gets from the figures given by the hon. Member for Wycombe. He referred to CBI figures which showed that 15 per cent. was private motoring and that this meant an average of 37 miles of private motoring a week. If one takes 12,500 miles a year as average, as the new clause seeks to do, one is talking about a pretty small assessment of mileage for private use. I am sure that the hon. Member for Norfolk, South was telling the truth, and I have no doubt that there are some salesmen who, once they have finished travelling and working at a difficult job all week, say at the weekend "Thank God. That's it" and then put the car in the garage, not wanting to use it again. If that happened over the whole year the private mileage for that car would be as low as the hon. Member for Norfolk, South suggested. I agree that that might be so in certain cases, but in most cases—I put it no higher than that—it is unlikely that the private use of the car would be so low.

Does the right hon. Gentleman agree that it is difficult to calculate the actual private use of the car, because, although the business man involved might not be using the company car for private use, he might be using his second car or he might be driven around by his wife or another member of his family.

That is absolutely right it is extremely difficult to calculate the private use of a car. In my experience as an accountant in practice, there was no more burdensome task both for the inspector of taxes and for an accountant than to have to spend a huge amount of time calculating—this had to be done—the distance from home to the office and how many miles were driven during weekends and holidays. This could continue during a long correspondence and many telephone calls.

That has been replaced by a scale which I shall come to presently. It cannot be suggested that having to calculate the mileage of the great majority of business users would be a better way of dealing with the matter. That is wrong. I see the hon. Member for Norfolk, South nodding in agreement. Nobody else saw him doing so, and I am sorry if I have embarrassed him.

I hope that nobody will support New Clause 3. It would mean going back to the old system, which would cause the great burden of having to calculate what proportion of the mileage was private use and what proportion was business use.

We could then go on to consider whether the scale that we use is accurate. That is the matter that we are really discussing. There can be few accountants and certainly, if the tax inspectors were to deal with these things stringently, few business motorists who would want to go back to the system of calculating private and business motoring.

Let us take the example of a motorist with a Cortina 1600 and driving an average of 12,500 miles a year. I know that the sort of person to whom we are referring loathes using his car again after working hard all week. However, the proposition is that he would have to do as little as 20 miles a week private motoring to come within the half scale available on 12,500 miles a year. Are the Opposition suggesting that, even if a man does substantial business motoring, he will not use his car privately for an average of more than 20 miles a week? I cannot believe that they would press that idea.

Even if we kept the mileage at 25,000 a year, such a driver would have to do less than 40 miles a week in order to benefit from going on to the proportional rather than the half scale. It stretches the imagination to believe the Opposition's proposition.

Most commercial travellers do not go to an office first but go straight to work from home. That is what make it possible for them to cover these phenomenal mileages in a year. At weekends they are only too glad to put the car in the garage, and they are most unlikely to do even 25 miles a week if they have any sense.

The hon. Gentleman takes me back. Those are precisely the arguments that I used. No doubt many salesmen do exactly that. I am sure that every client who told me that was telling me the truth, and I am sure that those who tell the hon. Gentleman the same thing are also telling the truth. However, the car is at their disposal. Are we to believe that they never go out and see their friends during the week, that they never go out at weekends and that they never use the car on holiday? We are talking in this debate to the vast public outside, and to expect them to believe that is expecting too much.

The Chief Secretary is making a lot of this point. We are talking about the private use of a company car. It does not mean that another car may not be used privately for more than 20 miles a week. I am not sure where the Chief Secretary gets the figure of 20 miles, because my suggestion would give a private use of about 50 miles a week. The right hon. Gentleman should not keep emphasising that the company car will be used for 20 miles of private use every week. It may not be the company car that is used privately.

There is a fair number of two-car families, but there are many others with only one car. The hon. Gentleman is seeking to bring down to 12,500 the mileage after which a man would be able to get the half scale and be allowed to use the proportion that, as I have said, few would seek to do. The hon. Gentleman also quoted the CBI in evidence and said that 15 per cent. was the proportion for private use. Fifteen per cent. of 12,500 miles is certainly less than 40 miles a week.

This is probably where the confusion has arisen. I was not relating that to the 12,500 miles in New Clause 4. The two clauses are alternatives. I am sorry I did not make that clear. I was utilising the CBI's investigation, which showed that those who had a business use mileage of over 15,000 miles did an average of 15 per cent. for private use. We are talking about 15 per cent. of a minimum of about 17,500 miles.

The hon. Gentleman quoted a number of figures which I took down. He said that the CBI had quoted 15 per cent. as the total mileage for private use. He talked about salesmen as being responsible for 10 per cent. to 20 per cent. of costs, and an average mileage of between 15,000 and 18,000 a year. But I remind the Committee that 12,500 miles is not an exceptionally high figure. After all, the hon. Gentleman put forward New Clause 4. If that is not the case, he is seeking to persuade the Committee that less than the average mileage should be allowed half the scale or a proportion of the total calculated costs.

Perhaps I may explain by using words of one syllable. In putting forward New Clause 4, I was trying to stress that the real problem arose last year because of the confusion between the concentration of exceptionally high mileage and the exceptionally high business usage. The two are not necessarily the same. We are beginning to get down to 12,500 miles because we believe that there are many people who use a car all the time who cannot possibly do the high amount of mileage required by the present Act.

I shall be coming precisely to that point. I do not think the hon. Gentleman is suggesting that 12,500 miles is an exceptionally high mileage. It is not. But under New Clause 4 it would be possible for business motorists, with that figure, to obtain half the scale. I should like to remind the Committee what the scale actually is and what that would mean particularly to business motorists. The scale, as it stands in last year's Finance Act, is in itself a very low scale by anyone's understanding of the availability of a car for private use and the amount of private mileage for which it is used.

Let me come to New Clause 4, which is—[Interruption.] We are debating two new clauses. The hon. Member for Blaby (Mr. Lawson) may not know it, but his hon. Friend introduced New Clauses 3 and 4. I assume that the hon. Member for Blaby supports New Clause 3 because, being a Whip, he has to support both of them even though he does not agree with them.

New Clause 4 seeks to reduce the milage from 25,000 to 12,500. We estimate that that would cost about £20 million because, as the hon. Member for Wycombe indicated, we are not talking about an exceptionally high mileage but rather about something lower than average business mileage. We put in a figure of 25,000 miles because it implies a reasonably substantial mileage. I have no doubt whatever that there will be many salesmen running their cars for business use on a rather higher mileage in a year than that. Certainly no one would argue that 12,500 miles was an exceptionally high mileage.

9.45 p.m.

If we accepted that 12,500 miles should be the scale of assessment of the benefit, for a car of 1300 cc or less, the present scale of £175 would be reduced to £87.50 Many motorists running such a car for even as little as 30, 40 or 50 private miles a week would consider that a small assessment. That is not the total liability—it is simply the assessment—on which the people about whom the hon. Member for Norfolk, South spoke would pay 33 per cent. or possibly as high as 40 per cent. It is a little difficult in those circumstances to believe that hon. Gentlemen are not exaggerating.

The hon. Member for Norfolk, South said that the major problems were confronted by salesmen earning between £4,000 and £6,000 a year.

The hon. Gentleman mentioned the man earning £4,000 to £6,000 a year. However, I am sure he has overlooked the fact that the Bill increases the level for P11Ds to £7,500.

Yes, but even if that man were running a Rolls-Royce he would not be caught. The full scales—certainly the half scales—would be an absurdity for the man with the average private availability of a car.

Would not the right hon. Gentleman agree, though, that there are many people, some of them earning more than £6,000—I stressed that—who have done very little private mileage with their cars before and who, under the new system below 25,000 miles, will find that they are taxed very heavily? Is the right hon. Gentleman satisfied with the 25,000 figure? If he disputes 12,500, does he not think that it should come down a bit?

Since the hon. Gentleman asks, no, I do not. The scale of assessment to private benefit, even without the substantial mileage of 25,000, even for a man doing a substantial mileage for his private use—even if he does only 40 or 50 miles a week on average—will be £175 on a car of 1300 cc or less, £225 on a car up to 1800 cc and £800 on something above £10,000 in value. The hon. Gentleman is a reasonable man. He is smiling. I do not know whether that means that he agrees, but I have always regarded him as reasonable. Is he really telling the Committee that that kind of scale is excessive and should be halved for average business mileage? I hope that even Conservative Members will realise that that is not a reasonable argument to ask the Committee to accept, and I ask the Committee to reject it.

The Chief Secretary has entertained the Committee with some pre-ministerial anecdotes about the way in which he, no doubt excellently, acted for clients, and has offered us some guesses and some memories as a defence of the Government's position. That will not do. We are concerned with making law, not with guesses and anecdotes. The right hon. Gentleman used the phrase "I would guess" more than once. That is not a sufficient basis on which to continue, in financial legislation, measures which unfairly and discriminately damage the position of people who, as we have established, are of modest means.

First, I deal with a point that the Chief Secretary made several times about the undesirability of returning to the old business of calculating all the mileage. We can all agree with his idea that we should aim for greater administrative efficiency. If the scale rates will simplify matters, we recognise the value of bringing forward such a system. However, the book issued by the Inland Revenue entitled "Notes On Expenses Payments And Benefits For Directors And Certain Employees" is full of recommendations and injunctions that those using their cars preponderantly for business travel should keep mileage records. In page 12, paragraph 10.7, the taxpayer is warned:
"Employees likely to fall within this category should keep sufficiently detailed records to demonstate the extent of their business travel in the tax year."
Under the section dealing with cars supplied with a driver, which would be the sort of cars that would probably not be used at the weekend, the book states that detailed records have to be kept throughout the year to assess what proportion of the driver's time, energy, wages and on-costs can be apportioned to that part of travel which is considered to be non-business. Presumably that is the last part of the journey between office and home or home and office. Therefore, records have to be kept over a long period. The whole of the book is full of injunctions that such records should be kept.

It will not do for the right hon. Gentleman to tell us that he has a wonderful new system that is so nearly perfect that we should not sully it—a system that eases the administrative burden for the car user and the Inland Revenue of keeping records of mileages. The right hon. Gentleman knows that to a large extent the record-keeping has to go on as before.

The effect of the law as it stands without the new clause is to ensure that commercial travellers are taxed more heavily than in the past. The law hits especially the travelling salesman who has a certain region to cover by car. Such a salesman cannot make use of a pool car. He has to cover a certain area from his house. He is being hurt the most by the present provisions.

As my hon. Friend the Member for Wycombe (Sir J. Hall) said in his excellent moving of the clause, the propositions in the mass of new arrangements as outlined in "Notes on Expenses Payments And Benefits For Directors And Certain Employees" are based on a muddle. It was a muddle in the mind of the Financial Secretary. With due respect, we sometimes feel that it is not the only muddle in his mind when dealing with these matters. In any event, it is a muddle between business mileage and business use. It would seem to be a muddle in the Chief Secretary's mind too. But perhaps it is not. Perhaps he knows that it is a confusion but chooses to keep it to please himself.

The confusion is between the idea that high business mileage means a high business use and low business mileage means a lower business use. That is nonsense. A salesman in the metropolitan area will find that it is possible to do a great deal of travelling, or a great deal of driving, and still clock up only 12,000 miles a year. That is well below the average for all the forms of travel that were mentioned by my hon. Friend the Member for Wycombe when dealing with the CBI survey.

It is possible in the metropolitan area, or the Home Counties, such as my county of Surrey, to spend all day on the roads and to clock up a modest mileage. If a salesman confines his business driving to such areas, he may well drive only 8,000, 9,000 or 10,000 miles a year. However, in Radnorshire, parts of Wales, Herefordshire, Northamptonshire or Scotland, it is possible to clock up an enormous mileage. In both instances the salesman may spend all day on the roads, doing an equal amount of work, but when driving in the outlying areas he gets the half-scale rate after 25,000 miles if he has kept all his records, detailed mileage accounts and everything else that the Inland Revenue tells him to do, whereas in the Home Counties he may drive between 4,000 and 6,000 miles a year and the Chief Secretary chooses to put nothing into the Bill to help him.

The salesman in the Home Counties is contributing as much as anyone to the efficient performance of our nation, but he gets no benefit. Our new clause would have enabled him to have some of the same benefit as those doing 25,000 miles. It would have been far better to reduce the mileage from 25,000 to 12,500. Keeping it where it is is yet one more attack on that so-called middle income group which is now merging with the lower income group, earning beween £60 and £100 a week—the people we are supposed to have been helping. As we learned earlier this week, these people are greatly disliked by Labour Members below the Gangway. There was talk that they would be helped in this year's budget, but when one adds up the tax concessions that they are supposed to have received and then deducts the additional tax imposts, increased national insurance and a variety of other costs, including higher petrol and fuel costs, as well as the increases yet to come from last year's Finance Act, one sees that they are no better off but are becoming daily worse off.

Here is an attack being sustained by the Government on people with modest incomes who are trying to do a job that involves having a car for substantial business use. If that is what the Govern ment want to do, why do they not say so? If they are pretending to help these people, they should at least reinforce and make some virtue of that pretence by supporting a clause that will ease the situation for the people of whom I am speaking.

The Government's position on this matter is feeble. The Chief Secretary's anecdotes are all very interesting, but have no relevance. His guesses are a poor basis for making law. I urge my right hon. and hon. Friends to press the clause to a Division.

I intervene briefly, provoked by the Chief Secretary's implausible arguments. The right hon. Gentleman remains as genial as ever but his arguments become more and more threadbare as he puts a greater distance between himself and the private practice he left in 1974, and as his association with the Chancellor grows longer.

The arguments initially adduced to support the provisions in the last Finance Bill were based on grounds of equity. In fact, on analysis it was found not to be equity but the rancid envy and antediluvian malice of some of the right hon. Gentleman's hon. Friends below the Gangway. Now the argument has shifted to that of administrative convenience or simplicity.

The Chief Secretary has batted on behalf of lower, middle and higher management. His mind has been lent to these classes to support them in their efforts to achieve a fair balance in the tax they pay. What the Chief Secretary has not admitted is that before the last Finance Bill there was but one test, admittedly not entirely simple—that of the annual value of the car and driver made available to the employee by his firm.

In his professional life the Chief Secretary may have encountered certain difficulties in arriving at the annual value, but since the last Finance Bill we have not merely one test but three. It is now necessary to discover whether the car is substantially for private use or substantially for business use, or is a pool car. In other words, there is now not one category of car but three.

Superimposed on that is the question whether a driver is provided for the car. As I understand the law—perhaps at some point it will be possible to elucidate this point—if one is fortunate enough to have a pool car there is to be no charge to tax for the driver, but if one has a car substantially used for business the value of the car is to be assessed by reference to the formula. However, the benefit of the driver is to be assessed on the old basis, the annual value. Therefore, one is still compelled to ascertain the number of miles for which one may have used one's car for business and the number for which it has been used for private purposes. If one's car is substantially used for private purposes, one must determine what the annual value of one's driver is, or was.

Beyond that, if one is on the formula one must still keep records. This emerges from the booklet helpfully circulated by the Inland Revenue to assist in determining whether one has used one's car for more or less than 25,000 miles for business purposes. It is wrong to pretend, as the right hon. Gentleman has done, that the new system is devised for the advantage of middle management so that it can ascertain its liability with ease and simplicity is not true. The truth is that the right hon. Gentleman was responsible for a mean series of sections in the Finance Act 1976, of which he is probably now a tiny bit ashamed.

10.0 p.m.

The right hon. Gentleman shakes his head. There will be opportunities to come back to this matter in Committee upstairs, particularly, for example, with regard to the question of accommodation. We shall consider why and how, closely and carefully, the rules have been dealt with so that some can slip through the net and some can be caught. I shall not delay the Committee on the matter now, but I give the right hon. Gentleman due notice that we shall go into it with considerably greater care in Committee upstairs.

Division No. 136]


[10.03 p.m.

Alison, MichaelBlaker, PeterBudgen, Nick
Arnold, TomBody, RichardChalker, Mrs Lynda
Atkins, Rt Hon H. (Spelthorne)Boscawen, Hon RobertClark, Alan (Plymouth, Sutton)
Baker, KennethBottomley, PeterClarke, Kenneth (Rushcliffe)
Banks, RobertBowden, A. (Brighton, Kemptown)Clegg, Walter
Bennett, Sir Frederic (Torbay)Brocklebank-Fowler, C.Cope, John
Berry, Hon AnthonyBrooke, PeterCostain, A. P.
Biggs-Davison, JohnBryan, Sir PaulDean, Paul (N Somerset)

The only honourable course for the right hon. Gentleman would be to withdraw the measures introduced in the Finance Act 1976. But it takes a bigger, braver and more honourable man than he is to admit error. The right hon. Gentleman's case is riddled with phrases like "These are practical arguments which you can safely pass by." But my right hon. and hon. Friends have riddled his arguments and have demonstrated how hollow they are. If he cannot, as he should, withdraw the offending sections of the 1976 Act, the least he can do is accept our proposal. There is just a moment for him to repent, but if he does not I hope that we shall press the matter to a Division.

Before I seek leave to withdraw New Clause 3, I should like to make a brief comment. Referring to his previous incarnation, the Chief Secretary said that he accepted as completely true facts given to him about the very small private mileage in the use of company cars. Such cases must have been true, for otherwise he surely would not have been prepared to represent the people concerned, even for the high fee which I am sure he charged.

I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 4

Taxation Of Directors And Others In Respect Of Cars

'The Finance Act 1976, Schedule 7, Part II, paragraph 3, shall have effect with the omission wherever it may occur of "25,000 miles" and substitution of "12,500 miles".'—[ Sir John Hall.]

Brought up, and read the First time

Question put, That the clause be read a Second time:—

The Committee divided: Ayes 116, Noes 156.

Dodsworth, GeoffreyLambie, DavidRees, Peter (Dover & Deal)
Drayson, BurnabyLamont, NormanRhodes James, R.
Durant, TonyLawrence, IvanRidsdale, Julian
Edwards, Nicholas (Pembroke)Lawson, NigelRossi, Hugh (Hornsey)
Emery, PeterLe Marchant, SpencerSainsbury, Tim
Eyre, ReginaldLuce, RichardShaw, Giles (Pudsey)
Farr, JohnMcAdden, Sir StephenShelton, William (Streatham)
Finsberg, GeoffreyMacfarlane, NellSilvester, Fred
Fisher, Sir NigelMacGregor, JohnSims, Roger
Fookes, Miss JanetMackay, Andrew JamesSinclair, Sir George
Forman, NigelMarshall, Michael (Arundel)Smith, Dudley (Warwick)
Fowler, Norman (Sutton C'f'd)Maude, AngusSmith, Timothy John (Ashfield)
Gardiner, George (Reigate)Maxwell-Hyslop, RobinStanbrook, Ivor
Goodhart, PhilipMayhew, PatrickStanley, John
Goodhew, VictorMeyer, Sir AnthonySteen, Anthony (Wavertree)
Gorst, JohnMiller, Hal (Bromsgrove)Stewart, Ian (Hitchin)
Gow, Ian (Eastbourne)Mills, PeterStradling Thomas, J.
Gray, HamishMoate, RogerTemple-Morris, Peter
Griffiths, EldonMoiyneaux, JamesThomas, Rt Hon P. (Hendon S)
Hall, Sir JohnMoore, John (Croydon C)Townsend, Cyril D.
Hodgson, RobinMorgan, GeraintViggers, Peter
Holland, PhilipMorrison, Charles (Devizes)Wakeham, John
Hordern, PeterNeave, AireyWalker, Rt Hon P. (Worcester)
Howell, David (Guildford)Nelson, AnthonyWarren, Kenneth
Hunt, David (Wirral)Neubert, MichaelWeatherill, Bernard
Hunt, John (Bromley)Newton, TonyWiggin, Jerry
James, DavidNolt, JohnWinterton, Nicholas
Jessel, TobyPage, Rt Hon R. Graham (Crosby)Wood, Rt Hon Richard
Kershaw, AnthonyPage, Richard (Workington)
King, Evelyn (South Dorset)Percival, Ian


King, Tom (Bridgwater)Powell, Rt Hon J. EnochMr Peter Morrison and
Knight, Mrs JillPrice, David (Eastleigh)Mr. Carol Mather


Archer, PeterHamilton, James (Bothwell)Ogden, Eric
Atkinson, NormanHardy, PeterOrme, Rt Hon Stanley
Bain, Mrs MargaretHarrison, Walter (Wakefield)Ovenden, John
Barnett, Guy (Greenwich)Henderson, DouglasPalmer, Arthur
Barnett, Rt Hon Joel (Heywood)Hooley, FrankPardoe, John
Bates, AlfHooson, EmlynParry, Robert
Beith, A. J.Horam, JohnPavitt, Laurie
Booth, Rt Hon AlbertHoyle, Doug (Nelson)Penhaligon, David
Brown, Hugh D. (Provan)Hughes, Rt Hon C. (Anglesey)Phipps, Dr Colin
Brown, Robert C. (Newcastle W)Hunter, AdamReid, George
Buchan, NormanIrvine, Rt Hon Sir A. (Edge Hill)Richardson, Miss Jo
Carmichael, NeilJanner, GrevilleRobinson, Geoffrey
Cartwright, JohnJay, Rt Hon DouglasRodgers, George (Chorley)
Castle, Rt Hon BarbaraJenkins, Hugh (Putney)Rodgers, Rt Hon William (Stockton)
Clemitson, IvorJohn, BrynmorRooker, J. W.
Cocks, Rt Hon Michael (Bristol S)Johnson, James (Hull West)Rose, Paul B.
Cohen, StanleyJohnston, Russell (Inverness)Ross, Stephen (Isle of Wight)
Coleman, DonaldJones, Dan (Burnley)Sedgemore, Brian
Cook, Robin F. (Edin C)Kaufman, GeraldShaw, Arnold (Ilford South)
Corbett, RobinKerr, RussellSheldon, Rt Hon Robert
Cowans, HarryKilroy-Sllk, RobertShore, Rt Hon Peter
Cox, Thomas (Tooting)Kinnock, NellSilkin, Rt Hon John (Deptford)
Crawford, DouglasLamborn, HarrySilkin, Rt Hon S. C. (Dulwich)
Crowther, Stan (Rotherham)Lamond, JamesSilverman, Julius
Davies, Denzil (Llanelli)Latham, Arthur (Paddington)Skinner, Dennis
Davies, Ifor (Gower)Lee, JohnSmall, William
Davis, Clinton (Hackney C)Luard, EvanSmith, John (N Lanarkshire)
Deakins, EricLyon, Alexander (York)Snape, Peter
Dean, Joseph (Leeds West)Lyons, Edward (Bradford W)Spearing, Nigel
Douglas-Mann, BruceMabon, Rt Hon Dr J. DicksonSpriggs, Leslie
Dunn, James A.McCartney, HughStallard, A. W.
Dunnett, JackMacCormick, lainSteel, Rt Hon David
Edge, GeoffMcDonald, Dr OonaghStewart, Rt Hon Donald
Ellis, John (Brigg & Scun)McElhone, FrankStewart, Rt Hon M. (Fulham)
Ennais, DavidMacFarquhar, RoderickStoddart, David
Evans, Ioan (Aberdare)MacKenzie, GregorStott, Roger
Ewing, Harry (Stirling)Madden, MaxSummerskill, Hon Dr Shirley
Ewing, Mrs Winifred (Moray)Magee, BryanTaylor, Mrs Ann (Bolton W)
Faulds, AndrewMarks, KennethThompson, George
Fitt, Gerard (Belfast W)Marshall, Dr Edmund (Goole)Tinn, James
Fletcher, Ted (Darlington)Maynard, Miss JoanWainwright, Richard (Colne V)
Freud, ClementMendelson, JohnWalker, Harold (Doncaster)
George, BruceMikardo, IanWalker, Terry (Kingswood)
Ginsburg, DavidMillan, Rt Hon BruceWatkins, David
Gould, BryanMiller, Dr M. S. (E Kilbrlde)Watt, Hamish
Graham, TedMiller, Mrs Millie (Ilford N)Welsh, Andrew
Grant, George (Morpeth)Mitchell, Austin Vernon (Grimsby)White, Frank R. (Bury)
Grant, John (Islington C)Movie, RolandWhitehead, Phillip
Grimond, Rt Hon J.Mulley, Rt Hon FrederickWhitlock, William
Grocott, BruceNoble, MikeWigley, Dafydd

Wilson, Alexander (Hamilton)Wilson, William (Coventry SE)


Wilson, Gordon (Dundee E)Wise, Mrs AudreyMr Joseph Harper and
Wilson, Rt Hon Sir Harold (Huyton)Wrigglesworth, IanMr Joseph Ashton

Question accordingly negatived.

Capital Gains Tax Indexation

'(1) For the financial year 1977–78 and subsequent years the sums allowable as a deduction from the consideration for the disposal of an asset pursuant to paragraph 4 of Schedule 6 of the Finance Act 1965 shall be altered in accordance with the formula set out below, and any reference in the enactments relating to capital gains tax to any such sums shall be construed as a reference to such sums as altered in accordance with this section—

A × B / C = D

When "A" is the sum allowable pursuant to the said paragraph 4;

"B" is the RPI for the month in which the disposal takes place;

"C" in the RPI for the month in which the sum allowable pursuant to the said paragraph 4 was expended.

"D" is the sum allowable so adjusted.

(2) This section applies to disposals so adjusted.

(3) In the section "the retail price index" means in relation to periods from 1st January 1962 the general index of retail prices and in relation to earlier periods an index which shall be calculated and published by the Board.'—[ Mr. Pardoe.]

Brought up, and read the First time.

I beg to move, That the clause be read a Second time.

This clause concerns the indexation of capital gains. It will be familiar to the hon. Member for Blaby (Mr. Lawson), because it is the very clause that he tabled last year after great discussions with his various advisers. I make no apology for tabling the same clause. After going backwards and forwards with every conceivable piece of advice about how to draft an indexation to capital gains tax clause, we came to the conclusion that this was the only way to do it.

The principle of capital gains tax is good. Where the possessor of capital enjoys a real gain, that gain is in a sense income. Indeed, if we had a sensible income tax structure, there would be much to be said for calling a spade a spade and including capital gains as income for tax purposes. I do not recommend that we should do that. I do not recommend it because our income tax structure is so unreasonable.

The principle that I support is that which involves tax on real capital gains. Gains on a capital asset which, because of inflation, are not capital gains at all merely enable the real value of an asset to be maintained.

10.15 p.m.

Let us suppose that a man bought an asset for £5,000 in 1972 and that that asset has increased in value to £10,000 since then. That man will be taxed at 30 per cent. on the alleged gain of £5,000. His tax will be £1,500. If he sells the asset he will receive £8,500 net after tax. The cost of living, measured by the retail price index, has doubled since that time. The sum of £8,500 will therefore be worth only that which £4,250 was worth in 1972. That man's original investment of £5,000 has become only £4,250 in real terms after five years. That is not a capital gains tax. It is a capital tax. It is a wealth tax.

I am in favour of a wealth tax as a replacement for investment income surcharge, the high rates of income tax and the general reform of our tax laws. I am not in favour of a wealth tax on top of our present tax structure. Let us not have a wealth tax by the back door. Let us do it by the front door. We should not tax a gain which merely compensates for the fall in the value of money.

The Government will say that this is an expensive clause. It may be. If the Government want to tax wealth they should bring forward a comprehensive and sensible wealth tax. They should not seek to tax wealth by this method because it taxes "phoney" gains which do not exist except in the imagination of the Inland Revenue and the Treasury.

On this occasion I am delighted to support the spokesman for the Liberal Party, the hon. Member for Cornwall, North (Mr. Pardoe). This is not a new issue. We have discussed it in successive Finance Bills for many years.

Capital gains tax is the wrong title for that tax. I was interested to notice that an amendment, which was not called suggested that capital gains tax should be called "inflation gains tax". It was a simple amendment. It was delightful in its neatness and simplicity.

As the hon. Member for Cornwall, North said, the amendment had the great attraction of not costing any money.

I shall come later to the cost of the clause.

The name of the tax does not reflect the true nature of what is going on. I recognise some of the parentage or history of the clause. The hon. Member for Cornwall, North did not in any way attempt to conceal it or pretend that it was his own invention. He put it forward bluntly as having been originally proposed by my hon. Friend the Member for Blaby (Mr. Lawson), who is now sitting on the Opposition Front Bench. It simply and readily makes the point which it is intended to make.

I do not doubt at all that if the clause were put into effect it would be necessary for the Revenue and the Treasury to look over it very carefully, and maybe to revise the wording and the way in which it is drafted. For instance, it might be thought desirable by the Treasury Bench and by the Revenue advisers to ensure that very short-term gains, particularly in certain types of securities, were not given this inflation adjustment, and that it should apply only, for example, to items which had been held for more than 12 months, or perhaps, in the case of certain types of assets, for several years.

We all remember that the original short-term gains tax was of this nature, applying to shares which were held for a year. In the case of land, I think the period was three years. Something like that might be a refinement which could be put into the clause and into these provisions if the Government were prepared to accept it. But at least for my part I do not think that is a disadvantage in our present purpose this evening, which is to press the Government on the principle of the matter.

If the Government and the Minister of State—who I assume is to reply—were prepared to say they would agree to the principle of it, I would not fuss about the detail such as I have been expressing, nor for that matter would I fuss if they said they would take it away and come back on Report with a totally different method for doing it. There are other schemes for allowing for inflation in the capital gains tax which could be adapted.

I used to think it would be much easier to have a regular slicing system of percentages similar to the old gifts inter vivos slicing system in regard to estate duty, which went on with the different adjustments for a number of years. The nature of inflation and the amount of inflation occurring over the last few years have eaten away at that argument. With the colossal rates of inflation that we have been experiencing—we get up to 20 per cent. and more per year these days—it is important to have a more accurate adjustment than merely a slicing system which causes capital gains tax to disappear over five years or some such period as that.

I think, therefore, that the fundamental approach involved in the clause of using the retail price index to adjust the capital gain for inflation is the correct approach, rather than a cruder system, but it is, of course, open to a certain amount of criticism. The retail price index is not the index by which property prices are measured. It is not the index by which inflation is measured in those terms. The retail price index, as we all know, is based on family expenditure surveys, taking account of the price of groceries, beer, petrol, and all the things which are day-to-day expenses. It cannot be compared exactly with, and does not move in exactly the same way as, the property price index, nor does it move in the same way as the Financial Times share index or the actuaries' index and indices of that kind. They move differently from the retail price index. That is one possible area of criticism of that method of tackling the problem of the indexation of capital gains tax.

Nevertheless, the arguments are strongly for that method because the money which is involved and which is liable to be paid as capital gains tax is related to the price of everyday goods. I do not know of a better measure of the price of everyday goods than the retail price index, even though the specific assets involved may move at a different speed and in a different way.

I do not think that there is a real revenue point involved here for the Treasury. I do not think that the Revenue would lose or gain if it used a property price index or a share price index instead of the retail price index. I do not believe that over a given period there is a great deal of revenue to be gained or lost.

There would be one clear advantage over using the asset indices, and that would be the use of one index across the whole field. If different indices were used for different assets, that would introduce a whole new range of calculations which would be difficult to handle. One has only to consider shares in property companies which would be affected by both the property index and the share index to realise the range of complications that would be encountered along that route.

The best approach is, therefore, to stick to the straightforward retail price index with which we are all familiar, admittedly in other contexts, and which is not inappropriate to apply to capital gains.

The question still remains whether the basic principle of going for this kind of indexation for capital gains is right. I agree strongly with the hon. Member for Cornwall, North in what he said in introducing the clause. This tax is in many respects a wealth tax by the back door, but as a wealth tax it is unsatisfactory because of its capricious nature in that it falls unevenly on different people since it is not a true measure of wealth.

I am not sure that I go so far as the hon. Gentleman went in what he said about the wealth tax. There is a theoretical case to be made for a wealth tax in substitution for other existing taxes. A straight front-door tax, to use the hon. Gentleman's phrase, would be more desirable than a back-door wealth tax of this kind with its capricious effect. If it has been estimated, or if it is possible to estimate, I should be interested to know what amount of potential capital gains tax is hanging over the economy in terms of the ownership of assets.

Any asset of any size has capital gains tax hanging over it. In the case of company assets, that would, of course, be corporation tax, but the same situation applies. There is an analogy with stock relief in corporation tax, a device which causes a considerable amount of concern among members of my profession—the accountants—over the way in which it should he treated. No doubt we shall return to that in other parts of the Bill.

It is most undesirable in principle that the balance sheets of companies or individuals should have large amounts of deferred taxation hanging over them. In some cases this makes people potentially insolvent in the case of companies, it means they are trading illegally. This occurs because they have hanging over their assets this sometimes hidden or half-obscure lump of taxation. This is the undesirable feature of using the so-called capital gains tax as a wealth tax.

10.30 p.m.

The other argument in principle which applies to a wealth tax, and applies to capital gains tax in so far as it is used as a wealth tax, is whether it is desirable that people should be savers and investors. It has become familiar to point out that the Government are in favour of saving but are against savers, that they are in favour of investment but are against investors. There is no better example of either proposition than the way in which capital gains tax falls on inflationary gains. It is a clear example of the difficulty and contradiction of thought within the Government and the way in which they are operating the tax system.

The hon. Member for Cornwall, North said rightly that this would be an expensive clause for the Government to accept. If one is prepared to fall into the trap of describing as expensive something that gives back taxation that would otherwise be collected, the only reason why it would be expensive is that the tax itself, and the way it works through inflation, is expensive and highly undesirable.

When the Minister of State winds up perhaps he will say that the Government prefer to do this some other way. I would accept a reduction in the rate of capital gains tax, but if the Minister says that there is another way, this should be considered. What we really want to see is an acknowledgment in principle of the unsatisfactory nature and effects of the operation of capital gains tax on inflationary gains.

For the reasons that I have outlined I was happy to add my name to the amendment and speak in favour of it. On the Notice Paper my name got attached to New Clause 5 instead of New Clause 6. I hope that the Table corrected it this morning.

As my hon. Friend the Member for Gloucestershire, South (Mr. Cope) says, this subject is a hardy perennial whose blooms grow more attractive every year, and whose roots grow deeper. It will not go away. I wish to say a few brief words in favour of the new clause.

I do so with some misgivings because I am not particularly attracted to this method of reforming capital gains tax. I do not say that because the clause was moved by the hon. Member for Cornwall, North (Mr. Pardoe). As my hon. Friend the Member for Blaby (Mr. Lawson) knows, I felt exactly the same about the amendment that was moved last year. My objection to this particular form is that, while it meets head-on the problem of capital gains tax and deals with the issue correctly, it is a complicated formula. It will create complications for accountants, private citizens and the Inland Revenue in dealing with these matters.

I am anxious to see more and more simplicity in our tax system, even if it means some rough justice. I would prefer to find a different way to deal with these matters. My preference, in contrast to that adopted by my hon. Friend the Member for Gloucestershire, South, involves tapering. I repeat that this will mean a certain amount of rough justice. It will mean that some capital gains that are not inflationary gains will sometimes get away tax-free, but it meets the general objective of greater simplicity for the taxpayer and the Revenue alike.

My hon. Friend the Member for Gloucestershire, South said that he had come round to being in favour of this form of tax in a time of high inflation. Although I appreciate that a tapering system would not straight away meet the inflationary element of the gain for somebody who, for example, sold shares within a three-year period, we must fervently hope that inflation will not continue at these levels.

We must examine the swings and roundabouts of the way the system will work. I hope that ultimately we shall even come to accept the principle of making capital gains tax a tax on capital gains. I accept that the Minister will say that the Government are not prepared to accede to this proposal. However, I hope that whatever the system adopted it will involve some form of tapering.

It has already been said that the present capital gains tax is a total fraud. One point that has not come out of the discussion so far is that, although we have been debating this topic for the three years in which I have been in this House, the case for it becomes stronger and stronger each year as inflation goes on apace. Whereas the case was strong in 1974 and 1975, it is now overwhelming. The point that the tax is a fraud need not be elaborated, although it is the strongest possible argument for reform.

My concern is for the private saver. We have talked frequently about the effects on dividend control, investment income surcharge and other aspects of the tax system as well as about inflation itself. We are making the position of the private saver acutely difficult, and it is almost impossible to see how he or she can obtain a real return on savings at a time of high inflation. But this form of capital gains tax also has that effect. Indeed, the consequences are becoming rather serious. The consequences for savers are particularly marked in retirement when people have saved for a long period of time, probably since 1965, and then find a high element of inflation in the capital gain and feel defrauded.

Another consequence is that those who may have looked to the possibility of saving in certain forms of saving which attract capital gains will be put off. This creates distortions in the savings market. There will be a trend for savers to go into areas where investment income surcharge or capital gains tax does not apply so as to cause distortions in the savings pattern.

I want to encourage the young couples who wish to save to buy their own house. There is no capital gains tax on the sale of owner-occupied houses because there are social and other benefits involved. I shall not go into that subject now because I would soon find myself out of order. However, I am less happy about distortions in other forms of savings.

There is a temptation for savers on higher incomes to go into gilts in order to obtain the benefit of the capital gains tax-free element after one year. There are other examples, the most notable of which are in the area of Government saving, where the Government give particular benefits to their own elements of saving but they do not give those benefits to the private markets in terms of shares, and so on.

Would the hon. Member for Norfolk, South (Mr. MacGregor) agree that a substantial proportion of shares are now held by people who are reluctant to sell or inhibited from selling because of capital gains tax or the notional capital gains tax that would, in fact, be a net loss? Does he agree that if the Government relented to some extent the health of the stock market would be much enhanced and that even a small increase in stamp duty might well make up the loss sustained?

I am a little doubtful about the increase in stamp duty but I agree on the general point. Indeed, it is a point that I shall partly refer to in another context. It is particularly true for retired people, who are now very cautious about moving their savings around—especially if they have been built over a long time in equities—because of the capital gains tax element. I know that there are exemptions for small sales but that does not fully meet the point. The hon. Member for the Isle of Ely (Mr. Freud) is correct.

There is another way in which the tax is having a serious effect, particularly on the equity market. This was referred to in the interesting speech of my hon. Friend the Member for Horsham and Crawley (Mr. Hordern) on the subject of investment income surcharge. He pointed out that private savers are now leaving the equity market in increasing numbers every year. My case is that the total number of shareholdings is reducing at the rate of 5 per cent. a year—nearly all of which are private holdings. Of course, there is a serious problem that must concern the House about the direction in which the equity market is going. There is far too great an emphasis on the institutional holder. I should stray too far if I went into the argument on that: nevertheless, it is a problem to which we must address our minds. The capital gains tax aspect of this is relevant.

Finally, there is a point about the amount of revenue that would be lost through such a clause. If the figure is as large as my hon. Friend the Member for Gloucester, South said, that demonstrates just how high a fraudulent element there now is in the yield from capital gains tax. It demonstrates what a large proportion of the tax is inflationary gain. It also means that money is being taken out of the free savings market on a large scale, and that—if capital gains tax is to achieve its original purpose—should not happen.

There are many arguments for such a clause. I should have preferred a tapering one but it is clear that at current levels of inflation this argument grows stronger every year. At some time, some Government must take that on board.

I have great pleasure in following my hon. Friends the Members for Gloucestershire, South (Mr. Cope) and Norfolk, South (Mr. MacGregor) because they are always of considerable assistance to the House in their observations on monetary and financial matters. Their knowledge is exceptionnal, and I hope that some of the views that they have expressed in supporting the new clause in principle will be taken on board by the Minister.

How right my hon. Friend the Member for Gloucestershire, South was when he said that the Government have, on the one hand, encouraged saving but deterred the saver and, on the other hand, encouraged investment but deterred the investor. Certainly the remarks of my hon. Friend the Member for Norfolk, South relating to the equity market were pertinent to this debate because there is no doubt that successive Governments, particularly the present Government, have swindled these who have invested in the equity market for the simple reason that investors have invested their money but the return to which they were entitled has been restricted by Government action. The actual value of their investment has dropped because of the high rate of inflation, and they have not been allowed to have returned to them the dividend that would reflect the high rate of inflation.

10.45 p.m.

Inevitably, over the years the equity market has got almost entirely into the hands of institutions. Far from redistributing wealth, the Government have concentrated it in a few hands, and that is dangerous for our economic growth and prosperity.

The Minister shook his head when my hon. Friend the Member for Gloucestershire, South said that the Government had deterred savers and investors. I hope that the hon. Gentleman will justify that shaking of his head and will explain what the Government have done to help savers and investors.

Perhaps I should declare an interest. In common with many other hon. Members, I have a few shares on the equity market. The return on them is well below the rate of inflation, and it would have paid me, despite capital gains tax, to sell the shares and squander the money. I have not done that, and I hope that the money is being used to advance the cause of British industry. However, I have no incentive to leave that money in the equity market.

Perhaps the false figure of capital gains tax that I should have to pay if I realised my small assets does deter me to an extent. Certainly the principle behind the clause gets stronger every year. The rate of inflation this year is around 17 per cent., and the Government must get the message and must act.

I hope that the Minister does not trot out the usual Treasury clap-trap about our not being able to afford such a proposal and so on.

Even if we believe what Treasury spokesmen say about the rate of inflation coming down to single figures over the next few years, the points that my hon. Friend is making about the importance of the clause will still be true because of the potential capital gains tax that is hanging over us on assets that have not yet been realised.

I agree. My hon. Friend highlighted that point in his earlier remarks. The Minister of State is a young member of the Government and I hope that he is not clothed in the guise of the old-school Socialists who believe that a proposal such as this could not work and would be too costly.

If the Government are not prepared to accept the principle in the few days or weeks that remain to them, I am sure that a future Conservative Government will make strides in this direction. I do not know what my hon. Friend the Member for Guildford (Mr. Howell) will be saying from the Opposition Front Bench, but I have considerable sympathy with the principle behind the new clause and I commend the hon. Member for Cornwall, North (Mr. Pardoe) for moving it.

Mr. J. Enoch Powell
(Down, South)