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

The purpose of the new clause is to provide what is wrongly, though properly, called a special rate of corporation tax, a rate of 30 per cent. which this new clause would apply to registered industrial and provident societies and to housing associations. The incidence of this tax would be importantly felt and is desperately needed by housing associations and co-operative societies.

I said that I regarded the term "special rate" as something of a misnomer, because the idea of a special rate implies, and certainly in uninformed circles is taken to mean, that something to the advantage of the group in question is being proposed. This clause deals with the rate of corporation tax paid by industrial and provident societies and housing associations. It is not demanding, and I am not asking for them to be specially advantaged. I am asking that that group of institutions should be removed from their present situation, in which they are disadvantaged compared with their commercial competitors.

Some of my hon. and right hon. Friends may argue — I would argue on another occasion — that the advantages of these non-profit making institutions are such that they should be given a positive advantage from corporation tax. But that is not what we are arguing for today. We are asking for their treatment to be comparable with and no worse than that which is given to commercial companies. The new clause merely seeks to relieve the societies and the associations of the discriminatory tax penalties which they presently suffer as a result of last year's Finance Bill.

When we sought to amend last year's Finance Bill to avoid these unfair penalties, I assumed that the Government in reforming corporation tax — as they chose to describe their proposals—had simply forgotten the effect which their proposals would have on friendly societies, provident and industrial societies, co-operatives and housing associations. I assumed that they had not realised the necessity of making special arrangements for these institutions to ensure that they would not be disadvantaged. It is impossible for me to be so charitable this year. The Government must know of the damage that their tax policy is now doing to these institutions, yet they have chosen to do nothing to rectify the injustice of last year's Bill.

Last year, when I moved the amendment which would have avoided the injustice coming about, the Financial Secretary sought to rebut the Opposition's arguments simply by saying that all tax innovations ought to be welcomed and that only fiscal conservatives would oppose a change of this kind. I understand why anyone who is responsible in any degree for Government economic policy welcomes changes of any description, but I cannot support a change—I did not support it, and I now want to remedy that change — that puts an important section of the economy at a disadvantage.

Now that Treasury Ministers have had a year to ponder the injustice, I look forward to hearing whether it will be argued that no such injustice exists or whether it will be said that the injustice exists but that it is just the bad luck of the institutions involved. My suspicion is that the failure to remove it is at least in part the result of the Government's prejudice against some of these institutions, co-operative societies especially.

The problem faced by the co-operative societies is easy to describe. When, in 1965, corporation tax was introduced, the rate of 40 per cent. was applicable to all companies — large and small companies and industrial and provident societies. In the early 1970s, the assessment of corporation tax was changed to what is called the imputation system. That system gave relief to businesses in respect of advance corporation tax on distributions. But since industrial and provident societies by their nature could not make such distributions, they were not originally required to pay the tax at the full rate. So when the imputation system was first introduced there were two special categories of enterprises which faced special problems for which the Government made special and necessary allowances. They were co-operatives and the like and companies or institutions which could not, sometimes by rule and often by practice, make the normal level of dividend distribution. Special arrangements were also made for small concerns which distributed a smaller proportion of their profits than the new rate of corporation tax hypothesised — 52 per cent. based on average distribution, which was anticipated to give a 40 per cent. yield.

At that time, the Government accepted that in smaller firms and institutions where the proportion of profit distributed was smaller than in normal commercial undertakings, a special accommodation had to be made. To accommodate the small companies, the small company rate was introduced. Initially, it was 42 per cent. Then it was 40 per cent. Then it was 30 per cent. That was designed as a special encouragement to small firms.

The Government of the day acknowledged that a parallel position existed in and for the institutions listed in the new clause. They acknowledged that co-operative societies by their nature distributed a smaller and a fixed percentage of their profits. Therefore, a special rate was fixed for them.

The differential between normal commercial companies and friendly, industrial, provident and co-operative societies was not meant to favour the latter group. It was not meant to ensure that those institutions paid less than others in tax. It was meant to give them equality of treatment.

The point was described exactly by the hon. Member for Croydon, South (Sir W. Clark) in Committee on last year's Finance Bill. I did not warn the hon. Gentleman of my intention to quote his words because I felt certain that he would be here to take part in the debate. I am gratified to see that my judgment on that issue about him is correct, and I repeat that I cannot imagine a better way of describing the position than that which he used a year ago. He said:

"if one accepts the principle of the differential between imputation where one can and cannot distribute, there should be a lower rate for building societies, and presumably co-operative societies, so that we still maintain the justice effected in 1972."—[Official Report, 1 May 1984; Vol. 59, c. 286.]

4.15 pm

The new clause seeks to restore the justice that the Government in 1972 believed to be proper. Yet last year the justice effected in 1972, in the hon. Gentleman's terms, was removed. Co-operatives are now taxed at full corporation rate, whilst private and commerical companies are allowed to deduct their shareholders' liabilities on the distributions which are made.

When the special rate for co-operatives was withdrawn last year, I am told that the Co-operative Union, speaking on behalf of co-operative societies in general, met the Inland Revenue. The Co-operative Union assures me that the Revenue itself, acting as the Revenue always does in a role almost independent of that of the Treasury and its Ministers, agreed that to introduce the scheme proposed in last year's Finance Bill and to abandon the special rate for co-operatives would be to militate against the interests of co-operatives in a way which placed them at a severe fiscal disadvantage to their commercial competitors.

The talk about fiscal neutrality does not appear to apply to co-operative societies, to industrial and provident societies, to friendly societies and to housing associations.

My right hon. Friend is on to a very important point in arguing for, in effect, simple equity. He is making a compelling case, and I welcome that as chairman of the Co-operative parliamentary group in the House. Will he emphasise that a fundamental difference is that a co-operative shareholding is quite distinct from that in a company and that co-operative members do not benefit from rights issues? Again I am extremely grateful to my right hon. Friend for the very strong and unanswerable case that he is advancing.

I am grateful to my right hon. Friend as well, because he is right when he says that, by their constitutions, co-operative societies have members — in some cases they are nominally described as shareholders — who do not enjoy the normal privileges and advantages of shareholders. There are no rights issues and no scrip issues, and the proportions of the profits that they receive are always limited by convention, often limited by rule and sometimes limited by law. It is because of the limitation on distribution that, were there not to be a special rate for co-operatives, the co-operatives would be enormously disadvantaged.

By their nature, co-operative societies minimise profits to their shareholders because they exist to maximise benefits to the consumers. Very much the same rule applies with the co-operative wholesale societies in England and Scotland which, although having a new and different constitutional form, nevertheless do not distribute profits in the way which is common in commercial undertakings, and they could not be allowed to do so. It is for the reasons that my right hon. Friend explained that, were they to be treated as if they were normal commercial companies operating under normal commercial rules, they would continue to be disadvantaged in the way that I have described.

When the Financial Secretary wound up last year's debate, he made two points in rebuttal, having criticised the Opposition for not accepting any change, no matter how unjust. First, he said that the problem that we described did not arise, and he added that in any case it arose only in a very few cases. He said that fewer than 30 industrial and provident societies and what he described as rather more than 50 building societies would be adversely affected.

At the end of the debate, I was glad that the hon. Gentleman at least conceded that some of these societies, worthy in themselves and an important part of the economy — the co-operative movement represents 6 per cent. of the total retail trade — were adversely affected by the new rule. But I made it clear on behalf of the Opposition that we regarded this as a gross injustice which ought to be removed if only one society was affected.

However, more and more co-operative societies seem certain to be affected because of the reorganisation now going on within the co-operative societies. They are amalgamating. They are becoming larger. As they become larger, they become more profitable. As they have become simultaneously larger and more profitable, an increasing number are being required to pay a rate of tax which is unjust compared with that of commercial competitors.

I shall conclude—no doubt the Chief Secretary will soon conclude the speech that he will give rather than the one that he is preparing — with three examples of the new iniquitous system, which the Finance Act 1984 brought about. They relate to successful co-operative societies.

The Sheffield society, which was called the Brightside and Carbrook when I was a subscriber, would have paid £510,000 under the scheme that existed before the Finance Act 1984. Under the new scheme it pays £675,000 on exactly the same turnover, and if the new clause is accepted, the tax liability at 30 per cent. will produce a yield to the Treasury of £306,000, which will more or less return it to its position before the discriminatory clause was introduced.

Under the old scheme the Plymouth co-operative society would have paid £20,000. Under the new scheme it pays £708,000, and if my 30 per cent. proposal is accepted the society will be required to pay £531,000, which is little more than was levied from it under the old scheme, but much more in line with what was regarded as just before the Finance Act 1984.

Under the old scheme the Peterborough society would have paid £705,000, under the new scheme it pays £800,000, and under my scheme it would receive a benefit which would return it more or less to its position before the Finance Act 1984.

We are asking for a return to the position that existed before the Finance Act 1984, which acknowledged that because of the co-operative societies' patterns of profit and dividend distribution, to levy corporation tax on them in the same way as on commercial undertakings would put them at a fiscal disadvantage. Surely that is wrong. I hope that the Financial Secretary will agree to change it.

I support the new clause because I welcome the opportunity to support mutual organisations. Yesterday we discussed an amendment which sought to help friendly societies. We all know, especially those of us who come from and represent northern constituencies, of the important social and economic role that mutual organisations, such as friendly societies and co-operative ownership enterprises, have played in the north and, indeed, throughout the country. We should support those organisations because their owners and participants, whether consumers or producers, workers or customers, are motivated by a prime interest in the organisation. They participate in and organise the societies not for private gain, but for the benefit of the co-operative and the community that it serves.

The new clause would help co-operative societies, especially co-operative ownership in housing, which is a relatively recent development. It has become a significant part of the housing sector—some would say not nearly as significant as it should be—only during the past two decades as a result of the pioneering work of a small group of enthusiastic supporters including Mr. Harold Campbell, who played a major role both through the Co-operative Housing Agency and by promoting the idea of co-operative housing in Government circles and throughout the country.

As the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) said, the new clause seeks to extend the lower rate of corporation tax to a variety of institutions defined in the Taxes Act. As I understand it, that includes credit unions, industrial co-operatives, housing associations and self-build societies. In my constituency, self-build societies, co-operative housing bodies and housing associations are making a most worthwhile contribution to the community's housing needs, especially in the south Middlesbrough area.

One of the best features of that development, which my colleagues and I should like to see extended to other areas, is the mixture and proximity of different types of housing ownership. Rented accommodation, self-build accommodation, part-rent and part-owned accommodation, co-operative owned accommodation and privately owned accommodation are together in the same development. That provides both a good social mix and, more importantly, a chance for consumers to have a wide range of opportunities to buy or rent houses, and to participate in housing schemes, as their inclination and pockets will allow. That sort of development, which the new clause would encourage, should be supported by the House.

The trouble is that, even if the Government accept the new clause, it will do little to reverse the dreadful decline in support for this type of housing venture and institution that has occurred since they carne to office. There has been a 21 per cent. real fall in gross loans and grants to housing associations since 1982–83. That means that in the north-east the Housing Corporation cannot meet the bill for more than £4 million worth of major repairs to housing association properties, of which some £2·27 million relates to properties for which local authorities are prepared to provide funds, but to which the corporation cannot respond. For a Government who say that home ownership is one of their most important aims in housing policy—they said that in the housing expenditure White Paper—they have been especially tardy in helping the low-cost home ownership programmes, which have become a growing proportion of housing association activity.

4.30 pm

We all know from our experience in our constituency surgeries, possibly from our own personal experience, and from those with whom we have contact, that low-cost home ownership and the role that the housing associations can play in it is vital.

In the north-east, the housing associations were allocated only £16 million, compared to bids of up to £45 million. Therefore, there is a substantial gap between what the associations could do to help the housing needs of the north-east, where the gap is considerable, and what they are enabled to do. We have rehearsed, during general economic debates in this House, the arguments for investment of that sort. It is just the type of investment on which the Government should be embarking at present. There is a real need, in areas such as the north-east, for this type of housing accommodation. There is also a real need for the spin-off in jobs and growth which would arise if the Government were to respond to the bids of £45 million made in the north-east by the housing associations.

In view of the Labour party's new enthusiasm for home ownership, it is interesting to note that in the 1985–86 programme there are only 300 houses under this heading for the whole of Cleveland county, where the smallest number of bids in the north-east region were made. Those are in Middlesbrough, which I have already mentioned. Perhaps some of the local authorities and their representatives on the boards of housing associations should investigate that apparent lack of interest, because many of us believe that the developments in co-operative housing and housing associations in the past 20 to 30 years have led to a third force in housing that is of enormous benefit to the community.

We hear a great deal from the Conservative Benches about the shortage of rented accommodation, but the references are usually to private rented accommodation. In recent times, to the benefit of many communities, there has been an enormous growth in the number of rented units of accommodation available through housing associations as an alternative to council housing. That is a very desirable development. I hope that the Government will support it.

The Conservative Government's limitations on capital finance have already held back the development of housing co-operatives. While the right hon. Member for Sparkbrook and some of his hon. Friends may be enthusiastic about the development of housing co-operatives, which were supported in the past by the late Tony Crosland and others who established the Co-operative Housing Agency, only 8,000 units of housing have been provided since the Government started to take action in that area many years ago. Those 8,000 units have been provided by about 200 registered co-operatives. One of the reasons for the small number of units is that Labour councils throughout the country have been adamantly opposed to the development of housing co-operatives and housing associations because of the blind ideological commitment of those Labour councils to council housing as the answer — and the only answer — to the housing problems in their areas.

There is no better example than Liverpool. Under the Liberal council, 2,000 homes were provided in over 30 registered co-operatives—a high proportion of the total in the country as a whole. Therefore, it is not surprising that the registered co-operatives in Liverpool have been given a tribute—

Order. The hon. Gentleman is straying rather wide of the new clause.

I am marshalling the case in support of the new clause, which seeks to aid mutual bodies, such as the housing co-operatives to which I am addressing my remarks. In demonstrating why the new clause should be supported, I think it is appropriate that I should point out the developments that have taken place in housing co-operatives in past years. I have also tried to show why such developments have not taken place more rapidly than some of us would have liked to see.

I was pointing out that one of the reasons for the slow rate of development is the antagonism towards those mutual bodies, which provide housing and other forms of enterprise, by councils such as Liverpool, because of their commitment only to local authority housing. It seems to me that that is a perfectly valid point to make, because the new clause is concerned with encouraging the development of mutual housing associations and mutual bodies which can provide facilities of that sort.

I hope that the House will support the new clause, because the distinctive type of housing that is involved could make a major contribution to the country's housing and social needs. One of the best ways to encourage that sort of development is through the taxation system, and it is wrong that the mutual bodies should not be on all fours with companies in that respect. They should be given the fairly modest encouragement that the new clause envisages. As I said earlier, the new clause would do very little to make up for the deficiences in respect of which the Government have been guilty since they came to office.

I am very pleased that the Government, after some dithering on coming to office, kept the Co-operative Development Agency in existence. The agency is doing a first-rate job but it could be doing a much bigger and better job if more resources were made available to it. In the 1960s and early 1970s, I was, together with other colleagues, responsible for putting together the proposals that led to the establishment of the agency. We also saw it not only as a promotional body but as a body that would provide substantial funding for co-operatives of all sorts. I appeal to the Minister, in considering the new clause, to have regard to the good work of the Co-operative Development Agency and to the extra work that it could do if given more resources.

The case made by the right hon. Member for Sparkbrook in favour of helping mutual bodies also applies to resources for the Co-operative Development Agency. That body, which at national level can do a certain amount, could do a great deal more if it had the co-operation, support and resources of the local co-operative development agencies that local authorities have established in some areas to promote mutual bodies and co-operatives of one sort and another. We want to see the co-operative sector and the mutually owned sector develop as a significant force in the British economy. We want to see bodies with a diverse ownership. That is why in consideration of the Bill last night we proposed amendments to seek to make share ownership in institutions established under the Companies Act much broader, to try to introduce incentives to spread ownership.

We should like to see the co-operative sector as a dynamic and much more substantial third sector of co-operative employee-owned enterprises than is currently the case. We believe that this requires a new framework, including the development of strong co-operative support organisations along the lines of the Spanish Laboral Popular, which has helped to foster the Mondragon group of co-operatives, with which I know many hon. Members on both sides of the House are familiar. That has been an enormous success. There are other reasons, in addition to the support which is being given by that body. The provision of up to 75 per cent. of the finance for new co-operatives is an enormous help to the establishment of such mutual organisations, and we have nothing comparable in this country.

In addition to the modest incentives provided in the new clause, we also want to see a new form of incorporation.

I would not interrupt the hon. Gentleman's exposition on co-operatives in general and on Social Democratic party policy in particular were he not doing damage to the case which some of us want to make. What we are arguing for in the new clause is not a special incentive. The strength of the case which I have tried to make out, and the strength of the case which the hon. Member for Croydon, South (Sir W. Clark) made a year ago, is not that this proposal provides anyone with some special incentive that gives an advantage, but that, unless the new clause is accepted, people will suffer from a disadvantage. If the hon. Gentleman insists on talking as if he wants to give people some special advantage, he totally undermines the case which he is making for the co-operative movement.

I do not accept that. I take the right hon. Gentleman's point that it is a powerful argument, when a Conservative Government are in office, to suggest that mutually owned organisations should be on all fours with institutions registered under the Companies Acts, but I should like to think that he and his right hon. and hon. Friends will also accept from me and my right hon. and hon. Friends that the concept of mutual ownership and co-operative ownership is so desirable that it should be encouraged by other incentives, in addition to the modest incentive of putting it on all fours with company-registered institutions, as the new clause proposes.

I was seeking simply to demonstrate our commitment to the co-operative sector. As you will know, Mr. Deputy Speaker, for many years many of us have had, and continue to have, long associations with that movement, and we believe that a great deal more should be done beyond putting these institutions on all fours, as the right hon. Member for Sparkbrook is proposing.

I will not go into the details of the proposal which we have made for encouraging the co-operative sector. That will no doubt be appropriate on another occasion. New clause 9 is a limited but helpful step in the direction of giving co-operatives and other voluntary developments support on equal terms with conventionally owned companies. I hope that the Government will respond to the pressure that has come from various parts of the co-operative movement, and that they will seek to make up for some of the damage that their other policies have done by accepting what is, after all, a modest and fair proposal.

I wish to associate myself with the remarks of the hon. Member for Stockton, South (Mr. Wrigglesworth) and of the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) regarding not only co-operatives but housing associations. I think that the comments were well taken.

The right hon. Member for Sparkbrook may not be aware that my constituency was and, indeed, still is the home of many well-known co-operative associations, particularly in the footwear industry. At the end of the 19th century, far-sighted employers set up many institutions as workers co-operatives or entities in which the principle of sharing the profits and involving the work force in the management of a company was enshrined. I think that the right hon. Member for Sparkbrook was quite correct. He may be interested to know that my council — which, incidentally, has a Conservative majority — has recently decided to provide finance for our local co-operative development association. One of the best managed co-operatives in my constituency is in Brixworth, which I have visited and which I intend to visit again soon.

Housing associations are very important to my part of the world with its high proportion of elderly citizens who depend a great deal upon the work of institutions such as the Abbeyfield, which in turn depend upon local housing associations for support. Therefore, I agree with the sentiments.

However, I have experienced great difficulty in accepting some of the arguments put forward in the debate. I should like to address some of the arguments, in particular those advanced by the right hon. Member for Sparkbrook. The essence of his argument is that the imputation system, the rate of advance corporation tax, which has been in operation for a decade now, in a sense benefited companies which had a distribution policy and were able to distribute some of their profits by convention or practice. For those entities which by convention or in terms of their own internal statutes or requirements did not distribute profits, his argument was that if one took the old corporation tax rate of 52 per cent., one had to deduct the standard rate of tax, the advance corporation tax, which the company was deducting from the dividend flow and paying to the Inland Revenue, with the shareholder receiving only the net payment and, therefore, 52 per cent., where, in a simplistic world, all the profits were paid out. I make that assumption to simplify the argument, although we know that it is not the case.

At one extreme, if a company paid out all its profits, with a 30 per cent. standard rate of tax and the old 52 per cent. corporaton tax rate, that would bring down the figure to a 22 per cent. rate of tax — mainstream corporation tax, as it is called — which would compare very unfavourably with a lower company rate and, indeed, with the rate at which larger companies would be paying corporation tax. I think that that was the argument that the right hon. Member was advancing.

I have problems with that argument, and I should like to advance three in particular. I will not pursue the obvious argument that companies do not distribute all their profits, but in the argument one would have to make some assumptions about the average rate of dividend distribution in the economy before one could compare those companies which distributed profits with those which did not. I did not pick up the exact calculation which the hon. Gentleman was making on that point, but I know that he shared the point with me.

My three points are as follows. First, it depends on which industry and company one picks before a generalisation can be made about dividend rates. There is no way in which one can make a general argument, as the right hon. Gentleman tried to do, about companies in relation to dividend rates. They vary from industry to industry, from type of company to type of company and from year to year, whether we are in recession or in boom. It may be legitimate to use that argument in a debate, but if the right hon. Gentleman tried to reduce the argument to an amendment or to a new clause to be included in the Finance Bill I think that he would be in serious difficulties because one cannot generalise about the dividend rate. It is a fair debating point, but, in practice and reality, one which cannot be sustained in considering legislation.

I suspect that the right hon. Member for Sparkbrook understands that point. He advanced the argument that a company is interested only in the net cost of its dividends. It assumes that the advance corporation tax that it deducts from dividends and pays to the Inland Revenue is a payment on behalf of shareholders as part of their total tax liability. That is the nature of our tax legislation and I cannot quarrel with it, but the reality is that companies look at their total corporation tax rate, not just at their mainstream rate. That is the rate which is shown in their accounts and which is used by financial analysts and the stock market when it compares the performance of different companies. Companies therefore look at their total corporation tax rate. When the right hon. Gentleman says that he is comparing the 30 per cent. rate for workers' co-operatives, housing associations and friendly societies with a higher rate nominally, but with a lower rate in reality, because of the payment in advance on account of shareholders' liability to tax, that, in the real world, is not the way in which companies look at it. They look at their total corporation tax liability.

Another argument relating to the main philosophical thrust of the right hon. Gentleman's case is that dividends are assessable at the higher rates of tax, not just at the standard rate. He knows that the advance corporation tax that is paid by companies on dividends paid out is added back. The net dividend is grossed up at the standard rate of 30 per cent., the advance corporation tax rate, but the shareholder is liable to higher rates of tax. It is not true to say in a simplistic way that the imputation system to which he referred earlier is simply about the standard rate of tax. It is not. It is about the part deduction by a company of a shareholder's ultimate liability to tax, but one has to look at the total liability of the shareholder.

The right hon. Member for Manchester, Wythenshawe (Mr. Morris) made an interesting point about rights issues but it seemed to me to be a bogus point. He appeared to argue that the entities that the right hon. Gentleman's new clause encompasses—housing associations, workers' co-operatives and friendly societies — do not have rights issues, whereas companies have rights issues, and that there is injustice, in the sense that corporate shareholders benefit from rights issues whereas this benefit is not available to the owners of the entities that are referred to in the right hon. Member for Sparkbrook's new clause.

Many hon. Members will be aware that if one takes up one's rights in a rights issue all that happens is that the total equity of the company may have grown by the subscription of new cash to the company but that there is no change in the financial status of the individual shareholder who takes up his rights. Therefore, I cannot follow the argument of the right hon. Member for Wythenshawe. If a shareholder does not take up his rights but sells them, he is subject to tax, but he gives up part of his equity ownership in the company. He gains cash through the sale of his rights but he forgoes an equal amount in terms of the value of his remaining ownership in the company, assuming that he remains a shareholder. I do not therefore follow the right hon. Gentleman's argument. The fiscal relevance of rights issues is not relevant to the new clause or to the argument upon it.

As for the main part of the right hon. Member for Sparkbrook's argument, he acknowledged that the small company rate of tax is 30 per cent. That rate is referred to in new clause 9. I imagine that the right hon. Gentleman chose that rate not only because it is the income tax rate but because it is relevant to the rate that is paid by small companies. However, the right hon. Gentleman correctly pointed out that he is addressing his argument not to the smaller entities that would pay 30 per cent. but to the larger entities where the rate of corporation tax will be 35 per cent. in the fiscal year 1986. He argued that for the larger entities paying 35 per cent. one must deduct a proportion of the advance corporation tax on dividends paid out to shareholders. That brings the effective rate which should be borne by the company below 30 per cent.

I do not accept that argument. One should stick to the 35 per cent. rate of corporation tax for the larger entities caught by that rate for two reasons. The first is fiscal simplicity. Many farmers in my constituency choose to be taxed at income tax rates rather than at corporation tax rates. They do not incorporate themselves. That may or may not be wise. I submit that it is for the convenience of the business world that there is a 35 per cent. standard rate of corporation tax that will apply from fiscal year 1986 and a lower rate of 30 per cent. That is widely understood, so I am not in favour, unless there are compelling arguments, of variations.

The second and more important point relates to a matter to which the right hon. Gentleman did not refer, namely, the major capital allowance changes that were announced in the 1984 Budget and incorporated in the Finance Act 1984. He knows that many large companies, although on a nominal rate of 52 per cent., were paying actual rates of corporation tax that were considerably less than that. As a general rule of thumb in the banking world one assumed, in the analysis of an industry, that the actual rate of corporation tax was between 25 per cent. and 30 per cent. for industry as a whole. What has happened as a result of the Chancellor of the Exchequer's 1984 Budget and the Finance Act 1984 is the reverse of the right hon. Gentleman's argument. The rates of corporation tax for companies have risen in many instances because capital allowances have been withdrawn. The position of entities like co-operatives and housing associations which did not have the benefit of capital allowances has remained unaltered. The effective rates of corporation tax for service companies have fallen, but for manufacturing industries and for some exploration companies they have risen. The actual rate is very close to the nominal rate. From fiscal year 1986 onwards it will be 35 per cent. Therefore, the injustice to which the right hon. Gentleman referred does not exist.

Is that not an argument for not abolishing capital allowances? Is that not the core of the argument to which the hon. Gentleman should address himself?

As the hon. Gentleman knows, that is an entirely separate issue which has been debated on its merits: whether there should be specific fiscal incentives for capital investment. I am very much in favour of encouraging correct capital investment, but it must be capital investment in either the public or the private sector that will make an adequate return on outlay. The right way to do that is not by the continuation of our very generous capital allowance system but by proper management systems for the review of capital investment projects and other projects to which I have referred in previous debates on the Budget and the Finance Bill and to which I intend to return later.

5 pm

The right hon. Member for Sparkbrook made a speech at the meeting of the Crosland Society at Trinity college on 7 June 1985. I draw the House's attention to the speech because it explains what sort of entities would benefit from the new clause, and what the right hon. Gentleman has in mind as examples of co-operatives. Towards the end of the speech, the right hon. Gentleman said:

"We have to realise that if we are committed to a more equal distribution of power as well as of wealth, the old Morrisonian model of centrally controlled public utility does not meet our needs."

The right hon. Gentleman made it clear that old-style nationalisation is no longer relevant to the future of the Labour party or our economy. Some enlightenment from the right hon. Gentleman would be helpful because it is confusing that later in the same speech he spoke about institutions that have been privatised by the Government. The right hon. Gentleman referred to the time

"when a privatised utility is returned to public ownership"

and spelt out the type of control there would be if Labour renationalises British Telecom, British Aerospace — although that is not a public utility — and British Gas which Conservative Members hope that the Government will succeed in privatisating next Session. What does the right hon. Gentleman mean when he refers to the renationalisation of utilities such as British Telecom and British Gas? What type of control will there be? Will they be genuine workers' co-operatives? The right hon. Gentleman ruled out the Morrisonian nationalized industries. Does the right hon. Gentleman imagine that if British Telecom is returned to public ownership it will be a gigantic workers' co-operative? That is the only conclusion one can draw from his speech.

I can understand the thinking behind the new clause, if the right hon. Gentleman is serious about his intention regarding the 30 per cent. rate of corporation tax for those entities. Perhaps the real reason is to benefit the utilities that the Labour party would renationalise as workers' co-operatives if, heaven forbid, it is returned to power, because they would be subject to this rate of corporation tax. I hope that the right hon. Gentleman will enlighten the House.

I wish only to add a few words of support for the new clause which aims to overcome the tax penalties that emanated from the Finance Bill last year. All sorts of organisations are affected, including industrial societies and other mutual organisations such as the friendly societies and the various types of co-operatives. We have heard from both sides of the House examples of the effect of the removal of the differential rate of corporation tax on those organisations.

We had a long debate on friendly societies yesterday. Already, we have seen that the Government's action is crushing these organisations. My hon. Friend the Member for Workington (Mr. Campbell-Savours) quoted Mr. Madders, the chairman of the friendly societies liaison committee, who said that the Government's action could result in friendly societies becoming extinct. That would be sad because the societies have a long-established tradition and have been in existence for about 100 years. They have served the people of Britain, especially those on lower incomes and in rural areas. The new clause would help the mutual organisations to come to grips with the severe competition with which they must contend.

The Government's line on friendly societies is that if they want to remain alive they must compete in broader areas of business where they would encounter more forms of taxation. They would have to employ staff to overcome the intricacies of tax problems. They do not have the necessary expertise or manpower. They rely on the voluntary help of people who do not have the skill or the time to deal with the complicated taxation matters which the organisations inevitably must deal with if they are to survive in the competitive areas into which Ministers suggest that they should move.

The Government's removal of the differential rate of corporation tax is an additional crushing action on the friendly societies. We argue our case not only from the economic point of view, but from the social aspect. That aspect is most prominent in my mind when considering the corporation tax treatment of friendly societies.

The local postman often plays the role of the deposit collector in rural areas, especially in the north of England. The postman does his rounds and collects deposits. He makes sure that Mrs. Smith is alive and well by checking the milk bottles on her doorstep. We must consider the friendly societies in that context. Social services have been cut; that is a broader issue and I do not wish to go wide of the point, but the social angle must be taken into account when considering the effect of last year's Finance Bill on mutual organisations.

Some hon. Members have mentioned the effect of the changes on co-operatives and much mention has been made of housing associations. I regard my constituency as a deprived area in housing terms and hon. Members who represent deprived parts of the country welcome all initiatives to help overcome the housing crisis which has resulted from the Government's crazy economic policy. It is distressing for the co-operatives to be crushed at a time of housing crisis. In my constituency there are 2,640 families in houses unfit for human habitation, houses with black fungus crawling up the wall and so on.

I understand the argument, but so that we may be better informed may we have an estimate of how many more properties would become available if the hon. Gentleman had his way and there was a reduction in corporation tax for housing associations?

We are not talking about a swamping action but about a fairly small reduction. The effect will not be massive and the new clause will not change the world, but small improvements can contribute to creating a better society. I do not think that the hon. Member for Enfield, North (Mr. Eggar) would like small co-operatives or housing associations to disappear because they help, in their small way. I see that the hon. Gentleman agrees with me.

The hon. Gentleman refers to small co-operatives and friendly societies. What rate of corporation tax do they pay now? Surely they benefit from the differential rate for small companies. Is the hon. Gentleman thinking of the larger co-operatives?

My right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley) made an interesting and useful point about the larger co-operatives when he said that because of competition co-operatives were having to get together and that we were experiencing a "fewer and larger" syndrome. That means that the tax paid by the larger co-operatives makes them uncompetitive compared with their commercial counterparts.

Is the hon. Gentleman saying that, for instance, most of the members of the Co-operative Wholesale Society will benefit because they are covered by section 340 of the Taxes Act? I do not have a copy of that Act but is the hon. Gentleman suggesting ways of helping the Co-op to beat Sainsburys and Tescos? Is that what he is really after?

The hon. Gentleman should go to the Library and check whether he is really talking about section 340 of that Act. I have been asked an ill-prepared question and I do not want to waste my time on it. I want to talk about the future of co-operatives.

A specific example of the importance of co-operatives is in high technology. The Labour party is now strongly associated with high technology. I regard the Labour party as the party of the future and of high technology. There is no question about that.

Many small companies involved in high technology are co-operatives. Such businesses, by their nature, are high risk. There is a serious downturn in the electronics industry and this is causing liquidations. The uncertain future and the changes in technology mean that a company might soon be producing obsolete products which it cannot sell and so it will become unprofitable.

One advantage of co-operatives is that the equity can be shared among a number of owners. Many instances of that have occurred in Scotland. I think of the closure of the British Steel plants. Many organisations have branched out. Joint ownership is laudable and should be encouraged. The removal of the benefits which existed until March last year has had serious effects.

We are talking about helping high technology not in a massive way, but in a small but significant way. My right hon. Friend the Member for Sparkbrook will recall visiting the Earls Court exhibition and speaking to three people who owned a small company. They explained how difficult it was to raise the capital to float the company. They did not intend to expand the business because they could not afford to go through yet another nine months of raising money.

5.15 pm

Such organisations should not be discouraged by an oppressive tax regime. Diverse ownership is the principle behind co-operatives and should be encouraged. It gives employees the opportunity to take part in the management and running of a business.

The new clause is worth supporting. It will ensure that mutual organisations such as co-operatives and friendly societies can go from strength to strength rather than being destroyed.

When I first saw the new clause I confess that I was attracted by the notion that co-operatives, friendly societies and housing associations should be relatively well treated compared with other companies. After all, co-operatives and friendly societies have had a long and honourable history. Long before the welfare state the majority of people in Britain were covered by friendly societies.

There is more to the clause than meets the eye. I understand that friendly societies and co-operatives were favourably treated in terms of corporation tax before the changes made last year. The Opposition are suggesting that they should be yet more favourably treated.

I agree about the need to encourage small companies. The hon. Member for Kingston upon Hull, West (Mr. Randall) referred in particular to high technology companies. In passing, the hon. Gentleman said that the Labour party was the party of high technology. When I first came to the House similar claims were made. The Labour party described the trend as the "searing white heat of technology." Shortly after the Labour party came to power, it put its plans in hand in the shape of the national plan. It needed evidence that there was a real interest in technology, and created the Department of Technology. More importantly, it put Mr. Frank Cousins in charge. The reason for placing Mr. Frank Cousins in charge was not—as it might seem to the general public and as we were led by Lord Wilson of Rievaulx to believe — to encourage technology but to find Frank Cousins a job. That job-finding practice has been done before and will no doubt be done again.

I was interested in the remarks made by the hon. Member for Kingston upon Hull, West about encouraging small companies and technology. He was right to say that these companies suffer from an acute shortage of capital because they do not have much of a track record to impress bankers. The fault that the hon. Member for Kingston upon Hull, West ascribes to the present system does not apply to small companies because small companies have the benefit of the small companies corporation tax rate. I hope that the Minister will tell us how small companies, whether they are co-operatives or industrial provident societies, will be affected by the proposal.

Small companies do not suffer in the way that the new clause tabled by the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) suggests. When the Minister replies, I hope that he will say how many co-operatives pay the full rate of corporation tax. My guess is that not many pay the full rate. Most are small, individual, friendly and provident societies that we all want to see thrive. They are doing well under the present corporation tax rate.

The Chancellor's measures taken in last year's Finance Act were intended to avoid distortion in the operation of corporation tax. My hon. Friend the Member for Kettering (Mr. Freeman) made that point in his excellent speech when he said that there had been too much of a buzz and distortion about investment. Companies should concentrate on making profits, and any distortion of the corporation tax in favour of a specific form of money-making activity — for instance, co-operatives and friendly or industrial societies — departs from the principle set out in the Chancellor's measures.

Some distortions do exist in corporation tax. As I see the right hon. Member for South Down (Mr. Powell) present I shall mention one area where distortion arises, and that is in Northern Ireland. I am in favour of a distinctive form of corporation tax for different parts of the country. The system of regional aid and grants has been extremely wasteful and we should reduce the cost of work either by reducing national insurance contributions or corporation tax in the regions most affected by the tax—

Order. We have strayed from the new clause. I hope that we may return to the mitigation of corporation tax liabilities.

I apologise, Mr. Deputy Speaker. The new clause invites us to make distortions in corporation tax, and I know that I cannot ask your opinion on that. If distortions must exist they should not be in the techniques of corporation tax or its operation but in its coverage. It is an established practice for grants to be given to firms in Northern Ireland to recover corporation tax.

The substance of the new clause remains to be proved. I understand why the Opposition want to make a case for the co-ops and that some Opposition Members may be sponsored by the Co-operative Wholesale Society. I hope that the Minister will tell us whether the Co-operative Wholesale Society as a trading unit suffers in terms of taxation when compared with such trading units as Sainsburys or the other big multiple organisations. The new clause does not make the case and I believe that the fewer distortions in corporation tax, the better.

I declare an interest as a member of several co-operative societies, many of which have gone bankrupt. I was a member of the Sowerby Bridge co-operative society and I am a member of the Oxford co-operative society.

The Opposition have a simple motive in tabling the new clause. We want to encourage the co-operative principle and to encourage the co-op which has fallen on hard and tough times. The co-op is not organised on the same basis as the giant organisations and cannot fight Sainsburys, Tesco and Asda. The Government want to put the co-op on the same competitive footing as the giants in terms of taxation. The co-op is not organised for that form of competition.

The Opposition want to encourage the principle of co-operation and the co-ops. The tax concessions to co-operatives in the rate of corporation tax has been accepted by Labour and Conservative Governments. It originated in the Heath Government, and there is no reason why what the Heath Government giveth the Thatcher Government should take away. The only reason can be that the Thatcher Government have a distaste for the principle of co-operation and for any principle decreed or decided by the Heath Government. That is another manifestation of the difference between the Heath Government, which wisely agreed a distinct rate of corporation tax for co-operatives, and the Thatcher Government, with their extremist composition.

The Opposition seek to repair the damage caused by the Finance Act 1984 by restoring the special tax concession for co-operatives which all previous Governments have accepted.

rose—

I shall not give way.

The Government are clear in their commitment to remove that privilege and to put co-operative societies on the same tax footing as private firms. I know that the Economic Secretary to the Treasury will say that co-operative societies should be treated the same in tax terms, but I say that co-operatives should have special treatment. They are a special form of organisation which deserves a special concession which all Governments have conceded in the past. That is an advantage — not a major advantage—that the co-operatives need because of their peculiar form of organisation and the specific competitive difficulties they face. Their interests are different from crudely and directly motivated, profit-oriented firms. The co-operatives' role is much wider and they have a commitment to serve their members and to advance certain principles in society. Co-operation is only one of those principles. Such aims and objectives merit and justify special treatment.

The Government will doubtless claim the principle of equality. They do not like co-operation, and do not know what co-operation and working together means. They will proclaim the virtue of one system of reduced corporation tax for all. The Opposition say that that is not right or reasonable. The co-operatives deserve a special advantage that they once had and that we are seeking to restore. The advantage springs from the co-operative principle which is not to maximise profits for their shareholders but to further the cause of their members and to maximise the benefits for their consumers by returning any profit or surplus in the system to those members at intervals in the form of the dividend in proportion to their purchases.

The central principle of co-operative societies is a commitment of service to, and a desire to advance and improve the position of, their members. Generally speaking, the members of co-operative societies are not the wealthy in society. Indeed, in most cases they are not even the middle class, because the co-operative principle has always been strongly rooted in working-class areas. Their aim is to improve the position of the less well-off, and that is another argument for the special tax concession that they had and that we are seeking to restore by the new clause.

5.30 pm

Although there have been accusations of giantism against the co-operative wholesale societies, the impact of competition from undoubted giants such as Sainsbury has forced the co-ops to come together to achieve the benefits of strength and size to enable them to face competition. It is unfair, therefore, to tax them with this form of liability when it has been forced on them by the nature of the giants with which they are competing. Nevertheless, the giants among the co-operatives are organised on exactly the same co-operative principle. Although they may be concerned with production, they are organised in the interests of the consumers, their members, rather than in the interests of the profit of their shareholders.

With more than 12 million members in about 500 separate societies, it is clear that the co-operative societies have a role which is worth encouraging. They appeal to millions of people who do not have large spending power. These are people to whom the pence really count and for whom the principle of co-operation—the return of the "divi"—is important.

My hon. Friends and I hold strongly to the view that it is fair to give organisations which perform that important social purpose the advantage which was accepted by all Governments up to the time of the passing of the Finance Act 1984. We want to return the position to the status quo ante Lawson. That position, which we say the societies should have, arises from the nature and organisation of co-operatives. When, in the early 1970s, there was a change in the basis of corporation tax, a Select Committee examined the possibility of changing from the classical system to the imputation system. That Committee received representations from, among others, all interested bodies, including the Co-operative Union and the various co-operative societies. It agreed that the change would be unfair to the co-operatives and that there should be a special rate to recognise their unique role.

When, therefore, the new chit system was brought in, there was a special rate; without that rate, there would have been a massive increase in taxation for co-operative societies. The reason for the distinction was simple. Co-operatives do not make distributions, as companies do, and, as the imputation system gives relief to a business in respect of the advance corporation tax on distributions, the co-operatives would have been paying tax on the full rate of mainstream tax. They were therefore given a special rate in recognition of their special role.

The Government argue that, because they are bringing down the rate of corporation tax, the co-operatives should be on the same basis as other private firms, so that they will all pay the same rate. However, the reasons for the special concession remain. If there was justification for the concession, it remains valid whether at the higher or lower rate.

When the Chanceller introduced his 1984 Budget, the co-operative societies protested against the abolition of their special rate, not because that rate had given them an advantage but because, if there was no special rate, the co-operatives would be liable to corporation tax at the full rate, whatever the full rate was, whereas companies could deduct the tax liability of the shareholder on the distribution.

After that proposal was made, a meeting took place between officials of the Inland Revenue and a deputation from the Co-operative Union. That took place in September of last year, when spokesmen for the Inland Revenue agreed with the co-operatives that the withdrawal of the special rate would disadvantage the co-ops compared with companies, and they agreed to advise the Financial Secretary accordingly.

The Inland Revenue officials also confirmed at that meeting what had been said by their predecessors in 1971 to the then Select Committee which recommended the special rate in the first place — that there had been no change in the circumstances to alter the co-operatives' position.

That was the situation at that meeting in Somerset house in September of last year. Subsequently, the co-ops received the news that there would be no amendment of the 1984 legislation and that the special rate would be abolished. That seemed to be a negation of the agreement — or at any rate the feeling — of that September 1984 meeting. It seemed an unreasonable decision which bore no relation to the position that the Inland Revenue officials had taken at the meeting. If the grounds were as the officials had then suggested, there should have been a change. That change has not been made, and that is why we are proposing in the new clause that it be made.

Why are the Government, in their zeal to remove anomalies and have a more uniform and simple tax system, so preoccupied with removing only those anomalies which help the mass of the people, particularly the less well-off, rather than the tax perks and advantages of those whom the Conservatives, by and large, represent?

The Government demonstrate that zeal — as the Minister will no doubt do when he replies — single-mindedly against one section of society — those whom my hon. Friends and I represent — whereas when it comes to any similar zeal for uniformity, efficiency and simplicity in the system which might harm the supporters of the Conservative party, it suddenly dries up. The cold glint behind the steel-rimmed glasses turns warm and affectionate, and changes proposed in that direction are suddenly withdrawn.

Let us consider some of the privileges and anomalies that are being attacked, amid howls of protest only from Opposition Members. When it comes to tax concessions which might benefit workplace nurseries or tax changes which might benefit friendly societies and working-class organisations such as the Buffaloes, or to considering postmen's Christmas boxes, the Government are full of zeal for tax reform and efficiency. When we speak of a special concession for the co-operatives, which benefit working-class people and help the humblest in society to improve their lot, giving them more power as consumers, the Government are full of energy and efficiency, bustling with zeal to clean up anomalies. But as soon as we consider anything which harms concessions to the Conservatives in society, it becomes political and cannot be done.

The Government stopped short of the sort of changes, for example, that the Secretary of State for Education and Science wanted to make in the grant system, because that would have harmed their section of society.

Order. The hon. member must restrict his remarks to the question of the mitigation of corporation tax liability.

My zeal for the new clause has overcome my normal caution and desire to stay within the rules of order.

There is a case for a special rate for co-operatives to demonstrate the Government's attachment to furthering the cause of co-operation and to demonstrate that we regard co-operatives as something of a higher order and a better form of industrial and economic organisation than the simple profit-oriented greed of the company that has only shareholders. By the new clause, we are therefore giving the comparatively small advantage to the co-operatives that they have always had.

There are various arguments for doing that. The former economics editor of The Times, Mr. Peter Jay, was writing in the mid-1970s about the theme, which has now been taken up in America, of furthering co-operatives as a means of breaking the deadlock in society between capital and labour and ending the constant wages inflation that seemed to be the dominant theme of the economics of the 1970s. There are economic, social and political reasons for recognising co-operatives as a higher form of economic and industrial organisation that should be encouraged.

We have to recognise that at the moment the co-op is not as healthy or as powerful as it was, and it is certainly not the intimidating organisation that Conservative Members have been trying to paint it as. It is having a difficult time in competition with Sainsbury, Asda and Tesco. One reason is that it is a democratic organisation that serves its members and puts their interest higher than sheer greed for profit.

A second reason is that the co-op has social commitments and responsibilities that spring from being a co-operative organisation. All those factors have to be recognised in the way the co-op is run, and if they are recognised, the co-op is put at a competitive disadvantage. We could argue that the clause is not only recognising a higher organisation, but repairing a weakness under which the co-op now labours. It is totally single-minded fallacious pursuit of the principle of tax equality for the Government to kick the co-op when it is in that state, as they did in the Finance Bill last year.

By the new clause we should recognise the unique role and special importance of the co-operatives, and express our desire to encourage that vital social principle.

The House started off listening with interest to the hon. Member for Great Grimsby (Mr. Mitchell), but during his speech our interest waned. His special pleading on behalf of the co-operative movement killed his case. If I had anything to do with the co-operative movement, I should not ask him to advocate my case.

The hon. Gentleman talked about the profit motive of companies such as Sainsbury and Tesco and compared that with the co-operative movement. What is wrong with the management of the co-operative movement? Why is it not making profits? Why do people who used to go to the co-operatives now go to Tesco and Sainsbury? The simple reason is that they are cheaper, so that is where the British working man and woman are now buying their goods. Let me make it clear that I have no vested interest in Sainsbury, Tesco, Fine Fare or any other supermarket.

Does my hon. Friend agree that the speech of the hon. Member for Great Grimsby (Mr. Mitchell) called on people to shop at Tesco or Sainsbury because they are more efficient than the Co-operative Wholesale Society?

I am sure that my hon. Friend is right. The special pleading became a little sickening, because in my view the co-operative movement has gone down because it cannot face the competition. When the hon. Gentleman began his speech he spoke about two co-operatives that had gone bankrupt. It is small wonder that they go bankrupt if they cannot face the competitiveness of Tesco, Sainsbury and so on. The co-operatives are owned by their members, and the hon. Gentleman maintains that the mass of poor people go there. If that is so, why are the co-operatives not more successful? The Opposition are always saying that everyone is poor. If everyone is worse off, surely people should be flocking to the co-operatives, which should be thriving, but the reverse is the case, and people are shopping at Tesco, Sainsbury and so on.

One of the best co-operative movements that we have seen in the past few years is the co-operative that has been formed by the National Freight Company. That co-operative works, but before the employee buy-out it was a loss-making organisation. It is now highly profitable. Is it not possible for the co-operative movement to do that? I do not know whether the hon. Member for Great Grimsby has anything to do with the co-operative movement, but if he has I suggest that he either pays a little more attention to why the co-operative movement has gone downhill or resigns from the movement.

I come next to housing associations. The hon. Member for Kingston upon Hull, West (Mr. Randall) did not know what section 340 of the Taxes Act covered. It covers the mutual societies and the rest, which do a good job. Housing associations do a first-class job.

Housing associations have done good work in the sale of the houses and flats they have owned. That is a good thing, but we have to do more. We should not single out any section, because the sale of houses and accommodation of housing associations is an incentive to buy for people who belong to the associations.

I shall trace the history of corporation tax so that we may discuss the subject with more clarity than is evident in the clause tabled by the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley). If the right hon. Gentleman looks at corporation tax, he will see that it was introduced at a rate of 40 per cent. It was then increased to 45 per cent. and when the Conservative Government took office it came down to 40 per cent. In 1973, as the right hon. Gentleman will recollect, the imputation system was introduced, whereby advance corporation tax became an advantage to distribution—a 30 per cent. advantage.

In an articulate speech of great clarity, my hon. Friend the Member for Kettering (Mr. Freeman) dealt with the matter. If a company distributed the whole of its profits, and if the profits were 100 units, and there was a 52 per cent. rate of corporation tax, that left a possible dividend of 48 units. If the 48 units were grossed up, it would be 70 units. With 30 per cent. ACT off, that brought one down to 48 units. In my reckoning, that meant that the effective cost of corporation tax on a distribution was just over 31 or 32 per cent. That was an advantage to companies that could distribute profits.

Mutual societies, co-ops, and housing associations do not distribute profits in that sense. That was the origin of the special rate for the mutual societies and so on. That special rate was 40 per cent. But then, as has been mentioned, in 1984 my right hon. Friend the Chancellor stopped stock relief and cut down capital allowances. He made the reason perfectly clear last year. He did it so that overall he could cut the burden of corporation tax. It was at 52 per cent., then it was at 50 per cent., 45 per cent. and 40 per cent., and it is coming down to 35 per cent. in 1986, which is one year hence. That reduction in corporation tax is an incentive for our whole economy. I am sure that the right hon. Member for Sparkbrook, who has special responsibility for matters affecting our economic future, will agree. Corporation tax reductions must generate economic activity. That is the idea behind them.

The special rate was and is set at 40 per cent. The Opposition want it to be reduced to 30 per cent. A rate of 35 per cent. should be the lowest level for every mutual society. What happens if the co-operatives and the housing associations do not make huge profits? They are not in business to make huge profits. As the hon. Member for Great Grimsby said, their profits are small. In the past, the co-operatives have enjoyed the advantage of paying dividends fully tax free, which are chargeable against their gross profits. Now they give a discount with their stamps, which are fully allowed for tax purposes.

I congratulate my right hon. Friend the Chancellor on achieving a maximum 35 per cent. rate of corporation tax for next year. The corporation tax level for any business earning £100,000 profit is 30 per cent. The new clause is slightly redundant because most of the mutual societies — the co-operatives and housing associations — make profits below £100,000 and would suffer only 30 per cent corporation tax. This new clause would impose another anomaly on our tax system. If we say that all organisations should pay corporation tax at 35 per cent., let us stop special pleading. Small businesses, small mutual societies, co-operatives and housing associations would be on all fours if this measure were accepted. I trust that my hon. Friend will resist the new clause.

The right hon. Member for Sparkbrook (Mr. Hattersley) explained that the measure followed from a similiar amendment that he moved to last year's Finance Bill. The new clause has enabled us to have an interesting and, in some ways, rather general debate on the societies — the provident societies, co-operatives, housing associations and building societies—that are affected by the new clause.

We have had a wide-ranging debate and it is not easy for me to pick up all the threads. The hon. Member for Stockton, South (Mr. Wrigglesworth) referred to the taxation of housing associations. Under section 341 of the Taxes Act, which applies to approved housing associations, rents received by associations are not liable to tax. Interest paid by associations qualifies for tax relief for their members and the profits on house sales are exempt from capital gains tax. Housing associations are liable to the full rate of tax only if the profits exceed £100,000, when they move beyond the small companies rate. Although most hon. Members would agree that housing associations need encouragement, I believe that the regime under which they operate is favourable.

A number of hon. Members referred to the nature and virtues of co-operatives. The right hon. Member for Sparkbrook suggested that the Government had a prejudice against co-operatives. That is not the case. The hon. Member for Stockton, South spoke of the Co-operative Development Agency's work. My hon. Friend the Member for Kettering (Mr. Freeman) referred to the work of the co-operative development association in his area. The hon. Member for Kingston upon Hull, West (Mr. Randall) referred to the possibility of co-operatives becoming more involved with the high technology sector. Hon. Members generally have recognised the valuable role that co-operatives can play.

The hon. Member for Great Grimsby (Mr. Mitchell) said that he thought that the co-operatives should be especially advantaged and should have special treatment because they particularly look after the interests of consumers whereas companies with shareholders do not. He said that they were suffering from competition from these companies with shareholders and that this was not necessarily fair. They therefore needed special treatment. There is a certain inconsistency in that line of argument. Any company, whether an incorporated or a co-operative body, that looks after the interests of consumers and customers is likely to flourish and any body that neglects them is likely not to do so well. My hon. Friend the Member for Croydon, South (Sir W. Clark) referred to the reasons for the decline in the co-operative movement. I do not think that any of us disagrees with the fact that the cooperative societies — the industrial and provident societies, housing associations and building societies—that are covered by the suggested provisions of the new clause play an important and sometimes central role in various activities in the community. We want them to prosper and develop.

The right hon. Member for Sparkbrook said that he was asking not for special advantages for the co-operatives and the other societies but for comparable treatment with commercial companies. He said that it would be wrong to call the proposed 30 per cent. tax a special rate and that he wanted to ensure that those societies were not disadvantaged. He referred to the "discriminatory pressures" of the 1984 changes in the corporation tax regime for capital and other allowances. He referred to the "injustice" of last year's legislation.

Even if the comments of the right hon. Member for Sparkbrook were justified — I shall endeavour to show that they were not — they conflict with what his colleague the hon. Member for Great Grimsby said. The hon. Gentleman felt that the co-operatives should receive special treatment because they were a higher form of organisation. I do not want to dwell on this difference between Labour hon. and right hon. Members, but it is important in understanding the new clause to be clear about what they said. The right hon. Member for Sparkbrook said that he was not asking for special advantages; he was merely suggesting that last year's changes brought about particular disadvantages for the co-operative societies. He looked back to the introduction of corporation tax in 1965 and then to the significant change made in 1972, from the "classical" system to the "imputation" system. He said that special arrangements were introduced at that time for small companies—the small companies rate—and for the societies because of their acknowledged special circumstances. That is the point on which we differ, because his argument is that the maximum rate of 40 per cent. which applied to those societies from that date recognised that the industrial and provident societies were in some way disadvantaged by the imputation system and, therefore, that a special rate should be retained to shield industrial and provident societies from the impact of the 1984 corporation tax reforms. I hope that that is not an unfair representation of the right hon. Gentleman's argument.

6 pm

I should like to take the right hon. Gentleman through the arguments, which will show that that is an incorrect interpretation of what happened. It was not the imputation system which damaged the societies from 1972 onwards. The rate of corporation tax which was, at that time, raised from 40 per cent. to 52 per cent. caused the problem. Before the imputation system was introduced, all companies paid the 40 per cent. corporation tax rate. With the introduction of the imputation system and the application of advance corporation tax payments for incorporated companies being offset by a higher rate of corporation tax, which rose to 52 per cent., the societies were damaged, but they were damaged by the rate change and not by the imputation system. It was, therefore, fair that there should be a special rate for industrial and provident societies, not because of the structural change but because it would have been wrong to make them pay the 52 per cent. which was the rate chosen to offset changes effected by advance corporation tax.

When the rate returns to 40 per cent., as now, and goes to 35 per cent. as it will next year, there is no longer a case for retaining a special rate because the industrial and provident societies are not disadvantaged by having to pay a rate above that which operated under the old system. The 40 per cent. rate was introduced, not to advantage them but to stop the 52 per cent. rate disadvantaging them.

The right hon. Gentleman argued that a special rate should be retained to shield societies from the consequences of last year's tax reforms. More than 99 per cent. of the industrial and provident societies pay the small companies rate, which we reduced last year from 38 per cent. to 30 per cent. Like small incorporated companies, if their profits are below £100,000 they are already enjoying a lower rate of corporation tax. Larger societies would pay the normal corporation tax rate. Most building societies pay the small companies rate, and the great majority of co-operative retail societies will be paying the small companies rate.

May I confirm that the Minister is not misleading the House when he gives such volume figures? How much business do the societies which pay at the higher rate conduct? Many of the societies to which he referred may be substantial but they may conduct little business.

That is a fair point. I was coming to it immediately. I do not intend to mislead the House. The hon. Member for Kingston upon Hull, West mentioned some of the smaller societies. About 20 of the 200 retail societies conduct about 75 per cent. of the turnover. The top 10 per cent. therefore conduct three quarters of the business. The smaller societies mostly benefit from the small companies rate.

The larger co-operatives, housing associations and building societies pay at the full corporation tax rate. During the 10 or 12 years before last year such societies enjoyed a highly privileged regime. When the imputation system was introduced, the offset for companies between advance corporation tax and the 52 per cent. rate was set to produce a broadly neutral revenue outturn for the incorporated sector. At that stage it did not and could not take account of the influence on rates of tax paid caused by 100 per cent. first-year capital allowances and by stock relief because they had not been introduced. The 100 per cent. capital allowances were introduced after the imputation system and stock relief was introduced in 1974. Those allowances were designed to ameliorate the 52 per cent. basic rate of corporation tax.

If we take into account what happened in the 10 or 12 years that followed, first, inflation turned out to be higher than had been anticipated and, therefore, stock relief came to play a much larger part in the tax affairs of distribution companies. Secondly, there was a period of heavy investment and many companies and societies took the opportunity to shelter their profits from corporation tax through capital allowances. They, therefore, enjoyed a relative advantage through an unintentional combination of circumstances during that time.

All that is happening as a result of the 1984 changes is that the societies are being brought back to a more normal and ordinary basis of tax charge. They will still be better off than under the classical system. They will still be better off than companies because their dividends to members are allowed in full against their taxable profits whereas company dividends suffer a 30 per cent. deduction which is allowable as an offset against advance corporation tax although it does not fully cover the corporaion tax charge. In that respect, societies, co-operatives and so on are at an advantage compared with the incorporated company sector. Although such societies and co-operatives in recent years have taken great advantage—as it was reasonable for them to do — of an extraordinary combination of high capital allowances, high stock relief and a lower ceiling to the corporation tax rate, that is not a regime which we choose to perpetuate. It was a set of circumstances which did well for the societies and I do not begrudge them that. It enabled them to accumulate reserves in a satisfactory way and I hope that they will be useful to the societies. There is no argument for introducing a different system of corporation tax or a lower rate for those societies merely because they were able to take unusual advantage of a set of circumstances in recent years. I therefore ask the House to reject the new clause.

May I first clear up the distinction—there is not a shadow of difference—that the Minister of State seemed to see between my speech and that of my hon. Friend the Member for Great Grimsby (Mr. Mitchell)? Much to my regret I missed my hon. Friend's speech, but as I understand it he was arguing for the principle of assistance because co-operatives are, in the Minister's words, a "higher form of organisation" which should be given special benefit. I share that judgment. I believe that the co-operative organisation is a superior form of organisation. I should like and hope one day to be able to give them special assistance. My hon. Friend and I are in agreement on that point.

That is a subject, as I know my hon. Friend will agree, for another new clause or for an amendment, not the one that we are debating today. My hon. Friend and I equally agree that the new clause is only a step towards the superior treatment that we should like to see given to restore the previous position that co-operatives had in the fiscal lexicon.

The most surprising speech of the day was that made by the hon. Member for Croydon, South (Sir W. Clark). As I understand it, he was opposed to the new clause and to the reorganisation of tax liability that I suggested for co-operative societies in particular. This is surprising, because last year when we debated the subject he was the most passionate advocate of the position which the new clause advocates. The hon. Member shakes his head. I have already had the good fortune to quote one paragraph from his speech. Let me quote his peroration in full:

"In 1972, the Finance Bill was introduced by a Conservative Chancellor and it was seen that equity should be carried through. I hope that my hon. Friend will either now — if he can say it now all well and good—or between now and Report say that when corporation tax comes down from 50 per cent. to 40 per cent. the differential, whether it is 31 per cent. or something else—I shall not argue the percentage — will be between the top rate of corporation tax and the rate that building societies pay. If it is not, there will be an injustice because building societies and co-operative societies do not have the right to distribute their profits."—[Official Report, 1 May 1984; Vol, 59, c. 286.]

If the hon. Gentleman will forgive me for saying so, he could not have put it more clearly a year ago, yet this afternoon he argued quite the opposite. I do not know why that should be, but the case he made a year ago is much stronger than that which he has made today and was not in any way undermined by the speech of the Minister of State. As I understand the last passages of the speech of the Minister of State, the Government case now is that co-operative societies, housing associations and the rest were unfairly advantaged in 1972. If he is not saying that, I do not understand how he can possibly advance his case.

With corporation tax at 52 to 55 per cent. it was necessary to have a 40 per cent. special rate to meet the needs of co-operative societies because of their special conditions in that they distributed only a small percentage of their profit. If it was necessary when the normal rate was 52 per cent. to have a co-operative rate that met their needs of something like 80 per cent. of the usual figure, why is it not necessary to have 80 per cent. of the usual figure to meet the special conditions of co-operative societies?

It is no good the Minister of State saying or implying that the change in the top rate of corporation tax has absolved the co-operative societies from the need to pay at a rate which penalises them. I gave him three examples — Sheffield, Peterborough and Ipswich. Each of those societies demonstrates that under the new arrangement, which is trumpeted about the country as a reduction in corporation tax, they are now paying more because the new method of calculation excludes them from the special rate. If they were not specially benefited 30 years ago and they are paying more now in comparison with what they might have been allowed to pay had the old arrangements been allowed to continue, the only possible conclusion anyone is able to draw in logic is that there is unfair discrimination against the societies and it operates—I do not know whether by intention or by mistake—because they distribute a very small proportion of their profits.

The Minister if State's answer was wholly unconvincing but not surprising. The speech of the hon. Member for Croydon, South was equally unconvincing but astonishing. In the light of what the Minister of State says we shall divide the House or we shall continue to argue the case of equity for co-operative societies and the proper incentives that they need to multiply and to profit.

I beg to move amendment No. 129, in page 2, line 6, at end insert—

'(3A) With respect to wine or made-wine imported into or produced in the United Kingdom on or after 29th July 1985, Schedule 1 to this Act shall have effect with the substitution—

(a) for the words "of less than 15", in each place where they occur, of the words "not exceeding 15"; and

(b) for the words "or not less than 15" of the words "exceeding 15".'.

I have reconsidered my grouping with this amendment, and now propose to take Government amendment No. 129 on its own, and to take, separately, amendment No. 2, after amendment No. 1.

In the Committee debate on clause 5, strong representations were made about the adverse effect of the clause on the import of Cyprus sherry, and the hon. Member for Birmingham, Hodge Hill (Mr. Davis) persuasively and eloquently argued the case for a change. Subsequently, I met the Cypriot Minister of Commerce and Industry and members of the Cyprus wine trade. That meeting was followed by talks with the Customs and Excise, the Ministry of Agriculture, Fisheries and Food, the Cyprus high commission, representatives of the United Kingdom importers and a small deputation led by the hon. Member for Hodge Hill.

It became clear, as a result of all these discussions, that the difficulties did not centre on clause 5 but stemmed from a combination of European Community regulations, which were applied within the United Kingdom from January of last year and which contained an anomaly affecting medium and dry style Cyprus sherries, and the provisions of the 1984 Budget. The full impact on Cyprus sherry of this combination did not come to light last year because it was masked by the importers taking advantage of the loophole on blending that clause 5 is closing. It was not until that loophole was blocked that the serious nature of the Cyprus problem became apparent.

As I said in Committee and subsequently, there was no intention of causing a severe disadvantage to the Cyprus sherry interests when action was taken in 1984. I have sought to establish what is necessary to restore the pre-1984 position for Cyprus sherry. Part of that is the amendment that I now commend to the House.

Before the Minister sits down—

Order. The hon. Gentleman has sat down.

I should like to thank the Minister of State for his kind words about my persuasion and eloquence in Standing Committee. I raised this issue on behalf of the Labour party and I was supported in Committee by my hon. Friends the Members for Wrexham (Dr. Marek) and for Kingston upon Hull, West (Mr. Randall). We were acting at the direct request of the Co-operative Wholesale Society, which is one of our biggest importers of Cyprus sherry.

I am assured that the society and the other members of the Wine and Spirit Association regard the Government's amendment as a most satisfactory solution to the problem which we drew to the Minister's attention in Committee. Not only will it avoid the impact of clause 5 of the Bill; it will also restore Cyprus sherry to the tariff classification which it enjoyed two years ago. As a result, the consumer will pay 50p less for a bottle of Cyprus sherry. Cyprus sherry will be cheaper now than it was as a result of the blunder made 12 months ago.

I am not blaming the Minister of State for what happened. It was obvious from our discussions in Committee and our private discussions afterwards that the Minister had not been told about this problem. I should like to pay tribute to his readiness to find a solution which will benefit not only the trade and the consumer, but also the economy of Cyprus. To be blunt, I believe the problem was known to the Government, to the Ministry of Agriculture, to the Foreign Office and to the Customs and Excise. Unfortunately, no one told the appropriate Treasury Ministers. I thank the Minister of State for acting so promptly and for responding so helpfully to our representations.

This amendment is the result of co-operation between the Opposition and the Government. Very often the Opposition plead for something and the Government willy-nilly resist it. I hope the Minister will not take this unkindly, but I believe the situation about Cyprus sherry was not known to him precisely, at least in Committee. It was clear to both sides on the Committee that something was going wrong and that if something was not done quickly a long-established industry would fade away along with all the other long-established industries that have faded away during the course of this Conservative Administration.

I am pleased that the Minister and my hon. Friend the Member for Birmingham, Hodge Hill (Mr. Davis) got together and got to the bottom of the problem. I am pleased that the Minister has said the amendment will put the matter right. The problem in Cyprus may be a small one in relation to industry in this country, but it would have had very serious ramifications for the economy of Cyprus. I am glad that the Minister has solved the problem, that the economy of Cyprus will not be damaged, and that the economy of this country, certainly in the Manchester area and in Birmingham, will not be damaged either.

My hon. Friend the Member for Workington (Mr. Campbell-Savours) wants to intervene when the Minister comes in, if he does. I hope that, in a spirit of co-operation, the Minister will give way so that we can put this matter right and for once have unanimity in the House.

My contribution to this debate will be brief because we had a considerable debate in Committee.

I believe that the Government were not aware of the anomaly caused by the change which took place in the 1984 Budget, and the way in which the importers were mixing their various grades of sherry overseas. That affected the imports. That anomaly was having a detrimental effect not just on the economy of Cyprus and the standard of living of its people, but also upon the retail and distributive outlets in this country.

As my hon. Friend the Member for Birmingham, Hodge Hill (Mr. Davis) pointed out, the Co-operative Wholesale Society is our largest importer of Cyprus sherry. I know that the society was deeply concerned about the effect of this anomaly. I agree with my hon. Friend the Member for Wrexham (Dr. Marek): I am delighted the Minister has had consultations, and from what he said they seem to have been very thorough. If the amendment is accepted, an anomaly will have been overcome, and that will be to the benefit of everybody.

On a point of order, Mr. Speaker. The amendment was moved by the Minister. Why did he not seek to reply to the debate?

That is not a matter for me; it is a matter for the Minister.

I beg to move amendment No. 1, in page 2, line 26, leave out subsection (2) and add—

'(2) In section 9(2) of the Hydrocarbon Oil Duties Act 1979 (oil delivered for home use for certain industrial purposes) the words "but do not include the use of oil as fuel or, except as provided by subsection (3) below as a lubricant' shall be deleted and there shall be inserted in its place the following:—

"(c) use in the bench-testing of an internal combustion piston engine by a motor vehicle manufacturer or motor vehicle engine manufacturer during the research development manufacture or preparation of such engine or any part thereof

but do not include except as provided in subsection 2(c) above the use of oil as fuel or, except as provided by subsection (3) below as a lubricant".

(3) Subsection (1) above shall be deemed to come into force at six o'clock in the evening of 19th March 1985 and subsection (2) shall be deemed to come into force on the passing of this Act.'.

The purpose of the amendment is to allow fuels used in research and development of automotive engines to be exempt from duty under the Hydrocarbon Oil Duties Act 1979. This is not a new idea or a new amendment. The amendment covers only the bench testing of engines for research and development in the motor industry. The cost to the Exchequer would be around £3 million a year for the industry as a whole. Ford carries out this type of work in my constituency of Billericay and would save about £500,000 a year.

My hon. Friend the Under-Secretary of State for the Environment has been closely involved in EEC moves to reduce pollution levels of vehicle exhaust gases. Like me, he believes that British development in lean-burn technology — that is, altering the ratio of the fuel to air mixture in the engine — is the key to more acceptable emission technology throughout Europe. The motor industry is spending millions of pounds to achieve these improvements, and much of the work is carried out by Ford at Dunton in my constituency, where the company employs 3,316 people. It is the largest employer of labour in my constituency.

This is a tax on innovation and is not levied in some of our overseas competitive markets, such as Germany, which puts the United Kingdom industry at a serious disadvantage when competing for research work of this nature. Engine research and production is vital for Britain if we are to maintain a high technology base, and is vital for our overseas trade. Ford produced over 780,000 engines last year in the United Kingdom and 46 per cent. of those engines were exported, earning for Britain £250 million.

The research being carried out into new generations of engines will have a continuing benefit for the United Kingdom balance of trade. Ford recently announced a £157 million investment in new engine development at Dagenham in order to produce about 200,000 engines a year, the majority of which will be for export. The developments are the result of long and expensive research activity in my constituency and bring to a total of £370 million Ford's engine investment in the United Kingdom in the last two years.

Lean burn still has enormous development potential; that is why we should be anxious to ensure that the United Kingdom motor industry does not suffer development costs that are not experienced by some of our competitors abroad. There is a case for arguing that all aspects of automotive engine research, which include engine testing both in vehicles and on test rigs, should be excluded, but the difficulty in controlling such exemptions is recognised, and this modest amendment applies only to rig testing where separate fuel storage facilities and records can be easily verified.

I hope that my right hon. Friend will look carefully at the points made in the amendment and be able to regard them with some favour.

I congratulate my hon. Friend the Member for Billericay (Mr. Proctor) on moving the amendment, and I shall be extremely disappointed if the Minister of State does not accept it.

The need for the amendment arises out of section 9 of the Hydrocarbon Oil Duties Act 1979 in which considerable concessions were made. The provision covers the exemption of petroleum products used in the manufacture of an article, for cleaning plant and for certain lubricating purposes. I should not have thought it unreasonable to extend it still further.

My hon. Friend was right to say that any tax on what we call research and development is a tax on innovation, enterprise and the way that the country is likely to go. I should have thought that the amendment was the right course to follow.

It might be helpful to read a short paragraph in a letter that I have received from Ford:

"the engines we produce at Dagenham and Bridgend have substantially increased our exports from the UK and offer the prospect of reduced emission levels and improved fuel economy."

The Minister of State should take account of this observation:

"But the payment of excise duty is imposing a substantial cost on our research and development programme in the UK. The petrochemical industry is not charged duty on fuel used in this way and certainly we are at a disadvantage compared with companies in Germany where there is a tax rebate on such uses of fuel."

Everyone knows that the motor car industry in the United Kingdom is struggling. We also know that our leading competitors are France, West Germany and elsewhere and that we must be on level terms with them. We are concerned not only with the lean-burn engine but with the use of ceramics for cylinder blocks. All these have to be experimented with, and many petroleum products have to be utilised to find whether they are suitable for the market. I should have thought that what leads to a better and more efficient engine and a more adaptable way of producing cars was what the Treasury in all its wisdom should encourage.

If my right hon. Friend fears that the fuel might be used for vehicle use on the open road, it could be dyed just as diesel is dyed, and some tracer compounds could be included in it. There are very few sites in which it would have to be organised in the United Kingdom, because it would involve only the main motor companies. Storage facilities could be agreed, and there could be a pipe feed between the storage facilities dedicated for the purpose and the few sites in question.

As my hon. Friend said, we are talking about static engine testing. It is for the motor industry, which is very competitive. Unless R and D work is done, the industry could be going into extremely heavy weather. Therefore, I support my hon. Friend's suggestion. I know that the Minister of State does not want to make many concessions on this occasion, but when the takes account of the importance of research and development to British industry, especially the motor industry, which is under considerable strain, bearing in mind that the amendment will deprive the Treasury of only £3 million a year, I hope that he will regard this as an area in which he should make a concession.

I am not unsympathetic to the amendment, even if it comes from what I regard as a surprising source. Nevertheless, I should like to know a little more about the cost involved, and I await the Minister's response before advising my hon. Friends how to vote.

I am also not unsympathetic to the amendment, but I wonder whether it is the right way to proceed. I am worried whether there would be sufficient control, and I am not assured that it would add anything significant to research and development. I am all for increasing the sums that companies spend on R and D, but I should have thought that the best way to do that was to provide fiscal incentives generally rather than to go for it piecemeal, as this proposal seems to do.

As my hon. Friend the Member for Billericay (Mr. Proctor) said, the purpose of the amendment is to relieve from excise duty hydrocarbon oil—mainly it would be petrol—used in the bench testing by manufacturers of motor vehicle engines. As my hon. Friend said, this is not a new proposal. I understand that this relief or something similar to it has been sought for at least 20 years and that successive Governments have taken the view that it is inappropriate to grant it.

I was glad to note my hon. Friend's comments about the Ford motor company's research and engineering centre in his constituency. I am sure that we all welcome what is being done there to develop a lean-burn engine. Looked at in isolation, the case for giving duty relief on oil used as fuel in research and development of lean-burn motor engines especially is at first sight reasonable. The amount of revenue forgone in this very restricted area would be small as a proportion of the total yield. But if the relief was so drawn, only a few major motor manufacturers would be involved and the administrative effort would not be great.

Those are the simple arguments in favour of the relief sought by my hon. Friend. However, his amendment is drawn more widely, and there would be a strong probability of further repercussions. The amendment goes further than relief for research and development and seeks relief also for fuel used in bench testing during the manufacture or preparation of engines. It also covers the manufacture or preparation of parts.

The hon. Member for Birmingham, Hodge Hill (Mr. Davis) asked about the cost. From what I have said he will appreciate that it is very difficult to give an accurate estimate.

Why?

I have just explained why. It is very difficult to judge how far the amendment would go in covering the work being done by manufacturers. At the moment the best estimate that I can give is that it would be several million pounds. The best estimate that the Customs can produce of the non-road use of petrol is in the order of £50 million to £100 million, and it could be argued that a very substantial part of that, if not covered directly by the amendment, would be somewhat on all fours with the amendment, and I am sure that the case for equity would be argued by others saying that they should also benefit from it.

There are knock-on effects and, as my hon. Friend said, there are control difficulties, though he thought that they could be overcome. I am not sure whether the control arrangements that apply to diesel oil which is used for particular sections of industry, which are relieved, will be as effective as the hon. Gentleman thinks in dealing with the wider questions of control that would arise, if the amendment were accepted.

Will the Minister give us slightly more information about his estimate of the cost? He seems extremely vague on that subject. What estimates has he received, what consultations did he have, and what representations did he receive that lead him to believe that the cost would be several million pounds?

I received that advice from my advisers, who studied the terms of the amendment, which do not necessarily provide what the hon. Members who tabled the amendment wish to suggest. It is important on Report to deal with the words before us. The approach in Committee is different because we can deal more generally with the ideas behind the matter, and if the words are defective we can correct them later. My advice is that several million pounds are involved.

My hon. Friend is not unsympathetic towards the amendment. Will he undertake to consider the matter seriously and to see whether, within his terms, he can assist us? Will he bear in mind that such assistance is provided in Germany and other Continental countries, and that something should be done to help the British motor industry?

I am glad to undertake to have further consultations, and a better estimate of the cost involved, especially with a closer definition of the proposed changes, may be made.

The duty on petrol has generally been regarded by successive Administrations—I emphasise that this is not a new matter which has arisen in recent months—as one on the product itself, wherever it is used. Exceptions are made for refineries, fishing boats, and for petrol and oil when it is used as a manufacturing material and furnace fuel. The House will be aware of the reduced rates that apply for aviation gas. The exceptions are few, and successive Governments have maintained that line.

Apart from the control difficulties, which arise from possible abuse, revenue would undoubtedly be lost. I accept that my estimates are not as accurate as those which I normally give.

The Minister did not take the amendment seriously.

I shall continue to ignore the hon. Gentleman's series of interventions from a sedentary position.

The relief proposed in the amendment is not as clearly defined as one would wish. In those circumstances, and following the precedent of many of my predecessors who have replied to similar debates or dealt with similar representations from the industrial interests involved, I cannot commend the change to the House. If the amendment is not withdrawn, I hope that the House will reject it.

I thank my hon. Friend the Minister for replying to the points raised by my hon. Friend the Member for Bedfordshire, North (Mr. Skeet) and me. I was surprised that the hon. Member for Birmingham, Hodge Hill (Mr. Davis) was surprised that I moved the amendment. During the last Parliament, I represented more Ford employees than any other hon. Member, and in this Parliament I represent many Ford workers, some of whom work at the Ford research and development establishment in my constitency, some work in my former constituency of Basildon, and some may work at Dagenham, but live in Billericay, Wickford or other parts of my constituency.

I have respected the hon. Gentleman for his consistency in opposing subsidies, and this appears to be a subsidy to research and development.

I am certainly opposed to subsidies in principle. As the hon. Gentleman knows, one represents one's constituents to the best of one's ability, and there is no inconsistency in that.

rose—

I shall not give way to the hon. Gentleman, who seems to interrupt everyone from a sedentary position, but is not prepared to make a speech. He makes only stupid interventions.

I thank my hon. Friend the Minister for his remarks in replying to the debate. I am grateful for his undertaking to reconsider the point to see whether a more tightly defined amendment can be tabled in future. On that basis, I beg to ask leave to withdraw the amendment.

Order. Before I call the next amendment, it may be appropriate to announce that I have reconsidered my provisional selection of amendments, and propose to select amendment No. 45 in the name of the right hon. Member for Taunton (Sir E. du Cann).

I beg to move amendment No. 2, in page 3, line 17, leave out clause 5.

The amendment would remove clause 5 from the Bill. I do not wish to detain the House long, because the matter was debated at length in Committee. Although I was not a member of the Committee, I read its reports, and hoped that there would be a Government amendment to deal with the problem raised by Opposition spokesmen on behalf of my constituents and Cinzano.

Amendment No. 129 dealt with the Cypriot problems, but did not cover the problem of blending for Cinzano. Cinzano resides in my constituency, and for many years has bottled all its vermouth in Telford. The company came in 1977 when the area suffered, as it still does, from high unemployment. Since then, sales of vermouth have fallen by about 20 per cent. in the United Kingdom, and this has obviously created problems for the company. With great relief, last year to save money it was able to start blending the different strengths and so maintain its bottling production in Telford. Clause 5 puts directly at risk about 50 jobs in my constituency and hundreds of jobs throughout the country. I appreciate that that may not be many, but it is important and should be considered.

Before the Budget, my noble Friend Lord Thorneycroft and I put our arguments on behalf of Cinzano to the Minister of State, who listened carefully. Clause 5 arises from a court case which was taken last year by Customs and Excise against Cinzano and which Customs and Excise lost. The question was whether blending was legal or whether it should be liable to double taxation. The House of Lords eventually ruled in favour of my constituents. It is regrettable that the Finance Bill is being used to change that decision, which has been in force for some time. In the past others engaged in blending when it was to their advantage.

In proposing the amendment, I do not blindly argue that the House should accept it to save jobs. Although that is important, sometimes there are more important matters. There are two strong arguments behind Cinzano's case. First, it is desirable to encourage bottling in the United Kingdom. It is better to use British people to bottle imports, and thus create jobs and add value to the raw product, than to import a finished product.

7 pm

Secondly, I am greatly worried about the danger that the proposal will lead to retaliation in other countries. I have in mind particularly the problems in the past in Italy where the sale of Scotch whisky has met with resistance, and has had to be dealt with at the highest level. Italy has acted honourably and has agreed to the sale of whisky in Italy without difficulty. If we introduce a piece of legislation that appears to be aimed at an Italian company, or at vermouth producers generally, Italy may try to retaliate. If that were to happen, it would be to the disadvantage of Britain.

The hon. Member is making a substantial case. He will know that many hon. Members feel strongly on the matter. Some of us intend to press the matter to a Division. Will he vote with us against the Government?

It would not be the first time that I voted against my own party. I certainly have no fears of voting for what I believe in. If there is a Division, the hon. Gentleman will see how I vote. It is important that the matter should be aired. If hon. Members feel that it is necessary to force it to a Division, that is up to them. It is interesting that in Committee the Opposition did not bother to push the matter to a Division.

Retaliation from foreign countries is a risk that must be considered. Cyprus, South Africa and Australia may be satisfied that, following a previous amendment, problems affecting them will not arise, but the risk that I have mentioned should be borne in mind.

I wish to save jobs in my constituency and I make no secret of it. The arguments in favour of encouraging bottling in Britain, and making sure that we do not put our exports at risk, justify the tabling of the amendment. I hope that I have persuaded the Minister that the arguments are just and that he will accept my amendment.

I am delighted to support the amendment tabled by the hon. Member for The Wrekin (Mr. Hawksley). The burden of his argument — although he was too polite to say it—is that the clause as drafted is nonsense and is simply a response to the situation in which the Government have put themselves. As the hon. Gentleman says, as a result of the clause, 50 jobs could be lost in his constituency. As he is an hon. Gentleman and has spoken eloquently on the subject, I am sure that he will back up what he said and join us in the Division Lobby in voting for the amendment. We shall welcome him on that occasion.

The hon. Gentleman related the background to the clause to the judgment in another place in February this year but, as I am sure he is only too well aware, the clause in this year's Finance Bill arose through a piece of faulty drafting of a measure in last year's Finance Bill when the Government were trying to comply with a judgment of the European Court.

The 1984 Finance Bill widened the differential between light and higher strength wines. Cinzano and other companies which are smaller and less well known saw that that gave them an opportunity to blend higher strength wines, with between 15 and 22 per cent. alcohol, with lower strength wines with less than 15 per cent. alcohol, and thus to pay duty on the proportional strength. As I understand the position, it meant a differential for them of 20p less duty per bottle. It arose from a mistake by the Treasury in its drafting last year, but now the Government are saying that what Cinzano is doing constitutes production.

Will the Minister in his reply say whether he agrees with me that production is already defined in the Alcoholic Liquor Duties Act 1979? I hope that the Minister will confirm my reading of that Act, in which it says that production means a material change in the product through a fermentation of grapes. According to that definition, we are concerned here not with production but with something called blending. It is an old practice, well known in Britain. That is how many fortified wines are made. The House of Lords was unanimous in ruling in February that blending was legal. Is the Minister now saying that the House of Lords was wrong in defining blending as legal, and that it was wrong in confirming the definition of production contained in the 1979 Act?

The truth is that the 1984 Finance Bill got things wrong and created a situation of which Cinzano has taken advantage. The Government are supposed to be in favour of business initiative but, when they see a company seizing an area of the market in which it can make money and provide jobs and opportunities and income in Britain, they immediately try to close what they consider to be a loophole.

I ask the Government to reconsider their view. They made a mistake last year and they are trying to cover it up this year, but the measure, as it stands, will lead to double taxation. As the hon. Member for The Wrekin has said, it will lead to job losses. It will also be a false economy, because the Treasury is likely to be the loser.

Will the hon. Gentleman explain to the House in a little more detail how double taxation will apply if the company does not blend the product in future?

I understand that the company wants to blend the product and, if it does so, it will suffer double taxation on the importation of the wine and on the blended product that it produces. That is manifestly unfair, and I do not think that even the Government can have intended that result. The hon. Member for Kettering (Mr. Freeman) shakes his head, but I understand that to be the position. The hon. Gentleman, who was a member of the Standing Committee, will recall that the Minister appeared to give some rather cautious and circuitous reassurances about setting up bonding arrangements, but it is my understanding that the Customs and Excise would not allow small companies to have those bonding arrangements, which are seen as a way round double taxation.

I believe that the Government made fools of themselves in their drafting of the Finance Bill last year. They will not concede that they made a mistake, and in addition they are challenging the ruling in the other place. On both counts we shall oppose them, and I hope that the hon. Member for The Wrekin will join us in the Division Lobby.

I was not intending to speak in the debate, but I should like to declare an interest as a director of Martini and Rossi Ltd., which has two-thirds of the vermouth market in branded products in the United Kingdom. Therefore, I am familiar with the problem which has been brought to the attention of the House.

It might be of assistance to the House to know how the industry has reacted to the problems that my hon. Friend the Member for The Wrekin (Mr. Hawksley) has so clearly portrayed. It is important to appreciate that the ending of blending has merely put the industry back to the position in which it was before initiatives were taken by my own company — and certainly Cinzano and other companies—to blend for the purpose of mitigating the effects of the comparatively higher rates of excise duty that were introduced — with the consequential VAT rates — in the Budget last year. As a result of this year's Budget, all that happened is that we in the industry have gone back to the burden of excise and VAT duties which applied before blending.

I would be grateful if the hon. Gentleman, with his expert knowledge of the industry, could clarify one matter. Is it not the case that the duty arrangements have now been altered? They were altered by the 1984 legislation under which duty on a blended wine was payable at the higher rate rather than at the average and mixed rate. That loophole has created these circumstances, and if the so-called loophole is closed there will be job losses. It is that point which has opened up the whole area of change.

All that has happened is that we have gone back to the situation which existed before, whereby the duty was charged on the blended product as opposed to the constituent parts of the product which was blended. If the duty was charged on the constituent parts, the duty was lower than that charged on the blended product. The hon. Gentleman is absolutely right.

My point is a simple one. The hon. Gentleman talks about employment prospects in the industry. That is a perfectly fair point to make, but it is nothing to do with blending. The problems of the industry, to the extent that there are problems, existed before blending because blending has taken place, as the hon. Gentleman knows, for the last nine months only. Therefore, to connect the argument of job losses with blending and with the ending of blending is a little misleading. If there are problems in the industry because of changing tastes, competitive pressures and comparatively high rates of duty in comparison with the duty on still wine — and, as my hon. Friend the Minister of State knows, all those points have been represented to him in the past, and doubtless will continue to be represented to him—I do not think that there is any validity in the argument which relates the employment problems and prospects of the industry specifically to the episode of blending. It is more relevant to connect the problem of employment prospects and the prosperity of the industry to the situation that prevailed hitherto.

I still do not follow the point that the hon. Member for Kettering (Mr. Freeman) makes. On the amendment — let us not call it a wrecking amendment, but a Wrekin amendment — the hon. Member for The Wrekin (Mr. Hawksley) said quite clearly that a lower duty was payable on the component parts of the blended product than that payable on the blended product. This gave an incentive to blend it in this country, and thus created jobs. The argument is that 50 jobs have been created in The Wrekin which the Government now seek to wreck. In the case of Martini, a larger number of jobs—possibly 200, but I am not sure, because Martini has a bigger share of the market — have also been created by Martini in the process of blending.

I think that it would be fair to say that no new jobs have been created as a result of blending, and in my company no jobs will be lost by the ending of blending. The episode has had a totally neutral effect on employment prospects and employment in my company.

In that case, is Martini blending abroad? The explicit evidence of Cinzano is that it is blending in this country and that, unless the amendment is carried, 50 jobs will be lost. We have assumed that Martini is behaving with similarly patriotic motives, with the desire to encourage jobs in the country, and that it, too, will lose jobs unless the amendment is carried. If that assumption is wrong, the argument concentrates on Cinzano, which, of the two companies, is perhaps behaving more honourably.

I hope that the hon. Member for The Wrekin will push the amendment to a Division because it is an important issue. It is well worth taking a stand against the Government. I was hoping that the Minister of State would give us the "Mr. Nice Guy" routine, of which he is the representative in the Treasury, and accept the amendment, realising that the Government have erred. The Government have erred because they are behaving with clear and simple vindictiveness. Indeed, I speak in the debate to criticise the way in which the Government are acting.

The Government have been defeated. They lost in the House of Lords where their arguments were not acceptable. Having lost at the game, they are now changing the rules of the game to get more money out of firms. In so doing, they are destroying jobs — Cinzano jobs, if not Martini jobs. On the evidence that Cinzano has provided, the Government are certainly destroying jobs. While the Government, albeit accidentally, have created 50 jobs in Cinzano as a result of blending, out of vindictiveness, to get their own back for having been defeated in the House of Lords, they are destroying those jobs, so it is worth making a stand on the issue.

The Government argue that the blending was simply a tax loophole because it was cheaper to pay duties separately on low and high strength wines which were then blended rather than to pay duty on an already blended, imported vermouth. In fact, blending has been practised regularly over the years. It is a traditional process. The great gain of the decision was that the blending was being done in this country.

The House of Lords in its unanimous ruling in February this year found that blending is legal, does not constitute production and, therefore, should not be double taxed. It is that decision that the Government are trying to reverse. The Government claim that, because of the practice of blending, they have lost £3 million from Cinzano and £10 million all told. However, in attempting to recoup the money they have lost, the Government are penalising themselves. The loss of jobs implied in the loss of blending in the country will lead to people becoming unemployed and to a loss in PAYE and national insurance contributions. This almost certainly will knock off something like £1·4 million in costs from the £3 million that the Government will gain in taxation. The Government are cutting off their own nose to spite their face in a fit of petty vindictiveness because they were defeated in the House of Lords. It is as simple as that.

It is amazing that in the debates on the Finance Bill one Conservative Member after another is pleading for more money to be given by the Treasury in the form of a tax cut or as extra expenditure for some constituency enterprise. In the past hour, we have heard the hon. Member for Billericay (Mr. Proctor) making a case for extra money to be provided for research and development in engines in his constituency, and the hon. Member for The Wrekin (Mr. Hawksley) stating that a special situation exists in his constituency for which extra money should be provided by way of a tax concession to preserve jobs in the constituency.

Will the hon. Gentleman accept that I am not asking for extra money, only that last year's status quo should continue?

There was a status quo situation last year but not the year before. Conservative Members are very good at looking after their constituency interests. Nevertheless, during the past two years they have voted with the right hon. Lady the Prime Minister against all sorts of public expenditure. No matter what kind of public expenditure it was, it was bad, until last week when the Chancellor suddenly said that perhaps public expenditure was good and that it should be increased.

As the hon. Member for The Wrekin (Mr. Hawksley) will vote with us against the Government, is this not the wrong time to chastise him?

I am suitably admonished and will not pursue that line of argument. Last year Cinzano took advantage of the loophole. If there is a tax loophole it should be closed, but this one is slightly different. My hon. Friend the Member for Great Grimsby (Mr. Mitchell) said that earlier this year the House of Lords unanimously concluded that blending was not production and that it would be more acceptable if duty was levied on wine at the port of entry; there would be fiscal neutrality. After wine had been imported and duty paid it could be mixed or diluted without the need for further checks by Customs and Excise.

I understand the Government's point of view. They feel that they have been "done" and that legislation has exposed this loophole, as a result of which they have lost revenue. They want to get it back, but I ask the Minister of State, Treasury to think carefully about the matter. If a substantal amount of revenue has been lost something must be done, but if we return to the 1983 position 50 jobs will be lost in Telford. Could not the Government have discussions with Cinzano and find out how small a concession needs to be made for Cinzano profitably to keep open its blending plant in Telford?

Ever since we joined the European Community we have heard about jobs being exported to France, Italy and other countries. For once the position has been reversed. Jobs have come, albeit in an unusual way, to this country and we should do everything that we can to try to keep them here. I hope that the Minister has had discussions with Cinzano. I am sure that the company would not say that the plant will be closed unless the 1984 position is retained; it would be exceedingly silly of Cinzano to adopt that attitude. The concession could be tightened up. Most of the revenue would then be recouped, but a sufficiently significant concession could be made to enable Cinzano to keep open its blending plant in this country. With 4 million people unemployed we must change direction. Manufacturing has not recovered; it is still below the level at which it stood in 1979. The Opposition believe it is most important that these jobs should be retained, and it would not cost very much to keep them here. If the Minister of State has the will, I am sure that he will find the way.

First, may I refer to what was said by Conservative Members about my sedentary interventions. For some inexplicable reason the Minister of State suddenly took his seat when, it appeared to me., he saw that hon. Members wished to intervene during his speech. Only the Minister knows why he did that.

Since we are debating a subject that is connected with sherry, perhaps I may put to him a question that I had intended to ask during his speech. During his discussions with representatives of the Cyprus Government, were employment questions raised by them? I am informed that they were. Was his judgment on that matter influenced by the possible loss of jobs in Cyprus, in the event of the Government failing to make the necessary changes?

Could it be that the 150 jobs that are at risk at the CWS blending plant at Irlam near Manchester and the thousands of jobs that will be lost in Cyprus affected the Minister's decision? If so, it means that employment implications are on the agenda. If they are on the agenda, the letter that was written by Cinzano to me and to other hon. Members is relevant to our debate. Mr. Farrar, as the managing director of Cinzano, must know his business. I am sure he objects to Government Ministers telling him his business, as may have happened this evening. He said:

"As you know, we are extremely concerned about this clause which has made it uneconomic for us to continue blending vermouth in the UK. As a consequence our Telford blending plant is likely to close with the loss of 50 permanent jobs and others in ancillary industries."

indicated dissent.

From a sedentary position, the Minister is shaking his head. He complained about my interventions from a sedentary position, but mine were oral. Perhaps the Minister is concentrating on another issue. If so, he should address himself to this issue. Mr. Farrar says that 50 jobs are likely to be lost. That should be a crucial consideration, particularly if it influences the Minister's judgment about Cyprus sherry. Mr. Farrar continued:

"You will not be alone on this issue. We have had support from all sides of the House and there was a fairly lengthy debate on the subject during the Committee stage when I am afraid the Minister stonewalled."

Of the 640 or so hon. Members of this House, only one Conservative Member has said that he supports the Opposition, yet he has been unwilling to give an undertaking that he will vote with us tonight. Where are the hon. Members who support the Opposition? Have they been silenced by the Whips? Have the Whips issued an instruction to Conservative Back Benchers not to speak on this issue and embarrass the Government because of the job implications?

My hon. Friend will remember that in Committee we debated this clause for more than an hour and a quarter. During that time not a single Conservative member of the Committee sought to catch the Chairman's eye and speak. I do not know, therefore, why my hon. Friend is so surprised that Government Back Benchers are reluctant to speak tonight. We welcome the support of the hon. Member for The Wrekin (Mr. Hawksley) and are delighted that he will be voting with us on behalf of his constituents. I do not know where Mr. Farrar got the idea that he has support from the Tory Back Benches, because it was certainly not apparent in Committee.

Mr. Farrar met Conservative Members. He asked for their support and they undertook that they would give it. In the light of that, Mr. Farrar wrote to me and some of my hon. Friends. I wish to know why those Conservative Members have been prevented from expressing their support in the Chamber. In reference to the effect of the clause on 50 jobs, Mr. Farrar said:

"it affects real people, real jobs"—

Try to keep a straight face.

The assistant Patronage Secretary suggests that I smiled. He knows the truth about why those Conservative Members have failed—

Has it occurred to my hon. Friend the Member for Workington (Mr. Campbell-Savours) that the assistant Patronage Secretary might be a consumer of these drinks?

Perhaps that accounts for the smile of the hon. Member for Huntingdon (Mr. Major). Mr. Farrar said:

"it affects real people, real jobs and the interests of industry as well as the consumer. We have fought long and hard — and successfully — through the Courts for the right to continue blending without being subject to punitive taxation. Now the Government wants to overrule the decision of the Courts. Please help us to dissuade them from this action."

We are trying our hardest to persuade the Government against the course that they currently seem bent upon. We seek the support of Conservative Members.

From a constitutional point of view, there is another matter of interest to the House. I am sure that it will appeal to the right hon. Member for South Down (Mr. Powell), because he specialises in European matters. It has been suggested that the Government exercise positive discrimination against European products. As Britain is a member of the European Community, there is much concern about the matter. Some Members of the European Parliament have tabled questions about it. It is hard to understand why the Minister is unwilling to cede the point while those questions remain unanswered. If it could be proved that there were some form of positive discrimination against European products, the Government might wish to reconsider the matter. Even at this late stage, I ask them to take that into account.

According to Mr. Roth's "Parliamentary Profiles" the hon. Member for The Wrekin (Mr. Hawksley) is sensitive to constituency issues. On one occasion, he was so sensitive that he warned the Patronage Secretary and his assistants that his seat would be at risk if he backed entry for Asian fiances. For many hon. Members, that may be an obscure issue.

Order. The hon. Gentleman must not stray too far from the amendment.

I am coming straight back into order, Mr. Deputy Speaker. The hon. Member for The Wrekin expressed his view on that occasion and this is a far more sensitive issue for the people of his constituency. The Labour party in The Wrekin is expressing considerable anxiety about the matter and it hopes that the hon. Member will feel strongly enough to vote against the Government.

Unusually, I do not wish to go all round The Wrekin. However, I congratulate the hon. Member for The Wrekin (Mr. Hawksley) on his courageous stand.

What courageous stand?

I assume that the vote will follow the voice. I know that when the hon. Member for The Wrekin votes, he will be putting his career at stake and his chances of promotion at risk.

Non-existent chances.

No. My hon. Friends are unusually uncharitable today. The hon. Member for The Wrekin is taking a correct and courageous stand against the Government and he may suffer in consequence. I have already seen sinister individuals trying to talk him out of pressing his amendment. The hon. Gentleman will not be alone in the Division Lobby. He should stick to his amendment. We shall vote with him and give him and his constituents the support that they deserve. We could feel malicious towards the hon. Gentleman because he defeated a first-class Labour candidate at the general election. But we are forgiving and we will stand with the people of The Wrekin in support of their hon. Member who has moved the amendment in their interests.

Some of my hon. Friends are slightly cynical about the intentions of the hon. Member for The Wrekin. I do not share that cynicism. I expect the hon. Gentleman to vote on the amendment, because the issue is so serious to his constituents. The Wrekin has one of the highest unemployment rates in the west midlands.

It is 21·7 per cent. — 13,000 people.

No doubt my hon. Friend will tell me any minute now how many of those people are male, how many are female and how many are young. I know that the youth employment rate in The Wrekin is one of the highest in the country. That is why the hon. Member for The Wrekin has been driven to put his future and his promotion prospects at risk. He is challenging not only the Minister of State, Treasury, but the assistant Patronage Secretary.

Why have the Government brought in the assistant Patronage Secretary? He is a reminder of what might happen to the hon. Member for The Wrekin if he votes in the interests of his constituents against the Government's dirty deed. I am shocked that the Government have not brought in the Patronage Secretary himself. His absence is almost a slight on the hon. Member for The Wrekin. The hon. Member for The Wrekin must go into the Division Lobby. Indeed, he must lead the way into the Lobby.

Order. I hope that the hon. Gentleman will relate his remarks to the amendment.

I am saying that I think that the amendment is of first-class importance and—

Order. I am talking about the terms of the amendment.

The terms are at the heart of the matter for the constituents of The Wrekin.

Fifty jobs.

As my hon. Friend says, we are talking about 50 jobs. It is a matter of good faith. The Government are trying, through legislation, to put jobs at risk. That is the issue tonight.

The House of Lords clearly said "Keep the jobs." What a situation. The House of Lords say that we should not have penal legislation to cripple production. The Law Lords say "Keep the jobs" but Ministers in the Commons say, "Keep the revenue and do not bother about the jobs." That is nonsense.

Has the Treasury calculated how much revenue it will collect. [HON. MEMBERS: "Come on."] Some hon. Members are taking your role, Mr. Deputy Speaker. What calculations have been made about the cost of the loss of the jobs compared with the additional revenue?

The cost is £1·4 million.

I should prefer the Minister to tell me the cost. What is the cost of the jobs? We are talking not about hypothetical jobs but real jobs. Cinzano has said real people and real jobs are involved. It should be possible for the Treasury to make calculations about the cost to the state of the 50 lost jobs. People who are unemployed are a cost on the state.

We want to know the real cost to the state of the unemployment that will be caused compared with the receipts. After that calculation has been made we shall still want to know the cost to the individual of unemployment. What will the social cost be?

The other day I gave a lad from The Wrekin a lift in my car. He had become a market trader in north Wales. He could not get work in Telford because there is no possibility of work there, so he became an itinerant. He described what was happening. It is tragic. There is no work for young people.

The Telford area has been given some status in that it has been given some regional development aid recently. That means that the Government recognise the unemployment difficulties in that area. We are talking not only about 50 jobs but about other jobs in ancillary industries. The loss of 50 jobs might not sound very important but it is not insignificant to the 50 who lose their jobs. The loss of those jobs will have knock-on effects, so the problem is more serious than the Government would have us believe.

I think that the Government gave assistance to The Wrekin just to spite us in north Staffordshire. The Government might have taken into consideration the marginality of The Wrekin constituency but not the unemployment level there. Granting assisted area status has nothing to do with the Government's sensitivity to unemployment but more to do with their sensitivity to the constituency's marginal status in election terms and the certainty that the hon. Member for The Wrekin will lose his seat at the next election.

It is disturbing that the Government are prepared to go to the length of overturning a House of Lords decision. That is almost incredible. The House of Lords took a decision but the Government, in their determination to make matters worse in the west midlands, have decided to hit Telford even harder. That is intolerable.

My hon. Friends have concentrated on one aspect—unemployment. That is the most important aspect but they have not addressed themselves to the discrimination against those who drink blended vermouth. I wonder why the Government have chosen to impose a further tax on that alcohol. Blended vermouth is a relatively mild drink, which is less intoxicating than many others. Why has the Treasury chosen to discriminate against people who drink blended vermouth? What is the justification for overturning the decision by the House of Lords? [Interruption.] It seems that the Whips now want to prolong the debate. The Whips and the Whips' dummies are trying to intervene and I find it difficult to reply to monosyllabic Members on the Front Bench. If they want to ask a question, let them do so.

Treasury Ministers should not sit on their Benches like dummies in Burton's shop window only opening their mouths to utter a single, useless word. The Government must give way to the enormous pressure coming from their own Back Benches. When Cinzano wrote to my hon. Friend the Member for Stoke-on-Trent, Central (Mr. Fisher), it told him that it expected enormous pressure to come from the Conservative Back Benches. That pressure has not manifested itself in speeches, but I assume that those Conservative Members who promised the company that they would speak on its behalf—

They had free meals.

My hon. Friend the Member for Stoke-on-Trent, Central forgets himself.

I assume that those Conservative Members who promised to support Cinzano have written to the Minister protesting about the decision. Will the Minister tell us how many Conservative Members, after being wined and dined by Cinzano, have written to him to protest about this tax and in support of the amendment? What undertaking has the Minister given to those Conservative Members?

My hon. Friends are cynical because they assume that those Conservative Back Benchers have not spoken in support of Cinzano because they were not sincere when they gave their undertaking. Of course that may not be so. Those Conservative Members may have discussed the amendment with the Minister and told him that they support it. The Minister may have given them some secret undertaking, which has led them to be absent tonight, thinking it unnecessary to give visible and vocal support in the Chamber. The Minister may have told them that he would do what the company wants. Will the Minister tell us what representations he has received and what replies he has given? If he remains seated, some of us will believe that the company was wrong when it said that there would be Conservative support for my hon. Friend the Member for Stoke-on-Trent, Central on this issue.

Unless the Minister can assure us that these missing Conservative Members have spoken or written to him and discussed this matter with him, we will think that, with the honourable exception of the hon. Member for The Wrekin, who will lead us into the Division Lobby tonight, we shall be alone. There will be only one Tory Member in the Division Lobby surrounded by the supporters of Cinzano, who are the Labour Members present. I am waiting to hear what the Minister will say.

I have just received a note telling me that I am requested to shine my pants. I do not know whether that is a parliamentary note, but I am grateful to my hon. Friend the Member for Great Grimsby (Mr. Mitchell) for his advice. I shall conclude and shine my pants by saying that the Opposition are waiting for the leadership of the hon. Member for The Wrekin and we hope that he will not fail us or his constituents tonight.

As the hon. Member for The Wrekin (Mr. Hawksley) said at the outset of his speech, I have taken a particular interest in this issue for several reasons. In moving the amendment, the hon. Gentleman was rather kind to the Government in his summary of the reasons for the problem. He fairly said that the problem began with a decline in sales, but I do not believe that that decline — for which he gave no reason — can be attributed entirely to a change in taste, as was suggested by the hon. Member for Kettering (Mr. Freeman).

There are several reasons. The decline in sales of vermouth began in 1980 with a significant increase in the duty on vermouth. In that year the increase was 30 per cent., and at that point the fall in sales began. That is not surprising. In the past five years total sales of vermouth have declined by 20 per cent. Last year there was a very steep increase in the tax on vermouth. It was a small amount in absolute terms, because it was only 8 per cent., but it was a big increase in relative terms because the duty on wine was reduced by 20 per cent. at the same time. Therefore, the relative duties on vermouth and wine were substantially changed to the disadvantage of vermouth.

In the last five years, the duty on vermouth has risen by 80 per cent. whereas the duty on wine has risen by only 20 per cent. It is therefore not surprising that during those five years there has been such a substantial fall in the sale of vermouth, and that decline in the total market has caused the problem for Cinzano.

The hon. Member for The Wrekin said that it was a relief for Cinzano to start blending last year, but I should remind him that the return to blending was occasioned by the big relative increase in the duty on vermouth. That was not designed to save sales; it was a step to reduce the duty and to improve sales by affecting the retail price of vermouth. Although the duty has risen significantly in the last five years, the retail price of vermouth has risen by much less. Consequently, the increase in duty has tended to be absorbed by Cinzano.

My hon. Friend the Member for Stoke-on-Trent, Central (Mr. Fisher) said that the Government made a fool of themselves last year. He is absolutely right, because at the same time as there was a big increase in the duty on vermouth there were changes in the categories of wine and fortified wine. The Government made particular fools of themselves in that context because they created a loophole which the makers of Cinzano were right to use to their advantage in order to alleviate the problem caused by the increase in duty.

The Government then tried to cover up their mistake by going to court. In fact, they took the case all the way to the House of Lords on the argument that if blending took place in this country it was a type of production and, therefore, a tax should be paid on top of the tax that was paid on imported wines. In other words, there would be double taxation. That is what the Government tried to achieve by legal proceedings.

I disagree with my hon. Friends in their analysis because I believe that the hon. Member for Kettering is right to suggest that bonding is the answer to the problem of double taxation. The Minister made the point in Committee — I have examined it carefully, and I think that he is correct — that bonding is the answer for Cinzano. There is a level at which an importer must import wine in order to be given the opportunity to import into bond and to pay tax as the wine leaves bond. I entirely accept that Cinzano is above that level and, therefore, that bonding could be described as an answer.

It is not simply a problem of double taxation. Even if Cinzano uses bonding and blends in bond—so that the company pays the tax only once, as the wine leaves the bond—it still faces the overall increase in duty of nearly 8 per cent. in five years, and a decline in sales. That increase in duty applies if the wine has been blended in bond. The bonding arrangement simply puts Cinzano back to where it was a year ago, when it began to take advantage of the loophole.

8 pm

I have described it as a loophole, but let me make it clear that I am not criticising the management of Cinzano. On the contrary, it deserves praise for showing flair in spotting an opportunity to alleviate difficulties created for the company by the Government's increase in the total duty on vermouth. Clearly, sharper people work for Cinzano than work for the Customs and Excise. Indeed, a learned judge said that the Government needed not a lawyer but an arithmetician.

There are some people with extremely sharp pencils working for Cinzano, and it is to the credit of the company that it took the opportunity to save jobs at Telford. It is not true to say that blending created those jobs at Telford. There was already a bottling plant there. Those jobs were jeopardised by the decline in sales, a decline that was the result of the Government's increase in the duty on vermouth. The management of Cinzano saw an opportunity to use blending to save jobs, and I gather that there are 50 full-time jobs at the Telford plant.

What are the Government willing to do about those jobs at Telford, if they intend to insist on clause 5? I appreciate the Government's argument on the issue and I have some sympathy with it. However, that does not get them off the hook from the point of view of those jobs at Telford.

Yesterday we were told by the hon. Member for Beaconsfield (Mr. Smith) to devote more time in our debates to the problems of unemployment. That is precisely what we are doing tonight, although that hon. Gentleman is not in his place. The Government have a responsibility to explain what steps they will take to save those jobs at Telford if they insist on blocking the so-called loophole that has been used by Cinzano in the last 12 months.

We can look a stage further and ask what the Government propose to do to create more jobs in blending. My hon. Friend the Member for Wrexham (Dr. Marek) referred to the number of jobs that have been exported from Britain. As a result of the introduction of blending, jobs have been imported into Britain. To the extent that vermouth is sold in this country, it will be blended either in Italy or here. In the last 12 months, some jobs have been saved in Britain by Cinzano. That has represented, in effect, the importation of jobs. That raises interesting opportunities. What other new jobs can be provided in the blending of other drinks by other companies? I do not know whether Martini blends vermouth. Either way, what can be done to encourage that and other companies to create such jobs here?

I was impressed by the arguments adduced by the Minister of State in Committee about the cost of opposing clause 5. He said that if we did not approve the provision, the Revenue stood to lose £10 million. About £3 million of that would be derived by Cinzano. I accept that it is an expensive way of saving jobs to spend £60,000 per job. Indeed, using the £10 million, it would work out at £200,000 per job. I appreciate, therefore, why the Minister regards that as an expensive procedure.

It was not clear from what the Minister said in Committee whether he was talking about the effect of the current blending operations in this country or was referring to potential blending operations. Is that £10 million the amount that has been lost in the last year, and will be lost to the Revenue in the coming year if we do not approve the clause, as a result of blending operations already located in Britain? Or is it the Government's estimate of the money that would be lost to the Revenue if there was an increase in the amount of blending done here and, therefore, an increase in the number of blending jobs that would thereby be created?

We should know the figures because if we are being told of possible lost revenue in respect of only 50 jobs, we need to know whether the Government are adding to the cost money that would create jobs elsewhere in the United Kingdom. We are satisfied, whatever the figures, that 50 jobs are at risk in Telford new town. We must be told what the Government propose to do to save those jobs if clause 5 is approved.

The Government may be wondering whether my hon. Friends and I intend to vote against clause 5. The hon. Member for The Wrekin lost my sympathy when he said that the Opposition did not vote against it in Committee. He will see at column 103 of the Committee proceedings that the Minister assured us that he would examine the points that we had made, with particular reference to Cyprus sherry.

I am not suggesting that the Minister has not fulfilled every assurance that he gave in Committee. It would have been wrong for the Opposition to have voted against clause 5 at that stage when the Minister had given fulsome and ready assurances not only to consider the points that we had made but to meet a deputation led by Opposition Members. That is why we did not press the point to a vote in Committee.

Not having been a member of the Committee, the hon. Member for The Wrekin may not have been aware of everything that was said at that stage, and he could not have been aware of the flavour of what was said. It would have been discourteous and ungenerous of us to have voted against the Government on this issue then, particularly as we now see that the Minister of State's assurances have been fully fulfilled, for example, in relation to the previous amendment dealing with Cyprus sherry.

We are now concentrating on the issue of vermouth, the jobs at risk at Cinzano and jobs which may be at risk in other companies. We are also concerned with jobs that could be created if only we imported blending jobs into Britain, instead of leaving them in other countries in the Common Market. I await the Minister's explanation before advising my hon. Friends on how to vote on the amendment.

This has been a curious debate, since it has taken place by courtesy of my hon. Friend the Member for The Wrekin (Mr. Hawksley). Those outside the House who are not familiar with our procedures may have thought that Opposition Members, who have largely spoken in the debate, were so concerned over the matter that they were determined to have the debate on the motion that clause 5 stand part of the Bill.

That is not the case because the debate is being held wholly by courtesy of my hon. Friend the Member for The Wrekin. If he had withdrawn his amendment last night, there would have been no possibility of Opposition Members having this debate. Normally in these circumstances, if hon. Members are determined to make their point of view heard, they sign amendments so that they cannot be withdrawn. Either Opposition Members were not sufficiently wise to follow the normal parliamentary practice and sign my hon. Friend's amendment, or they were prepared to leave the decision on whether there should be a debate, first to Mr. Speaker, to see whether he would select the amendment, and then to my hon. Friend—

rose—

I appreciate the hon. Gentleman's emotion at having been caught out on the procedural inadequacies of his and his hon. Friend's actions.

Is the Minister not aware that he casts a slur on his hon. Friend the Member for The Wrekin (Mr. Hawksley)? His hon. Friend, as an honourable Gentleman, would never have withdrawn from the Notice Paper an amendment that was crucial to his constituents. We placed our faith, and were right to do so, in his hon. Friend. We are supposed to be honourable Gentlemen. The Minister should apologise to his hon. Friend.

I think that my hon. Friend will be able to use what has just been said in campaigning in his constituency. I do not think that I have heard such an open-ended compliment or endorsement of a Member of Parliament by Opposition Members for a long time. Although I know that my hon. Friend will have no difficulty in defeating any candidate who may be put up by the Labour party, that full and forthright endorsement of his position will be noted by him, and he will take advantage of it.

I reiterate the point that the debate and all the speeches that we have heard from Labour Members are wholly by courtesy of my hon. Friend the Member for The Wrekin. I hope that those who study debates in the House and are concerned with the way in which we deal with the important matter of excise duty will read with care all that has been said on this occasion. That will be to their advantage, and I hope that they will draw interesting conclusions from what has been said.

Most of the comments that have been made have concentrated on the issue of jobs, particularly the 50 jobs at the bottling plant in Telford. Some hon. Members who participated in the debate do not appreciate that, before the Budget changes of 1984, Cinzano was imported in bulk and bottled in this country. The blending was the bonus that flowed from the changes made in 1984. Those changes allowed producers of blended products, if those products were blended from two different levels of alcohol in the liquor, to pay less duty than would be paid in respect of the final product if it had been imported or manufactured in accordance with the law as it then stood. As has been said, that matter was taken to the courts, and the House of Lords, in its judicial capacity, ruled that the Customs and Excise view was incorrect and, as a result, the blending taking place was perfectly legal and proper.

rose—

Let me deal with points that the hon. Gentleman made in his speech. I noted with interest the deference that he paid to the House of Lords and the great unwillingness of Opposition Members even to contemplate overturning a judicial decision by the House of Lords. I am a more robust democrat and a more robust believer in the House of Commons. I believe that in the House of Commons we are perfectly justified in looking at the state of the law that has been determined by the House of Lords—no higher body could so determine it—and deciding that, if we do not like that provision of the law, we can bring to Parliament proposals for change. That is the democratic method, and it is what we are doing in clause 5.

I am astonished that Opposition Members should seek to elevate the decisions of the House of Lords into a constitutional doctrine and that their respect and support for the House of Lords are so intense that the hon. Member for Stoke-on-Trent, Central (Mr. Fisher) should criticise me and other members of the Government for coming forward—

Will the right hon. Gentleman give way?

I have listened to a long debate from Opposition Members, and I am wholly entitled to reply to the points that were made.

The 50 jobs at Telford were crucial to the issue. During the debate in Committee the hon. Member for Birmingham, Hodge Hill (Mr. Davis) properly referred not only to those 50 jobs at Telford but to the 150 jobs at Irlam involved in bottling and blending Cyprus sherry. It was the hon. Member for Hodge Hill who reasonably and courteously congratulated me only a short time ago on having brought forward amendments that make the blending of Cyprus sherry unnecessary. Therefore, if the 150 jobs at Irlam are involved purely in blending, they may well be at risk.

There may be some misunderstanding between us. I have checked this point. There would not be any loss of jobs at Irlam as a result of amendment No. 129.

In other words, the removal of the need to blend at Irlam is not the determinant; and it would not be with regard to Cinzano, either. I had discussions with representatives of Cinzano, who came to see me before the Budget. I asked the specific question: could the jobs be guaranteed at Telford if the House of Lords judgment—the discussion took place even before we knew that judgment—went against the company and in favour of Customs and Excise? Alternatively, I asked, what would happen if we changed the law? I was not given a categorical assurance about that.

The Minister of State will accept my assurance that I checked with both companies and, just as I have been assured that the 150 jobs are not in jeopardy at Irlam as a result of amendment No. 129, I have also been assured that the 50 jobs at Telford are very much in jeopardy as a result of clause 5. I do not make the point in any partisan sense. I believe that those are the facts.

Those are representations that have been made to the hon. Gentleman. I note what he said.

It is absurd to say that we should maintain a loophole in the excise duty provisions to allow that blending to take place, as that would create an unfairness, since the blended product would have a lower rate of duty than exactly the same product that had been blended outside the country or manufactured at the same level of alcohol outside the country. I do not believe that that method of job creation or protection would stand up to intensive survey. As has been admitted, the actual cost of those jobs would be considerable.

There could also be the adverse knock-on effects on others involved in the drinks business, who would be hurt by the unfairness and inequity of letting that "loophole" continue—I use the word that was used by Opposition Members. All that I have heard in the debate convinces me of the wisdom of the Government's proposal to maintain clause 5 in the Bill. I hope that the House will so maintain it.

I thank the Minister of State for his reply to the debate. We have had a good debate, which has been lively and longer than many of us had thought.

Fifty jobs in my constituency are important. I am glad that we have had an opportunity to discuss them. The hon. Member for Newcastle-under-Lyme (Mr. Golding) talked about the assisted area status aid that had come to Telford, which might help us to create more jobs there. He could have mentioned many other things that the Government have done to help Telford. We have had the new hospital and motorway, the enterprise zone and urban aid grants, which should create thousands of jobs. However, I still believe that, in spite of the thousands of jobs that the Government are creating there, those 50 jobs are very important. I do not ask—not that the Opposition would agree anyway—for leave to withdraw the amendment. I leave it to the House to decide how to deal with it. If hon. Members wish to support it, they know what to do.