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Orders Of The Day

Volume 115: debated on Thursday 30 April 1987

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

Finance Bill

(Clauses 11, 18, 20 To 23, 33, 45, 147 And 160 And Schedule 4)

Considered in Committee. [Progress 29 April.]


Clause 11

Accounting For And Payment Of Tax

Question proposed, That the clause stand part of the Bill.

4.18 pm

The story that leads to this clause begins most directly with the VAT small business review that was published on 24 October last year. The proposals in the consultation document followed a wide-ranging view of the VAT policy towards small businesses to see whether special arrangements could be provided for them. The review was announced in the White Paper entitled "Building Businesses … not Barriers".

A major concern expressed by small businesses and often expressed to me directly in letters from hon. Members enclosing correspondence from constituents, is that they often have to pay VAT to Customs and Excise before they are paid by their customers, who frequently take long periods of credit. A further concern was that they were obliged to complete and pay four VAT returns a year and would prefer a system more akin to that for other bills, such as the rates, with regular advance payments.

The changes proposed will overcome these problems by helping with cash flow and budgeting, and thus ease the VAT burden on small businesses. The consultation exercise that the Government asked Customs and Excise to conduct last October was wide-ranging. Not only were responses received to the consultative document from 192 trade bodies and individuals, but the views of small business were canvassed directly. A question and answer leaflet was sent to 5,000 randomly selected small businesses and 1,256 were completed and returned. The consultative document and leaflet contained a package of proposals targeted specifically at assisting the small business and included a scheme for cash accounting and a scheme for annual accounting.

The overwhelming majority of respondents welcomed the small business review and, in particular, the proposals for these schemes. There were, and this is the purpose of consultation, suggestions for change to the proposals for both schemes. The most important of these was about the higher limit to allow more businesses to use the scheme and that in itself was a commendation for the principle of the schemes. Other suggestions concerned the detailed operation of the schemes. All these suggestions were carefully considered by the Government and many have been accepted in whole or in part. The result was the Chancellor's announcement in his Budget statement about the introduction of schemes for cash accounting and annual accounting.

Clause 11 provides the enabling provision for regulations to be made covering the cash accounting and annual accounting schemes. The scheme for cash accounting will give a small business the option of accounting for VAT when it receives payment rather than when it issues a tax invoice. This will give automatic bad debt relief to businesses using the scheme. Similarly, it will be able to reclaim the VAT that it has incurred on its purchases only when it make payment rather than when it receives a tax invoice. Under annual accounting a small business will have the further option of making one VAT return a year rather than four as at present. Businesses choosing to use that option would make nine payments by direct debit on account and a tenth balancing payment would be made with the annual return.

This enabling clause tells the House little about how the scheme will work, and the conditions for their use. Those details will be contained in the regulations. As I said on 8 April in a reply to my hon. Friend the Member for Berkshire, East (Mr. MacKay), the regulations for cash accounting will not be made until the necessary Community derogation has been approved. A draft of -.he proposed regulations has been placed in the Library and copies have been sent to trade bodies. The regulations for annual accounting will not be made until next spring and again a draft will be sent to trade bodies before they are made.

As the Chancellor announced in his Budget statement, the schemes will be open to businesses with an annual turnover not exceeding £250,000. That represents a considerable advance on the £100,000 which was originally proposed in the consultative document last October, and covers over half of all the businesses that are registered for VAT. Once admitted to use either scheme, a business will not normally be required to leave until its turnover has exceeded the limit by 25 per cent. to a figure of £312,500 in a year.

Cash accounting will be available to businesses registering for VAT, as well as for existing registered businesses, but for annual accounting a business must have been registered for at least one year. The regulations will also detail the other conditions to be satisfied for Customs and Excise to give approval to use the schemes and the circumstances in which use of the schemes may be withdrawn. Refusal to use a scheme, or the withdrawal of an approval, would be appealable to the independent value added tax tribunal. The regulations will state the procedures to be used by a business on entry, while using, and on ceasing to use, a scheme, and will be framed to take account, in whole or part, of many of the representations received. Those for cash accounting especially meet the points that have been made about leaving the scheme and receipted invoices.

Subject to the necessary derogation from the Community, cash accounting will start on 1 October 1987. Annual accounting will start in the summer of 1988 when the necessary computer reprogramming has been completed. Broad details of the scheme will be available from local VAT offices at the end of May. Further information will be contained in a leaflet that will be sent to all businesses with the July, August and September VAT returns.

A business wishing to receive the public notice, which will give the conditions for joining and using the scheme, will be able to return a tear-off slip to its local VAT office. A business wishing to join, having read the public notice, should complete and return to the VAT office the application form which will be part of the notice. Provided that the conditions are satisfied, approval will be given to use cash accounting from the beginning of the business's net VAT accounting period, on or after 1 October.

I welcome the concept behind this scheme, for which I have argued for many years. However, will the Minister explain to the House why the current system was built in the way it was? What was the justification for the existing system? Historically what arguments have been deployed against the arrangements that he now seeks to introduce?

That question goes back into history a little. The legislation was introduced originally in 1973. At that stage neither the hon. Gentleman nor myself were Members of the House. In those days I was not in the habit of reading Hansard to see what was happening in a body of which I was not a Member. However, I am grateful for the hon. Gentleman's welcome for the legislation, in which he is joined by many other people in the country who feel that it is a good development.

Although the scheme for annual accounting is not being introduced until the summer of 1988, information will be available on a broadly similar time scale. An information sheet will be available in local VAT offices at the end of May, and a public notice, including a tear-off application form, containing the conditions for using the scheme, will be available after Royal Assent. The cost of cash accounting is a once-and-for-all loss of about £100 million, with on-going annual costs of £10 million. The revenue cost of annual accounting is broadly neutral.

I should report to the Committee on the Community derogation, about which my right hon. Friend the Chancellor spoke in the Budget debate. For cash accounting, the Government acted urgently on Budget day by lodging with the Commission of the Community a formal request for the necessary legal derogation, with the proposed operative date of 1 October 1987. There has been no suggestion that the Commission sees any significant difficulties with the proposal and the Government are optimistic that it will take the next step of formally notifying other member states shortly. If, within two months of that notification, neither the Commission nor any member state requests that the matter be raised by the Council, the approval will have been obtained.

In summary, there are rare occasions in ministerial life when one can lay proposals before the Committee which enjoy widespread and even possibly universal approval.

Now that the Minister has dealt with the details, perhaps I can ask him just one detailed question that he might care to answer. It concerns those people who opt to take cash accounting and, for some reason, have one year with a very high turnover, which is different from their normal expectations. Would those people automatically go out of the scheme, or would there be some discretion? The Minister seemed to suggest the possibility of some discretion.

It may help the right hon. Gentleman if I state what is contained in the regulations in that regard. The draft regulations have been placed in the Library. The regulations state:

"(2) A person admitted to the scheme shall remain in it for a minimum of two years, unless:
  • (a) at the end of any quarter or prescribed accounting period his turnover in the year then ended has exceeded by 25 per cent. the figure of £250,000 and in the year then beginning is expected to exceed the figure of £250,000, in which case he shall notify the Commissioners and leave at the anniversary of his joining; or
  • (b) if at any time there is reason to believe that his turnover in the year ahead will exceed by 25 per cent. the figure of £250,000 in which case he shall notify the Commissioners who may require him to leave the scheme at the end of the next accounting period."
  • Clearly, if he goes above £312,500, and is not expecting to come below it again and to go back to the original figure, he has that freedom. I repeat that the regulations state:
    "in the year then beginning is expected to exceed the figure of £250,000".
    Under those circumstances, he would have to leave the scheme. However, if he expected his turnover to go back below £250,000, he could remain within it.

    In summary, as I was saying, there are rare occasions when one can lay proposals before the Committee of the House, which enjoy widespread or, even possibly, universal approval. Those outside bodies that approved the original principle of cash accounting in the consultative document have a fortiori applauded the extension and expansion of that principle that was made by my right hon. Friend the Chancellor in his Budget. In particular, small business federations, institutions, organisations and lobbies have been generous in their praise of my right hon. Friend's imaginativeness and helpfulness.

    Those of us who have run small businesses and been responsible for payrolls and answerable for profits, and who have run them for enough years to have had to have lived with the consequences of our actions, and who have had the time to experience both the downs and ups of what the textbooks of one's youth called the "business cycle", know just how significant and beneficial for small businesses is the change to cash accounting for VAT.

    I have been heartened that my hon. Friends, who follow this scene closely and who have done so much in an informed and reasoned way to advance the small business cause, have been so enthusiastic about the difference that the schemes will make. As they know, anything that makes life simpler for small businesses is potentially good for jobs. Such knowledge of how a small business works was not shared by Opposition Members who, in a purblind way, said that there was nothing in the Budget for the unemployed, in bright and blissful ignorance of how 1 million jobs have been created in the economy during the past four years, and by whom.

    The measured reaction of the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley), 24 hours after the Budget, when he demonstrated total confusion between cash accounting and partial exemption, suggests that Opposition Members do not understand VAT either. The preternatural interest that Opposition Members have latterly been taking in the subject of VAT might usefully have been taken earlier in the interests of good opposition. I appreciate that cash accounting and partial exemption are complicated and esoteric subjects, difficult to grasp readily, but it is as well for this country that the right hon. Member for Sparkbrook, will never have to grasp them in government.

    Apart from the trumpet's uncertain sound from the Opposition, these provisions have been widely welcomed by the rest of the nation, and I commend them to the Committee.

    4.30 pm

    I think that the Minister may regret his peroration when we come to deal with partial exemption later in our debates. We shall be putting certain matters to him that will demonstrate an adequate grasp of the difference between partial exemption and cash accounting.

    Clause 11 has a history that goes back beyond the VAT review for small businesses, which was published in October 1986. When considering the Finance Bill of 1985, in a debate on cash accounting initiated by the Opposition, my hon. Friend the Member for Workington (Mr. Campbell-Savours) spoke eloquently in favour of it. At that time Ministers were much less certain about the benefits of cash accounting. It would seem that the reason for their change in outlook between 1985 and now is the draft 22nd directive from the EEC Commission. That draft directive asked for cash accounting for small businesses, and it was following its publication that for the first time there was a VAT review for small businesses, which called also for cash accounting.

    It is correct, as the Minister has said, that the Commission suggested a limit of £100,000 on the turnover of small businesses, which the Government have upped to £250,000. We welcome the clause and the uplift, and we shall be supporting the clause because of the help that it gives to small businesses. However, certain specific questions arise from the manner in which the Government have introduced the clause, and these I shall put to the Minister.

    First, will the Minister tell me how many firms will be involved in cash accounting? How many, potentially, which have a turnover of less than £250,000, could opt for it? I should like to know also how many firms have turnovers of more than £100,000 but less than £250,000? In other words, how many firms will be affected by the Government's uplift of the EEC's recommendation?

    Secondly, the Minister has said that on Budget day the Government made an application to the Commission for derogation from the sixth directive. Will he confirm that and tell me when he expects the derogation to arise? Until the EEC has given permission for there to be a derogation from the sixth directive, the change to the VAT rules in clause 11 and the regulations promulgated under it cannot take effect.

    Thirdly, will the Minister tell me whether he expects any difficulties with the Commission arising from the different limit on turnover that has been recommended by the Government as opposed to the EEC?

    Fourthly, will he tell me how a loss in VAT revenue will arise at the end of the first year of the implementation of the system of about £100 million and only £10 million thereafter? I am sure that there is an adequate explanation, and it is as well that we are aware of it when we are debating a system that involves such large sums for the Revenue.

    Finally, now that the Minister has acceded to the pressure that came as much from the Opposition Benches as from the Government Benches for cash accounting for small businesses, is he prepared to accede to the request that came last year and the year before that for some power of mitigation within the new system of VAT penalties? There is much concern among small businesses on this score. I shall be grateful if the Minister will respond to that and to my other questions, bearing in mind our welcome for the clause overall.

    The Minister was right to say that the proposals have been welcomed by Conservative Members, by the Opposition and by alliance Members. I know that the implications of cash accounting for bad debts will be welcomed by many small businesses. The downturn in North sea oil activity, for example, has led to an embarrassing amount of bad debt, and the VAT implications have been potentially quite serious.

    It is right that the clause should be welcomed. but I should like to know why, when representations were being made on behalf of individual companies that were facing difficulties—I do not wish to be churlish—it was not possible to say that the change would be introduced at the earliest opportunity. Like the hon. Member for Workington (Mr. Campbell-Savours), I am puzzled by the delay that has taken place in introducing it, but it is only right that it should be welcomed.

    I should like to know also whether, in interpreting the regulations, any distinction will be drawn between the balances of businesses opting for cash accounting or annual accounting. Depending on the sector in which a business operates, it is possible for a business mostly to recover VAT. I trust that that will still be allowed and that there will be even greater advantages for businesses that essentially recover VAT. The ability to recover it at an earlier stage will be beneficial to cash flow. It will be helpful if the Minister will make clear that no distinction will be drawn.

    The questions that I would have asked about cash accounting have essentially been asked and dealt with, and I merely say that in this context there is likely to be a welcome benefit for small businesses. Much more radical reforms of VAT could still be introduced. First, the overall threshold could be raised to a much higher level. Secondly, we should explore the possibility of abolishing VAT on inter-business transfers. Such a step would radically simplify the administration of the system. Administrative burdens are a major problem for small businesses.

    In response to the Minister's attack on those who occupy the Opposition Benches, I wish to say that before I was elected to the House of Commons I was involved in running small businesses on behalf of others, and once on my own account. I am well aware of the real practical problems that are faced by a business that employs two or three people when it has to administer and handle VAT. The simpler the administration can be made, the more a business can concentrate on making and selling its products or services. I hope that the Minister, satisfied though he may be that this measure has widespread support, will not let up and will pursue further every way possible of simplifying the administration and lifting the burden that falls on small businesses. None the less, the measures that are before us are welcome and will be helpful.

    The hon. Member for Sedgefield (Mr. Blair) has asked a number of questions which I shall do my best to answer. First, he asked how many firms would be involved that would normally be within the threshold of £250,000. The answer is 840,000 out of a total of 1.49 million VAT traders.

    The hon. Gentleman went on to ask me how many I thought were likely to take up the new system. That is to some extent a conjectural question until there is a take-up, but there had to be a calculation to ascertain the cost tht would be incurred as a result of introducing the system. After we have eliminated the repayment traders, to whom I shall return in response to the intervention of the hon. Member for Gordon (Mr. Bruce), and those governed by the retail trading scheme, which effectively have had similar benefits historically, we are left with about 300,000 traders who are potential candidates for the scheme. We are expecting that about 200,000 traders will take advantage of the scheme.

    That is our best estimate. The hon. Member for Sedgefield asked me for percentages. My recollection is that the limit of £250,000 involved just under 65 per cent. of all traders—that is, 840,000 against the total—and that 44 per cent. of all traders—in other words, about 660,000 — were involved in terms of the original £100,000 limit.

    The hon. Gentleman asked whether the Government sought and applied for a derogation on Budget day. I said so in my introductory remarks, and added that we were encouraged to believe that there had been no suggestion that the Commission saw any significant difficulties with the proposal. That includes the proposal of the new limit that we have set.

    The Government are optimistic that the next step of formally notifying other member states will be taken very shortly. If within two months no member state or the Commission requests that the matter be raised by the Council, automatically the approval will have been obtained. Assuming that the Commission circulates it in the near future, we are looking to early July when we might expect, assuming all goes well, that the derogation had been obtained.

    The hon. Member for Sedgefield asked about the cost of £100 million in the first year and £10 million in subsequent years. The cost is effectively a cash flow cost, because all we are doing is delaying the taking in of the money. On the figures that I quoted, we estimate that in the first year, when the main bulk of traders will come into the scheme, we shall defer about £100 million of revenue into subsequent years. In subsequent years new traders, and other traders who did not register in the first year, will come in. We will lose some bad debt money because bad debt relief will be furnished through this scheme in the way that I suggested.

    Finally, the hon. Gentleman asked about mitigation. I have confirmed on many occasions, and my right hon. and hon. Friends have likewise confirmed, that the working of the penalty and surcharge regime will be reviewed in advance of the 1988 Budget, in the light of a decent span of experience. The scheme will be examined and, assuming my right hon. Friend the Chancellor brings in the 1988 Budget, we will report on the result of that review.

    The hon. Member for Gordon asked whether the repayment would be better for those engaged in cash accounting or annual accounting. The cash accounting principle will apply when traders making returns pay their bills, as well as when they receive money. In the normal course of events, it will not be of interest to repayment traders because they have the advantage of earlier payment or earlier receipt of money under the present arrangement. Repayment traders would normally not be part of the annual accounting scheme because they would be advancing money even earlier than it would normally be received. The regulations for annual accounting will not come out until the spring of next year, but we do not envisage that repayment traders will be included in them.

    The hon. Member for Workington (Mr. Campbell-Savours) intervened to ask about the history. I have not been able to receive advice on the detailed debate in 1972, but there is no evidence that cash accounting was a strong runner at that time. I was not a member of the Finance Bill Standing Committee in 1985, so I am grateful to the hon. Member for Sedgefield for having described the contribution of the hon. Member for Workington. It sounds as though cash accounting was a late runner in the stakes, rather than running the whole time.

    I rise to intervene because this is one of a number of initiatives that I have been asking to have reformed since I was elected in 1979. I hope that the Minister will ensure that small businesses understand the effect of this clause. It will mean that instead of delaying invoices—as invariably small businesses do to avoid making substantial payments in a particular quarter—if there is a sudden blip in their supply arrangements, they will be able more efficiently and accurately to keep records and send invoices in the knowledge that they will not he affected in the way they previously would have been.

    I remember very well that, on occasions, one delayed invoices because one was concerned that substantial debt to the Exchequer would be incurred because of the rules as they existed in the early 1970s. It is important that small businesses get the message clearly that, if they use this system correctly, it will benefit them substantially.

    Question put and agreed to.

    Clause 11 ordered to stand part of the Bill.

    Clause 147

    Reduced Rates Of Tax

    4.45 pm

    I beg to move amendment No. 2, in page 96, line 5, leave out lines 6 to 14 and insert:—

    'Table of Rates of Tax

    Portion of Value Lower limit £

    Upper limit £

    Rate of Tax per cent.


    The Minister will not be surprised to hear that I had not expected to be on my feet quite so early. for reasons which I cannot fathom, we seem to be getting through this Bill at a faster rate than has been the case in previous years. No doubt others will have some speculative reasons as to why that is happening. This amendment—I make no apology for this—is tabled in a constructive spirit. We contend that the Government have—leaving aside the philosophical argument for and against tax cuts and how those tax cuts should be applied—cut taxes at the top end of the scale more substantially than at the lower end. They have increased net payable taxes at the bottom end of the scale.

    This amendment aims to modify the Government's enthusiasm for cutting taxes on inheritance, which have been reduced substantially in recent years and will yield in the current financial year about one third of the yield 60 years ago. No doubt the Conservative Government regard that as a great triumph of change, but it is a switch which is regrettable. The amendment represents a substantial uplift on the current level. The reason for that, rather than a straight indexation of the rates, is that we have taken on board the argument put forward about the increase in house prices. Houses are the single source of most people's wealth. This is a constructive amendment, which we hope Government Members will see in that light.

    It may be appropriate to return to the wider argument, if we debate the question that the clause stand part, when I could elaborate on the alliance's view of how inheritance taxes and gift taxes should be developed. At this stage rest the argument on the contention that the right thing to do is to modify the relief the Government are proposing and to target that relief at the other end of the scale, so that under our proposals people with moderate estates — I believe that is the Government's stated objective—will benefit more than those with larger estates. That is a reasonable objective.

    I have been somewhat surprised on the occasions when, either as a witness or a participant in the debate, I have heard Ministers argue about the burden of taxation on the low paid and those of relatively modest means and use that argument to describe the imbalance and to justify tax relief at the opposite end of the scale or right across the board. If the Government really are concerned about reducing the tax burden on people of modest means, they should be thinking in terms of limiting the relief that they are giving to people on higher incomes and targeting it to those at lower levels.

    This is a modest amendment which is put forward in a constructive spirit. It seeks, as I said at the outset, slightly to modify the Government's enthusiasm in this direction, and we hope that it will be considered in that light.

    The hon. Member for Gordon (Mr. Bruce) has put me in a little difficulty because he said that he would explain his party's wider views on inheritance tax and so on, in the clause stand part debate. Since his amendment simply proposes an alternative scale, and, therefore, we are talking about inheritance tax, it is much better for me to explain the clause and to deal with the amendment at one and the same time. The hon. Gentleman will have the opportunity in a later debate or in this debate to make his other remarks, but it would be more sensible for me to make one contribution.

    Let me start with the actual rates to which the amendment is proposing changes—that is to say, what is in clause 147. In 1979 we came to office committed to drawing the teeth of the capital transfer tax introduced by the right hon. Member for Leeds, East (Mr. Healey). The combination of rampant inflation and the failure to index the starting point had meant that by 1979 capital transfer tax was a penal tax.

    In 1980 we doubled the threshold for CTT. In 1981 we reduced the rate of tax on lifetime gifts. In 1982 we introduced the requirement to index the thresholds—to follow the income tax example—to avoid a repetition of the 1970s experience. In 1984 we reduced the death rate and made the rate on all lifetime gifts half the death rate. In 1986, in last year's Finance Act, we made a major reform—the abolition of CTT on lifetime gifts. It was then that the tax was renamed inheritance tax. That measure was widely welcomed as being of great help to those seeking to pass on to the next generation firms and farms that they had built up.

    Our intention this year is rather different, but equally important. Since 1979 our policies have encouraged a large expansion in the owner-occupation of housing and the trebling of private direct share ownership. More and more people now own property—houses, shares, and so on—that they will wish to pass on to their children. If no action is taken, more and more of those modest estates will be brought into inheritance tax liability. The purpose of the clause is to take many of those small estates out of inheritance tax altogether and significantly to reduce the charge on the others.

    Clause 147 increases the starting point for inheritance tax from £71,000, as it was up until this point, to £90,000. That is an increase of 27 per cent. Had we simply indexed that starting point, it would be £74,000. The result of this substantial increase is to reduce the number of estates paying inheritance tax this year by about one third. or some 12,000 estates in all, compared with the number that would be paying tax with indexation.

    The new scale produces reductions in inheritance tax liabilities at all levels. The four point scale—replacing the present seven point scale — is in itself a welcome simplification. But—I make this point again the largest reductions are concentrated at the lowest end. An estate of £ 100,000 will see its tax bill reduced by some 60 per cent. The estate of around £1 million will see only a 3 per cent. reduction in its tax bill. As with the income tax changes which we debated yesterday, we have deliberately skewed the changes to give maximum benefit at the lower end.

    The amendment is another example of the confusion that the alliance sometimes gets into in the way in which it approaches such matters. It is either that or it is an example of the alliance's neither-one-thing-nor-the-other approach or split-the-difference approach to policy. Or perhaps the alliance does not know what it is about. From the way in which the hon. Gentleman moved the amendment, I am not sure whether he knows what it is about.

    It is true that the effect of the amendment is to increase the burden of inheritance tax, but it would reduce the starting point from £90,000 to £80,000. The effect would be to make 7,000 more estates liable for inheritance tax than would be the case under our proposal. That is why I was astonished to hear the hon. Gentleman say that those with modest estates would benefit more under his proposals than ours. The reverse is true.

    The Chief Secretary is being a little unkind. He will have noted that the hon. Member for Gordon (Mr. Bruce) said that the debate had began too early. He obviously had not had time to work out the policy. The Chief Secretary should be a little more generous in his remarks.

    I think that the hon. Lady is right. We were told yesterday that the Liberals and Social Democrats needed a little more time to work out their income tax proposals and what they were going to do following the vote last night. Clearly, they have lacked the time to put forward this amendment, because they have got it wrong.

    Not only does the amendment show confusion, but it underlines the difference between our parties. The Social Democrats and Liberals want to see more people paying inheritance tax. Moreover, their proposals would cause the greatest relative increase to those to whom we are giving the maximum benefit. Rather than impose the greatest additional charge on the largest estates, the Social Democrats' and Liberals' proposals would place the greatest additional charge on those at the lower end and that is completely alien to the spirit of our proposals. Therefore, I am sure that he will not be surprised to hear that we prefer our clause to his amendment and I would certainly urge my hon. Friends to oppose it.

    Nor are the Social Democrats' and Liberals' proposals necessary to protect the yield of tax. Even after the changes that we are proposing. we are still expecting a yield of about £1,100 million in inheritance tax next year, well above the expected yield in 1986–87. That illustrates yet again the point that the Opposition parties have so often failed to grasp—that lower tax rates do not necessarily mean lower tax yields if they are underpinned by a buoyant and flourishing economy. Indeed, even more to the point, if, as has been happening under the Government, they help to bring about such an economy, that is very much their effect.

    Is there any connection between these substantial reductions in capital transfer tax, and, indeed, inheritance tax, over the past seven years, and the £110,000 million which has been shipped abroad in investment overseas since 1979? Is there a connection between the great collapse in taxation for rich people in society and the vast amount of money that has run away and been frittered away overseas?

    There has not been a great collapse in taxation on the richest people. What has been done, and rightly, is that we have reduced the rates of income tax from the absurdly high levels that existed under the Labour Government and so given incentives and encouragement to people to earn more. We have also made some changes in other areas such as investment income surcharge, I believe correctly. I see no parallel between the changes that we have made and the fact that we have been so successful in building up overseas assets. That is due to a completely different set of circumstances.

    Because Britain is so much better off under this Government than under the Labour Government, despite all the alleviations that we have introduced in CTT, and now inheritance tax, the yield of the tax will be almost 50 per cent. higher next year that it was in 1978–79. It is a favourite cry of Labour Chancellors and Shadow Chancellors that they will tax and tax until the pips squeak, but that demonstrates that squeaking pips do not produce money for the Exchequer. A resurgent economy based on widely distributed wealth does.

    The amendment will be welcomed by all those who believe in a capital and property-owning democracy. As I have said so often before in the House, tht is what we are constantly and increasingly achieving by increasing wealth and savings and by spreading it to ever wider numbers of the British people. The sale of council houses is but one of the many ways in which that is being achieved. For those who benefit from the sale of council houses, certainly in a generation to come, they will have a profound effect in bringing in financial and other assets and giving the opportunity of financial independence to millions more families. The proposal embodied in the clause enables us to take a further step in that direction.

    I believe that the proposals will be welcomed by all who believe in the importance of encouraging the creation of wealth, rather than the vain attempt to use the tax system to achieve a redistribution of wealth that is inimical to its creation. They will be welcomed by those who think that it is a healthy development that more and more people, lower down the income scale than ever before, will be able to leave property to their children, and to enable them in turn to enjoy the independence that property ownership can bring. The proposals are a further modest contribution to our wider objectives, and as such I commend them to the Committee.

    5 pm

    Nothing illustrates more clearly the confusion of thought in the minds of members of the Social Democratic party than the amendment moved by the hon. Member for Gordon (Mr. Bruce). As my right hon. Friend the Chief Secretary pointed out, the effect of the amendment is precisely the opposite to the intention that the hon. Gentleman explained to us. If we accepted it, we should penalise the least well off. It is quite extraordinary that the Social Democratic party should bring such an ill-thought-out, ill-considered proposal before the Committee. Mercifully, however, there is no prospect whatever of the amendment being accepted.

    My right hon. Friend made another important point. The whole philosophy of the Government, rightly, is to reduce the burden of taxation on the British people. A major cause of the modest economic performance of this country since 1945 has been the burden of taxation. However, there is still too much of a guilt complex about reducing taxation, which some people think is somehow immoral. I make the opposite assertion. I say that high taxation is immoral, and that it has been a dead hand on the economic performance of the country. Now we are beginning to see that, as my right hon. Friend so clearly explained, lower rates of tax produce a higher yield and greater wealth in which all can share.

    The hon. Member for Workington (Mr. Campbell-Savours) illustrated how out of touch he, his party and the Social Democrats are with what has been happening all over the United Kingdom since the right to buy was given for the first time to those who previously had no choice. One million houses and flats, whose tenants were previously condemned to live in them for ever as local authority tenants, have now been sold. My right hon. Friend was right to mention that the acquisition of that wealth by over a million former tenants will bring some of them nearly up to the figure that appears in clause 147. From now on, £90,000 will be the limit below which no inheritance tax will be paid. It is not far-fetched to say that the value of some former council houses is now approaching that figure. I welcome the raising of the threshold from £71,000 to £90,000, and the fact that we are able to obtain a higher yield from lower rates and higher thresholds for inheritance tax is proof positive of the economic justification for the Government's proposals.

    My right hon. Friend told the Committee that many estates in the coming year would have been subject to inheritance tax but for the proposed changes in clause 147. That will mean a significant reduction in the burdens placed upon the Inland Revenue. I do not know whether my right hon. Friend will speak again in this debate, but it would be interesting to hear from him whether there will be any reduction in the staff of the capital taxes office as a result of the changes that he proposes in the Bill.

    I hope that, should there be any more contributions from members of the Social Democratic party or the Liberal party during the Committee stage of the Bill, they will be better informed than the hon. Member for Gordon.

    First, let me point out that we entirely agree with the Chief Secretary about the confusion contained in the amendment, and in what was said by the hon. Member for Gordon (Mr. Bruce). We do not intend to support what he said. The upshot of his amendment would be a decrease in the tax take from the present regime, but an increase in taxation on the proposals in the Bill.

    I do not think that it is worth spending much more time on the points made by the alliance, as they were indeed confused. Perhaps by the time that the election comes, the alliance will have thought out its policy. But I feel that it is more important now for us to consider inheritance tax in the context of the general issue of taxation on individuals; and to bear in mind that, since 1979, the Government have reduced the annual yield of capital transfer tax — inheritance tax, as we now refer to it. Between 1979 and 1986, the reduction was about £488 million.

    The Chief Secretary referred to some of the changes in capital transfer tax that the Government have made since 1979. However, he omitted to mention the costs as they were described in the Red Book. If I may take the most expensive example, the doubling of the threshold in 1980 cost £125 million. The full-year cost of clause 147 is estimated in this year's Red Book to be £170 million. That makes a total of £658 million by way of reduction in capital taxation.

    The Chief Secretary made great play of reducing the rates and getting more tax. That does not fit very well with what the Minister of State, Treasury said in Standing Committee on last year's Finance Bill. He said:
    "There is no disagreement between the hon. Lady"—
    he was referring to me—
    "and the Government that the yield from capital tax has fallen. The hon. Member for Workington (Mr. Campbell-Savours) and I had a prolonged exchange on the Floor of the House on clause 80 … I gave him a global sum that acknowledged that the yield had been substantially reduced during the life of the present Government." — [Official Report, Standing Committee G, 10 June 1986; c. 387.]
    At the immense full-year cost of £170 million, the Government have reduced the burden of capital taxation. That figure compares badly with the mere £10 million spent on special tax relief for the over-80s. The Government have shown plainly that they put their money in the pockets of their friends. They weep crocodile tears for the plight of the elderly, but spend a mere £10 million on them.

    The Chief Secretary also made great play of the benefits that the proposal would bring to home owners. But what he forbore to mention was the extent of house price inflation, particularly in London and the south-east, where house prices are rising much faster than inflation. I see that the Chief Secretary is nodding away as though that just happens and as though it is no responsibility of the Government, but since 1979 the Government's record on both private and public sector house building has been dismal indeed. It is only recently that there has been an increase in private sector house building. Many Opposition Members are only too well aware of the fact that there has been no public sector house building whatsoever. It is not surprising, therefore, that house prices are inflated.

    Many people have been able to buy their own homes, but those hon. Members with constituencies in London and in the south of England know that the price of a new house is well beyond the means of couples on average, or even above-average, incomes. Those who come to our advice surgeries are not worried about the amount of tax that they will have to pay on the house that they have inherited from their parents; they are worried about finding somewhere to live because they cannot afford to buy their own house or flat.

    The price of a very tiny house in my constituency is about £50,000, which is well beyond the means of most people. They are therefore faced with a long wait for council accommodation. A young couple with a child may often be housed in the third bedroom of their parents' council house. Alternatively, they have nowhere to live at all. About 1 million people are far more worried about homelessness than they are about having to pay inheritance tax on their parents' home. The Chief Secretary pretends that the Government are concerned about such people but he has it all wrong and he is trying to give the wrong impression to the House. This clause is designed to deal not with the problems of home ownership but with the Government's determination to relieve the burden of taxation on the better off while increasing the burden on the worst off.

    During Question Time today there was an exchange on the increase in the tax burden on those who are on half average earnings. A comparison of the 1978–79 tax system with the regime that applied up to the Budget—and in no way has it been altered by the Budget and the Finance Bill—shows that the top 1 per cent. of tax units on an income of £40,000 or more a year have had a reduction in the amount of tax for which they are liable of £7,700, while the bottom 50 per cent. of tax units have had a reduction of only £120. The Chief Secretary spoke at great length about helping people to own their own homes, but that is not the purpose of reducing the rates of inheritance tax. It is another part of the rigging of the tax machine to ensure that the better off pay far less tax while the poor pay tax to line the pockets of the rich.

    We have seen at every turn during the last eight years that, sometimes blatantly and sometimes subtly, that is what has happened. The Parliamentary Private Secretary to the Chief Secretary to the Treaury is looking somewhat sceptical. I only wish that he would read Hansard from time to time, especially the Financial Secretary's answers to written questions in which he is forced to tell the truth and puts his name to very detailed answers that make that perfectly clear to all concerned.

    5.15 pm

    It is also somewhat disingenuous of the Chief Secretary to take this clause in isolation. It has to be seen in the context of all the measures that deal with inheritance tax in the Finance Bill. In clause 148 and schedule 13 the Government have accepted the principle of the amendents that were moved by the hon. Member for Corby (Mr. Powell) during the proceedings in Standing Committee on last year's Finance Bill. It will be interesting to find out why that was done, and we shall pursue the point in Committee. The Minister of State says more in Standing Committee than the Chief Secretary would like him to do. He is an open and honest man, and it is most refreshing for Opposition Members to hear all that he has to say.

    Referring to the amendment that had been moved by the hon. Member for Corby, the Minister of State said:
    "The amendments deal with the effects of termination and creation of life interests … and are intended to probe the reason for those interests being treated in the same way as an absolute gift of free estate."
    The Minister of State then made it clear that these interests were fully discussed when the matter was first introduced in 1982. He said:
    "The trust regime was subject to consultation in 1982 and it has been widely accepted … The Government propose to leave the present trust regime in being, as a defence against the death charge, to prevent the death charge becoming voluntary."—[Official Report, Standing Committee G, 10 June 1986; c. 389–91.]
    However, the thrust of the proposals of the hon. Member for Corby suddenly appear in other clauses of the Finance Bill that have been carefully left out of the proceedings in Committee of the whole House. The Minister will say that all will be made safe by the anti-avoidance provisions of schedule 13, but that schedule will be subjected to the strictest parliamentary scrutiny. It is not possible to rush through that schedule before the election.

    Once again we are deeply suspicious of the reduced rates of inheritance tax. The Chief Secretary put the best gloss on it that he possibly could from his point of view, but it has little to do with protecting the interests of the so-called modest home owner. It has much more to do with the Government's usual trick of lining the pockets of the rich. We reject the way in which the Government continue to rig the tax regime in their favour.

    I want to raise an issue on this amendment that was touched on by my hon. Friend the Member for Thurrock (Dr. McDonald). It relates to my theory about the effect of capital gains tax and capital transfer tax in the south of England on property prices. During the last seven years one of the greatest movements in property prices nationally has taken place in the home counties and also in many other areas where there are no Labour Members of Parliament. It is about time that the people in those areas, who in the last seven years have increasingly been willing to move towards Conservatism, stopped to consider what is happening, why they are paying higher and higher prices and why hundreds of thousands of young people in the southern counties cannot afford to buy a home. I can give them the answer tonight.

    Large numbers of people in the south, when they buy a property, acquire substantial tranches of wealth, that arise directly out of the reductions in capital transfer tax that have taken place during the last seven years. The reductions that have taken place in capital gains tax as well, certainly as they affect some people, have also liberated funds there for use in the purchase of property. It is those two things separately, and in their interaction, as they are used in the process of acquiring property, that force up property values in the south.

    Perhaps I can give some examples. Let us take a Georgian house in my constituency. For what might be regarded as a typical London Georgian house, one would probably pay probably £20,000 to £25,000. In London the price might be £400,000. In the constituency of my hon. Friend the Member for Thurrock it might be £70,000 or £80,000. Although that is only one fifth of the price of a similar property in central London, it is still three times higher than the price of a similar property in the north of England. The reason is very simple. The money does not circulate in those communities in the north, in the midlands, or in Scotland in sufficient volume to influence the property market by being available for the purchase of property.

    One of the most efficient ways of bringing some sanity back into property prices in the London area and the south of England and giving people the opportunity to buy their own homes — which, the Government tell us, is their policy—would be substantially to increase taxes in this area and take out of the economy this money, which is being used for industrial investment, and so on, overseas, and also for inflating the property boom in the south of England.

    I tell people outside the House that they would do well not to sit and gloat over the substantial increases in their assets in London and other parts of the south. They ought, rather, to consider the hundreds of thousands, indeed millions, of people in the south of England who will never own a home if we allow the current tax regime to go on well into the future. We are not talking only about Labour voters. We are talking also about many Conservatives who also want to own their own homes but who will never have the opportunity to do so because of the fund of money that is being made available to prop up prices in the south.

    One of the facets of the "two nation" argument that has developed over the past few years is this difference that exists in property prices between the south and the rest of the country. It is accentuated by the concentration of wealth here. If we were to look at the figures — this reduced tax base, but greater revenue, which the Minister tells us he is getting from these taxes—they would show that there is a heavy concentration of wealth in the south. It is all splashing about in what is geographically a very small area and it is inflating house prices in a way that is against the public interest. I think that the Government should act accordingly.

    A recent survey in Stafford indicated the required income for a person who lived at the upper end of the income scale so that he could have a five-bedroomed house, a fairly substantial car and a child away at school, and also at the lower end of the scale, which is where the houses are somewhat cheaper. I have just bought a house in Stafford for £8,000, which was extremely interesting to me, and it leads me to the point that there are significant reasons—this is the other side of the argument of the hon. Member for Workington (Mr. Campbell-Savours) — why people should move to the midlands or the north, because they get significantly better value for money as regards the cost of living and the value of property in what is quite often a prosperous town.

    I am grateful to the hon. Member for giving way to me when I have just made a contribution.

    Will he accept that the fact that people move north should be weighed against the fact that many do not move north because they are scared to jump off the escalator of property prices in the south? They are concerned that if they move from the south to the north they will never be able to move back to the south because they will not be able to afford to do so. That is part of the north-south divide.

    That is an interesting point, to which I have an immediate answer. GEC recently moved its transformer division to Stafford. The proof of the pudding is in the eating, because a substantial proportion of the people who lived in Broadstairs, when they saw what was on offer and what value they could get by moving to Stafford, did so with alacrity. I hope that I have dealt with the point that the hon. Gentleman made. There is a considerable incentive for people to move, because it is to their advantage.

    We are here, however, dealing with inheritance tax. The hon. Member for Workington raised the question whether it was unfair that people on lower incomes were unable to acquire property and hold it in trust for, or for the benefit of, their children. It is the Labour party's policy of denying, or at any rate inhibiting, the right of people to buy council houses that is causing serious difficulties for those who would like to be members of the property-owning democracy.

    That may be so, but there has always been this inhibition. It may be that this is a reaction to prospects of electoral success and the party is trimming its policies.

    I am sure the hon. Gentleman is aware that not only would we insist on people having the right to buy council houses, but that we would ask the hon. Member to accept the extension of the right to buy privately rented property. Is he prepared to go the whole hog on the question of private home ownership?

    I am impressed by the hon. Lady's conversion. If she and her colleagues have now seen the light on this policy, which is fundamental to the Conservative philosophy, all I can say is that they really have got the skids under them and that their conversion to this policy, in electoral terms, is to be encouraged. If the goings-on in the far north, or rather, if I may say so, in the pockets of Militant Tendency and Left-wing politics in London and elsewhere, are shared by the Front Bench of the Labour party, we really will be travelling. But the reality is that the Left wing of the Labour party does not believe in the policies put forward, purely for electoral reasons, by the hon. Member for Dagenham (Mr. Gould).

    I shall deal briefly with the alliance, because this is its amendment. Do the proposers of the amendment believe that it is a good idea to have a 100 per cent. inheritance tax? I have no doubt that the hon. Member for Gordon (Mr. Bruce) will give me quick, straight answers. Particularly with regard to agricultural land, should there be a complete prohibition of the opportunity for farmers to pass on their land to their children? Does the alliance believe that it is essential that farming land should be nationalised? In the agricultural context, I believe it to be essential that farmers and those who own the sort of property that I have mentioned should have the opportunity to pass it on to succeeding generations. The hon. Member has indicated not, but I should like to hear it from his lips.

    5.30 pm

    The hon. Member for Stafford (Mr Cash) asked three questions. The answers are no, no and no.

    Does the hon. Gentleman wish to reply to the debate?

    I will reply briefly to the debate. As the Committee has indicated a wish to be tidy I will make a couple of other points so as to avoid having to speak again.

    The exchanges at the beginning of the debate reminded me that in Scotland we are used to referring to the auld alliance. Speeches from the Tory and Labour Benches against me showed alliance at work and perhaps the reactions were predictable. The hon. Member for Eastbourne (Mr. Gow) must be under pressure from the alliance in his constituency, judging by the speeches which he constantly makes. He chose to launch a strenuous attack on an amendment which concedes the need to raise the threshold but is not as enthusiastic about it as the Government. I feel that he protested a little too much to be convincing.

    On house prices, which I shall not deal with other than as they relate to the amendment, when the Government are raising thresholds, which we think is legitimate up to a point, it is reasonable to take account of house price increases, given that the home is the main capital asset of most families. The Government have to be careful that they do not get ahead of the field to the point where their tax changes actually fuel increases in house prices rather than reflect them.

    We believe that the increases the Government have gone for are more likely to fuel than to reflect increases in house prices, especially when coupled with tax relief above the standard rate of income tax for the purchase of houses. That is why we have argued that mortgage tax relief, which should continue, should be restricted to the standard rate of tax and that the increase in inheritance tax should reflect rather than add to the increase in house prices. In our amendment we have sought to get the balance right. Certainly we feel that we are closer to the correct balance than is the Government's proposal.

    The Chief Secretary made the slightly spurious and perhaps unprovable contention, which was echoed by some of his colleagues, that by cutting the incidence of tax the Government have boosted revenue. If they had not cut the burden of tax, would not the buoyancy of the revenue have been further enhanced? The reliefs that the Government have allowed over the years on capital taxes have accumulated to about £800 million. I think that we are entitled to assume that that should be available for spending on services which should have higher priority than increasing relief to the better-off members of the community, who have done exceptionally well out of the Government.

    If more relief is given to the richer members of the community, the Government are less able to attack the problems facing the people at the bottom. There is any amount of evidence to show that as a direct result of Government policy over the last eight years the rich have got richer and the poor have got poorer. The provisions of the clause will increase rather than reduce the gap. That is why we have drawn attention to it and have sought to modify the increase.

    One argument that the Government use against both major Opposition groupings is that when we put forward plans for increasing investment in the Health Service, in education or in housing it is not possible to achieve that without paying for it. We acknowledge that. On the alliance Benches we have assiduously costed our plans and we will put detailed information to the electorate when the time comes.

    The converse is that, if the Government go on giving away in extra relief substantial sums of money, their ability to fulfil their pledge to maintain standards in the Health Service and in education is shown to be a sham. The people know that these services have not been safe in the Government's hands because they have been keener on giving money back over-generously to the better-off and have therefore reduced their ability to provide funds for services needed by the whole population and for dealing with the problems of poverty.

    The alliance believes that there should be taxes on capital and that there should be fair and effective methods of redistributing wealth. The Conservative Government have said nothing about the distribution of wealth; they talk only about its accumulation. As I have said, the distribution is getting more rather than less unequal.

    The hon. Gentleman has said that we are not interested in the distribution of wealth. Nothing could be further from the truth. By making the most of resources and by developing wealth from the basis of a profitable property-owning democracy, including the principle of inheritance, one is able to accumulate wealth and as a result to distribute it. The hon. Gentleman has demonstrated that he does not have the faintest idea about economics. I am surprised that he holds his present position in the alliance.

    These interventions come from quarters of which we know the composition of the electorate the last time it was tested. Contrary to what the hon. Gentleman asserts, I repeat that the concentration of wealth has become more unequal during the eight years of the Government's tenure of office. That is a fact for which there is ample evidence and support.

    In tabling the amendment we have recognised the changes that have taken place. I have already said that we think it proper to reflect changes in average house prices but that we do not think it right for the Government to go too far down the road so that they no longer have the ability to achieve balance and justice.

    The Government should promote taxes on capital which are effective at redistributing wealth and which are seen to be fair. That is why we have argued the case for tighter taxation of lifetime gifts and have recommended consideration of an accession tax. That is a simple tax on the recipients rather than on the holders of wealth. The tax efficiency point is that, if a wealthy person chooses to distribute his or her wealth by dividing it among a large number of recipients, the total tax burden accruing to that wealth is reduced. For example, if £1 million is given to one person, that person will inevitably pay a substantial amount of tax on accession of that wealth. If the money is given to 100 people, the total tax take to the Treasury will be reduced because the people receiving the gift will not reach the higher threshold. It is a simple tax-efficient system which would encourage wealthy people to distribute their wealth widely in a way that has not happened recently. As I have said, the reverse has been the case.

    The debate has been worth while. It has opened up some interesting avenues. I acknowledge that the diference between our amendment and what the Government propose is not substantial but in our view it would be a more balanced approach to the problem. The purpose of the amendment was to secure the debate which we have had. We wanted to argue the case that the Government are going too far. I make no apology for repeating that, as the house price argument has been a major factor in justifying the Government's action, I believe that the Government have gone too far down the road and may be responsible for increasing house prices, particularly in the areas where prices are highest. In those circumstances, I believe that our amendment has considerable merit.

    Given the thinness of our numbers, for reasons which puzzle many of us and about which people outside speculate, I do not wish to press the amendment, but I thank the Committee for the debate.

    Is it the will of the Committee that the amendment be withdrawn?

    Amendment, by leave, withdrawn.

    Question put, That the clause stand part of the Bill.

    The Committee divided: Ayes 186, Noes 69.

    Division No. 150]

    [5.40 pm


    Alison, Rt Hon MichaelFox, Sir Marcus
    Ashby, DavidFranks, Cecil
    Atkins, Rt Hon Sir H.Fraser, Peter (Angus East)
    Atkins, Robert (South Ribble)Freeman, Roger
    Baker, Nicholas (Dorset N)Galley, Roy
    Baldry, TonyGardner, Sir Edward (Fylde)
    Banks, Robert (Harrogate)Garel-Jones, Tristan
    Bennett, Rt Hon Sir FredericGoodhart, Sir Philip
    Biggs-Davison, Sir JohnGorst, John
    Blaker, Rt Hon Sir PeterGow, Ian
    Boscawen, Hon RobertGrant, Sir Anthony
    Braine, Rt Hon Sir BernardGreenway, Harry
    Brinton, TimGregory, Conal
    Brooke, Hon PeterGriffiths, Peter (Portsm'th N)
    Browne, JohnGrylls, Michael
    Bruinvels, PeterHamilton, Hon A. (Epsom)
    Buck, Sir AntonyHamilton, Neil (Tatton)
    Carlisle, John (Luton N)Hampson, Dr Keith
    Carlisle, Rt Hon M. (W'ton S)Hannam,John
    Cash, WilliamHarris, David
    Chalker, Mrs LyndaHarvey, Robert
    Chapman, SydneyHawksley, Warren
    Clark, Sir W. (Croydon S)Hayes, J.
    Coombs, SimonHayward, Robert
    Cope, JohnHeathcoat-Amory, David
    Cormack, PatrickHeddle, John
    Corrie, JohnHenderson, Barry
    Couchman, JamesHiggins, Rt Hon Terence L.
    Dorrell, StephenHind, Kenneth
    Eggar, TimHolland, Sir Philip (Gedling)
    Farr, Sir JohnHolt, Richard
    Fenner, Dame PeggyHowarth, Alan (Stratf'd-on-A)
    Forman, NigelHowarth, Gerald (Cannock)
    Forth, EricHowell, Ralph (Norfolk, N)

    Irving, CharlesRaison, Rt Hon Timothy
    Jackson, RobertRhodes James, Robert
    Johnson Smith, Sir GeoffreyRhys Williams, Sir Brandon
    Jones, Robert (Herts W)Ridsdale, Sir Julian
    Jopling, Rt Hon MichaelRippon, Rt Hon Geoffrey
    Kershaw, Sir AnthonyRoe, Mrs Marion
    King, Roger (B'ham N'tield)Rossi, Sir Hugh
    Knight, Dame Jill (Edgbaston)Rumbold, Mrs Angela
    Knowles, MichaelRyder, Richard
    Lang, IanSackville, Hon Thomas
    Latham, MichaelSainsbury, Hon Timothy
    Lawler, GeoffreySayeed, Jonathan
    Lawrence, IvanShaw, Sir Michael (Scarb')
    Lawson, Rt Hon NigelShelton, William (Streatham)
    Lennox-Boyd, Hon MarkShepherd, Richard (Aldridge)
    Lester, JimSilvester, Fred
    Lewis, Sir Kenneth (Stamf'd)Sims, Roger
    Lightbown, DavidSkeet, Sir Trevor
    Lilley, PeterSmith, Sir Dudley (Warwick)
    Lord, MichaelSpeller, Tony
    Lyell, NicholasSpencer, Derek
    McCrindle, RobertSquire, Robin
    McCurley, Mrs AnnaSteen, Anthony
    MacGregor, Rt Hon JohnStern, Michael
    MacKay, Andrew (Berkshire)Stevens, Lewis (Nuneaton)
    Maclean, David JohnStewart, Allan (Eastwood)
    McLoughlin, PatrickStewart, Andrew (Sherwood)
    McNair-Wilson, M. (N'bury)Stewart, Ian (Hertf'dshire N)
    Major, JohnStradling Thomas, Sir John
    Malins, HumfreyTaylor, Teddy (S'end E)
    Malone, GeraldTebbit, Rt Hon Norman
    Maples, JohnTemple-Morris, Peter
    Marland, PaulThomas, Rt Hon Peter
    Marshall, Michael (Arundel)Thompson, Donald (Calder V)
    Mates, MichaelThompson, Patrick (N'ich N)
    Mather, Sir CarolThorne, Neil (llford S)
    Maude, Hon FrancisThornton, Malcolm
    Merchant, PiersThurnham, Peter
    Miller, Hal (B'grove)Townend, John (Bridlington)
    Mills, Sir Peter (West Devon)Tracey, Richard
    Mitchell, David (Hants NW)Trippier, David
    Montgomery, Sir FergusTwinn, Dr Ian
    Moynihan, Hon C.van Straubenzee, Sir W.
    Murphy, ChristopherVaughan, Sir Gerard
    Nelson, AnthonyWakeham, Rt Hon John
    Neubert, MichaelWaller, Gary
    Newton, TonyWardle, C. (Bexhill)
    Nicholls, PatrickWarren, Kenneth
    Onslow, CranleyWatson, John
    Oppenheim, PhillipWatts, John
    Oppenheim, Rt Hon Mrs S.Wells, Bowen (Hertford)
    Ottaway, RichardWhitfield, John
    Page, Sir John (Harrow W)Wiggin, Jerry
    Page, Richard (Herts SW)Wilkinson, John
    Percival, Rt Hon Sir IanWinterton, Mrs Ann
    Powley, JohnWood, Timothy
    Price, Sir DavidYoung, Sir George (Acton)
    Prior, Rt Hon James
    Proctor, K. HarveyTellers for the Ayes:
    Pym, Rt Hon FrancisMr. Michael Portillo and Mr. Peter Lloyd.
    Raffan, Keith


    Abse, LeoDalyell, Tarn
    Archer, Rt Hon PeterDavis, Terry (B'ham, H'ge H'l)
    Beckett, Mrs MargaretDewar, Donald
    Bidwell, SydneyDixon, Donald
    Blair, AnthonyDobson, Frank
    Bray, Dr JeremyDormand, Jack
    Buchan, NormanDubs, Alfred
    Callaghan, Rt Hon J.Fatchett, Derek
    Campbell-Savours, DaleFaulds, Andrew
    Canavan, DennisField, Frank (Birkenhead)
    Clark, Dr David (S Shields)Foot, Rt Hon Michael
    Clwyd, Mrs AnnFoster, Derek
    Cocks, Rt Hon M. (Bristol S)Freeson, Rt Hon Reginald
    Cook, Frank (Stockton North)Garrett, W. E.
    Corbett, RobinGodman, Dr Norman
    Cox, Thomas (Tooting)Golding, Mrs Llin
    Crowther, StanGould, Bryan

    Hamilton, W. W. (Fife Central)Nellist, David
    Harrison, Rt Hon WalterPatchett, Terry
    Hattersley, Rt Hon RoyPike, Peter
    Healey, Rt Hon DenisPowell, Raymond (Ogmore)
    Heffer, Eric S.Prescott, John
    Hogg, N. (C'nauld & Kilsyth)Ross, Ernest (Dundee W)
    Kaufman, Rt Hon GeraldSheldon, Rt Hon R.
    Leighton, RonaldShore, Rt Hon Peter
    McDonald, Dr OonaghShort, Ms Clare (Ladywood)
    McKay, Allen (Penistone)Skinner, Dennis
    McNamara, KevinSmith, (C.flsl'ton S & F'bury)
    McWilliam, JohnSpearing, Nigel
    Madden, MaxTorney, Tom
    Marshall, David (Shettleston)Williams, Rt Hon A.
    Maynard, Miss JoanWinnick, David
    Meacher, Michael
    Millan, Rt Hon BruceTellers for the Noes:
    Miller, Dr M. S. (E Kilbride)Mr. Frank Haynes and Mr. Tony Lloyd.
    Mitchell, Austin (G't Grimsby)
    Morris, Rt Hon A. (W'shawe)

    Question accordingly agreed to.

    Clause 147 ordered to stand part of the Bill.

    Clause 160 ordered to stand part of the Bill.

    Clause 18 ordered to stand part of the Bill.

    Clause 33

    Employee Share Schemes, Etc

    I beg to move amendment No. 4, in page 23, line 7, after 'Schedule', insert

    'and the consequential provisions relating to capital gains tax in Part IIA thereof.

    It might be helpful if I discuss clause 33 and schedule 4, which have two main purposes. They introduce an improvement to the 1980 and 1984 Finance Acts and share option schemes—[Interruption.] I can understand the puzzlement of the hon. Member for Dagenham (Mr. Gould). I was rather surprised to find myself speaking on this amendment so soon.

    Perhaps we could jointly clear up this slight confusion. I had assumed, Mr. Armstrong, that, in accordance with the business motion which the Committee passed yesterday, we were proceeding to deal with clause 160.

    That is true. I put the Question, That clause 160 stand part of the Bill, and it was carried. I also put the question on clause 18.

    There were no speakers on clause 160. Apparently, no hon. Member wanted to speak to it.

    On a point of order, Mr. Armstrong. I came with the intention of speaking on clause 160. I think that we were expecting a speech from my hon. Friend the Economic Secretary. I did not think that it was my place to rise before my hon. Friend had done so. In fact, I had a personal assurance from him that he was about to speak on that subject. I am surprised that the Committee will not be able to debate this important matter.

    I understand the hon. Member's disappointment but, when I put the Question that the clause stand part of the Bill, no hon. Member rose. I cannot call hon. Members who do not rise

    Clause 33 and schedule 4 have two main purposes. They introduce an improvement to the 1980 and 1984 Finance Acts and share option schemes. This is a new facility to enable employees whose company is taken over to exchange their existing share options under an approved scheme for options over shares in the acquiring company. This meets representations on the point, and I am sure that it will be welcomed. Until now, an employee in this situation has been forced either to realise his existing option with the risk that, if three years have not elapsed, the gain will be liable to income tax, or to maintain the option in a company in which the shares will be mostly held by the new parent. There is to be no statutory obligation on the acquiring company to extend this opportunity to the employees of the target company. However, this factor will certainly become one of many discussed between all the parties concerned at the time of the merger or acquisition.

    The intention is that the employees concerned should be no worse off and no better off, technically, than if the takeover had not occurred, and they had simply held on to their original options. To qualify, therefore, the new options must, first, continue to be governed by the rules of the target company's existing schemes — this will ensure, for example, that the employees do not lose any rights attaching to the options which they had hitherto enjoyed or, for that matter, gain any rights that they did not previously have—and, secondly, be equal in value to the old options at the time of the exchange. This is very much a technical matter. This condition will be satisfied where the total market value of the shares under the old and new options at the time of the exchange is the same and the total price payable on exercise of the new option is also the same as the total exercise price under the old option.

    The two Government amendments ensure that employees are not faced with an unintended capital gains tax charge as a result of such an exchange. Under an amendment which has not been called, although its purport may be discussed in the debate, there is a suggestion to make the approval of a company's Finance Act 1984 share option scheme conditional upon it also introducing an all-employee 1978 or 1980 Finance Act scheme. We want to encourage the take-up of all three kinds of approved scheme. A restriction of that sort would not help that objective. For many companies, an all-employee scheme may initially be inappropriate—that is why I would not wish to make a restriction.

    We would want this change to be available to both 1980 and 1984 schemes at once. For many companies, an all-employee scheme may initially be inappropriate or seem to burden them. There is a danger that a condition of this kind would discourage such companies from introducing any scheme at all—discretionary or all-employee. There is no evidence to suggest that the introduction of the 1984 scheme has had an adverse impact on the other schemes. On the contrary, all three schemes are popular and successful in their own right. For example, in the year to March 1987 a record total of over 200 new all-employee schemes were approved by the Inland Revenue, bringing the total to over 1,250 such schemes, and there are now more than 2,000 approved 1984 schemes.

    Clause 33 and schedule 4 also introduce certain technical changes to the close company material interest provisions as applied when determining whether employees may participate in their company's approved share or share option schemes. Some of these changes were announced by my right hon. Friend the Financial Secretary on 13 November last year. All of them —clause 39 deals with a related matter—are designed to help to ensure the smooth running of all three kinds of approved employee share schemes, but there are also some consequential changes in the way in which these provisions apply for close company interest relief purposes.

    The main effect of the present provisions will be to ease the position so that trust-held shares may be disregarded in calculating the material interest disqualification where the individual irrevocably disclaims or otherwise surrenders his interest in the trust and he has received no benefit from it. This will help those individuals who might otherwise have been unable to participate in an approved scheme. There are also certain other more technical changes mainly designed to clarify and ensure the smooth running of the existing rules.

    6 pm

    The spread of share ownership to all levels of a company is, and has been throughout, a major objective of the Government. These modest changes will enhance the employee share ownership movement still further.

    We seem to be making very good progress today, Mr. Armstrong, and I thought that in order to facilitate the progress it would be better to talk about clause 33 and schedule 4 in general, but in particular I have referred to the purposes of amendments 4 and 8 and I commend them to the Committee.

    In accordance with the lead provided by the Chief Secretary, I propose to speak briefly in a debate which I assume will cover the clause itself and the amendments.

    My hon. Friends and I generally support employee share option schemes and welcome the measures in the clause and in the schedule, and indeed in the amendments. It is clearly right to take account of the immense impact that takeovers have had over the last year or two years, and there seems no reason to believe that that impact will be very much reduced in the immediate future. Huge sums have been involved. I will not weary the Committee with a recital of the billions of pounds' worth of assets involved in bids over recent years. We have the prospect of that continuing, although I suppose it is fair to say, judging simply by a reading of newspaper headlines, that there has perhaps been a temporary lull over the last month or two.

    But the conditions that prompted the takeover fever and the merger mania still prevail. The deregulation of the City and the cash-rich companies which now, both as victims and as predators, feature in these takeover bids are still there. Those who are victims still continue to offer very attractive targets and those who are predators clearly have the cash and the resources with which to make their predatory raids. They do so and they are likely to continue to do so, largely because the conditions in which investment in new capacity might be attractive are absent.

    For those reasons it seems to me that the spate of takeover bids is likely to continue and it is therefore absolutely right, and indeed commendable, that the Government should be legislating to take account of the likelihood that more and more employees will be affected by takeover bids in the future. Indeed, in January 1986 the Transport and General Workers Union estimated that no fewer than half a million people worked for firms which were the subject of or were involved in takeover bids. Therefore, it is, potentially at any rate, a very substantial problem.

    In those circumstances, I think it is right that those who are members of employee share option schemes should have the sort of protection that is provided in these new provisions. Nevertheless, the provisions leave open a number of questions, and certainly leave a couple of questions hanging in the air. It is to those questions that I should like to draw the Chief Secretary's attention.

    If employees who participate in share option schemes are to be given this protection in the case of a successful takeover bid, why is similar protection not being given to the beneficiaries of pension funds? Why is similar provision not being made for employees in general, simply by virtue of their position as employees? After all, far and away the most important piece of property which is at risk as a consequence of a takeover bid is not a small holding in a share option scheme but the job of a worker, not to mention his or her rights as a beneficiary under a pension fund. Therefore, we are bound to ask what is so special about rights conferred by share ownership. Why should the protection of this provision he made available to those who own bits of paper in respect of their shareholdings but not to employees as workers — in other words, not in relation to their jobs?

    The Chief Secretary must surely be aware of the problems. He must know that on almost every occasion on which a takeover bid is mounted the workers, usually the employees of the victim company, are extremely nervous, and often with very good reason, about whether their jobs are going to be placed at risk. It is remarkable that in these circumstances it is the employees whose jobs are most on the line who are often kept most in the dark. It is they who have the fewest rights to information and who, generally speaking, are not consulted about what is going on. They know that rationalisation — which is the term usually applied to the objective of takeovers—is almost always a euphemism for laying people off. Therefore, why is no protection being provided to workers qua employees, quite apart from the question whether they own shares?

    More particularly, what about the rights of pension fund beneficiaries? Again, the Chief Secretary must be aware—I know that his Department is, because it has taken some small action already — of the abuses and scandals which have disfigured so many takeover bids with respect to the rights of beneficiaries and the treatment of pension funds. All too often we have seen instances in which pension fund surpluses, which are truly the property of the beneficiaries, have been traded away as part of the assets of the target company or in other circumstances have been the target of the predator company, which has got its hands on those surpluses and in some cases actually used them to pay off part of the purchase price of the company which it has acquired, or even to make redundancy payments to the workers whom it then proceeds to lay off.

    For all those reasons, it seems remarkable to me, and remiss of the Government, that they should have rushed to legislate—quite rightly and commendably, as I have said — in this area, but not in respect of those many thousands, indeed millions, of workers who have rights under occupational pension schemes.

    The Chief Secretary may perhaps remark that these matters do not arise directly under the clause, but I think he will accept that they are legitimate questions in this context. We make the point very strongly that if we are to legislate to take account of the impact on employees of the current and projected spate of takeover bids, we must pay attention to the matters that I have sought to raise.

    The next Labour Government will certainly take steps to provide new rights of consultation and information for employees. We will also provide appropriate new rights for the beneficiaries of pension funds so that they too can be protected when their interests are affected by takeover bids.

    I think it would be right for me to reply briefly to the point made by the hon. Member for Dagenham (Mr. Gould). One answer, as I think he recognises, is that clause 33 is entirely about employee share schemes and not about anything else. Secondly, it is designed simply to remove a technical tax difficulty that had arisen.

    On the third point, I think that the most important answer to his question is that what is being proposed under clause 33 is not to make it obligatory for the acquiring company to extend the opportunity of having a share option to those in the target company who already have share options. There is no new statutory obligation being imposed as a result of this clause. It is up to the acquiring company to decide whether it wants to extend to those employees with share options in the target company the possibility of having share options in the new company. What the clause does is to remove a technical tax obstacle to that. In that sense there is a difference between this and the extension of statutory obligations, in the case of a merger on the acquiring company.

    In the case of the jobs of the employees, which was one of the examples that the hon. Gentleman gave, where employees become employees of the acquiring company because it wishes them to remain in their jobs, their tax position is not adversely affected. But if we had not made this change it is possible that those who had share options and were given the opportunity of new share options would have found that their position had been adversely affected, because if, for example, three years had not elapsed since they acquired the option the gain would have been liable to income tax. All we are doing is removing an obstacle, to enable the acquiring company to make that offer. That is probably the crucial difference. That is why I put such stress on the fact that employees should be technically no worse off as far as their share options are concerned and no better off had the takeover not occurred, but it is still available to them not to have the share option at all.

    I am not seeking to argue that the points I made are on all fours with the precise problem addressed by this clause. I take the point entirely that it follows, therefore, that the mechanism for removing an obstacle in this case may not be appropriate in the cases that I have sought to raise. I am asking the Chief Secretary to address the principle that lies behind this provision—a principle that we endorse and welcome—and the absence of any consideration, so it seems, in the Government's mind of the rights of employees in a more general sense on the occasion of a takeover and. in particular, of the precise rights of beneficiaries under pension funds. At present, as he knows, beneficiaries often have to rely on perhaps badly drawn-up trust instruments of some sort that have very little protection from statutory law.

    We are at one on this clause. The hon. Gentleman is raising much wider issues. Off the top of my head I do not see that there are any obstacles that we are removing here in relation to the straightforward job position of an employee being taken over, because the similar tax obstacles are not there. The question of information goes rather wider than we might be able to discuss on the Finance Bill.

    On the pensions issue, again the hon. Gentleman raised much wider issues that should be debated on other occasions. The clause and amendments are fairly narrow but I believe beneficial, and I hope that I have answered the points that the hon. Gentleman raised.

    Amendment agreed to.

    I beg to move amendment No. 5, in page 23, line 7, at end insert—

    '(1A) In paragraph 15(1) of Schedule 10 to the Finance Act 1984 for the definition of "qualifying employee" there shall be substituted the following words "qualifying employee" in relation to a company, means an employee of the company (other than one who is a director of the company or, in the case of a group scheme, of a participating company) who is required, under the terms of his employment, to work for the company for—
  • (a) at least twenty hours a week where the employee has been employed continuously by the company for not more than one year, or
  • (b) at least sixteen hours a week where the employee has been employed continuously by the company for more than one year but not more than three years, or
  • (c) at least twelve hours a week where the employee has been employed continuously by the company for more than three years but not more than five years, or
  • (d) at least eight hours a week where the employee has been employed continuously by the company for more than five years.'.
  • With this it may be convenient to take amendment No. 6, in page 23, line 7, at end insert—

    '(1A) in paragraph 15(1) of Schedule 10 to the Finance Act 1984 for the definition of "qualifying employee" there shall be substituted the following words—"qualifying employee" in relation to a company, means — an employee of the company (other than one who is a director of the company or, in the case of a group scheme, of a participating company) who is required, under the terms of his employment, to work for the company for at least twenty hours a week; and any other employee provided that in such a case the number of shares which he is granted the right to acquire bears the same proportion to the number of shares which he would have been granted the right to acquire had he worked for twenty hours per week as the number of hours he is required to work bears to twenty.'.

    I do not think that I need detain the Committee for long. The share option scheme has been a great success. All parties have welcomed it because the practicality of it and the benefits it gives employees are beyond doubt. It is a great asset and is of great benefit to employees. In the legislation, only employees who work at least 20 hours per week for a company are entitled to participate in share option schemes. Most economic pundits would agree with me that the number of part-time workers will increase in the future. Accordingly, I wonder whether 20 hours per week is the right figure or whether we should reduce it.

    Amendment No. 5 proposes that, where an employee does not work at least 20 hours a week but only works 10 hours, 16 hours or whatever, the number of hours worked plus the length of service should entitle an employee to participate in a share options scheme. If the Government do not like that proposition, amendment No. 6 proposes an equation based on the figure of 20 hours a week. If an employee who worked 20 hours a week under a share option scheme was entitled to 100 shares, an employee who worked only 10 hours a week should be entitled to 50 shares. That is the idea behind amendment No. 6.

    I hope that my right hon. Friend the Chief Secretary will not dismiss this out of hand. It is absolutely essential that we give the benefit of share option schemes to regular employees who work, albeit part-time. In the retail trade, in which I have no vested interest, part-time employees who work on a Friday or a Saturday quite obviously do not work 20 hours a week, but they are still regular employees. They may work only 14 hours or 16 hours a week, but the Government should give some thought to including in this legislation those sorts of employees.

    The purpose behind my amendment, with which I am sure my right hon. Friend will agree, is that I do not want any loopholes on the matter of share option schemes. Many of these part-time workers, particularly married women, have worked for up to 20 years for a particular employer. Consequently, they should have similar benefits to their colleagues who work 20 hours a week or more. They should not get the same benefits as employees who work 20 hours a week, but, depending on the number of hours they work per week, and upon their length of service with the particular employer, they should receive some benefit. I hope that my right hon. Friend will give sympathetic consideration to both those amendments and I ask the Committee to accept them.

    6.15 pm

    I support what my hon. Friend the Member for Croydon, South (Sir William Clark) has said. My name is attached to amendments Nos. 5 and 6. I think all hon. Members agree that the employee share scheme legislation first introduced in the Finance Act 1978, which has been improved in two succeeding Finance Acts, has been an enormous success. I do not know what the numbers are today of employees who participate in Finance Act 1978 schemes, but I believe that not only do a very large number of schemes now qualify but that there are a large number of employees who now hold shares in the companies which employ them as a direct result of this legislation. That is welcome.

    It has been possible for any company with a stock exchange listing to set up a scheme of this kind to enable most, but not all, employees to participate. The concern that my hon. Friend and I have is that this should be widened a little. There is no doubt that part-time employment is growing all the time. That is to be welcomed. The object of the two amendments is to achieve some sensible and equitable way of ensuring that part-time employees can participate in these schemes.

    My hon. Friend will correct me if I am wrong, but amendments Nos. 5 and 6 suggest alternative schemes to enable part-time employees to participate. Clause 5 proposes reducing the qualifying number of hours in accordance with the number of years that a part-time employee has worked for his company and clause 6 tackles the problem in another way by reducing the number of shares that a part-time employee is able to take in any one year. When my right hon. Friend the Chief Secretary replies, I hope that he will look at the principle underlying the amendments sympathetically.

    I am grateful to my hon. Friend the Member for Croydon, South (Sir William Clark) and my hon. Friend the Member for Beaconsfield (Mr. Smith) for raising these amendments. I certainly agree with both of them about the great importance of employee share schemes and I share with them the delight about the way in which they have grown and the way in which benefits have been extended to so many more employees over recent years. I also agree with both of them 'about the importance of part-time employment. In no sense in what I am about to say are any of my remarks directed against that.

    As my hon. Friend the Member for Croydon, South made clear, the purpose of the amendments is to admit part-time employees to Finance Act 1984 approved employee option schemes. His amendments give us a choice. We considered this carefully when the 1984 scheme was first introduced. Indeed, we modified our original proposals to reduce the qualifying limit for employees who are not directors from 25 hours to 20 hours a week. However, we felt then, and we continue to feel, that it would not be right to go any further, certainly at this stage, and perhaps I can explain why.

    My hon. Friend referred to part-timers in a retail shop. Of course, those part-timers can benefit under the schemes in the Finance Act 1978 and the Finance Act 1980. Both those schemes must be available to all the company's employees on similar terms and there are relatively low limits on the level of benefits. Therefore, they are available to part-timers but the scope for abuse in respect of part-timers is limited.

    By contrast, the benefits under the Finance Act 1984 schemes can be much greater. Those schemes are discretionary. They do not have to be available to all employees. The point on which one has to reflect is that the scheme in the Finance Act 1984 offers generous tax reliefs and it is aimed particularly at improving the motivation of key employees who can contribute substantially to their company's success. Part-time employees, such as those in a retail shop to whom my hon. Friend referred, may, of course, have an important contribution to make — indeed they do — but by definition it is unlikely to be as substantial or capable of enhancement by improved incentives as in the case of full-time workers. Of course, as with any such limits, some individuals will always find themselves on the wrong side, wherever a dividing line may be drawn. As a matter of judgment we believe that the present rules strike a reasonable balance of 20 hours a week.

    It is possible for companies to grant share options to their part-time employees in other ways. For example— I do not float this as particularly likely—they could do so under an unapproved scheme. That would mean there would not be any special tax relief for the employee's gain on exercising the option. More importantly, they could set up a Finance Act 1980 approved savings-related share option scheme. As I said, that would allow part-time employees and directors to take part.

    My hon. Friends the Members for Croydon, South and Beaconsfield have made their point succinctly. I agree with both of them on the objective of achieving as wide a spread of share ownership as possible. I have no doubt that my hon. Friends will continue to watch the progress of the 1984 schemes and may return to the matter in future debates. We can consider it again then. For the reasons I have given, I cannot recommend the Committee to accept the amendments.

    Under the Finance Act 1978 scheme, what is the qualifying period for participation? I am not clear whether any employee can participate, regardless of the number of hours per week they work or whether there is a minimum number of hours per week that one has to work before participating in a 1978 scheme.

    My recollection—if I am wrong I shall write to my hon. Friend—is that, since the scheme has to be available to all employees, it covers part-time employees of any sort.

    I understand from the response of my right hon. Friend that he will keep the matter under review and that we can come back to it at some time in the future. I am convinced, as is my hon. Friend the Member for Beaconsfield (Mr. Smith) and I am sure other right hon. and hon. Members, that wider share ownership should be extended. In view of the fact that my right hon. Friend has promised to keep it under review and that we can come back to it in the future, I beg to ask leave to withdraw the amendment.

    Amendment, by leave, withdrawn.

    Clause 33, as amended, ordered to stand part of the Bill.

    Schedule 4

    Employee Share Schemes, Etc

    Amendment made: No. 8, in page 122, line 38, at end insert—



    3A. In section 47 of the Finance Act 1980 (savings-related share option schemes) after subsection (2) there shall be inserted the following subsection—
    "(2A) Where a right to acquire shares in a body corporate which was obtained as mentioned in subsection (1) above is exchanged for a right to acquire shares in another body corporate in accordance with a provision included in a scheme pursuant to paragraph 10A of Schedule 10 to this Act, the exchange shall not be treated for the purposes of the Capital Gains Tax Act 1979 as involving any disposal of the first-mentioned right or any acquisition of the other right, but for those purposes the other right shall be treated as the same asset acquired as the first-mentioned right was acquired."

    3B. In section 38 of the Finance Act 1984 (approved share option schemes) after subsection (6) there shall be inserted the following subsection—
    "(6A) Where a right to acquire shares in a body corporate is exchanged for a right to acquire shares in another body corporate in accordance with a provision included in a scheme pursuant to paragraph 4A of Schedule 10 to this Act, the exchange shall not be treated for the purposes of the Capital Gains Tax Act 1979 as involving any disposal of the first-mentioned right or any acquisition of the other right, but for those purposes the other right shall be treated as the same asset acquired as the first-mentioned right was acquired.";.—[Mr. MacGregor.]

    Schedule 4, as amended, agreed to.

    Clause 45

    Carry-Back Of Relief

    Question proposed, That the clause stand part of the Bill.

    Last year we extended the life of the business expansion scheme indefinitely and, in putting it on a longterm footing, we made a number of changes to focus the impact of the scheme more closely on its original objectives and to improve its operation. After such major changes we think that there is a good case this year for keeping further revisions to a minimum. I am glad that the changes we have proposed were welcomed by the Leader of the Opposition on Budget day.

    Clause 45 is intended to reduce bunching of investment towards the last quarter of the tax year. As hon. Members will know, under the scheme relief is given for the tax year in which shares in a qualifying company are issued to an investor following subscription. Therefore, in order to obtain relief in any particular year, there is a deadline for investment of 5 April. Naturally, many people delay making their investment until near that deadline so that they have an idea of what their personal financial affairs are like towards the end of the financial year. For some it may be because they wish to minimise the length of time between paying for the shares and recovering the tax relief. Others may not have a clear idea until a late stage as to what their financial position for that tax year will be, so they have no idea how much money may be available or what tax relief they would get.

    As experience of the scheme on the part of investors and promoters has grown, there has been an increase in the amount of investment earlier in the tax year, parti:ularly in the third quarter. However, there is no doubt that it remains more difficult for companies to raise equity under the scheme in the first half of the tax year.

    There is no simple solution to the problem. Whatever deadline is set for the making of investments under the scheme, it is likely that there will be a concentration of investments shortly before it. Therefore, simply putting back the deadline would hardly help the companies concerned. However, we believe that the proposal now before the Committee will provide an incentive for more investment to be made under the scheme in the first half of the tax year.

    We propose that an investor should be allowed to claim relief in the preceding tax year on up to half of any investments made under the scheme in that period, subject to a limit of £5,000 on the total amount of relief for all investments that can be carried back from any tax year to the previous one. To take advantage of that option, the investment would have to be made during the first half of the new tax year—between 6 April and 5 October. The normal limit of £40,000 on the amount of investment on which relief might be claimed for any one year would continue to apply. I do not suggest to the Committee that that change will eliminate completely the phenomenon of bunching. However, I believe that it will have a valuable impact and will make it easier for companies to raise business expansion scheme finance in the first half of the tax year.

    I want to say a few words about the clause, but before I do I should declare an interest. I do some work for a company that manages a business expansion scheme fund. I hope that what I lack in objectivity will be made up for by a little personal experience.

    My hon. Friend the Economic Secretary described the problem fairly accurately but, in fact, there are two problems. One is in connection with BES funds and the other is in connection with individuals. The amendment to the law that he has proposed will go a long way towards solving the problem for individuals. There will be BES issues aimed at them in the first part of the tax year which will give them some relief in the previous part of the tax year, enable the sort of carry-over to which he referred and remove bunching. However, it does not solve the problem of BES funds.

    I think that BES fund managers find that they cannot raise money for a BES fund until towards the end of a calendar year because people have no idea what their tax position will be and they want to leave it late. At the same time, the BES fund manager has to give himself room to invest the money. Most of us find that we cannot raise the money until about October in a calendar year and that effectively means that we reach Christmas by the time we have the money. Therefore, we have effectively three months to invest it. My practical experience of the company for which I do some work is that fund managers are running around looking for things in which to invest in March. That is a bad thing. It often means that money is thrown at deals that the scheme was not intended to help promote. The clause will not solve that problem. I shall explain why and ask my hon. Friend whether he will deal with it, if not on this occasion, at a later date.

    6.30 pm

    The first problem is that if a fund is not fully invested by 5 April, the carry-over relief is of no use, first, because it applies only to half the uninvested amount and. secondly, because the maximum is £5,000. If an individual had put £40,000 into a fund and that fund was 75 per cent. invested by the end of the tax year, the carry-over relief would entitle him to a reduction of only £5,000, not the £10,000 remaining uninvested in the fund. The second problem is that, regardless of how much money one puts into the fund—even if one puts in only £10,000—one is still entitled to a reduction of only half the amount that is uninvested at the end of the year.

    The clause represents an attempt to come to grips with a real problem, but it does not do so in respect of BES funds. Although most of the money that has been raised for BES issues in the past couple of years has been in one-off public prospectus issues, my hon. Friend would do well to consider trying to encourage people to make such investments through funds. There is a considerable amount of evidence that many public prospectus issues are put together specifically for the purpose of raising money under the business expansion scheme. They are not preexisting companies that are looking for development capital. Business expansion scheme funds are in a position to find the sort of investments that my hon. Friend wants to see made under the scheme. BES funds are in a position to seek out relatively small companies that are looking for £100,000 to £200,000. However, if a City institution is to promote a BES issue, it has to consider raising £2 million to make it worth the effort.

    Not enough of the companies that one wants to help with BES are trying to raise that amount of money. Therefore, the sorts of issues that are put together in public prospectuses to raise money under the business expansion scheme are — not always, but often — artificially put together solely to take advantage of the BES. One can however, say with a good deal of honesty that money that is raised by BES is often development capital that is genuinely needed in an existing small business.

    Although the clause will help to solve the bunching problem for an individual and allow him to wait until the end of the tax year to see how much money he will have to pay on and therefore how much he should invest in the BES because of the relief that he needs, something slightly different is needed for BES funds. I ask my hon. Friend to consider proposing that, as long as the money is invested in a BES fund, perhaps not even by 31 March, but some earlier date such as 31 January in a tax year, the fund managers should have an additional four, five or six months after the end of the tax year to invest the money. In that way, one will encourage people to invest in BES funds and give BES funds a little more time to look for the sort of businesses in which they should invest and not find themselves in the last couple of weeks of March, scrambling around for deals to throw money into. If 5 April arrives and they have not done so, all the tax relief is lost and everybody—the managers and investors—will be in an extremely difficult position. I shall be grateful if my hon. Friend will consider introducing an amendment to that effect at some stage during the passage of the Bill or, if the Bill is lost, in the Finance (No. 2) Bill.

    There is always a slight danger, on occasions such as this when the Government introduce an extension to an existing tax relief, to say that it is all very well as far as it goes. The business expansion scheme has been a tremendous success. It is an imaginative tax relief, and it has encouraged an enormous amount of investment in new and existing businesses. Treasury Ministers at the time introduced it against fierce resistance from the Inland Revenue. Indeed, the original proposal was that tax relief would be only at the standard rate of tax. If it had been, it would have been stillborn. It is because it is a generous relief that it is a successful scheme. Can my hon. Friend give the Committee some idea of the amount of investment that has been encouraged by the scheme?

    On occasions such as this one knows that there will be some abuse. However, we must consider the net benefit. The Government, quite rightly, when it has been clear that the scheme has been abused, have introduced restrictions on qualifying investment. Overall, it has been a successful scheme. Last year, I was glad when the Government decided to make it a permanent scheme. This relatively modest extension recognises one of the difficulties that has occurred — the bunching of investment and the artificiality that that brings, which my hon. Friend the Member for Lewisham, West (Mr. Maples) described. To some extent, the clause gets to grips with that problem.

    It might be helpful if my hon. Friend the Economic Secretary would explain why the figure of £5,000 was chosen. I think that I am right in saying that the maximum relief available to an individual in any one year is £40,000. Having decided in principle that it is sensible to allow carry-back on any investment made in the first six months, there must be a case for saying that, that being half the year, one should allow half the relief to be carried back.

    In his Budget statement the Chancellor said:

    "Last year I put the business expansion scheme on to a permanent footing. However, the present rules still produce too much end-year bunching of BES investments, and hence may crowd out some projects and lead to bad decisions on others. I propose, therefore, to permit someone who invests in the first half of the year to claim part of the relief against his previous year's income. This will make it easier for companies to raise BES finance throughout the year"—[Official Report, 17 March 1987; Vol.112, c.820.]
    Of course, that has been expressed in the clause.

    If the Chancellor had been a little more frank, he would have said, "We tried to get people to invest in small new companies by offering them tax relief. Of course, because people wanted the tax relief, but not to take any entrepreneurial risk, they were only willing to invest in asset-backed enterprises such as private nursing homes. We did try to sort out the worst abuses last year, so give me some credit for that. However, because BES is seen as just a tax dodge"—hence its popularity, which the hon. Member for Beaconsfield (Mr. Smith) did not explain—"people have been thinking about investments only in the last three months of the tax year—January, February and March. This has meant that any half-baked scheme can raise cash in that period, but for the other nine months of the year virtually no project, however well thought out or beneficial to the nation, can raise a bean. Therefore. we shall patch up the BES a bit more by allowing people who invest in the period April to September to claim relief against their previous year's income."

    The real question. if the Chancellor had been frank, is whether it is sensible to direct a state subsidy to investment according to the tax planning needs of wealthy BES investors — bearing in mind that the Peat Marwick report showed that 85 per cent. of recipients of BES relief were higher rate taxpayers — rather than some wide-ranging criterion such as the need to create jobs or to improve the nation's industrial performance. They are certainly the criteria that we would apply to any money that is given to support industry, whether directly by grant or through tax relief.

    The Inland Revenue statistics for the latest year available, 1984–85 — this is from "Inland Revenue Statistics 1986" — show that 61 per cent. of all BES investment went into companies in the service sector, compared with just under 2.4 per cent. in manufacturing. I mention that, not out of any disrespect for the service sector, but to emphasise that manufacturing needs the greatest Government support. It is the area in which the Government have dismally' failed over the past eight years, as we see if we look at the huge losses in the manufacturing sector and note the Government's own forecast of a deficit. Britain has lost one fifth of its manufacturing sector and the Government expect a vast deficit of £8,000 million this year in manufactured goods. Therefore, it is manufacturing industry that needs the greatest support and encouragement if we are to avoid the expected balance of payments deficit this year.

    The regional analysis of business expansion scheme money shows that the destination of just over one quarter of it was described as unknown. That cannot he satisfactory for any Government. Perhaps the Economic Secretary has done a little investigative work on this matter since the financial year 1984–85. If he has. perhaps he will tell us the destination of that quarter of BES money. Of the 74 per cent. that was traced, over 62 per cent. went to the prosperous south-east, 5·5 per cent. went to the north and north-west combined and only 1·6 per cent. went to Northern Ireland. Those are extremely worrying statistics. The BES scheme weights the relief that is given at the expense of taxpayers in favour of schemes that have been brought into existence in the south-east of England. The BES does nothing to help the serious unemployment in the north and north-west and in Northern Ireland.

    The total BES investment was about £140 million. Assuming that all investors pay tax at a rate of 60 per cent., this represents a Government subsidy of £84 million. That expenditure is large. It is important that £84 million of Government money is properly directed, but there is no indication that it has been. The Department of Trade and Industry figures for regional and general industrial support show a steady fall from £791 million in 1980–81 to £277 million in this financial year. Since 1984 a mere £370 million has been given by way of regional developments grants for eligible capital projects.

    The Government have provided relief through a scheme that is heavily concentrated in the south-east. It benefits the better-off taxpayers and, as the hon. Member for Lewisham, West (Mr. Maples) said, means that tax relief will go to ill-thought-out schemes and will not be of great benefit to anybody except the taxpayers who receive that tax relief.

    There must be better ways of spending £84 million. There must certainly be better ways of keeping track of Government money that has apparently disappeared to an unknown destination. I am sure that the Economic Secretary is extremely worried about that — or is he? Perhaps it does not matter if better-off taxpayers, the higher rate taxpayers, benefit from it. It matters only when we are looking at those who receive unemployment benefit or social security benefits.

    The Government have allowed money to be spent—tax relief is a form of spending-without proper checks. This is an ill—directed scheme and it is high time that it was examined once again to see whether there are better ways of giving support to industry, especially in the deprived regions. Instead of accepting the assumption made by either the hon. Member for Lewisham, West or the Economic Secretary that this scheme is permanent, I hope that the Minister will think again. He is prejudging the outcome of the general election. This scheme requires careful examination and we need a redirection of that £84 million.

    A number of points have been raised during the debate. The hon. Member for Thurrock (Dr. McDonald) concentrated on her dissatisfaction with the way in which the business expansion scheme works in practice. It is inherent in any scheme of this kind that full information becomes available only gradually. It is important that as more information about past years becomes available to the Inland Revenue the Inland Revenue and Ministers should consider the implications of that. From time to time we should, if need be, make adjustments to the scheme to take account of the information that becomes available. That is what we have done.

    6.45 pm

    In earlier Budgets we tightened up the focus of the scheme to deal with the problem of asset backing. In this Budget we made the change by way of the clause that we are discussing about the timing of the investment. I do not think that it is an ill-directed scheme. Funds should be available, and are available, through such a scheme to small and growing companies that need the funds for investment. I disagree fundamentally with the hon. Lady that it would be sensible to try to direct the tax relief to a specific sector such as manufacturing. I hope that more manufacturing and other sorts of companies will be able to take advantage of the scheme, expecially in view of the change that we are now making.

    The whole of manufacturing industry is becoming increasingly profitable, and that is the best way to encourage the growth of that industry. When that happens, no doubt more companies within it will look for extra finance. The hon. Lady spoke about 62 per cent. of the money being spent on the south-east. The location is determined by the registered office of the company, not necessarily by the operating area of its activities. Therefore, the fruits of the investment may occur anywhere in Britain, and no doubt frequently do.

    I was not aware of that important piece of information. Many new or very small companies are extremely unlikely to have their registered offices at the same location as their place of operation. Many of these funds raise their capital in London and are London-based and, of course, their registered offices will often be in the London area. However, the investment might well be elsewhere. Can we get a better survey to find out where these businesses actually are?

    The more information that we can obtain on the operation of the scheme the better. I have already said that. As the tax relief relates to the investment in the company itself rather than to the activities that are carried out by the company, it is inevitable, as my hon. Friend said, that the figures will come forward on the basis of the registered office of the company.

    The Minister speaks about registered offices, but presumably tax relief is given for a specific scheme. Therefore, one surely knows, not just the location of the head office, but the purpose for which the scheme is designed. I spoke about private nursing home schemes. Presumably one knows the location of the various nursing homes for which relief might be given through a scheme of this sort. Is the Minister saying that he has information only about head offices, and has no information about the purposes of the scheme for which tax relief is given? Surely a geographical element must come into the matter, at least for some schemes, if not for every scheme.

    The Inland Revenue does not have information on where the activities of a company as a taxpayer take place and whether it operates through the benefit of business expansion scheme finance or through any other scheme. Such information is not available in the form that the hon. Lady seeks.

    I have said, and I repeat, that it is important for us to continue to obtain as much information as possible about the scheme as it goes along. The Peat Marwick report referred only to the operation of the scheme in its infancy. I have no doubt that we shall want more information as the scheme develops, especially in the light of the changes that we have made during the past two years, because we shall wish to see the way in which those changes are reflected in the behaviour of investors and, indeed, in the behaviour of the companies in which the investment is made. I do not think that there is any difference between us about the desirability of such information, but the matter is not nearly so straightforward, or the information so readily available, as the hon. Lady implies.

    My hon. Friends the Members for Beaconsfield (Mr. Smith) and for Lewisham, West (Mr. Maples) raised several points about the proposal in clause 45. My hon. Friend the Member for Beaconsfield asked why the figure of £5,000 was chosen for the amount that could be carried back. My hon. Friend the Member for Lewisham, West complained that only £5,000 could be carried back, and also that it applied to only half the figure. I should like to comment on those points, but before I do so I should like to mention the actual figures. For 1984–85, which is the latest year for which full data are available, a total of 807 companies benefited from the scheme and the amount raised was approximately £150 million. Information on the following year, 1985–86, is not yet complete. However, the indications are that the figures are likely to be considerably higher than they were for 1984–85.

    The Peat Marwick report on those figures concluded that the great majority of those funds would probably not have been raised by other means if the business expansion scheme had not been available. Clearly, the scheme has had an important impact in that respect, and has helped smaller businesses and companies to get going in a way that otherwise would not have been open to them. That fully justifies the initiative that the Government took in introducing the scheme.

    Let me now deal with the figures. The evidence for the years completed so far, which is all that we have to go on at this stage, is that 80 per cent. of all investors put in sums of up to £10,000 a year. Therefore, £5,000 will be half the figure that covers 80 per cent. of all investors. Although one might argue for another or a higher figure, it is clear that, in the great majority of cases, the figure of £5,000 will be significant and will cover the amounts involved.

    My hon. Friend the Member for Lewisham, West made a particular plea on behalf of the funds and said that he thought it would be helpful to have a different regime for the funds because, by their nature, they could spread risk and find investments more readily than could individuals who were looking for direct investments. I beg to differ on that point. I do not in any way wish to denigrate the funds, which have played an important and useful role, but they should not be given special advantages over individual direct investments. In fact, we are in favour of investment of both types. The arrangements that we are now introducing will make such investments easier because, as I have said, it will not be necessary for an individual to wait until the end of the tax year before making an investment that he knows can be set against the taxable income that has already been earned because it fell in the previous year.

    Wherever one puts the cut-off date, there is bound to be bunching before the date concerned. However having said that, we shall obviously keep that under review—as, indeed, we have done the entire operation of the scheme so far. As I said in my introductory comments, the provisions will not necessarily remove all bunching, but they will have a significant effect. If, during the first half of a new tax year, someone knows his taxable income for the previous year, he will now, up to a figure of half of £10,000 — be able to make an investment that will be usable, retrospectively, for tax credit against the previous year, the earnings for which he should know by that time. That should benefit individuals and fund managers. I do not think that it is beyond the ingenuity of fund managers for the BES to work out the best ways of taking advantage of the new proposal.

    The point that I was trying to make was that this amendment is of no relevance to the BES funds, for the reason that I gave. I understand that My hon. Friend wants the same tax regime to apply to individuals and to BES funds, but the amendment to the law that he is proposing will not be of any benefit to the BES funds, because in no circumstances will they be able to carry over uninvested funds from the end of one tax year to the first half of the next.

    The value of the funds is not only to the companies in which they invest, but to the people who invest in them. To the extent that it is easier for those who invest to make such investments at different times of the year, which they cannot readily do at the moment, the provisions are bound to make it easier for the funds to raise money at times other than later in the tax year. The earlier in the tax year that the funds can raise the money, the longer they have to make the underlying investments themselves. Therefore, although the benefit is not directly available to the funds as a result of what we are doing, the advantages to the investors will, by definition, make it easier for the funds to raise money throughout the year.

    I do not want to deny that my hon. Friend has a point in emphasising that there are different considerations between funds and individuals. However, I am not persuaded that we should make a separate regime for individuals and funds, because I am in favour of encouraging individuals also to make direct investments through the business expansion scheme. It should be possible for the funds to gain some of the benefit of the willingness of individuals to make investments in the first half of the year, which are encouraged by the clause, and which otherwise they might he reluctant to make. On that basis, I hope that we shall have my hon. Friend's support, and that of others, for the clause.

    Question put and agreed to.

    Clause 45, order to stand part of the Bill.

    Bill (Clauses Nos. 11, 18, 20 to 23, 33, 45, 147 and 160 and Schedule No. 4), reported, with amendments; to lie upon the Table.

    Chevening Estate Bill Lords


    That the Order [23rd April] relating to the committal of the Chevening Estate Bill [Lords] be amended, in line 15, by leaving out the words 'Standing Committee' and inserting the words 'Committee of the whole House'.—[Mr. Ryder.]

    University College Of Wales, Aberystwyth

    Motion made, and Question proposed, That this House do now adjourn. — [Mr. Ryder.]

    6.58 pm

    I am delighted that I have been given the opportunity to debate the future role of the University college of Wales, Aberystwyth. The college has a special place in the hearts of the Welsh people as it was the first college of the university of Wales to be established, in Aberystwyth. The institution was built through the efforts of many dedicated men and women and by the scarce pennies that were contributed by the people of Wales over a century ago.

    The University college of Wales is held in high esteem for sentimental reasons and because of the excellent academic standards that it has achieved over the years. Many distinguished ex-students, many of them in public life, in education and in industry, are making an important contribution to the wealth and welfare of the nation.

    It is with horror, therefore, that we learn of the drastic cuts that were imposed as a result of the Government's higher education policies on all the university colleges in Wales, and on Aberystwyth in particular. As a result, between 1981 and 1986 the University college of Wales suffered cuts of about 22 per cent. in its University Grants Committee grant, which led to a reduction of 20 per cent. in its academic staff and of 22 per cent. in other staff. There are now to be further reductions and the future looks even more bleak.

    To cope with continuing financial restraints between 1987 and 1990 and to avoid huge deficits, the college is being forced to make further painful decisions that could involve a reduction, either by amalgamation or closure, of the number of departments from 32 to 22 and the loss of up to 75 academic and non-academic posts. When we consider that this is happening in an institution with about 3,000 students and with fewer than 300 academic staff, the seriousness of the situation becomes obvious to anyone.

    Over the past few years the college administration has applied itself to coping with immense difficulties. Expenditure on academic services, administration and maintenance has been cut to the bone. The college has been successful, however, in increasing research income and in attracting a growing number of overseas students. At the same time it has pioneered significant developments in transbinary co-operation, which include working with the Welsh college of agriculture and the college of librarianship in Wales. It is therefore discouraging for all those involved — students, staff and anyone concerned about the future of the college—that decisions affecting an important institution in the heart of Wales should be taken by a centralised committee without sufficient weight being given to the special circumstances of the institution.

    First, the college is relatively small but broadly based. It is geographically remote from the other constituent colleges of the university of Wales. Any rationalisation within the university has therefore to be limited because of the practical and geographical difficulties involved, and the need to offer an adequate range of mutually supporting disciplines on the one campus.

    Secondly, the college has a special role to play in the cultural and linguistic life of Wales. It has therefore to use a significant part of its resources to accommodate bilingualism and Welsh medium teaching, and to fulfil its obligations as a guardian of Welsh culture.

    The college is situated in the heartland of rural Wales and it makes a significant contribution to the economy of that area. It has close ties with the community around it. It is one of the largest employers in an area that is devoid of large-scale industry and business. It is integrated with the life of the surrounding area in a way that few other colleges outside Wales can be. To take away the viability of the college through the implementation of further cuts would be a serious blow to Aberystwyth in terms of jobs and economic prospects. My constituents are aware of this, but their displeasure goes further than that. They are fiercely proud of their university college and of its fine tradition, and anything which diminishes that tradition diminishes us all.

    I maintain that the way in which the UGC allocates its funds is grossly unfair to Wales, and especially to the UCW. I do not believe that it takes fully into account the unique character of Welsh colleagues and their special place in Welsh society. The Welsh university tradition is entirely separate from that of England, and this should be taken into account. That is why I share the serious concern of the college at the attitude of the Croham report, which dismisses any idea of a Welsh committee within the UGC. In my view it is essential that such a committee should be set up immediately, as it is the only way to defend the interests of the UCW of Aberystwyth in a climate of dwindling resources and Government indifference to higher education in Wales.

    The Government must take responsibility for the serious problems in higher education, because they are starving it of funds. It is demeaning to treat education in terms of profit and loss. I know that it can be demonstrated that Aberystwyth uses its resources with care and responsibility, but the immense contribution that it makes to the community, to Wales and to the world of education cannot be measured in money and its future must be sustained by increased resources and encouragement by the Government.

    At this late hour I make a plea to the Minister to reconsider the grants that are allocated by the UGC to the UCW. I hope that she will give the matter favourable consideration and that I can return to my constitutents to say that the future of the college at Aberystwyth is secure for generations to come.

    7.7 pm

    The hon. Member for Ceredigion and Pembroke, North) (Mr. Howells) has presented his case eloquently for the University college of Wales, Aberystwyth. With him, I wish to pay tribute to the UCW's long history of service to the community and to its special place as the senior college of the university of Wales. I recognise with the hon. Gentleman the high esteem in which the college is held within its own area. I recognise also that the funding changes to which the hon. Gentleman has referred that have been introduced over the past five years, the reductions that have gone with them and the policies that underlie them have presented all seven of the colleges in Wales with problems of adjustment. Some of these have been shared with other universities in Great Britain and some have derived from the college's own characteristics.

    I am standing here this evening instead of my hon. Friend the Under-Secretary of State for Education and Science with special responsibilities for higher education because he is even now returning from another part of the Principality. My hon. Friend has been visiting University college, Swansea to see for himself how it is coping with change. On a wider front, my right hon. Friend the Secretary of State for Education and Science and my hon. Friend have had the opportunity of discussing these matters directly with senior members of the university of Wales, and have recently met a deputation from the Association of University Teachers in Wales. We are not unfamiliar within the Department with the matters which the hon. Gentleman has raised, and the Government are not unsympathetic. As Minister of State, I take an interest in higher education so I, too, have been following the matters to which the hon. Gentleman has referred with considerable interest.

    The public funds available to universities through the University Grants Committee are the subject of at least three levels of decision, and in Wales there is a fourth, owing to the federal structure of the universities. It is important that these levels are not confused.

    The first level is the decision made by the Government on the amount of funding; then the UGC decides on the distribution of grants to universities; then the universities settle their internal distribution. Conventions are attached, quite rightly, to the extent to which the Government comment on the decisions, both of the UGC and the individual universities. Those conventions are designed to protect the autonomy of universities. Because those distinctions are sometimes confused, it is important to be clear about where matters now stand.

    The Government have made known their expenditure plans for the current financial year and the following two years. Although they are the subject of review, they at least give some indication of what is in the Government's mind. The UGC has informed universities of their initial basic allocation for the academic year 1987–88 and the provisional allocations for 1988–89 and 1989–90. I stress that it is an initial allocation, because the UGC has held in reserve certain funds for special purposes, including measures to promote rationalisation within and among universities. Universities are preparing academic and financial plans which accord with the level of grant they expect to receive.

    Within the university of Wales, a related exercise is being conducted by a special working party on rationalisation. The hon. Member referred to the outcome of the rationalisation working party exercise, the report of which has been passed to the colleges, and to Aberystwyth's outlined academic plan. It would not be proper for me to comment on those documents as they are still in a formative stage. At Government level, both the resources we are providing and the policies outlined in our recent White Paper on higher education, to which the hon. Member referred, demonstrate our firm commitment to universities within a wider higher education system.

    Last November my right hon. Friend announced an additional £95 million for universities in the current financial year. Additional funds have been made available following the conclusion of a satisfactory academic pay settlement. That means an increase in funding for universities of some 10 per cent. The benefits of that additional funding and the extra money flowing through the science budget will not be felt immediately, although the benefits of the higher pay are immediate. The funds will not be spread evenly among the universities.

    We come to the second level of decision-making; the decisions taken by the UGC. The outcomes of the UGC's resource allocation procedure have been widely misunderstood in Wales as in other parts of the country. It has sometimes been presented, unfortunately, as being discriminatory. It is discriminatory in the sense that it discriminates in favour of research excellence, but it also uses criteria that have been applied fairly to all universities.

    Except in respect of certain additional sums made available in recognition of special factors, the UGC's method treats Welsh universities the same as any other universities. I hope that all parties will accept that this is as it should be. All universities, wherever they may be located, should be judged against the same standards, using the same measure of performance.

    There is room for debate about what these criteria should he. One criticism levelled against the UGC's allocations is that it tends to favour the larger institutions at the expense of the small ones. Colleges such as UCW are consequently disadvantaged and disfavoured, but that is a matter for the UGC, which has said that it will look at that again, although it appears from the preliminary statistical analysis that smaller institutions generally do not have higher unit costs than larger institutions., I reiterate that the UGC has pointed out its willingness to look further at that.

    I should mention two further factors that are relevant to the UCW. The first is the importance of achieving effective rationalisation of provision. That means looking again at the small departments to see whether they are being cost-effective or whether there is a better means of securing academic strength through the concentration of provision.

    The Government welcome the lead taken by the university of Wales in promoting and co-ordinating rationalisation among the colleges. I understand that the UCW has the strategic objective of substantially reducing its departments, although that does not imply a corresponding loss of opportunities for students, particularly as it relates to disciplines within larger departments.

    The second factor I emphasise is research excellence. The Government have been encouraging the UGC to pursue selectivity in the funding of university research. Selectivity favours those institutions with a proven record of success or where the prospects of success look brightest.

    The UGC first introduced more specific selectivity in its grant allocations for the current academic year. In doing so, it made judgments on research quality in 37 subject-related cost centres in every university. Although the UGC was able to identify departments microbiology, botany and international politics-within the UCW, which were above the national average ranking on research, the college did not fare particularly well from the exercise, but I am glad to see that one of the college's explicit objectives is to improve its research ratings. It intends, in its internal resource allocation procedures, to effect that aim.

    The hon. Member talked about the Welsh factors arid teaching through the Welsh language. The Government and the UGC recognise the commitment of the university of Wales to Welsh medium teaching and the provision made at Bangor and Aberystwyth. That recognition is given expression in two ways: first, as a special factor, in effect, as an addition to grant in the allocations made to the two colleges and, secondly, in a separate grant made to the university of Wales registry which covers, among other items, the activities of the board for Welsh medium teaching.

    The hon. Member made plain his views about the current committee report and how he feels it would be best to deal with universities in Wales. I take note of those views and will report them to my hon. Friend.

    I accept that grant levels have not permitted as much expansion of the board's activities as the board and the university would have liked, but equally the past seven years have seen a substantial development of Welsh medium provision and I hope that more will come. I am assured by the UGC that the level of provision, in its calculations, has not been reduced, although, in accordance with the conventions, the separate elements of each university's block grant are not identified.

    Some members of the UCW have argued that the college's commitment to Welsh medium teaching imposes upon it the need for a more generous student-staff ratio than might apply in other areas. I accept that that is the case. The purpose of the special recognition made in the UGC's formula is to take account of the additional staffing need. If the present allowance turns out to be insufficient, that matter can be taken up with the UGC.

    Another matter about which the hon. Gentleman made a particular point was the relative geographical isolation of Aberystwyth and the fact that it is located in a mainly rural area of disadvantage in terms of its place and other respects. If there is a case to be made, I am sure that the UGC will listen to it with much sympathy.

    One possible disadvantage is that the college might be less attractive to overseas students, but that is not entirely borne out by its success in recent years in considerably increasing the number of overseas students. Therefore, the point about it perhaps being in a disadvantaged area with less opportunity to attract people, and being isolated and in difficulties because of its situation and lack of resources is not entirely borne out by what has happened with overseas students.

    Over its 115 years, University college, Aberystwyth has demonstrated great flexibility in responding to changing circumstances, and for that we give it all credit. Now is the time for similar flexibility in order to build on the college's strengths and to improve its overall cost-effectiveness. I am confident that the ingenuity and talent of the present generation of academic leaders within the college will be able to match up to the present challenges in the spirit of their predecessors.

    Secondary Education

    7.21 pm

    I am grateful to you, Mr. Deputy Speaker, for giving me this opportunity to speak on the Adjournment on reform in secondary education. We should be debating reform not just because change is a good thing for its own sake, but because there is no doubt that education will be a matter for ever-increasing debate, including debate which may well take place during any coming general election campaign.

    It is important that all hon. Members should address themselves to the way in which we can get politics—I mean the wrong kind of adversarial politics—out of our education system. I hope later this evening to give an example of the way in which that might be done.

    We must be moving to a way forward in education where we can remove the obvious diversions which appear to exist between political parties and, more often, within the education system itself. After all, the education of our young people is one of the most important matters to which the Government and people of the nation must address themselves.

    I am grateful to my hon. Friend the Minister for being prepared to reply to the debate. I hope that she will be able to confirm that, given the present dispute about recent pay talks, the door is open to teachers, administrators and union leaders to discuss the way forward after the interim period through which we are now going. I hope that she will also be able to make a few remarks about the way forward, although I do not propose to devote my speech to the present pay dispute in the teaching profession.

    The divisions that exist within education are not helped by the fact that there are at the moment four separate teaching unions. I was a member of the Assistant Masters and Mistresses Association. They are all perfectly respectable institutions in the sense that they all have a history of support, and many teachers have loyalty to all four of those unions. I have excluded the head teachers' unions, which can be added to my remarks.

    All the unions take a different stance at different times—and that they are perfectly entitled to do—but in the longer term we should be looking for less division and for a way in which teachers can be represented by a less diverse group of bodies. In particular, I support the stance of the Professional Association of Teachers, at least in one respect. It has always said, and I support this without hesitation, that—if I may use an outdated term—to take industrial action is not the best way for the teaching profession to put its case.

    I want to go on record as saying that the best advice for the majority of teachers who want to do the best for children and for the education service, whatever their political views, is that the way forward should not include the taking of industrial action — working to rule or taking strike action. That is not the best way forward, and I join the many others who are appealing to the members of the teaching profession to think again. It is fair enough that they should have different views and put their case strongly, even—with respect to my hon. Friend the Minister — to disagree with Ministers, but industrial action is not a good way forward and in my opinion, as an ex-member of the profession. it does not achieve the best results.

    If anyone had any doubts that change was needed in education, they might have been removed if they had looked at the survey in The Independent this morning. It highlighted, as far as I could see without any political bias, the deficiencies in the present system, which is mainly comprehensive. The survey was not criticising the comprehensive system as such. As I understood it, the survey said that, because of all the changes in education since 1945, we have not addressed ourselves properly to what it is we are trying to do in the schools. After all, we are not just trying to get the maximum number of pupils to Oxford, Cambridge or the other universities, or the maximum pass level at GCSE or any other exam; we are trying to decide what skills, qualifications, numeracy, literacy, and so on, we want from our pupils when they come out of the schools. The analysis in The Independent, which has been reproduced elsewhere, put that very well and I would recommend not only my hon. Friend the Minister but any other hon. Member to read it.

    Let me take a few moments to point to one or two reforms in the secondary education system that I would welcome. I hope that there will be at least a debate, and perhaps action. In any school in any education system there is nothing more important than the quality of the head teacher and the way in which he leads his team of teachers, ancillary staff and pupils.

    My right hon. Friend the Secretary of State has obviously been addressing himself to that problem, but I want to encourage the idea of a staff college to provide specialist training for head teachers and potential head teachers. After all, that system works extremely well in the services. I am not suggesting that such a staff college in education should somehow mimic the staff college at Camberley, but there is a strong case for rigorous, meaningful training for head teachers in management and all the other skills that they will need in addition to their teaching skills.

    I am not devaluing the teaching skills required by head teachers, because it is good teachers who should be promoted to headships, but they need other skills as well which they may not have had the chance to develop during the earlier part of their careers. For that reason, I again urge the Government and my hon. Friend to respond positively to the idea of a staff college and management training.

    Let me pass on to another suggestion that relates to my remarks about the profession, its behaviour and the unions. The majority of teachers have high professional standards and are committed to their work. Indeed, I should like to take this opportunity to pay tribute to the schools and to the overwhelming majority of teachers in Norwich who are doing sterling work, far beyond the call of any special contract or written agreement, for the sake of their pupils. That is continuing all the time and must be recognised by hon. Members.

    Nevertheless, there is still the problem of industrial action and other actions by teachers which do not have a good effect on their professional status. Therefore, I should like to recommend for serious consideration by the Government the setting up of a professional teachers' council. That is quite distinct from the unions. After all, any body of employees has a perfect right to set up a union under the law, and I shall not comment on that now. But, in addition, we could set up a professional teachers' council which would have the task of setting and monitoring professional standards for members of the teaching profession—whether ensuring that political bias is not introduced into schools, or setting standards or a code of conduct for teachers.

    There are many roles that such a body could fulfil, in the same way as the British Medical Association and other bodies perform such functions for doctors and members of the fraternity. I hope that my hon. Friend the Minister of State will comment on that, and perhaps suggest that the matter may be considered in the future.

    I should now like to move on from the teaching profession to the way in which the secondary school system is now run. I am delighted that my hon. Friend the Member for Norwich, South (Mr. Powley) has joined me, as I wish to refer to a topic that has caused considerable unease among my constituents and his. At present, the local education authority administers the way in which children are allocated to various secondary schools. Of course, there is the Government principle of freedom of choice for parents, but we all know how that works out in practice. Many parents write to me, as their Member of Parliament, saying that they have been unable to secure the school of their choice. They then go on to appeal; but even after they have appealed, the system still seems to work against them. The present arrangement is causing a great deal of unhappiness, which we in Parliament should at least consider, and perhaps try to legislate to remove it.

    I recommend to my hon. Friend the Minister serious consideration of the question of open entry to our schools. Anyone who knows anything about education — including my constituents—will know that there are all sorts of snags inherent in such a scheme; but I ask my hon. Friend to consider the matter seriously and see whether those snags can be ironed out. As I said at the beginning of my speech, I should particularly like to see politics taken out of education, and that is one of the reforms that will be necessary if we are to achieve our aim. I believe that entry to a school should be determined mainly through discussion between its head teacher and governors, and indeed members of staff and parents.

    While some schools may not necessarily be able to expand fast enough to take all the pupils who want to go to them, it would at least be a step in the right direction if we took the matter out of the hands of the present administrative structure and introduced open entry. We may have to couple that with a change in the way in which funding goes into schools. In the short time available, let me hint at what I should like to see happen.

    Under the system I should like to see in operation, a capitation allowance would be paid directly to a school for each child who attended that school. If the school were expanding, there would be at least the possibility of its receiving more money, and putting up extra buildings and employing extra staff to cope with the demand. Many people say that the less good schools that are not so popular will go into a vicious spiral of decline and disappear out of existence. But, from my experience of the independent sector, I do not believe that that will happen. If for any reason a school becomes less popular, it may go into a short-term decline. That, however, presents a challenge to the head teacher, the staff and the governors. They will ask, "What are we trying to do? Why are we not attracting the number of pupils that we are able to take?" After suitable discussion, they will take action to arrest the decline, and the inevitable result will be an improvement of standards all round. That argument, therefore, can be rejected.

    I am grateful to my hon. Friend for giving way to me, particularly on a point about which I have some feeling and knowledge.

    Is my hon. Friend agreeing with the philosophy expounded by the present Government about giving greater autonomy to the governing body of a school for its financial management? As he may know, I was a governor of the Manor school in Cambridge before I moved to Norwich. That school participated in an experiment to give the headmaster and governors greater autonomy in the financial management of the school. I hope that my hon. Friend will agree that, if that philosophy were followed — I do not hear many encouraging noises from some teaching unions, but I hope that it will be followed — one of the ways in which governing bodies and teaching staff could attract pupils to their schools would be by having greater independence and more say in how their school is run and how disciplines are operated, and thus being given greater management of their own affairs.

    I thank my hon. Friend for his intervention; I entirely support what he has said. I trust that he will allow me to give an example that illustrates my point — although the matter is out of our hands at present and, indeed, I cannot make any comment on the actual processes involved.

    Bowthorpe school, in my hon. Friend's constituency, is now a highly controversial subject, and I am recommending that politics should be taken out of education, not put back into it. However, I will say that, if the open-entry system that I have recommended were adopted—along with the independence of schools and governors referred to by my hon. Friend—any future problem similar to that faced by the Norfolk education committee and the head teachers of Bowthorpe school would be dealt with in an entirely different way. If the roll of a school in the position in which Bowthorpe school has found itself was declining, it would be up to the head teacher and the governors to decide together how to address the problem of decreasing finance, and how to move forward into the future. I hope that my hon. Friend will agree that, under such a system, politics would probably be partially—if not totally—taken out of such circumstances.

    Let me say in passing how much I welcome the move already made by my right hon. Friend the Secretary of State to devolve more power to head teachers. I do not wish to comment on that in detail, because we have already heard welcome announcements about it.

    I referred earlier to pay and possible future negotiations. Let me now make a further point connected with the issue of the independence of head teachers. I should like pay negotiations in the longer run — whatever form they may take in the future — to be mainly concerned with the basic or minimum rates. In the independent sector, head teachers have much more room for manoeuvre on how much they pay individual teachers—possibly because they want to attract more teachers, particularly in shortage subjects such as physics, mathematics, craft design and technology. If we laid down that pay negotiations should address only the minimum levels and gave head teachers more power—as my hon. Friend the Member for Norwich, South and I both wish—that could be applied to pay as well. That is something that we might consider in the longer term. I should be interested to hear the response of my hon. Friend the Minister, and I hope that she will comment on how we are progressing with the serious shortage of physics and mathematics teachers, about which I have often spoken in the House.

    It would be foolish, in my implied criticism of the way in which secondary schools are run, to minimise the severity of the problems posed for local education authorities by the dramatic fall in school numbers since 1979. Hard decisions about administrative reorganisation and school closures have had to be taken. Unfortunately, attempts have been made to pass on responsibility for those problems to the Government. An unholy alliance has been formed between the Labour-led local authorities trying to extort further resources from the taxpayer and teachers' unions seeking pay increases beyond the local authorities' income.

    The debate on the future of education is not, therefore, just the product of the recent disruption in the schools. The fundamental problems lie in the structure of the system itself. I have not had time to develop all the changes that I should like to see, but I have referred to some of them. The basic objectives of education are poorly defined at the moment, as was pointed out in this morning's article in The Independent. Furthermore, the educational attainments to be sought by pupils are highly obscure. The active and effective participation of parents has been impossible until very recently.

    Largely because there is little or no effective freedom of choice for parents or pupils within the state sector, the vested interests in the educational establishment — the civil servants in the Department of Education and Science, the administrators working for the local education authorities, the union leaders and some local authorities have been able—how can I put this courteously, Mr. Deputy Speaker?—to resist positive change. It is for this reason that a whole range of issues, covering the restoration of educational standards, open entry and capitation, the formulation of a national curriculum to which my right hon. Friend the Secretary of State is addressing himself, and about which, if I had had more time, I should have spoken enthusiastically — perhaps my hon. Friend the Minister of State will comment on that point—have been treated as politically taboo.

    This is a challenge that the Government and the Conservative party, as we approach the general election, must accept. There must be a fundamentally new strategy for education that draws pupils, parents and teachers into an effective partnership, enlarges the range of choice and provides real freedom in education, while reducing bureaucratic control. That will require clear educational objectives, better administrative arrangements and proper safeguards for the teaching profession. I look forward to my hon. Friend's comments, enthusiastic or otherwise, on what I have said.

    Does the hon. Lady seek the leave of the House to speak again?

    7.44 pm


    With the leave of the House, Mr. Deputy Speaker, may I respond to the very interesting points that have been made by my hon. Friend the Member for Norwich, North (Mr. Thompson) about the reform of the education system. I believe, with him, that for too long we have allowed our education system to wander without very much sense of direction. It is important that we have a clearer idea of where we want to go.

    I accept with alacrity my hon. Friend's point about the politicisation of some local education authorities. Sadly, one has to look no further than the recently published HMI report on the London borough of Brent to see what happens if a local education authority decides that its priorities are other than the needs of the children for whom it ought to provide a sensible system of education.

    The report saddened me, not just because it is apparent that the management of the local education authority has become completely out of touch with the needs of the children, but because I believe profoundly that young people should be served well by the schools that they attend and by their teachers. Therefore, my right hon. Friend the Secretary of State for Education and Science and my colleagues and I are very worried that children in Brent are not receiving the education to which they are entitled.

    My hon. Friend referred to his concern about the action that some teachers are taking on pay and conditions of service. It is worth putting on record yet again exactly what has happened in the last few years. I was a member of the Burnham committee, and according to the records there were 12 pay negotiations. Of those 12 pay negotiations, only three ended in a negative settlement. In the other negotiations, there were interventions, sometimes ACAS had to be brought in, and at one time there was a pay policy. No clear and straightforward settlement was reached in the very unsatisfactory Burnham committee negotiations. Therefore, its passing has not been regretted by anybody.

    Apart from the Burnham committee being put out of its misery, equally unsatisfactory arrangements have been in existence for about six years. The local education authorities were supposed to sit down with the teachers unions and discuss conditions of service, but the working party failed to meet on a number of occasions because one or other of the union leaders did not wish to attend the meeting. That shows how impossible it was for the local education authorities and the unions to get together to determine conditions of service.

    To put that matter right the Government decided to introduce legislation that would lead to the setting up of an interim advisory committee to look into pay and conditions of service for teachers. At the same time, the Government granted a pay award to teachers which, in this calendar year, amounts to a 16·4 per cent. increase. Taken together with the negotiated arrangements for the immediately preceding period, over 18 months that will amount to a 25 per cent. increase in the basic rate of pay for teachers. By no stretch of the imagination can that be considered to be other than a most generous pay award.

    When people look at what is happening now in the schools and see that the major unions are still involved in action because not all of the package is entirely to their satisfaction, they find it hard to understand why, after such a generous pay award, the teachers are not seeking other means to discuss their differences with the Government.

    My hon. Friend would obviously like me to say more about how, ultimately, we hope that the pay and conditions of service of teachers will be determined. My right hon. Friend has said on a number of occasions that the interim advisory committee is indeed an interim body and that he does not wish to have to determine teachers' pay and conditions of service. Later this year, therefore, he hopes to open discussions with the teacher unions, the churches, parents and all those who have an interest in education in an effort to find the best way in which rates of pay and conditions of service can be determined. My hon. Friend's suggestion that there should be a professional council for teachers may then be considered.

    Of course, we need to look at other matters too. I have a great deal of sympathy with my hon. Friend when he talks about the management of schools. It is of great importance, not only that our schools are clear in their objectives, about what they are in business for, but that they are managed well. The head teachers in our schools have a heavy responsibility. It is not simply a matter of becoming a super teacher. It is also a matter of going into an institution, into a business. One can draw a parallel, as many do, between the management of a school and that of a business, because a considerable degree of management skill is needed for a school to be run effectively. This applies not just to a large comprehensive of 1,500 children or so but to the smallest primary school. The skill of managing how the children are taught and how best to cope with staff is something that many teachers need. It seems to me fair to suggest that an institution or organisation might be set up to provide potential head teachers with the specific management skills needed to run a school.

    That leads on logically to the whole question of how schools are governed. When it comes to what Government have already done to ensure that the customers, the parents, are more involved in the schools which their children attend, the 1986 Act, which I am proud to have had a very small part in putting through the House, is the first step in making sure that parents have a firm part in the government and management of schools.

    It is not enough, however, just to give parents a role in governing. We must ensure that they have more than a vague idea of their role. They need a clear managment objective when they become governors. It is more than simply going to a few meetings and doing one's duty as a governor in attending and making decisions. There is the whole business of what the school is doing, how its curriculum is managed and whether the funds for which the head teacher is responsible are being well spent. Governors must also consider the ethos of the school and its discipline, because it is the head teacher, on the whole, who is responsible for the ethos of the school. Nevertheless, that can be determined by a strong governing body, and certainly by a strong chairman of governors. So it is not just the training of head teachers but the training of governors that is an important part of the philosophy that we want to develop.

    Greater financial delegation to schools has been broached by my right hon. Friend the Secretary of State, who believes that the experiments and pilot schemes currently being run in Cambridgeshire, Solihull and other parts of the country demonstrate clearly that, where schools and, in particular, head teachers, are given the chance to manage the finances, the schools are more likely to be better run and those involved are more likely to feel that the decisions taken actually relate to the institution. In this way one can draw together the responsibility of the governing body, the responsibility of the head teacher and the good management of the school much more easily and reasonably.

    Earlier today my attention was drawn to a report about furniture in schools. Hon. Members may wonder why I want to talk about furniture in schools, but it seems to me a good example. The report concludes that where furniture is purchased in bulk by people who do not use it themselves, those who use it feel no great responsibility for it, and that the state of the furniture in schools at present is rather deplorable. The Government have taken that into account in their funding of local education in this next financial year. We have given a substantial increase to local authorities, amounting to almost 19 per cent., to allow them to put right furniture and equipment which may not be up to the best standards. Financial delegation, however, would vastly improve the chances of purchasing furniture that was well made and represented good value for money, and once the furniture was installed, governors and head teachers would be much more interested in how it was cared for.

    My hon. Friend also touched at some length on the matter of open enrolment. In other words, he developed a theory that is very close to his heart, that it should not be possible for a local authority to restrict, even under the more recent Act introduced by the Government, the number of children going into any given school. He developed the view that if parents had access to the school of their choice, and if that school could take the number of children who wanted to go there, the authority should fund that school according to the number of children attending it.

    I understand that philosophy very well. When I was chairman of a local authority, I had on one occasion, because of a vast over-subscription to one extraordinarily popular single-sex girls' school, a very difficult problem. We had about 100 more people wanting to go to that school than we could possibly accommodate. It seemed to us almost impossible to tell 100 sets of parents that their children could not go to that school. To everyone's horror, I went to the headmistress and asked whether it was possible to take two more forms of entry for that particular year. Could she take 60 more girls? She said that it would be difficult, but not impossible, and we managed to accommodate the vast majority of parents who wished their children to attend that school, by the use of a simple methodology, flexibility. Of course, we had to give extra resources to the school and make sure that there were sufficient classrooms, books, and so on, but by being flexible as an authority we met the parents' wishes. That was exactly the right thing to do, in my view.

    I note with interest exactly what has happened to Bowthorpe school. I note also my hon. Friend's views on how one could extend entrolment to schools within authorities. I hope that he will accept with me that such a philosophy, which I would welcome, would have to be worked out with our colleagues in local authorities, because it is not something that we would wish to go into unless we were certain that the schools that were not as popular with parents would not suffer dramatically and overnight, since that would jeopardise the education of children already in schools whose popularity was or might be declining.

    It is important to point out to my hon. Friend that his philosophy on the way in which he would fund a school depends very much on how good that school is. Schools are chosen by parents for different reasons, but mainly because they have discovered, by the normal process of talking to other parents at the school gate or by talking to their neighbours, why they have chosen certain schools.

    For the most part, schools get a good reputation if the leadership is good. Often a good head teacher will make a school greatly desired by parents. It is not always the case that a good head teacher or a head teacher who has created the impression that his or her school is excellent is actually delivering excellent education. Therefore, while one accepts that there should be financial delegation to heads, that open enrolment should be encouraged, and that head teachers should be trained, there is another facet to the reforms that I hope my hon. Friend will accept, namely, the introduction of a basic national foundation curriculum, on which my right hon. Friend hopes there will be a wide national debate.

    While all the ideas about management and about how children can get into schools can be discussed at length and can be put into practice, unless what goes on in the schools is coherent, well thought out and based on the best practice, and unless the fundamentals of what children are learning are understood by the people as being valuable, we shall not make any progress in our plan to reform education.

    I hope that with those few words I have managed to reassure my hon. Friend that we are talking much the same language and that the Government are studying closely many of the ideas that he has put forward.

    Higher Education

    8.2 pm

    I am grateful for the opportunity to speak on higher education in the Adjournment debate, particularly following the Government's recent publication of a White Paper on the subject. That White Paper sets a most encouraging tone for the future of higher education, which I greatly welcome.

    Good education, whether at school or in higher education, is one of the most important investments for the future of the individual and of the nation. There is no doubt in my mind that the quality and quantity of higher education will be important factors in enabling the country to develop new products and services from which our businesses and industry can enable the country to flourish.

    There is a good story to tell on student numbers. Over the past eight years the number of British students in higher education has risen by more than 85,000 to over 500,000, an increase three times greater than was achieved during the previous decade. This has resulted partly from the peaking of the number of 18 and 19-year-olds in 1982. Perhaps more significant is the steady increase in the number of able young people who wish to take advantage of higher education. With Hatfield polytechnic being only a few miles from Stevenage I am pleased to observe that polytechnics have played a major role in providing for the growth in student numbers.

    As regards the future, I am pleased and relieved that the White Paper plans for a growth in student numbers over the next few years and envisages steadily increasing participation. The larger figures now projected are vital if we are to compete effectively as a leading nation in an increasignly competitive world.

    There are four areas upon which I should like to dwell briefly: first, the position of polytechnics; secondly, funding for higher education thirdly, the emphasis on different types of courses; and fourthly, the funding for research in higher education institutions. The polytechnics have clearly established themselves as institutions providing excellent education. Industry values particularly the sandwich courses that are often provided and the close co-operation that frequently exists between the polytechnics and industry and commerce, both in the locality of the polytechnics and sometimes more widely. Again, Hatfield polytechnic has close contacts with British Aerospace, Marconi Instruments, STC and various companies which are able to co-operate with it in producing useful courses for students and also in developing various scientific research projects.

    I have noticed at Hatfield and at other polytechnics that there have been strains in the relationship between the polytechnics and the local education authorities. Although the local education authorities frequently regard polytechnics as the jewel in the crown of the spectrum of education for which they are responsible, nevertheless there is a great deal to be said for the proposal in the White Paper of a system of control analagous to that applying to universities. Therefore, the proposal for a polytechnic and college funding council is an important step forward for the future of polytechnics. They will be able to advance even more effectively in such a structure. Quite a few local education authorities have found the polytechnic to be such an unusual item in the education activity in which they are involved that they have not been able to address the problems of the institution effectively. Under the proposals in the White Paper there are much better prospects of polytechnics being treated more satisfactorily.

    On the general question of the funding of higher education, concern has frequently been expressed to me and to other hon. Members about the funds being provided to universities, polytechnics and colleges. I understand and sympathise with some of the worries put forward but I also believe that in the 1970s there was much waste in various sectors of higher education, with numerous courses being indifferently controlled and monitored. There is a great need for a much more stringent examination of the financing of courses and of the need for certain courses. Nevertheless, the substantial increase in higher education funding for this year is greatly to be welcomed. Some institutions were finding the pressures very great. Hatfield polytechnic had commented to me on several occasions that with the substantial increase in the number of students, the strains on staffing activities and so on were considerable.

    I should like more funds for research, particularly scientific and technological research. There is considerable potential for funding from industry and commerce. To encourage the provision of such funds more imagination should be shown to ensure better co-operation between higher education institutions and industry and commerce. A number of higher education institutions have complained to me that if they are successful in obtaining extra funds perhaps their funding from the local education authority or Universities Grants Committee has been adversely affected. That is hardly an encouragement for higher education institutions to seek to co-operate more.

    The final point concerns priorities and emphases on different types of courses being provided in higher education. Criticisms have been made that the Government were taking a philistine position in urging that larger numbers should be educated in mathematics, certain sciences and technologies, and perhaps relatively fewer in the more abstruse subjects. I reject these criticisms. With half a million students in higher education, it seems perfectly sensible to encourage the expansion of those activities that will be most directly relevant to the various needs that industry may have in this country in the coming years.

    A total of 500,000 people are in higher education—a large number. Those young people must be encouraged to pursue courses and to develop ideas in areas that will benefit both them and the country as a whole in the future. Therefore, I hope that the Government will not be deterred — and the White Paper suggests that the Government are not being deterred—from making sure that the priority will be to encourage higher education being well directed to the future needs of the country, its industry and commerce.

    8.13 pm

    The Parliamentary Under-Secretary of State for Education and Science
    (Mr. George Walden)

    I am glad to respond to the positive and forward-looking speech of my hon. Friend the Member for Stevenage (Mr. Wood). He has been a lecturer in high-tech subjects with one of our largest firms, and he is talking from personal knowledge and a more general interest. The Hatfield polytechnic is very close to Stevenage. I was there recently and I had an opportunity to discuss with the deputy director some of the problems and prospects facing that institution. My general impression was of optimism and forward-looking attitudes.

    My hon. Friend is right to stress the importance of polytechnics in higher education. Polytechnics have improved their efficiency greatly and are now a major part of higher education. The Government has been following with gratitude the efforts that polytechnics have been making to accommodate more students.

    My hon. Friend next raised the question of funding. Last year we increased funding for polytechnics and colleges by 8·5 per cent., which is well over the current rate of inflation.

    The third point my hon. Friend dealt with was research in the polytechnic system. Although there has been a lot of contact between polytechnics and industry, as in the universities, we recognise—as do other members of the educational and business communities — the need to expand contacts between education and industry. We have seen positive proof of this expansion in the polytechnics, in increased investment, industrially related development, and also a major increase in the role of the provision of training by the polytechnics.

    Government policy in this regard is to do everything we can to encourage these developments. That is the reason why we set aside last year £15 million to be directed specifically to encouraging a number of initiatives, including research in polytechnics. We were careful to stress, as we shall continue to stress, that the sort of research that we want to be pursued in polytechnics and colleges must be of the applied variety and closely associated with industry. This has been accepted by the polytechnic community. The sums that we offered, which in effect doubled the amount of finance available for research, were applied for by many polytechnics and colleges. Our philosophy is to encourage contacts with industry by encouraging polytechnics to bid with a business plan for the available funds.

    Finally, my hon. Friend mentioned courses and the pattern of courses between the arts and sciences in higher education. There is a widespread misconception that this Government have a philistine attitude to education and to higher education in particular. Nothing could be further from the truth. Not only do we not underestimate the contribution of the arts and humanities but, in simple figure terms, such has been the expansion in the number of students since 1979 that there are now not only far more students doing science-related courses than ever before, there are also more students doing arts-related courses. Since 1979 we have increased student numbers by 160,000 full and part-time. We hope now to add to that another 50,000.

    Whereas I welcome the stress that my hon. Friend placed on the need for vocationally orientated courses, particularly in science-related subjects, I am sure he agrees with me that the humanities — whether languages, economics, business studies, or humanities in their purer form, the classics, or whatever—have a very important role to play in higher education, both for their own value in themselves and also for training the mind in rigour and dexterity.

    I am glad to have had this opportunity to respond to my hon. Friend's points. I share his optimism about the future of higher education in this country in general and about the new prospects that the White Paper offers for polytechnics in particular.

    Question put and agreed to.

    Adjourned accordingly at seventeen minutes past Eight o'clock.