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Indirect Taxation

Volume 968: debated on Tuesday 12 June 1979

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We made it clear in our manifesto that we intended to switch some of the tax burden from taxes on earnings to taxes on spending. This is the only way that we can restore incentives and make it more worth while to work and, at the same time, increase the freedom of choice of the individual. We must make a start now.

I have reviewed the whole field of indirect taxation to decide where the increased revenue could best come from. There are many cogent arguments at this stage in favour of value added tax.

First, large areas of consumer spending, in fact about half the total, are not chargeable to VAT. Food, children's clothes, heating and light, public transport, house prices and rents are all zero rated.

Second, poorer households tend to spend proportionately more of their income on such zero-rated goods. This means that, unlike most indirect taxes, VAT is not regressive.

Third, by comparison with taxes such as those on alcohol and tobacco, VAT is much more broadly based.

Fourth, there is a real opportunity for simplifying the operation of the tax by having one rate instead of two.

In his speech in the House on 22 May, the right hon. Member for Leeds, East seemed to favour increases in the surcharge on national insurance contributions or in advance corporation tax. The national insurance surcharge falls on the whole of British industry, including production for export, but not on imports. It is inferior in that respect to VAT, which falls on imports but not on exports. That is clearly significant in the light of the latest trade figures. An increase in advance corporation tax, which he also seemed to suggest, would damage the overall liquidity of industry at a particularly difficult time: by contrast, an increase in VAT actually increases liquidity.

For all these reasons, my choice must fall on VAT. Moreover, the increase I make must be sufficient to provide for substantial and worthwhile reductions in income tax. I propose, therefore, that as from next Monday VAT should be charged at a new unified rate of 15 percent.

Allowing for the wide range of goods and services that are zero rated, and will stay zero rated, the new rate that I propose is equivalent to 8 per cent. averaged over the whole of consumer expenditure. That is significantly less than the average in the European Community.

The yield from the increase to 15 per cent. is estimated at £2,035 million in 1979–80 and £4,175 million in a full year. Thus, it will provide scope for further direct tax reductions in later years. The relatively small size of the yield this year reflects the loss of over two months' revenue between April and the present and the time lag allowed to traders before they pay over VAT receipts to the authorities—an average of over three months. I have referred to the helpful contribution that that gap provides towards improving liquidity. As these funds build up in traders' hands, they provide a substantial boost to the liquidity of the firms and companies concerned. Concern has been expressed that an increase in VAT could lead to some particular difficulties, for example in relation to telephone bills for calls made before the date of change. I am proposing transitional provisions to deal with that and some other problems of that kind.

The increase in VAT will of course add significantly to the point of sale prices of drink and tobacco. For example, the VAT increase will mean about an extra 28p on a bottle of whisky, approximately 2p on a pint of beer and 6p on a typical packet of 20 cigarettes. In these circumstances, I do not think that it would be justifiable to make a separate increase in the excise duty on drink and tobacco this year.

I fully realise that this increase in value added tax will result in a rise in prices—in fact, a rise of about 3½ per cent in the retail price index. This is, of course, a once-for-all effect. But there never will be a time when it is easy to effect the switch from direct to indirect taxes, and the present moment is clearly no exception. That much-needed reform has been postponed too long already.

The House should bear in mind that, as I have already indicated, VAT does not fall on a wide range of necessities. That means that the increase will fall less heavily on people in the lower income groups. As will be apparent when I come to my income tax proposals, I shall be leaving people with more money in their pockets with which to pay the increased VAT. I appreciate, however, that those who are not liable to income tax—and I have in mind particularly many of those living on retirement pensions—will not benefit directly from my income tax proposals. That brings me to our proposals in the field of social security.