HC Deb 12 May 1964 vol 695 cc384-94

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

11.22 p.m.

Mr. John Diamond (Gloucester)

The reason I have the good fortune to catch your eye, Mr. Speaker, is because the hon. Member for Grimsby (Mr. Crosland) is unwell and not able to be in his place. I think it would be proper for me to say how much we regret that he is not here and that he is unwell.

The subject I desire to raise is quasi-political subscriptions included in Government contracts.

Mr. Speaker

May I ask the hon. Member whether the Minister responsible has had notice?

Mr. Diamond

Yes, Mr. Speaker, and he is good enough to be on the Front Bench to listen to what I have to say.

I am not, of course, dealing with the right of an individual out of his taxed income to use his money for whatever purpose he may desire, political or otherwise. I am merely dealing with the question of the right of organisations, mainly companies, to devote some of their funds without the consent of the people to whom the funds ultimately belong and to use these funds for the furtherance of political and quasi-political objectives.

Political objectives would, of course, be payments direct to political parties, and quasi-political objectives would be payments to the sort of front organisations with which we are now all familiar. I might list the four best known. They are Aims of Industry, the Economic League, British United Industrialists Limited, and the Enterprise Association, with which two hon. Gentlemen opposite are closely connected.

Moneys paid to these front organisations are used either in support of the Conservative Party, or are paid direct to it. For example, at the last election British United Industrialists Limited devoted 90 per cent. of the sum which it collected to the Conservative Party, 5 per cent. to the National Liberals, and 5 per cent. to Aims of Industry.

The way in which the Government have responsibility in this matter is that any contracts which are paid for out of taxpayers' funds, and which include in the constitution of the price of the goods delivered subscriptions of this kind, are contracts under which the Government are diverting public money for political purposes as to 100 per cent. That would arise not only in Government contracts, but, less directly, in Government subsidies.

The second broad category from the Inland Revenue point of view, items which are not properly allowable for tax purposes but which, by one means or another, are treated as allowable, do in fact attract a relief of about 50 per cent. in Tax and Profits Tax, and therefore we can say broadly that ½ per cent. of these payments made in the circumstances which I have described would again be payments by the general taxpayer for the benefit of the Conservative Party and associated front organisations.

The evidence which I produce of the way things are going wrong is first a Question to the Minister of Aviation on 25th March when I asked him the position with regard to overhead expenses on the Bloodhound contract for which Ferranti Limited were the contractors. I asked whether, in calculating those overhead expenses, that is to say, in calculating the price which the Government were paying with taxpayers' money, subscriptions to Aims of Industry and similar bodies were disallowed. The answer was: "No, Sir." There was some explanation, and at the end the relevant sentence was: In assessing this figure, we do not normally take account of individual items which, as in this case, would be too small to affect the final percentage."—[OFFICIAL REPORT, 25th March. 1964; Vol. 692, c. 434] One has to do one's best in calculating what size these items might be. The figure which would not affect the final percentage would be a figure of less than 1 per cent., or to be on the safe side, a figure of less than ½ per cent., because ¾ per cent. might be held to go to the nearest digit, and therefore it is safest and fairest to assume a figure of less than ½ per cent. But, as we know from the Report of the Public Accounts Committee, the overheads for that contract were about £3 million, and ½ per cent. of that is £15,000. One can say, therefore, that a figure up to £15,000 might well have been paid by Ferranti Limited as a contribution to Aims of Industry, and that figure might be included in the overheads paid for by the Government out of taxpayers' funds for political purposes, which I am sure no respectable Government would wish to do.

But that is only one item which has recently come to light. There must be many others. It is difficult to find out what these might total. I understand that total research and development expenditure, which is based on what are shortly called cost-plus contracts, and where any expenditure of this kind if not disallowed would be added to the price, amounts to £434 million for the current year, and ½ per cent. of that would be about £2 million. But production and research in the Defence budget amount to £867 million. That is to say, something in addition to research and development has been added for production.

If one takes half the production just as a figure representative of those items which are ordered again either on a cost-plus contract or a contract based on technical costs, one arrives at an answer of an additional £1 million, or a total of £3 million all told, which, according to the Government's own answer and the Government's own formula, would be included in Government contracts, paid for by the taxpayer and diverted to the uses of the Conservative Party and the front organisations that I have listed.

This is not an unreasonable figure, because when we look at it the other way we find that a figure of £3 million is required. We find that the Conservative Central Office has a budget of about £1 million a year, at present, and that in the last General Election approximately £2 million was spent by the Conservative Party on its publicity campaign in the period prior to the General Election. That makes a total of £3 million, and it might therefore very well be that the two figures roughly coincide.

I say that this might well be the case, because we know that the £3 million spent in this way does not come from private resources. We have been told by the Leader of the House—not in his capacity as Leader of the House but as an investigator of his party's organization—that these private subscriptions run at about £1,000 only. Therefore, the rest of the money must come out of companies and organisations of one sort or another, and it seems that there is a good deal of support for the contention that the Government are collecting from the taxpayer £3 million and diverting it, through Government contracts, to the Conservative Party and its front organisations.

Then there is the question of subsidies. The Government calculates the subsidies and gives part of the subsidies to firms which, in turn, use part of this money for political purposes. We get to the situation in which 100 per cent. is diverted. We know of the famous case of Fison's, which received a fertiliser subsidy of about £30 million, and which contributed substantially at the recent by-election—to the tune of £2,320—to various Conservative associations which it wished to support. That is my complaint about the Government's handling of public money for political purposes as to 100 per cent.

Now I turn to the question of taxation, where the allowance of items which should properly be disallowed has the effect of diverting 50 per cent. of the money so paid out of the taxpayer's pocket into the hands of these political bodies. This can be done in a variety of ways. First, it can be done by a deliberate mis-statement. If the inspector of taxes is told everything and the company has a clean sheet, everything is all right, but there can be a deliberate mis-statement.

We had a case of a deliberate misstatement, with which I will not trouble the Financial Secretary, in the famous case of Fison's, where it was denied three times running that any payment had been made to these Conservative associations, both on behalf of the company and on behalf of the agent himself—and then, ultimately, the chairman announced at the annual general meeting that £2,320 had been paid. If those same officers who denied in the first place that any payments had been made had made similar denials to the inspector of taxes, these moneys would have escaped tax.

Then there is the question of secrecy. I know for a fact that, certainly until recently, a well-known City firm—it would be wrong to give the name—adopted the practice, each year, of deciding that a sum of money—in the old days a modest sum of £2,000; what it is now I do not know—should be devoted by the chairman for such purposes as he might decide. The chairman uses the money as a donation to the Conservative Party. That is one example I know of as a fact, but I do not know how many times it is repeated. If one gets that kind of secrecy, how does one know that the inspector of taxes is made aware of the circumstances? If he was made aware of them he would, of course, disallow the item for tax purposes.

Then there are services. If a company pays for services that are properly connected with the furtherance of its business that would be a proper expense for Income Tax purposes, but one knows that many of these organisations are concerned exclusively with anti-nationalisation measures. One knows that some of the directors are directors of large companies like Hawker-Siddeley, a firm which gets most, or a large part, of its business from nationalised industries such as the nationalised airlines. It is difficult to think that it is in the best interests of Hawker-Siddeley to be known to be contributing to an an organisation that is out to do down nationalised bodies such as the airlines which provide the company with the majority of its business. I doubt, therefore, whether, if this were fully disclosed, it would be held to be proper expenditure of the kind that is allowable for tax purposes.

There is the general question of advertising. One hears a lot about advertising, and in the accounts of companies it is given the simple title of "advertising". It could be advertising for perfectly normal and proper purposes; it could be pure anti-nationalisation advertising, which is purely political and cannot be held to be anything else in the case of those large steel companies which depend very largely for their business on orders for steel from nationalised bodies such as the railways. To what extent are those items fully probed to make sure that the Revenue is protected?

The largest item in this category is what I might call "so-called advertising." The local Conservative Party has a fête and a brochure is issued. A page costs £100 or £250, dependent on what a firm feels disposed to pay. The sum is paid, and put down in the firm's books as "advertising." The total brochure costs 8s. 4½d to produce, or something like that, and the balance goes as profit of the fête to the Conservative Association which is running it. The majority of it comes from these company subscriptions, as to which one-half improperly comes out of the pocket of the taxpayer for the benefit of the party concerned.

All these matters arise because of the way in which they are described and the impossibility, in my view, of the inspectors of taxes, however intent they are on seeing that there is fair play, being able to devote the time and the detailed attention to ferreting out each item, especially when there is secrecy. So the real question is how we can protect the Revenue. I am sure that the Financial Secretary is as concerned as is anyone else to do see that these items are brought to light, because without light, as he will appreciate, things begin to get somewhat mouldy, and even start to smell.

11.33 p.m.

The Financial Secretary to the Treasury (Mr. Alan Green)

I admit to some difficulty in answering the hon. Member for Gloucester (Mr. Diamond) for one particular reason that I am sure he will appreciate. Practically everything he has said tonight has been on a strictly hypothetical basis. Sentence after sentence started with the sort of phrase—"might well have been," "could possibly have been," "the probability is," and so on. I therefore fear that he has not really given me anything specific to answer. I am sorry that he has not—but he has not.

The hon. Gentleman, as a practising accountant, knows probably better than I—certainly as well as I—the rules of the Inland Revenue. If there are specific cases that he can substantiate and bring to my notice, I will look into them. It would, of course, be open to the taxpayers concerned to contest the cases, as again the hon. Gentleman knows perfectly well.

If a taxpayer believes that the expense for which he is claiming an allowance was incurred wholly and exclusively for the purposes of his business, the taxpayer, just like the inspector, though from opposite ends, has a perfect right to take the matter to the court if he so wishes. I have to tell the hon. Member first, therefore, that I am not a judge. I am not standing at the Dispatch Box prepared to act or speak like one, and I know that the hon. Member will not expect me to do that. If there was a single case to be decided I would expect the Inland Revenue to take it to the courts. As the hon. Member knows, the inspector has perfectly clear guidance and if the taxpayer concerned wishes to contest it he will no doubt do so. If the Inspector disallows a legitimate expense contrary to law, the taxpayer can take the Revenue to court. This in fact has happened.

This is the situation in every one of the possibilities which the hon. Member has mentioned. They are only possibilities, as the hon. Member has acknowledged in the language he has used, though we must check that from Hansard tomorrow. If all these possibilities which the hon. Member has raised are justiciable, as I believe them to be, a case should be brought either by the Inland Revenue and contested by the taxpayer, or conversely by the taxpayer and contested by the Revenue, and in the courts a proper decision can be made. This is the first part of the answer that I can give to the hon. Member.

The hon. Member raised the question of the Ferranti case and he received an answer from my right hon. Friend the Minister of Aviation explaining why a particular item for the purposes of calculating the contract price had been disregarded. It is making a little too much of it to assume that the item was of such and such a size on a percentage basis when the hon. Member either knows what it was or cannot know what it was. To take ½ per cent. and apply it to a contract figure of £3 million and turn it into £15,000 and make the connection between that and whatever Ferranti Limited may or may not have given to a par- titular institution or, to use the hon. Member's terms, a quasi-political body, and to say that it is a reasonable presumption that the sum was £15,000—to argue in that sort of way by confusing the particular with the general—is simply to make a statement that arouses a great deal of suspicion. It is to make it without having the means of verifying whether the attack is justified or not. I do not know what the sum was at this moment in time.

I suggest to the hon. Member that if he feels so strongly about this he should take the matter outside. It is the proper thing for him to do. I respect very much his knowledge of accountancy procedure and, I believe, his substantial practice of that procedure. These companies employ auditors, and the bigger the companies are the more we can be absolutely certain that the auditors will be highly respectable and proficient auditors of the hon. Member's standing or its equivalent. Therefore, we have the auditors themselves, with their professional standing, and then the inspector of taxes and, finally, in the case of dispute, the courts. I should have thought that this was a perfectly reasonable process, because we have laid down what expenses in general are allowable—

Mr. Diamond

The hon. Gentleman is missing the point in dealing with the Ferranti case. It has nothing to do with auditors or tax inspectors. It is merely concerned with the decision to allow expenses of that kind. If the figure which I gave is not the right figure, why does the hon. Gentleman not tell the House what it is? He has paid out the money.

Mr. Green

The hon. Member, with the greatest respect, is confusing two things. He is saying that if a company—and he instanced Hawker-Siddeley in the same sort of context—is concerned with Government contracts there apparently should be some special rule in dealing with allowable expenses. If that is not what the hon. Member's argument is, I do not know what he means. But in that case, of course, he would know from his own experience again that he is on to something which is really almost impossible. Companies such as Ferranti or Hawker-Siddeley, which take Government contracts also take private business contracts as well. How one entirely separates the profit legitimately earned on a Government contract from the profit legitimately earned on a civil contract in the final accounts of the firm which embraces both these activities, I am really not at all clear.

Why one should apply different rules of allowable expense to a contract that results in a profit, or, indeed, in a loss, because it is on Government account from the expenses allowed on some other account is something on which I am not at all clear. I hope that the hon. Gentleman is not suggesting that we should do that.

Mr. Diamond

I am sorry to interrupt the hon. Gentleman again, but, of course, I am not dealing with profits or losses at all. We are talking about the expenses incurred in carrying out this work and the Government's reimbursement of those expenses. The Government say that they have reimbursed all these expenses, including subscriptions to Aims of Industry.

Mr. Green

My right hon. Friend the Minister for Aviation gave the reason why this particular item was not struck out. The reason he gave was that it was so small that it was not worth bothering with. I am not particularly defending or attacking the answer given. But this is a separate issue.

What the hon. Gentleman has been seeking to do, if I understood him correctly, is to differentiate between the forms of expenses allowed in cases where firms took Government contracts and the expenses allowed to firms which did not. That is quite wrong. The rule on expenses is well known to the hon. Gentleman and to every Inspector of Taxes. I believe that it is well known to every professional accountant and auditor who acts for companies that the expenses must be shown to have been incurred wholly and exclusively for the purposes of the trade or profession.

If I have not quoted the position absolutely exactly, I think that I am extremely near to having done so. This is a matter of professional duty of auditors in the first place, and, as far as I know, they honourably carry out that duty in every case. The inspector of taxes, of course, can challenge any expenses if he wishes to do so. I have no doubt that on occasions something gets through. That is human nature. If the inspector challenges, there may be a court case, as happened, I think, with Tate and Lyle. It might, of course, happen again on the nationalisation issue which the hon. Gentleman raised.

What I am saying is that the basis of the law is perfectly clear and well understood by accountants, companies and inspectors of taxes, and it is applied. If there are cases in which there is doubt the proper place to take them is to the courts and for the courts to make the judgment and not for me to do so. This would be for me to exceed my duty.

I really cannot accept from the hon. Gentleman here and now the series of hypothetical propositions which he has put to me tonight. If he can put to me particular cases and produce all the facts, I will willingly do my level best to see that the Revenue is further and consistently protected against malpractices in the use of expense allowances by whoever and however they may be followed.

Question put and agreed to.

Adjourned accordingly at a quarter to Twelve o'clock.