SELECTIVE EMPLOYMENT TAX

HC Deb 05 April 1967 vol 744 cc198-211

12.25 p.m.

Mr. David Mitchell (Basingstoke)

I wish to raise the question of the damaging effects of the Selective Employment Tax on the pattern of employment, upon the pattern of industry and the cost of living as it affects the ordinary person. I do it now to reinforce the many letters which have been sent to the Chancellor in the hope that this House can influence him before his Budget proposals are announced.

I am very much aware that once the Chancellor has announced his Budget proposals he is in something of a difficult situation, involving a loss of prestige in withdrawing proposals made or which he is making. I thought it wise to raise this now before the Budget. I appreciate very much the appearance of the Financial Secretary to the Treasury on the Government Front Bench. I realise that he is inhibited from saying very much, because the Chancellor is at present in what I think is known as his "broody" period, during which time he cannot leak out the Chancellor's proposals.

I hope that he will note and ponder the matters which are drawn to his attention this morning. I base my remarks on three factors—common sense, a recent E.D.C. report, and a survey that I have carried out in my constituency, in Basingstoke and Andover. I believe this to be the largest private survey carried out anywhere in the United Kingdom on the effect of S.E.T. Over 500 firms were contacted and asked how S.E.T. affected their business.

It has been a major task analysing the replies. I do not suggest that this gives a statistically balanced sample of the entire United Kingdom, but it does give a comprehensive cross-section of the distributive trades in two towns and will, therefore, be a very helpful guide as to what is happening on the ground. Some firms dealt with S.E.T. in several ways. I can only assure the Financial Secretary that my analysis is statistically as fair a picture of the results of S.E.T. as I can get from the replies.

I will give the bare statistics before going any further. Three per cent. of the firms reduced the service to their customers, almost all by cutting out a delivery service. A total of 5 per cent. reduced the number that they employed, or changed the type of person in their employment from part-time to full-time. A further 9 per cent., all shopkeepers, reduced their standard of living.

These are small shopkeepers who have previously been employing someone part time and who either could not afford to do without the part-time worker and are financially worse off or who had to work longer hours because they dismissed a part-time worker. The picture here is of the smaller firm where the proprietor appears to be working very long hours, certainly in excess of what would be approved by any trade union and for less per hour than would be approved by any trade union. Some 22 per cent., a very large proportion, cut back on the modernisation and expansion proposals which they had for their businesses and 52 per cent. simply increased their prices to customers.

The E.D.C. report specialised on the question of the pattern of employment. It is as well to have the thing in context and to recognise that the E.D.C. report concerned itself solely with three things, whether there were changes in employment policy, what was the cost of S.E.T., and what changes had occurred in the numbers employed during the period under review. The report attracted 40 organisations representing 330,000 workers in the distributive trades and it used replies from 33. One is fascinated to know what happened to the remaining replies—perhaps they were quite unprintable. The E.D.C. records show some rather startling results of S.E.T., particularly startling if the Financial Secretary and his colleagues will cast their minds back to the reasons given for introducing the tax. It was supposed to get people out of employment in the distributive trades and into the productive trades, to transfer people, or encourage the transference into our manufacturing industry and the like. I can quote numerous Government Front Bench speeches indicating this.

What has happened is that there has been a reduction in the numbers of part-time employees and an increase in the numbers of full-time employees. In other words, people have been getting rid of two part-timers who would be of little value in manufacturing industry and taking on full-time workers because the Selective Employment Tax is the same for both of them and it is, therefore, more economic to have a full-time worker rather than two part-time workers. One of the results thrown up by the E.D.C. report is a direct contradiction of the effects which the Chancellor of the Exchequer planned.

My survey in my constituency shows that the tax has had one main effect. Part-time workers have been sacked. It is fair to say that some of them have not been replaced by full-time workers. Some of them are women, but mainly they are old-age pensioners who take a part-time job. This is a particularly unfortunate effect of the tax.

I suggest—and I hope that the Chancellor will give serious consideration to this—that the tax for part-time employees should be at a pro rata rate or half the rate of the tax payable for full-time workers. It is perfectly possible to do this by altering the stamp. I also suggest that we end the nonsense of the firms which pay in and receive back. The administrative costs of this operation are totally unnecessary and something which, I should have thought, the Chancellor of the Exchequer would wish to dispense with as soon as possible in the interests of efficient administration of the economy. I believe that firms should simply pay at reduced rates.

My second major point concerns the damaging effect of the tax on the pattern of industry. The E.D.C. report draws attention to transport and warehouse workers doing the same work. Some of their employers get the premium. It is paid for those transport and warehouse workers who work for a manufacturer. Some of them pay in and get it back—those who are working purely for transport concerns. Some pay the full levy per employee because their warehouse happens to be that of a wholesaler.

It is totally illogical that a product stored and distributed by a manufacturer should be treated totally differently when it is handled by a distributor. Many businesses have been built up on providing specialist distributor services. A manufacturer who wants supplies of paper does not go to every mill in the country and ask for a sample of paper. He goes to a paper wholesaler who produces samples of this or that quality, or this or that shade. He goes through them and selects what he wants and then orders it from the mill. The service provided by the specialist wholesaler-distributor is valuable for industry, whether export industry or home industry.

Take the question of buying new machinery, electrical equipment or the 1,001 other things which are needed in a factory or articles used for manufacture for export. Again, one does not go to every factory for every item. One goes to someone whose job it is to collect the items together, to warehouse them and supply them when they are wanted. This is a valuable part of the efficient working of our trade and industry.

Now it pays a manufacturer to set up his own distribution network in addition to, or in replacement of, the specialist wholesaler. The Financial Secretary may shake his head, but I have examples of this which I can give him. If he likes, I will send some of the papers to him. It is an unnecessary and wasteful duplication of national resources that manufacturers are encouraged to extend and even to set up distribution networks for their products when there are already in existence wholesalers who specialise in this work.

I give another example of the oddity of this tax. This is something of which I was not aware before it was drawn to my attention, and no doubt the Financial Secretary is not aware of it. An industrial photographer does not go to weddings and funerals to take photographs. He specialises in taking photographs which are used in manufacturing departments of modern technological industry—things like printed circuits in the radio and electrical industry. If he works for a manufacturer, the manufacturer receives a contribution from the Government. If he works for himself and does work for several manufacturers, which is more efficient, the tax has to be paid on the employees in the firm. A nonsense is being created, a distortion in the economy.

Apart from the distortions in the industrial economy—and there are thousands of them—there are many personal and human problems. There are organisations in my constituency doing charitable work, mainly in healing. They are not registered charities and therefore cannot get the benefits of being one which were wrung out of the Chancellor of the Exchequer during the Budget debates last year. Therefore, they have to pay the tax. I should have thought that there was a strong case, reinforced by the other examples which I have given, for flexibility in the system so that different rates of tax might be charged and so that there might be discretion in the hands of the Ministry of Labour or the Ministry of Social Security locally about what should be paid by individual people.

There is the nonsense concerning hotel proprietors who earn valuable foreign exchange for this country and who have to pay the tax on their employees. Their money is being used to subsidise manufacturers, regardless of whether they help the export trade or not. They subsidise the manufacturer of Christmas decorations, of coloured candles and of children's toys. Here I refer to the Prime Minister's famous remarks about the "candy-floss" economy. He is the man who for the first time in this country's history has subsidised the manufacturer of candy floss. Yet the hotel industry, which earns valuable foreign exchange for this country, is penalised.

To return to my survey, 22 per cent. of the people have saved on the money they are putting by for expansion, modernisation, new equipment, replacing road vehicles and meeting the technological age. Taking the longer-term view, I should have thought that it was essential that more money should be put by for expansion, modernisation, modern and safer road vehicles and new equipment. The Government's action is a recipe for utility and austerity in years to come.

I come finally to the effect of the tax on the cost of living of ordinary people. My survey shows that 52 per cent. simply passed on the increase. Some of the letters which I have received from people, particularly in the retail trade, are such that I could not read them in Parliamentary language. Suffice it to say that 52 per cent. have passed on the tax in one form or another, and this at a time when a freeze is being enforced. It is quite clear from my survey that the Government's intentions have in large measure—

Mr. Leslie Spriggs (St. Helens)

The hon. Member has said that 52 per cent. have passed on the tax. Can he say what percentage has been passed on to the consumer in those cases?

Mr. Mitchell

I am grateful to the hon. Member for his intervention. In the survey which I have carried out in my constituency, I asked how the firms were treating the Selective Employment Tax. I have no statistical information about whether they have passed it on in full or in part. Some firms say that they have passed it on only in part, for reasons mainly of competition, particularly in the grocery trade. They could not raise their prices higher because, for example, there was a competitor on the other side of the road. Some firms have passed on the tax in part and some have cut down on their employees. Basically, 52 per cent. appear to have made straight increases in price by which they have tried as fairly as possible to pass on what the tax costs them.

The Government's overall intention appears to have been to apply a wage freeze and to operate the Selective Employment Tax, coupled with increases in vehicle licence duty, petrol tax and the like, which have had the effect of forcing up prices. One does not need to be an economist, a financier or a Chancellor of the Exchequer to understand simply what is happening.

We have a situation in which wages are pegged but prices are not merely rising but are being forced up by the action of the Government with the S.E.T., which, they specifically said when introducing their prices and incomes legislation, was one of the things which employers were entitled to pass on to consumers. My survey shows that over half of them have done so.

Therefore, in direct contradiction to all that the Government said at the General Election, when golden opportunities were held out for the people, we find that the practical effect of what they are doing has been to peg wages and to force up prices. To force up prices when wages are pegged means only one thing: a lower standard of living.

The difference between the S.E.T. and any other tax, however, is that that lower standard of living does not affect those who are best able to pay. It does not affect those who are wealthiest or who have the biggest wage increase. It bears hardest on those who are least able to afford it, the old, the sick, the part-timers and people on fixed incomes. It hurts the weakest most. If that is the practical result of the Government's policies, the sooner that the Selective Employment Tax is not merely amended, as I have invited the Treasury to amend it, but swept away altogether, the better it will be for the country.

12.44 p.m.

The Financial Secretary to the Treasury (Mr. Niall MacDermot)

In listening to the peroration of the hon. Member for Basingstoke (Mr. David Mitchell), I wondered whether he would care to pass on those sentiments to those of his hon. Friends—I am not sure that he is not one of them—who keep urging us to reduce the rate of direct taxation and increase the rate of indirect taxation. People who use that argument sometimes forget the considerations to which the hon. Member has just referred in his peroration.

The hon. Member courteously acknowledged at the beginning of his remarks that I am liable to be singularly uncommunicative in replying to the points which he has raised. As he appreciates, in the classical words of Mr. Baldwin, my lips are sealed at a time like this. The hon. Member has, however, raised some wider observations concerning the Selective Employment Tax to which I am inclined to reply.

I have listened with intense interest to the information which the hon. Member has given concerning the survey which he has conducted in his constituency. I would be most interested to see a fuller report on it if he has one. It is an interesting example of the effect in a fairly representative town of the way in which employers have tackled the problems with which they have been confronted as a result of this tax.

If a new tax is introduced, particularly in a sphere in which people have, perhaps, had a lighter tax burden than others previously, they will find themselves confronted with problems and may even smart under a sense of what appears to them to be injustice. In our view, however, as we have said throughout, we were correcting an imbalance in the tax system in that the weight of indirect taxes fell much more heavily upon the manufacturing sector than upon the service industries. Be that as it may, what we are concerned with here is how firms have dealt with the tax.

I was interested to see what a relatively small percentage—5 per cent.—came within the category of employers reducing the number of people employed or changing employees from part time to full time. The hon. Member suggested that changes from part-time to full-time employment meant getting rid of two part-timers and employing instead a new full-time employee. Our information is that it by no means always, or necessarily even in the majority of cases, happens that way. The evidence is that many employers have persuaded hitherto part-time employees to work full-time.

I would be interested to know—not necessarily now, but at some time if the hon. Member has the figures from his survey—how many dismissals have resulted of either part-time or full-time employees, but preferably of both, and the actual figures of dismissals as opposed to a shift among the same employees from part-time to full-time employment.

We are, of course, aware of the comments that have been made, including the comments of the E.D.C. Report to which the hon. Member has referred, about the effect of the tax on part-time employment. The hon. Member said that 22 per cent. of firms have cut back on modernisation and expansion and such things as replacement of road vehicles. I do not in any way challenge his efforts to make a dispassionate report of the results of his survey.

What I wonder is the extent to which any action of that kind which has been taken is really the effect of the S.E.T. and how much is the effect of the July measures. It may be a combination of both. In so far as it is a combination of both, naturally the firms would, in answer to the survey, say that this was the way in which they had dealt with the effect of it. I make that comment only to say that I would not accept that as a permanent feature of the tax this would be a representative figure of the way in which firms would deal with it.

In his closing remarks particularly, the hon. Gentleman criticised the tax as having the result that 52 per cent. of employers increased their prices to customers. In fact, the main object and first purpose of the tax was to raise additional revenue in order to reduce demand. May I correct at once the heresy which was repeated again by the hon. Gentleman that the first and main purpose of the tax was to transfer workers from the service sector to the manufacturing sector. It was not. That was the third purpose of the tax, and in a different form. It was not to transfer workers, but, in the long term, to shift the balance from employment in service industries to employment in manufacturing industries, and we said that we anticipated that that would come about as a result of recruitment policy rather than the transfer of employees from one sector to the other.

The main and first purpose was to raise a substantial body of taxation and do it in a way which would not impose yet further burdens on those sectors which are at the moment bearing the main brunt of taxation.

If this was achieved and had the effect of reducing demand, it was anticipated from the start that a substantial proportion of it must be passed on in increased prices. As the hon. Gentleman acknowledged, it was recognised in the policy statements on prices and incomes, that it was one of the grounds upon which it would be legitimate to increase prices. However, it is an interesting reflection that it is about 50 per cent. of people who have reacted to the tax in that way.

Mr. David Mitchell

If the hon. and learned Gentleman says that the main purpose of the tax was to raise a substantial sum of money—I think that the expression he used was "a major increase"—in taxation in the Budget last year, how can he square that with the assurances given a few weeks before the Budget, when the Chancellor of the Exchequer, the hon. and learned Gentleman and his colleagues were appealing for support in the country, and when the Chancellor said that he had no intention of making major increases in taxation in his Budget, to contradict things which the Conservatives were saying were likely to happen if a Labour Government were elected? There is a complete contradiction between the grounds on which his party was elected and the explanation that he has just given.

Mr. MacDermot

The hon. Gentleman is picking me up on the word "major". I do not want to quarrel with him about words in that definition.

The amount involved for this tax is approximately £200 million in a full year. The effect in the first year was greater because of what has been called the "forced loan" aspect and the delay in the repayment of premiums. It has been recognised all along that this is a substantial sum and, although there was a quarrel about the timing, no one quarrelled about the judgment of the amount which needed to be raised in last year's Budget to reduce the pressure of demand. If it was not to be done in this way, the alternative would have been to increase other and existing taxes which already weigh heavily upon people in other sectors.

I find considerable support and comfort in the figures which the hon. Gentleman has given as to the effect of the tax. It shows that it has had the effect that a certain amount has been passed on in prices but that, as we always said would be the case, there are other ways in which employers seek to cushion the effect of the tax, absorb it and meet it other than by increases in prices.

The hon. Gentleman touched on a number of other familiar points in this connection. He referred to the administrative costs involved in the premium payments or rebates and suggested that it would be much cheaper and simpler to introduce new National Insurance stamps. I can assure him that that is not the case. From an administrative point of view, the machinery which has been adopted is a much simpler one, and it is a remarkably cheap tax to collect. If one compares it with any of the other main taxes—and I gave the figures recently in answer to a Written Question—the cost of collection is lower than that of the average Customs and Excise tax, which, in turn, is very much lower than the cost of collecting the Inland Revenue taxes such as Income Tax and Corporation Tax. Although it may be a nuisance for employers to be taxed and repaid in this way, it is not right to say that it is administratively a laborious and expensive machinery.

The hon. Gentleman looks perplexed. The reason for it is that there is an existing machinery for collecting stamps for National Insurance purposes with verifiable categories. I am sure that the hon. Member for Finchley (Mrs. Thatcher), with her experience, will know that to add to the multiplicity of categories for the purpose of stamp collection would create tremendous problems within her former Ministry. It was found much simpler to graft on machinery to that which the Ministry of Labour has with its Standard of Industrial Classifications to make premium payments and refunds in the neutral sector rather than trying to do it through the machinery of the National Insurance stamp.

The hon. Gentleman referred to the criticism which is often made about the position of transport and warehouse workers whose employment gives liability to tax in some sectors, to refund in others and to premiums in the manufacturing sector. He said that this is anomalous and illogical. However, it depends on one's viewpoint. One of the purposes of the tax is deliberately to make a selective discrimination as between the manufacturing sector and the service sector. Once the number of qualifying employees is satisfied to bring an employer within the relevant sector, there is no reason why the employers of transport and warehouse workers should not be relieved from liability just as are employers of office workers and others who might themselves be non-qualifying workers.

The hon. Gentleman says that this has many distorting effects and that it now pays manufacturers to set up their own distribution machinery instead of using hauliers. The effect of the tax in relation to that would be purely marginal, however. It may be that it is profitable in the interests of the employer to set up his own distribution machinery. If so, he will do so. But I should have thought that the amount of the 7s. 6d. premium would be a very small factor to take into account in making a decision whether or not to embark on having one's own transport fleet.

The hon. Gentleman referred to difficulties of people who are doing beneficial work of a quasi-charitable nature and who do not succeed in qualifying as charities. There are some borderline cases both ways which one might like to see dealt with differently. During our debates some of my hon. Friends were criticising the effect of this tax on establishments like Eton and other public schools. What it amounts to is saying that present legal definitions of charities, which date back to the times of Queen Elizabeth I, are not satisfactory in the modern age. I would not quarrel with that, but it is not something which can be dealt with by the Chancellor of the Exchequer in a Finance Bill.

Other people have given thought and attention to the problem, but I am not aware that anyone has yet come up with a very satisfactory alternative way of drawing a line between what are and what are not charities. From a fiscal point of view, registered charities are a definable class with which we can treat. We could not possibly take on board the problem of having to decide which other worthy bodies should be treated as charities—

It being One o'clock, Mr. DEPUTY SPEAKER suspended the Sitting until half-past Two o'clock, pursuant to order.

Sitting resumed at 2.30 p.m.