§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Concannon.]
§ 10.1 p.m.
§ Mr. Mark Woodnutt (Isle of Wight)
I am grateful for the opportunity to raise this constituency matter tonight. Though toffee apples seems a trivial subject compared with the previous debate there is a most important principle at stake in which Customs and Excise appears to discriminate against the very small manufacturer by refusing to repay purchase tax that he should not have paid in the first place.
881 In a similar case last year, Mr. Justice Cross ruled in the High Court that purchase tax should not have been paid on toffee apples and he ordered that the tax paid be repaid to the large manufacturers who brought the action. I understand the amount involved was about £40,000. But in the case of Mr. R. Herbertson, in Shanklin, a small manufacturer, the sum involved is only £715 8s. 1d. It appears that there is one rule for the large manufacturer and another for the small and that this is a case of bureaucracy taking advantage of the fact that Mr. Herbertson would probably have difficulty in financing an expensive court action.
The facts are that in 1958 Mr. Herbertson started to manufacture toffee apples. In 1962, my right hon. and learned Friend the Member for the Wirral (Mr. Selwyn Lloyd), then Chancellor of the Exchequer, imposed a 15 per cent. purchase tax on the wholesale price of confectionery from 15th May. Customs and Excise then ruled that a toffee apple on a stick was a sweet. This was just as ludicrous as Mr. Gillie Potter's judicial pronouncement in a comic review many years ago, that a toffee apple, by virtue of the stick attached, became subject to the regulations under the Forestry Acts. The manufacturers claimed that the toffee apple was a fruit, and this view was upheld by Mr. Justice Cross last year when the sum repaid was in the region of £40,000.
Mr. Herbertson then put in his claim for a refund of £715 8s. 1d. This represented the purchase tax that he had paid in the years 1962 to 1965 and it was verified by the local Customs and Excise official in Shanklin. Customs and Excise stated in a letter to Mr. Herbertson that they could not repay tax paid under a mistake at law and at no time have they ever advanced another reason to Mr. Herbertson.
When I raised the matter in a Question a short while ago, the Minister gave me a different reason in a supplementary answer. He said that this case is different because Mr. Herbertson passed on the tax to the retailers, and it was not possible to repay tax because it was impossible to trace the many people who were Mr. Herbertson's customers.
882 With due respect to the Minister, that statement was not true. Last Sunday afternoon, I spent 1½ hours going through Mr. Herbertson's own invoice counterfoils and records to satisfy myself that no separate charge had been made for purchase tax. I have confirmed in every case that the charge stated on the invoice was inclusive, and I have invoice books with me, together with the counterfoils, to prove it.
In 1962, before the Budget, Mr. Herbertson advised his customers that he was increasing his price from 5s. a dozen to 5s. 6d. a dozen, and he had considerable difficulty in persuading them to accept this increase. Therefore, when purchase tax was imposed, he decided to bear the burden of the tax himself. Furthermore, he actually reduced the price to 5s. 5½d. because of the ease of calculation. It so happens that 15 per cent. purchase tax content on a price of 5s. 5½d. works out at 8½d., whereas if it had been 5s. 6d., it would have been 8.6087d. He was thus getting 4s. 9d. for himself and 8½d. per dozen for the Revenue. That was 3d. less for himself than he obtained in the previous season. It is obvious from these figures that the £252 17s. that he paid in respect of 1962 is beyond doubt the amount that is due to him.
At the end of the 1962 season, he increased his price by 8d. a dozen to cover extra costs. It cannot be claimed that this could be purchase tax because, on the higher figure, the tax was then 9½d. a dozen. At the end of 1964, two years later, there was a further increase in Mr. Herbertson's price, but this, in common with the increases placed on their products by other manufacturers, was to cover increased labour and material costs and, in Mr. Herbertson's case, a higher burden of his fixed overheads per dozen brought about by his considerably smaller turnover.
There is no doubt about the decrease in his turnover. The Minister will have the figures. In 1963, Mr. Herbertson paid £229 in tax. In 1964, it was down to £183. In 1955, at higher prices, it was down to £95, and in that year he lost money on this range of his products. This should be enough to prove to the Minister that at least he should look at the case again.
883 I would claim that even had a manufacturer passed on the tax, he would still be entitled to reclaim it. It is unreasonable to reject the arguments that I have advanced. Mr. Herbertson should be treated the same as the large manufacturers and, if necessary the Minister should have the courage to overrule his officials.
§ The Financial Secretary to the Treasury (Mr. Dick Taverne)
The hon. Member for the Isle of Wight (Mr. Woodnutt) is utterly wrong when he says that there is a difference in taxation treatment between large and small, between rich and less rich manufacturers or taxpayers. There is no question of this. The reasons for the distinction have been made clear to the hon. Gentleman in the past, but he has chosen to neglect them. It was made clear that this was a question of a mistake of law, and that in law the manufacturer who had his purchase tax repaid was on a different footing from Mr. Herbertson. On the question of equity, a different question arises, but the hon. Gentleman has not accurately stated the Answer I gave in the House recently.
In looking at this case it is important to consider the history. We start with the imposition of the tax. In the 1962 Finance Act a new group, Group 34, which charged purchase tax on confectionery, was added to the purchase tax Schedule. It was the Government's intention—and it was the hon. Gentleman's Government—right from the start to tax toffee apples under that provision. Accordingly, manufacturers and wholesalers concerned were approached by the local staff of Customs and Excise and given a public notice, which I shall name because it is an important part of the matter, Public Notice No. 78, which drew attention to the procedure for obtaining a determination from the court where liability of an article to tax was disputed.
If someone claimed that toffee apples should not have been included as confectionery he should have disputed it before the courts. A supplementary notice introduced later, No. 78C, drew specific attention to the fact that toffee apples were regarded as chargeable.
Three firms challenged the legal validity of this, and argued that toffee apples 884 were not chargeable. On 11th October, 1968, a judgment was given in the High Court in favour of the plaintiffs. I think that it is fair to say that it came as as much of a surprise to the trade as it did to the Customs. As a result of the judgment repayment was ordered to the plaintiffs of the tax which they had paid under protest before they had stopped paying entirely. It was about £7,000 in all, and not the £40,000 stated by the hon. Gentleman. The important point was that these taxpayers had paid under protest and in some cases had not paid.
After that court decision instructions were issued that no tax was to be collected on toffee apples in the future. As the tax is payable to the Department in arrear up to one month after the end of the quarter in which it becomes due, no tax was collected from the manufacturers in response of transactions after 30th June, 1968, the end of the previous quarter. The local staff were told that any applications for refund of tax should be reported to headquarters.
The legal position is that under a well-established principle of law, which has been pronounced time after time by the judges, a person who has paid tax without protest under a mistake of law cannot get that money back. A person who has paid tax without protest under a mistake of law, which means that both parties supposed the charge to be well-founded until the court ruled otherwise, has no legal entitlement to the repayment of that tax. That is the law, and there is no obligation on Customs to repay. The hon. Gentleman said that he does not like the law, and he is entitled to that view. But that calls for a change of the law, which is not a matter for the Customs.
There are good reasons why the Customs stick to that law, because there are numerous Customs regulations. They are often challenged, frequently many years after revenue or tax of one kind has been collected under them, and if many years later there is a court ruling that the tax was wrongly collected it would be an enormous burden to trace all the various cases in which tax had been paid under them. It is a law that the Customs cannot disregard.
§ Mr. Woodnutt
That being the case, could the hon. and learned Gentleman tell me how it is that a High Court judge 885 said that the tax should not have been paid, because a toffee apple is not confectionery but fruit, and ordered the Customs and Excise to repay the amount collected? Incidentally, I took the figure of £40,000 from a report of the case.
§ Mr. Taverne
The hon. Gentleman still does not understand. In that case the judge ruled that the tax was not chargeable. Therefore, those who had paid it under protest were entitled to the money back. But those who had paid earlier were not entitled, under this doctrine of payments under a mistake of law, to have their money back. It was only those three firms which had protested which were entitled, under the Chancery judge's ruling, to get the money back.
I hope it is clear. The distinction between Mr. Herbertson's and many other cases and those of the three successful firms is that the three successful firms paid only under protest. As we understand the law, we do not see that there is any obligation to pay Mr. Herbertson. But, despite the fact that it would be impossible for the Customs to pay ex gratia in all cases, it is standing practice, where tax has been paid under a mistake of law, to give special consideration to claims for repayments and to see whether a concession would nevertheless be justified.
Effectively, repayment is regarded as justified where the trader claiming a repayment has not charged the over-payment to his customers or, where he has, if he is still in a position to adjust the charge so that the benefit of the repayment reaches the taxpayer who ultimately bore the burden.
This procedure was carefully followed in respect of claims for repayment of tax paid on toffee apples, including Mr. Herbertson's; but, after full consideration, based on the representations of claimants and inquiries made without prejudice by their officers, the Customs came to the conclusion in March, 1969, that in no case could repayment be justified in equity, quite apart from the law. It was nothing to do with the size of firm. It depended on the facts of each case whether they were legally entitled—
§ Mr. Woodnutt rose—
§ Mr. Taverne
I am coming to the hon. Gentleman's point.
886 It depended whether they were legally entitled because they protested. If they had not protested they were not legally entitled. Then, depending whether there was a case in equity, the repayment would be justified in equity if it went to the people who had borne the tax.
I now come to Mr. Herbertson's case. It may be that the hon. Gentleman has now provided information which is entirely new and, in the light of what he has said, one would like to look at it to see whether there is a case in equity. But the inquiries so far do not indicate this.
On the legal side, there was no record that Mr. Herbertson protested about the tax in his returns or in his correspondence or orally that toffee apples were not chargeable. Nor did people think that in the trade. That is not surprising, because at that time it was thought that they were chargeable. But there did not appear, on inquiry, to be any circumstances which could be regarded as justifying repayment to him as a concession on grounds of equity.
I understand, from inquiries made by the Customs, that within two months of the introduction of the tax on 8th May, 1962, Mr. Herbertson raised his prices. If that is wrong, naturally we will reconsider it. But the specific date which came from the Customs inquiries shows that within two months of 8th May, 1962, Mr. Herbertson raised his prices.
I will re-examine this matter in the light of any information which the hon. Gentleman may supply. But he must realise that if prices were raised within two months of the introduction of the tax on 8th May, 1962, it is not clear that any refund would benefit the persons who have borne the tax, because one cannot benefit the purchasers of the toffee apples. One would not be justified, contrary to the demands of law, in repaying money to Mr. Herbertson which would be in the nature of a windfall. He certainly stopped making toffee apples in 1965.
As I said, this has nothing to do with size. It is nothing to do with discriminating in favour of large manufacturers. It is, first, a question of law, and on the facts it seems clear that Mr. Herbertson is not entitled to repayment. Secondly, the Customs, ex gratia, will sometimes 887 consider the case if the entire burden of the tax was borne by the trader.
I would be glad to look at the other information which the hon. Gentleman has supplied and try to reconcile it with the information that I have—which is that on 8th May the prices were put up—and then, in the light of that, reach a conclusion whether, in equity, there is a special case here.
§ Mr. Woodnutt
I thank the hon. and learned Gentleman for agreeing to look at the matter again. I assure him—
§ Mr. Speaker
Order. The hon. Member has exhausted his right to speak. 888 Does he wish to ask a question of the Minister before he sits down?
§ Mr. Woodnutt
On a point of order. I rise merely to get the record straight. Indeed, it is clear that the record must be wrong, for I have the Customs and Excise record book with me. This man was not selling goods on 8th May, because he did not start the summer season until 18th May.
§ Question put and agreed to.
§ Adjourned accordingly at twenty minutes past Ten o'clock.