PURCHASE TAX

HC Deb 28 January 1970 vol 794 cc1630-59

7.50 p.m.

The Financial Secretary to the Treasury (Mr. Dick Taverne)

I beg to move, That the Purchase Tax (No. 1) Order 1969 (S.I., 1969, No. 1736), dated 4th December 1969, a copy of which was laid before this House on 8th December, be approved. The effect of this order is to introduce five minor adjustments of the purchase tax coverage which are needed to correct particular anomalies which have been the subject of increasingly strong representations in recent months. Three of them are settled by way of new reliefs but two involve increasing the scope of the tax to a minor extent and that, as the House will appreciate, is why this Motion is necessary. These are not matters which should, in our judgment, wait for the next Finance Bill, and the Treasury order procedure is provided under the Purchase Tax Act, 1963, so that miscellaneous minor items of this character can be dealt with as and when action is needed.

The order came into force on 1st January, 1970. The gap between the operative date and the publicity given to the order on 8th December gave the traders concerned three-and-a-half weeks' notice in which to make their preparations. A period any longer than this would have given rise to concern on the part of those traders granted relief, and increased the risk of forestalling by those traders who are encountering a charge for the first time.

Taking the alterations in the order in which they are set out in the Statutory Instrument, the first three items are in the textile field. The House will recall that, in his Budget last year, the Chancellor brought back into the purchase tax certain domestic textiles whose exclusion from tax could no longer be justified. Experience since then has shown that there are a few minor instances where the tax can with advantage be adjusted. As regards the first item, disposable incontinence pads, these became chargeable at 13¾ per cent. of the wholesale value, together with the generality of articles used for domestic bedding and similar purposes. The existing exemption for invalid aids was retained, and this includes air pillows and air cushions and also water beds, water pillows and water cushions.

There has been considerable pressure for the purchase tax to be taken off incontinence pads as they are at least as important as nursing aids as some of the items already exempt. I understand that the Surgical Dressing Manufacturers' Association has welcomed the decision.

The next item concerns certain bonded fibre fabrics, and here our proposal is simply to restrict the existing exemption for these products to its intended industrial scope and to prevent its growing use as a means of avoidance of the tax on goods sold on the retail market. I will give an example of the way this happens at present.

Group 6 of the Purchase Tax Schedule covers, among other things, clearing materials such as dusters and dish cloths if they are finished articles. The materials of which they are made are also taxed, at the same rate of 13¾ per cent., under Group 7. However, there is an exemption, to which I have referred, for bonded fibre fabrics. This was intended to exempt fabrics which industry used as general purpose cleaning cloths, etc. But recently this material has been put on the retail market in packs of 6 or 12 small square pieces recommended for use as dish cloths, dusters and car polishers, and so forth. There are other possibilities of substitution of this material for conventional textiles. The Household Textiles Association and a number of textile firms concerned with dish and cleaning cloths have pressed for the anomaly to be rectified.

The present amendment has, therefore, been drafted to restore the charge on material used for household purposes whilst maintaining the exemption in favour of industry, as was originally intended. The technical definition of the type of bonded fibre fabric is not altered, but the words not put up for retail sale are inserted. I am sure that the House will agree that we ought to take action to stop tax avoidance of this kind, however innocently it may have begun to develop, because otherwise the market becomes distorted. I have no reason to suppose that the alteration we propose will cause domestic articles in this new material to lose their attraction for the public. But we must, in fairness to manufacturers in more traditional materials, make sure that they compete on a fair basis.

We are also, at the same time, proposing the addition of another industrial exemption to Group 7, in favour of certain polyolefin fabrics.

When the tax on tissues and fabrics in Group 7 was widened in the 1969 Budget the existing exemptions for certain fabrics of natural materials used industrially were left unaltered. The polyolefin fabrics had been developed while textiles generally were outside the scope of the tax, from 1955 to 1969, and when the tax was reintroduced they became chargeable at 13¾ per cent. Certain fabrics woven from narrow strips of polyolefin either by itself or in union with jute or flax, had in the meantime become widely used industrially as wrapping material.

The Association of Jute Spinners and Manufacturers, Dundee, supported by the Flaxspinners' and Manufacturers Association of Great Britain, also of Dundee, made strong representations for the exemption of jute to be extended to polyolefin or mixtures of this with jute or flax. This is the purpose of the present amendment, which has been welcomed by the Jute Spinners Association and other interested parties.

I come now to the other item which involves an extension of the scope of the tax. This concerns certain elements for electrically operated ceiling, wall or floor heating systems. At present, apparatus of a kind used for domestic heating is taxed at 36⅔ per cent. under Group 12. However, this applies in practice only to apparatus that is supplied in a form immediately ready for installation. There is a kind of ceiling, wall or floor heating system which essentially consists of a combination of conductive and resistive materials sandwiched between two layers of insulating material. This element is supplied either cut to length and sealed at the ends with electrical connections fixed, or in the form of a roll of the element which then needs to be cut and sealed on the site with the electrical connections being added.

Previously the first variety was taxable because it is an appliance or apparatus and the second variety is not taxable because it is not complete. The cutting and sealing operation involves little work or expense and can easily be done on site: consequently, the non-taxable element enjoys a distinct advantage.

The non-taxable variety is made in the United Kingdom and the taxable variety is made by a Norwegian firm. This has led to a formal complaint to the E.F.T.A. Committee of Trade Experts by the Norwegian Government quoting Article 6 of the Convention which says that Member states shall not (a) apply directly or indirectly to imported goods any fiscal charges in excess of those applied to like domestic goods, nor otherwise apply such charges so as to afford effective protection to like domestic goods … The majority of members of that Committee took the view, which was strongly contested by the United Kingdom that there was discrimination contrary to Article 6. To avoid an adverse ruling by the E.F.T.A. Council on this issue E.F.T.A. and the Norwegian Government were assured that action would be taken as soon as possible to remedy the situation.

The amendment proposed to the Purchase Tax Schedule removes this particular anomaly, and is not intended to affect anything else. I must say, however, that this item has caused me more concern than any other in the Order, because the British product affected is made in a factory in a development area in Scotland where increased scope for employment is urgently needed. We cannot, of course, give more favourable purchase tax treatment to products manufactured or processed in development areas.

This is an idea which the House has frequently considered in various contexts and had to reject: it could not be confined to one product and its general acceptance would undermine the purchase tax as a revenue instrument.

I am sure that the House will understand that I nevertheless felt very unhappy about a proposal which would in any way deter or hold back the expansion of the factory making this particular product. In fact, we have deferred moving this Resolution so as to give time for consultation with the manufacturer concerned to see whether he could suggest any satisfactory way in which we could meet our E.F.T.A. obligations without taxing the Scottish product. Both that manufacturer and the Norwegian firm making the directly comparable product would naturally have wished us to remove the distinction between them by making them both tax-free, and I have personally explored this thoroughly with representatives of the Scottish manufacturer and with the Secretary of State for Scotland, and with my hon. Friends the Members for Central Ayrshire (Mr. Manuel) and West Stirlingshire (Mr. W. Baxter). My hon. Friend the Member for Central Ayrshire is the Member whose constituency is affected.

I am afraid that it has all been to no avail, because the further we went into the technicalities the more evident it became that preferential tax treatment for these two products, even if extended to one or two others closely analogous, would be grossly inequitable to a number of other British manufacturers of electric heating systems and appliances and would be logically indefensible. We cannot at the present time contemplate removing all these systems, appliances and elements from the tax since they represent a sizeable source of revenue which we cannot afford to lose.

We have, therefore, been forced to the conclusion that the only solution to the problem is to put the elements covered by the present order into the taxable area along with their peers. I put forward this part of the order with considerable regret.

The final item is a provision excluding from the charge on tape recorder/reproducers certain audio-instruments suitable only for instructional use, which I am sure will be welcomed by Members.

In the 1968 Budget the purchase tax was extended by the addition of a new Group 19A to cover instruments for reproducing pre-recorded sound, such as tape recorders and reproducers. Since then there has been a growth in the number of specialised instructional instruments available and there has been pressure for some action to remove these from the charge under Group 19A.

After discussions with interested Government Departments and the trade a formula which would exclude from the tax the bulk of the instruments specialised for instructional use has been devised and constitutes the proposed amendment. This corresponds in a sense to the exemption which we introduced during the 1968 Finance Bill for certain types of projector: it is the audio counterpart of that provision for visual aids to instruction. Since 8th December the Customs and Excise has been in touch with the various manufacturers concerned to establish with them which models come within the formula.

I shall be happy to deal with any other points relating to this or any other item. I have tried to deal briefly with the points arising and explain why we need to make the order. I would only add that the proposed changes are not expected to have any significant effect on the Revenue, and for these reasons I ask the House to approve the order.

8.2 p.m.

Mr. Michael Alison (Barkston Ash)

I want to deal with two items, the first to do with Item 4, about which the Financial Secretary spoke for a good part of his speech, and the second dealing with Item 5.

Item 4 deals with the electrically operated heating elements. There is, as the Financial Secretary suggested, a rather special story behind this change. The story of the inclusion of these instruments in the charge to purchase tax in my view, in spite of the attempt he made to put the best possible Government face on things, amounts at best to maladministration and at the worst to something approaching a scandal. Depending on whether the Financial Secretary can go further and give us more hope on this topic when he replies, it will be my advice to the management of Imperial Chemical Industries and to its shareholders seriously to consider submitting this question to the Ombudsman.

It may be that the Opposition will want to come back and have another go at this item, at least in the Finance Bill, if the hon. and learned Gentleman cannot hold out hope of doing something constructive about it earlier.

It is important that the House should look at the history of this project. In some ways it is a fascinating story. It concerns the novel, semi-textile material going under the trade name of Flexel; it is a sort of rubberised fabric with a very high carbon content which is capable of conducting electricity. Its main use is in space heating. It can be built as an integral part of the ceiling or wall of a building at the time of construction and it operates by radiating heat. It is produced by I.C.I. at the Nobel Division Factory at Ardeer, in Ayrshire, in the constituency of the hon. Member for Central Ayrshire (Mr. Manuel). It results from a good 10 years of research.

Its significance is two-fold for the point of view of the economy generally. It is designed to be built as an integral part of a house; it is really part of the building materials used for the ceilings or walls. Its attraction is that it needs no special accessories, pipes, junction boxes, switches and all the other odds and ends which make obtrusions and take up space. Indeed, it is in its economy in the use of space that it is made particularly attractive for council house building and small private house building. The producers say that The architect does not have to accommodate us; we accommodate him. This is a novel departure in house building.

Secondly, it gives off radiation heat and is very efficient as a heat radiator in that it can produce a comfortable heat at anything up to 5° lower than comparable forms of appliances. It is extremely economical in its use of heat; which is important since economies in the use of heat are given weight in our fiscal system, for example, with night storage heaters.

By 1966, I.C.I. had completed the pilot stage of the development of this product and were ready to scale up. There followed discussions with officers of the Customs and Excise precisely about the implications for purchase tax of this product. After these discussions the Customs and Excise concluded that, provided certain installation procedures were followed in the use of materials on the building site the system incorporating Flexel would be free of purchase tax. The House will note that this explicit assurance was confirmed to I.C.I. in a letter from the Customs and Excise dated 19th December, 1966.

This was the green light for I.C.I. at Ardeer. Before this clearance the light, from I.C.I.'s point of view, was red or at least amber, because the central heating market, in which Flexel was designed to compete, is extremely competitive. Gas central heating installations, oilfired and night storage systems are all free of purchase tax. Flexel was given the green light on the assumption that it would be free of the tax. Without the tax a typical installation of Flexel works out at £180 per house, for the small house in the £4,500 to £5,000 range.

If the House accepts this new charge at the rate of 36⅔ per cent. on Flexel the whole profit basis of the product and the operation designed to market it is completely undermined. The competitive merits of this new development are not only obliterated, but swept entirely out of court by an increase in its selling price of effectively well over one-third.

Production was cracking along in Ardeer on the assumption that it would be free of purchase tax and by the beginning of this year the factory had 200 employees; it was anticipating a turnover of about £1 million in February, 1970. The growth prospect was at the rate of 20 per cent. in turnover per annum over the next few years. It was anticipated, and this is the key figure, that employment at Ardeer would go up to as high as 1,000, from 200, by 1972—this in a development area with an otherwise high level of unemployment.

This order, if it is accepted and the Government can hold out no hope of modifying it in a Finance Bill, is likely to strangle a promising project, with a substantial export potential on a good home market basis, not at birth, which would have been hard enough, but during adolescence, which is really a great deal worse. It will not be competitive any longer.

It is worth mentioning, in passing, that I.C.I. his already accepted orders for 7,000 houses using this system and to be completed in the current year, but on prices fixed before the order takes effect. I.C.I. will, therefore, have to carry the extra current cost, quite apart from the loss of competitiveness and profit which this represents for the future, and the 36⅔ per cent. tax which will be yielded to the Revenue will be a direct extra charge en I.C.I. which it will not be able to recover.

I should like to refer to the charge of maladministration, if not of scandal, which lies behind the order. It lies in the fact that the Government are making a total change since the original clearance was given to I.C.I. in 1966. This change is a response not to reconsidering the nature of the product, or the nature of the original exemption, or an extra need for revenue, or to a desire to close a tax loophole, but simply to a foreign objection.

As the Financial Secretary has said, through the E.F.T.A. agreement the Norwegian Government objected in respect of their own domestic product, known as Eswa, which is not an identical product. To accommodate the Norwegian Government, potentially a foreign competitor, but on only a tiny scale—British imports of Eswa are insignificant in relation to both the Norwegian and the United Kingdom economy—the Government have made this change.

Incidentally, Eswa is not even a like product. It incorporates different materials and it is fully and finally pre-fabricated before arrival on site. It operates on a totally different principle. To make it all square with Flexel, we now have to rewrite the original clearance which was given by Customs and Excise to bring this important British innovation within the tax net.

This is not good enough and I must ask the Financial Secretary seriously to consider it again. Unemployment in the Scottish economy is at stake; the potential of a promising export product is at stake; and the whole confidence of manufacturers in the word of the Government before scaling up and starting commercial production of new products is at stake.

If they applied their full Departmental skills and intelligence, the Government could probably devise a formula which could accommodate Eswa as well as Flexel in a new category which would continue to have exemption without causing offence to others producing quite dissimilar articles and appliances. The Government asked I.C.I. whether it could devise such a formula. Let the Government now try. Flexel is not strictly an appliance. It could be described as a special kind of building material and it is not unfair to place it in the category of building materials. I believe that the hon. Member for Central Ayrshire would probably be prepared to support me about that.

It is incorporated in the building of a house and it is not dissimilar from other materials used in a house to ensure the most economic use of heating. It is not a heating appliance and should not be regarded in that sense. It is arguably a building material, or it could come under the heading of elements to be included in the exemptions in Group 12(5) in the orders governing purchase tax. Elements of this sort are featured in night storage heaters which come in Group 12(5) exemptions, and night storage heaters are excluded. They incorporate elements in exactly the same way as this material, which is itself described in the order as an element.

Night storage elements are excluded on fuel policy grounds because they are extremely economic in their use of power and they are used at off-peak periods. The same principle applies to Flexel. It, to, maximises radiant heating and the efficient use of electrical power. If night storage heaters and the elements therein can be exempted, Flexel should be exempted on the same principle.

The main significance lies in the fact that this is a structural building material. It goes into the wall of a building and it is in no sense to be confused with appliances which are movable and which can be freely operated in a house where Flexel is not installed. It will be competitive only in new housing with central heating installations, which are already exempt, which is the crucial consideration.

The Financial Secretary cannot justify this innovation in the purchase tax laws on the ground that there will be outcries from the manufacturers of other types of appliances. It is not in the same market or category and it does not compete with them. It competes with the already purchase tax-free installations operated by gas, by electricity, in the case of night storage heaters, or oil.

I ask the Financial Secretary to undertake at least to consider whether, with the help of his Department, he can devise a formula for the Finance Bill to secure exemption for Flexel. I advise I.C.I. to do everything it can to see whether it cannot have the maladministration aspect considered. It is not right that it should have been assured by Customs and Excise that a certain product would be free of tax and should then be landed with this change. I suspect that a charge of maladministration, taken to the Ombudsman, would stick.

The Financial Secretary briefly referred to Item 5. We warmly welcome the decision to remove from the charge some specialised audio instruments. The Financial Secretary, who sat with me through the long debates on the Finance Act, 1968, will agree that we have some grounds for complaining that this exemption was not made earlier.

It is now nearly three years since the Finance Act, 1968, was passed and these audio instruments have, therefore, been carrying tax unnecessarily for three years. These exemptions could have been included among those perfectly properly made in the 1968 Act, for these fall into the category of those instruments which were then exempted, such as tape recorders for scientific or industrial use. Similar considerations apply to these instruments as apply to those specialised appliances for recording or reproducing speech. Those for educational use are exactly the same sort of specialised instruments as those for scientific, industrial or commercial use.

In some ways the omission to include these audio instruments in the Finance Act exemptions is all the more reprehensible, because my hon. Friend the Member for Bournemouth, West (Sir J. Eden) specifically raised this issue in Committee. He said: In my constituency there have grown up over a number of years three or four very substantial international schools of English. Thousands of European students come every year on courses of varying length to learn English, and the teaching is done primarily through the medium of specially adapted tape lessons and recording devices".—[OFFICIAL REPORT, Standing Committee A, 8th May, 1968; c. 619.] It is to exactly these specially adapted recording devices that the Financial Secretary is now granting exemption. Why could this not have been done in 1968, when my hon. Friend the Member for South Angus (Mr. Bruce-Gardyne) and I debated day and night to get these concessions along with those for other instruments for scientific, industrial and commercial use?

The Financial Secretary will, therefore, realise that we give a rather jaded but, nevertheless, real welcome to the concession. In this connection, however, in the case of these specialised audio educational instruments which we are now exempting, I should like to know what is to become of the recordings which are associated with them. Presumably, they will be taped. It would be anomalous to exempt the recording instruments entirely from the tax, but to leave the associated and specially adapted tapes at the level of 50 per cent. To exempt the player, but, at the same time, keep a 50 per cent. level of tax on the tape, is altogether anomalous.

Possibly exemption will follow automatically from the exemption already available for tapes which are not produced in quantity for general sale. If, however, that is not the case and the tapes are to bear a charge, in spite of the fact that the record player is to be exempted, I hope that the hon. and learned Gentleman will undertake to consider exempting the tapes concerned on the same basis as the specialised tapes for purpose-built blind speaking/recording instruments are exempted when this year's Finance Bill is introduced.

With those comments I welcome the exemption. I question the wisdom of the new charges and I hope that the Financial Secretary will give us more encouragment, particularly on Flexel.

8.21 p.m.

Mr. Archie Manuel (Central Ayrshire)

I support wholeheartedly the case made by the hon. Member for Barkston Ash (Mi. Alison) concerning the imposition of purchase tax on the I.C.I. product, Flexel. I hope not to repeat too much of what the hon. Member has said. He appears to have had from I.C.I. an even better brief than the hon. Member who represents the constituency. Between us, however, I hope that we present a strong enough case to cast serious doubt in the minds of Treasury officials and Ministers concerned.

I have considerable sympathy with my hon. and learned Friend the Financial Secretary, because he was not originally associated with this matter. I understand from certain sources that the decision was taken a considerable time ago, much longer ago than some of us imagined when we first took an interest in the matter. But my hon. and learned Friend does not gain any marks because, with his officials, he has not managed to devise a way round the problem, which will react severely on a section of people in my constituency.

My attention was drawn to the order a few days before the House rose for the Christmas Recess. As a result of information that was conveyed to me, I led a deputation to the Treasury on Wednesday, 17th December. The deputation consisted of my hon. Friend the Member for West Stirlingshire (Mr. W. Baxter), Dr. J. S. Flanders, Mr. J. Mannion and Mr. G. Bell-Barker, from I.C.I. The order was to be moved in the House the following day, 18th December. Although I got no satisfaction at the meeting with my hon. and learned Friend the Financial Secretary, he told me next day in the House that the order would not be moved that day. I regarded that as a considerable victory and felt that we would get round the imposition.

The whole question of purchase tax being applied to Flexel arose, as the hon. Member for Barkston Ash has said, from a Norwegian firm operating in this country—but not to a great extent—who had complained to the Norwegian Government that Flexel did not bear purchase tax. The Norwegian Government took the matter to the E.F.T.A. Council and it was agreed that Flexel should carry purchase tax of 36⅔ per cent.

I am concerned about the way the Treasury has operated in this whole matter. I am convinced that public relations on the Treasury side were appallingly bad. The word "scandalous" has been used from the benches opposite and I concur in it. I.C.I. had no notification of the question being raised at the E.F.T.A. level. The first that the company knew about the matter was when two Customs and Excise officials visited the I.C.I. plant in my constituency and indicated that purchase tax was to be applied to Flexel. The method of collection of the tax was mentioned. That was the first indication.

The Norwegian firm communicated with the Norwegian Government, but no approach was made to I.C.I. by the Treasury to ascertain I.C.I.'s side of the case. We could, no doubt, have defended our firm better than it was defended at the E.F.T.A. meeting.

The Flexel heating system was developed as a result of 10 years of extensive research by the Nobel Division of I.C.I. in my constituency. The installation and running costs of the system have proved to be competitive with other heating systems. The Flexel system, however, is particularly attractive in low cost housing, and especially in local authority housing—I know this through my local authority contacts in Scotland—where not only costs but floor space is strictly controlled. The fact that the system is built into the structure of the building and accordingly does not require any allocation of floor space for boilers, radiators, pipes, etc., or any additional structural work, particularly attracts local authorities throughout the United Kingdom. Commercial marketing was first commenced in 1964, since when Flexel has been installed in about 10,000 houses, at least 80 per cent. of them being in local authority ownership.

About 200 people are employed in the Flexel system within the United Kingdom. When the final commissioning of the new Flexel plant has been completed and the market in Europe, America and the Far East is established, there will be about 800 to 1,000 people working on the system. The plant will be completed early in 1970. The overseas market should be established by 1972 and expansion should be at about the rate of 20 per cent. per annum. This is a conservative estimate of growth.

The Financial Secretary has mentioned expansion in connection with the factory, but the factory has already been completed to full expansion to deal with the overseas orders that it hopes to get. Therefore, the money has already been invested. Systems such as this are, naturally, subject to severe competition from oil, gas and conventional electric systems. Prices are, therefore, a vital matter.

Having talked to the building contractors, I understand that gas and Flexel are almost level in price. This will certainly put Flexel at a great disadvantage. Flexel has gained in popularity because of the reasons I have indicated, but we will now lose out on price because of the application of purchase tax.

The question was raised in 1966 and I.C.I. has a letter dated 19th December that year stating that purchase tax would not be applied. I.C.I. then went ahead with promotion of the system in the United Kingdom and installed increased plant capacity in my constituency at a cost of £250,000 to cater not only for the United Kingdom market, but for expansion overseas. The justification for that expenditure was the expectation that Flexel would be free of purchase tax.

There is another question I should like to ask my hon. and learned Friend. This plant has cost £250,000. It is in a development area. It is responsible for employing about 200 people. Being in a development area it can attract Government grant at 40 per cent., which, on £250,000, is £100,000. Is this going down the drain? Is there a likelihood of the whole exercise, the whole initiative, all the research for over 10 years, being placed in complete jeopardy, because of the Treasury not being able to find a way round the present system and so letting our own British firm be at the mercy of overseas competition? Is there a question of competitors, through Governments, trying to steal a march on I.C.I.?

The development grant question ought to be considered. Those of us interested in municipal housing know that the Government meet housing costs above 4 per cent. If Flexel were used and the local authorities were to receive the grant there would be a heavier outlay by the Government to meet the added cost over and above the 4 per cent. We know that there is already an added cost for the Government, but this would be an addition further to that, and therefore more money would be spent by the Government in helping the local authorities.

In the present competitive situation, I.C.I. tells me, and against systems which are free of tax, I.C.I. is convinced that it cannot pass on this tax and remain competitive. Accordingly, the rate of growth of the system in the home market would be seriously hampered. This would seriously affect the company's efforts in the export market. There is the additional complication that it has already accepted orders for a further 7,000 houses at the current price to be installed this year. A large proportion of the orders are for local authorities—Aberdeen, Clydebank, Johnstone, Bearsden, Cumnock, Kilmarnock, the constituency of my right hon. Friend the Secretary of State for Scotland, Saltcoats, Harrow, Gateshead, Manchester, Darlington, Tam-worth, Coventry, Worcester, Limavady, Enniskillen, Moira—in Ireland—Lurgan. I.C.I. has accepted contracts to install at a fixed price to the extent of £1 million.

There will be consequences, however, beyond this. The firm is going ahead with trial installations in Germany, Austria, Switzerland, Italy, Spain, Portugal, the U.S.A. and Japan, and the firm foresees the possibility of high-potential markets there, but inevitably it has to pass through a trial and testing period in these territories, and it could extend over two or three years. This period can be sustained economically only by an expanding home market. Without this, I.C.I. must have second thoughts on its overseas activities. The imposition of the purchase tax, therefore, not only puts at hazard the Flexel project at home but involves the possible sacrifice of foreign currency earning activities.

After my meeting with the Financial Secretary on 17th December at the Treasury there was a further meeting with I.C.I. officials on 17th January. Following that the case for the tax not being applied was sent to the Treasury on 13th January, along with a draft text which I.C.I. thought could be accepted and would relieve the firm of paying this purchase tax. I have the text here, but I do not want to quote it now, and I am sure the Financial Secretary will have it. Those representations were turned down by the Treasury.

On behalf of I.C.I. Dr. Flanders replied on 27th January to a Treasury letter of 23rd January. I should like to quote part of this letter. Dr. Flanders said to the Financial Secretary: You distinguish central heating systems from whole house systems based on flexible heating elements on the basis that in the former the energy is converted to heat at a central point and then transmitted via some heat-carrying medium to the heat sources located throughout the house, whereas the latter system converts the electrical energy to heat at the heat source itself. With respect, we do not consider this to be other than a technical distinction. It was, in fact, our understanding of our previous meeting that the reason for exempting central heating systems rested on the manner of construction and installation. This was my firm conviction, too, when going into the matter.

You yourself"— Dr. Flanders went on to my hon. and learned Friend— have quoted the phrase 'large area, low temperature systems' and it is this characteristic which, in our view, makes the systems using flexible heating elements analogous to the central heating system. You suggest in the third paragraph of your letter that rigid panels could also be built into the fabric of a building This, I suppose, is theoretically possible, but is perhaps unlikely on a practical basis. However, for this reason we included in our suggested definition the requirement that the flexible element had, of necessity, to be incorporated in the fabric of the building. I still feel that we can clearly distinguish between the element which has to become part of the fabric of the building and the rigid panel which is often fastened to the fabric but really only causes minimal damage when removed. The above comments do not cover all the points raised in your letter but will suffice to show that we still believe that there are good grounds for distinguishing heating systems using flexible elements. As already mentioned, we are very disappointed that you intend to proceed with this order. Quite apart from the long-term difficulties which this decision will cause, we shall immediately be faced with the problem of orders already accepted but which are unlikely to be carried out for 12 to 18 months. Quite apart from our continued objection in principle to the imposition of purchase tax on Flexel, it will be necessary for us to seek meetings with the appropriate officials to discuss some of the administrative difficulties which will arise. That is signed by Dr. J. S. Flanders.

I appeal to the Financial Secretary not to proceed with this order. I do not suppose it is much use my making such an appeal, but I feel very strongly about this matter. I ask him not to proceed with the order even though this might break the rules, upset conventional attitudes and cut the red tape. Could he at least give early reconsideration to the matter of imposing purchase tax on Flexel?

In view of what has been said during this debate and in the light of the views put forward by the highly qualified people from I.C.I. who have given advice on this matter, surely the whole matter should be examined again when we are dealing with the Finance Bill. Can we not have a promise from the Financial Secretary that he will seriously consider this matter since he recognises that the order will have very bad effects, not only in my particular constituency, but throughout local authority areas which have been making arrangements to embark on the installation of this heating system?

The outstanding success of the Flexel heating system is being placed in jeopardy by the Treasury decision to apply this tax. Employment in my constituency could be adversely affected by this decision. Let the Government turn their mind to how this tax can be withdrawn rather than to arguments as to how the tax should be kept on. This will avoid the adverse criticisms which have followed their actions, made by the people concerned with the growth of British industry.

8.40 p.m.

Mr. J. Bruce-Gardyne (South Angus)

My hon. Friend the Member for Barkston Ash (Mr. Allison) and the hon. Member for Central Ayrshire (Mr. Manuel) have unveiled before the House a thoroughly disgraceful story. Having listened to what they have said, I cannot not help wondering whether this difficulty might never have arisen if the Government had not fallen in to the habit over the years of treating their E.F.T.A. colleagues in such a scurvy manner and, since the element of competition between the Norwegian and Scottish product is a limited one, if there had been a better understanding and sympathy on the part of Her Majesty's Government in the Councils of E.F.T.A.

I wish to raise a much narrower and more parochial point. I wish to devote my remarks to paragraph 3 of the order. The Financial Secretary may be glad to hear that I extend to that paragraph an unqualified welcome, so far as it goes, but it reflects the casual drafting shown in the original extension of purchase tax to textiles in the last Budget. It is characteristic of the Chancellor of the Exchequer that he prefers to do ill by stealth. He allowed us to believe that it was a simple little matter of extending purchase tax in an effort to catch such candy floss society frills as linen table napkins, but we gradually began to discover that the extension was much more widely drawn.

One of the victims caught unwittingly in the net was the textile industry in Eastern Scotland.

Mr. Deputy Speaker (Mr. Harry Gourlay)

Order. We cannot on this order have a wide-ranging debate on purchase tax. The hon. Gentleman can only discuss the specific changes which are proposed in the order itself.

Mr. Bruce-Gardyne

That, Mr. Deputy Speaker, is precisely what I was intending to do.

The point to which I was referring was the exemption under paragraph 3 of the polyolefin fabrics under sub-paragraph (b). As the Financial Secretary has pointed out, this had been strongly requested in the jute textile industry of Dundee and in my constituency because the product caught by purchase tax was designed purely in the form of a commercial end use for the future. The polypropylene packaging is intended to perform exactly the same purpose.

I wish to pay tribute to the Paymaster-General. He is about the only member of the Government who appreciates that administrative inconvenience is no excuse for imposing taxes which make no economic sense. It was largely thanks to his efforts that a solution to this particular anomaly was discovered and incorporated in paragraph 3 of the order. Unfortunately, however, no sooner does one eliminate one anomaly than one is liable to create another. One firm in my constituency in Dundee, Messrs. W. G. Grant, has discovered that although it was led to understand that its particular predicament would be covered by the exemption contained in paragraph 3 it is not covered. I notified the Financial Secretary that I would raise this point, which has also been raised with the Customs and Excise and with the Treasury.

Messrs. W. G. Grant manufacture two products. The first is a polypropylene windbreak, and the second is a container for nurserymen's trees called a "rootainer". Both of these products are still caught by purchase tax and fall out-with the scope of the exemption in paragraph 3, although they are wholly and exclusively produced for commercial end users. The windbreaks do not qualify for exemption under the order because the polypropylene tape is twisted, with the result that some of the strands exceed one millimeter in width. The "rootainers" are caught because they are made of acrylic waste, which is not one of the synthetics now enumerated in the order.

In each case, the purchase tax adds about 17 per cent. to the end price. That is because provision has to be made for a notional wholesale mark-up, although both products are sold direct to the commercial customer. In the case of the "rootainers", directly competitive products are not caught and enjoy exemption under the order, because they are made either of hessian or of polypropylene.

Messrs. Grant explained their problem to the Customs and Excise when the order was under discussion. They formed the impression that their predicament would be dealt with and did not press their case because they recognised that the major issue was the polypropylene packaging, and they did not wish to hold up the exemption for that.

Now they seem to encounter an attitude bordering on indifference at the Customs and Excise—

Mr. Roy Roebuck (Harrow, East)

No.

Mr. Bruce-Gardyne

That happens to be a fact, though the hon. Gentleman may be unaware of it.

They are told that they should stop twisting the polypropylene tape in the windbreaks, although that would make them useless as windbreaks, and it is suggested that, in the case of the "rootainers", they should try putting a frilly edge round them which would add to the cost of the end product and serve no conceivable purpose save as a lasting reminder of the folly of the purchase tax rules.

Messrs. Grant are still trying to find a way of resolving their problem with the Customs and Excise. But the basic position is quite clear. Purchase tax is supposed to be a tax on consumer goods. The House will notice from Section 3(a) that that is precisely the point dealt with by the order. The tax should apply to goods which are sold retail and, by inference, not to goods sold to commercial users. I do not ask the Financial Secretary to produce a solution to Messrs. Grants' predicament tonight, but I do expect him to see that an acceptable solution is found in due course to what admittedly is a small but indefensible anomaly.

8.50 p.m.

Mr. Peter Doig (Dundee, West)

Like the hon. Member for South Angus (Mr. Bruce-Gardyne), I welcome Section 3 of the order which is concerned with polypropylene. During the Budget debate, the hon. Gentleman tabled an Amendment which was not called by Mr. Speaker, and we got nowhere. Subsequently, meetings were arranged between the jute manufacturers, and polypropylene manufacturers and officials of the Customs and Excise with a view to reaching some agreement. Again, they got nowhere.

Shortly afterwards I approached my hon. and learned Friend's predecessor, who has now received his just reward and is in the Cabinet as Paymaster-General. He put in super-human service in bringing about this change, and it is no doubt due to his efforts that we have this order incorporating the change before us tonight.

In my constituency, over 16,000 people are employed in the jute industry, and approximately 600 are at present employed in the polypropylene section. Had this tax been imposed on polypropylene, it would have finished that section completely.

However, the important point does not merely concern the jobs of those 600 employees. It is that, recently, there was trouble in Pakistan and there was a risk that the jute crop would be in danger. That would have been a disaster to those employed in the industry in my constituency and that of the hon. Member for South Angus. In view of that, it was essential to keep the polypropylene industry alive. The jute industry, the machinery which weaves the jute and the people who operate the machinery can be quickly changed over to weaving polypropylene instead. So it was not merely a question of the existing 600 jobs. There was a danger to the future of the 16,000 jute jobs which might have been affected by the change. In view of that, this is an important change for my constituency which is greatly welcomed.

I want to associate myself with the other points which have been made, but I do not want to see the order delayed to take care of them. I hope that my hon. and learned Friend will see what can be done in the future to take care of them, but it is important not to endanger the main point, which is Section 3.

The hon. Member for South Angus referred to the predicament of Messrs. W. G. Grant. I too have been approached by this firm, which has factories in my constituency. Their rootainer is quite a small article. It is not sold on the retail market to the general public. It is simply a cheap and effective means of keeping together the roots of plants used in horticulture. This product is an off-shoot of the jute industry, which is experiencing considerable trouble at present. It is an enterprise which should be encouraged, since it does not compete with other commodities.

Coming on to the point about Flexel heating, a medium-sized firm in my constituency has taken over a new factory in the last year or two and has gone to considerable expense to produce and market this product. If this is in danger it will be a serious blow for firms of this kind. I am not referring to firms the size of I.C.I. which can carry this kind of thing without endangering their future in any way. When we come to the smaller and medium-sized firms which are also affected and have laid out considerable capital sums to produce something which they were led to believe would not carry purchase tax, it seems quite wrong that it should now be changed at this late date to bring it within the order after they have incurred this capital expenditure.

I should not like my hon. and learned Friend to delay or withdraw the Instrument to cover these two points. I think that he should look at these two points again in the near future to see whether anything can be done about them.

8.56 p.m.

Mr. Roy Roebuck (Harrow, East)

I warmly welcome paragraph 5 of the Purchase Tax (No. 1) Order, 1969, which states: In croup I9A, under the heading 'Not chargeable under this Group', after paragraph 2 there shall be inserted the following paragraph:—

'3. Instruments which are—

1. (i) suitable only for use in a course of instruction; and
2. (ii) capable of operation only from mains supply; and
3. (iii) incapable of erasing instructional material prerecorded on magnetic tape or other recording material'."

This provision will be a great boon to schools and other educational institutions.

I understand that during my unavoidable absence from the Chamber the hon. Member for Barkston Ash (Mr. Alison) was rather sourly inquiring why it had taken so long for the Treasury to make this alteration. Perhaps I can assist him. It is because the Opposition are so ineffective, so impotent, that they were unable to present the case properly to my right hon. Friends.

Mr. Alison

We presented the case most effectively in the Finance Bill, 1968, but it was turned down.

Mr. Roebuck

The hon. Gentleman's idea of what is an effective presentation is rather different from that of those of us who take a more detailed view about what is effective and ineffective.

My attention was drawn to the difficulties which arose under Group 19A when the headmaster of St. Bernadette's Roman Catholic school, in my constituency, indicated that his school wished to purchase a machine for teaching children various languages.

St. Bernadette's School enjoys a high reputation in Harrow. It is always anxious to improve its educational methods. Therefore, I listened with the keenest attention to the representations which were made to me. They were to the effect that the langauge machine in question would cost about £70 and that the purchase tax would amount to about £14 or £15.

On hearing this I was horrified and communicated instantly with my right hon. Friend the Member for Manchester, Cheatham (Mr. Harold Lever), who was then the Financial Secretary to the Treasury. As was to be expected, he was most receptive to my representations, as indeed would be any member of this Government of adventurous hope. My right hon. Friend said that there were difficulties about drawing regulations in such a way that machines required purely for educational purposes would escape the tax, but, nevertheless, difficulties would not be allowed to come in the way of a sensible approach to the problem. That was the attitude we normally expect from any member of this Government.

My right hon. Friend instituted appropriate inquiries, got people to work on the issue, and finally produced a draft of the order; and, by virtue of paragraph 5, instruments used for instructional purposes will escape the tax.

The Treasury deserves congratulation. The order also indicates the way that democracy works in this country. Here is a situation where the citizen finds some provision which is annoying and not conducive to helping to educate children. Through the normal processes he approaches his Member of Parliament who subsequently makes representations to the Government and, because we are fortunate in having a Government who are responsive to this kind of thing, we get an alteration in the law of the land.

I congratulate the Financial Secretary on what he has done. His praises will be sung by those of my constituents with children at this school. There will be praise throughout the land for him and the Government for this action.

9.0 p.m.

Mr. Taverne

With leave of the House, perhaps I might reply to the debate. I will start with the less controversial questions and come back to the serious matter of Flexel later.

I am glad to find that the eloquent representations of my hon. Friend the Member for Harrow, East (Mr. Roebuck) were so successful. I cannot ascribe the failure of earlier representations to the inadequacy with which they were made, but there were circumstances which made it difficult to give this relief before. There has been a growth in the number of specialised instructional intruments available. It was not possible before to give this relief, because the audio instruments had not then developed a sufficient degree of specialisation for us to be able to distinguish them, for tax purposes, from the general purpose instrument which it is intended to charge.

As we have explained many times, it is impossible to tax things according to the use to which they are eventually put. One must tax them at the wholesale point, before one knows how they will be used. It is now possible to say, in certain cases, that there are instruments which comply with the definition contained in the order, and to make the exemption which one would wish to make.

Mr. Bruce-Gardyne

I am a little confused by that statement. How does it relate to paragraph 3(a), which makes precisely this definition, according to use, in the case of bonded fibre fabric.

Mr. Taverne

One can see from the order precisely how this relief can now be given. There are three factors. First, the instrument must be suitable only for use for instruction. Second, it must be capable of use only from mains supply. Third, if it is not suitable for use only for instruction, the purchase tax exemption could not be given. It is because there are instruments designed and suitable only for such use that the exemption can be given. That proves my point.

One cannot exempt on the grounds that something which can be used for many purposes will be used only for one. One cannot possibly say, for example, that tapes, which can be used for many purposes, should be exempted, because one does not know, at the time that the tax is imposed, whether they will be used for educational or non-educational purposes.

Mr. Alison

Would the hon. Gentleman clarify one point? What about the tapes for these specialised instruments? By definition, the tapes used in these instruments can be used only for educational purposes. Presumably, therefore, the tapes escape the tax as well.

Mr. Taverne

No, they do not escape. The tax applies to all tapes. One could not differentiate tapes in the way that one can differentiate these instruments.

I turn now to the polyolefin exemption. The product of which the hon. Member for South Angus (Mr. Bruce-Gardyne) spoke, and which is manufactured by Grants, is not a polyolefin product but an acrylic, so it does not come within the terms of the order. But I can assure him that this matter is under consideration, and that I hope that a solution will be found that will be favourable for the firm concerned.

I turn now to the question which has dominated the debate, that of the treatment of Flexel. Strong representations have been made by the hon. Member for Barkston Ash (Mr. Alison) and by my hon. Friends the Members for Central Ayrshire (Mr. Manuel) and Dundee, West (Mr. Doig).

First, the history of what happened. This product, when first produced, was claimed not to be subject to purchase tax. Representations were made by Norwegian competitors that this was contrary to the E.F.T.A. Treaty. This was considered, and it was decided that it should bear purchase tax. It was then modified. The modified product was discussed with Customs, and Customs agreed that, as modified and in the way in which it was to be installed, it would not be subject to purchase tax as the purchase tax law then stood.

Of course, no Customs officials can give any undertaking that purchase tax will not be changed, and that items which at one time are not subject to the tax will remain exempt for all time. Nor did they give such an undertaking. They did agree that that particular product at that time was not subject to purchase tax.

The hon. Member for Barkston Ash says that there was gross maladministration because we are now bringing it into tax in response to a foreign objection. What he is, in effect, saying is that we are guilty of gross maladministration because we happened to comply with the E.F.T.A. Treaty. If a case is made that there is discrimination as between like products we cannot defy E.F.T.A. We cannot disregard E.F.T.A. and say that because the foreign competitor is only a small one we shall deal with one like product differently from another.

I must admit a point which caused me much more unease was that made by my hon. Friend the Member for Central Ayrshire, about the notification of I.C.I. It is certainly true that where there is not sufficient technical information available of course the technical information is obtained. Here all the technical information was available. All the details were in the hands of the Customs. It would normally be the case if we wanted to approach anyone that we would approach the trade associations, but here the trade association did not take the same view, for obvious reasons, as I.C.I. about the particular exemption continuing. Nevertheless, it may well have been true that when the case was prepared I.C.I. should have been informed. That may well have been so, but it would not normally be the case because one would proceed through the trade association.

Mr. Manuel

Although my hon. and learned Friend says there is some doubt whether I.C.I. should have been approached, he will have no doubt whatever that the Norwegian firm approached his Government and the Norwegian Government approached E.F.T.A., which approved the case which the Norwegian Government gave to it.

Mr. Taverne

The Norwegian firm was the firm which made the complaint to the Norwegian Government and the Norwegian Government then brought the complaint before E.F.T.A. Because I was worried on this point I have looked most carefully at the presentation of the case before the Committee of Trade Experts. It was extremely carefully and ingeniously argued by the United Kingdom delegation, but here were two products obviously in competition and it was open for the Committee to take the view that these were like products.

The hon. Member for Barkston Ash said that they were parallel but not like products. There was a distinction there, but it was not perverse of the majority of the committee to have taken the view that they were like products. They obviously had certain elements in common. They are both Elements for electrically operated ceiling, wall or floor heating systems, being elements which consist of electrically conductive or resistive material in strip or sheet form between two layers of insulating material. After the E.F.T.A. points had been raised and after it was agreed that we had to put the position right we could do one of two things. We could either make both products subject to tax or make them both exempt from tax.

What I wished to see was that both should be exempt from tax. This, I think, would not have made any difference to the revenue. It would only make a difference to the revenue if that line could not be drawn between them and various heating appliances and there would then be a danger because many millions would be at stake. The question has to be faced: could we somehow distinguish Flexel and Eswa and put them in the non-taxable category?

Mr. Alison

Surely the case is simpler than that. The fact is that Customs and Excise had already determined that Flexel was not subject to tax. If Eswa was then found to be of the same kind of element or material as Flexel it follows logically that Eswa would automatically like wise be included. It is not a question of including both, but if they are like products the tax automatically applies to either product.

Mr. Taverne

It is not as simple as that. One of the points which was strongly argued by the United Kingdom delegation at the committee was that because it was possible to distinguish them for purchase tax purposes they were not like products. This argument was not accepted. It is possible that a distinction can be drawn for purchase tax purposes even between like "products". Once one had to treat them alike one could no longer say that because it might be technically argued that Flexel was a system whereas Eswa was clearly an apparatus one could draw the distinction on the grounds of one being an apparatus and the other a system. That could no longer be done. They both had to be treated alike. From whatever angle one looked at it is became impossible to draw a logical and defensible distinction such as the hon. Member and my hon. Friends have asked us to draw.

One could not say that this was a building material and that it could, therefore, be exempt because there are other products which could be regarded as such. One consists of electric wires running between two layers of materials, one insulating polystyrene and one chipboard, which are placed between ceiling joists, the insulating layer forcing the heat down into the room. Again, there is an American produced panel which was closer to other heating appliances. They are also building materials or could be regarded as such and could not be said to be on the non-taxable side of the line.

The basic problem which we faced was that there are three sources of heating which one must regard for tax purposes. There are free standing appliances, appliances fixed to the fabric of the building, which are fittings, and appliances built into the fabric itself. In Category I, one has what the layman would call ordinary electric fires providing radiant or black heat, or both, and spreading heat by convection or a fan or both. The second category, fittings, contains the same varieties of fire as the first and many are to be found also in Category III, that is, appliances built into the fabric itself which include radiant bar fires and the convector type which can in certain circumstances be built into the wall of the room.

There could be no possible justification, and I examined this as sympathetically as I possibly could, for discriminating for tax purposes between Flexel and Eswa, on the one hand, and heating panels, on the other, nor between heating panels and built in or otherwise fixed traditional electric fires or between those and freestanding appliances. If we did draw a line the whole of the revenue in this field would be at risk.

My hon. Friend the Member for Central Ayrshire (Mr. Manuel) asked whether I would reconsider the matter, or whether I had a closed mind on the subject. Of course, I have not got a closed mind on the subject. I have not yet seen the letter from Dr. Flanders which he read. It was, as he revealed, written yesterday, but it has not reached me yet. We shall have to consider this carefully.

Having looked at it from every possible angle and approach with the aim of seeking to exempt from tax both Flexel and the Eswa products I could come to only one conclusion on everything which I have so far considered and, unfortunately, I feel that both must be taxable.

Mr. Alison

Could the hon. and learned Gentleman look at one further possibility, namely, that some sort of offset concession could be made to the Norwegian Government, for example, on tariffs which could counter balance the purchase tax and leave them in the same net position? An order under the import duties legislation or tariff arrangements could be made. Something simple like that could be done because, under the Customs and Excise, Flexel is exemptable.

Mr. Taverne

The hon. Gentleman is introducing complications which are quite impossible to envisage. If one begins saying that one particular product must be exempted from tariff although otherwise there is discrimination within E.F.T.A., one gets into a mire from which it is very difficult to extricate oneself.

Mr. Manuel

I appreciate the sympathetic way in which my hon. and learned Friend has dealt with the representations made here tonight. I referred to this year's Finance Bill. Could he promise the House that he will take the opportunity to see that the matter is very fully and thoroughly examined with a view to seeing that Flexel get the relief for which we have been asking?

Mr. Taverne

I assure my hon. Friend that any new suggestion which comes forward will be carefully considered. I have already made clear which way my sympathies lie and have lain throughout. I have not yet, for example, seen the further argument adduced by Dr. Flanders. If by any chance any further new factors brought forward could persuade one that such a distinction—which I have felt so far to be impossible—could be made, there would be opportunity to do it.

Question put and agreed to.

Resolved, That the Purchase Tax (No. 1) Order 1969 (S.I., 1969, No. 1730), dated 4th December 1969, a copy of which was laid before this House on 8th December, be approved.