I come now to the reform of indirect taxation. In our election manifesto we said this:
We will abolish the selective employment tax, as part of a wider reform of indirect taxation, possibly involving the replacement of purchase tax by a value-added tax.
We also made it clear that no decision would be taken on a value-added tax until the case for it had been thoroughly investigated with the help of the Civil Service.
§ That review is now complete, and it has involved the Customs and Excise Department in a very full study of the introduction of a V.A.T. in this country. They have examined the systems of V.A.T. in other countries, and they have visited some of them so that they could see at first hand how the tax worked. For reasons which I shall explain shortly, I have decided that, as from April, 1973, both S.E.T. and purchase tax will be abolished and a value-added tax will become operative. A Green Paper is being 1393 issued today. It will be the basis for comprehensive discussions and consultations about the administrative and other details of the tax, and legislation will be introduced next Session. This will involve the most fundamental change in our scheme of indirect taxation since purchase tax was introduced just over 30 years ago.
§ We have frequently explained why we consider S.E.T. to be a thoroughly bad tax. It is unfair and it is arbitrary. It discriminates between one employment and another in a way which is quite indefensible—both in general and in detail. The distinction between manufacturing and services is in fact quite untenable. Moreover, the scheme of the tax involves the Government in collecting some £2,000 million with one hand and giving back nearly £1,500 million with the other—but after an interval. The result is that even those who are in no way liable to the tax have to make a forced loan to the Government. For these and other reasons the tax is almost universally disliked.
§ Purchase tax has some obvious advantages, but it also has one major disadvantage, and that is that it bears particularly heavily on a limited number of goods and not at all on services. The desire to broaden the base of indirect taxation was, I believe, one of the reasons why the previous Government decided to raise additional revenue from the S.E.T.
§ I have, of course, considered a number of alternatives—
§ Mr. Barber
One suggestion that has been made from time to time is that S.E.T. should be replaced by a general employment tax. Such a tax would certainly be simple to collect, but it has one overriding and I believe conclusive disadvantage. Under the international rules, such a tax would not be rebateable on exports nor chargeable on imports. It would for this reason have a serious adverse effect on our balance of payments in comparison with the continuation of the present combination of purchase tax and S.E.T., even though these taxes also enter to some extent into export costs. Apart from other considerations, this effectively rules out a move to a general employment tax.
S.E.T. and purchase tax at present add an estimated £60–70 million a year to 1394 our export costs, and the replacement of purchase tax and S.E.T. by a value-added tax will enable us to remove the whole tax charge from the prices of our exports and to impose it on imports, and to do so on a basis compatible with our international obligations. But there is much more to it than that. The value-added tax is, by its nature, a comprehensive tax, and its introduction in this country will produce a much fairer system of indirect taxation.
At this point, there is one aspect that I should make clear. The decision to replace our present system of selective taxation by a broad-based value-added tax should not be interpreted as meaning that we are proposing universal coverage at a single rate. We have made it clear that food will be relieved of the tax, except perhaps those few items already subject to purchase tax, and also newspapers, periodicals and books. And there will be an exemption for small traders. There are also arguments for special treatment in other cases. But I must stress that it will not be possible to entertain too many of these special cases or one of the main points of the new tax will be lost. As the new tax will not become operative until April, 1973, the precise rates and coverage are matters for decision much nearer the time of introduction and, until those decisions are taken, it is impossible to say what effect the change-over might have on the cost of living.
A great deal of preparatory work will be needed before the new tax can be brought into effect. It must be based on firm foundations and its design must take into account the practical problems of particular sectors of the economy. It is for this reason that I decided to issue a Green Paper, as a basis for consultation with those concerned. The period of two years that I have allowed for the preparatory work is less than the time taken by many other countries to introduce a value-added tax.
I mentioned that, in our review of indirect taxation, we have had the advantage of the experience of other countries. The list of countries overseas which have introduced a value-added tax is long and growing. Its advantages are becoming more and more widely recognised. The E.E.C. has adopted it as the common form of turnover taxation for its members 1395 and, if our application to join the Community is successful, we shall in any event be required to introduce it here. But this is not the main reason for its introduction here. The value-added tax, on its merits, is a better tax than either S.E.T. or purchase tax. It is, I think, significant that, outside the E.E.C., Norway, Sweden and Denmark have already introduced a value-added tax as being, in their view, the best form of general indirect taxation. Ireland will do so shortly, and other countries have it under consideration.
The Green Paper to which I referred will serve two purposes. First, it will explain the system to those who will be affected by the new tax. Second, it will provide the basis for consultations in the coming months with trade and professional associations and with other interested parties so that legislation can be drafted. As I have said, the Bill will be introduced next Session.
The Government arc pledged to abolish S.E.T. I must tell the House that my regret is that this tax which, as I said, is so disliked, but which now yields some £500 million a year, cannot be abolished this year.
§ Mr. Barber
I have, however, decided that as from the earliest practicable date, 5th July, all the rates of S.E.T. shall be cut by half.
§ Mr. Faulds
I will wait until you are ready. May I congratulate the Government on having half kept a promise.
§ Mr. Deputy Speaker (Sir Robert Grant-Ferris)
Order. The whole House is very pleased to see the hon. Gentleman back in his place, but I hope that he will not take too much advantage of the good will of the House towards him, which is very real, by raising points of order which he knows are not points of order.
§ Mr. Barber
I should now like to give the House the new rates. I am sure that both sides of the House would like to 1396 know what the new rates will be. The new rates will be £1.20 for men, 60p. for women and boys, and 40p. for girls.
This reduction of S.E.T. by one-half will help in the fight against inflation, for it will have a direct influence on prices—both prices to consumers and prices which enter into industrial costs. This reduction in S.E.T. will also cut by one-half, or upwards of £100 million, the average amount outstanding of the forced loan from manufacturing industry to the Government, which arises from the arrangements for collection and repayment. In this way it will strengthen the liquidity of companies in manufacturing as well as in service industries and so help with the financing of working capital and investment.
In revenue terms, the net cost of the reduction in S.E.T. will be £290 million in 1971–72 and £245 million in the following year. In demand terms, it will play an important part in providing the additional stimulus which, as I said earlier, I consider to be necessary, although the effect on demand will be less than the revenue cost, and will build up gradually.