§ I turn now to the value-added tax. The House will recall that a year ago I announced a major reform of indirect taxation under which a value-added tax would be introduced in April, 1973, and, at the same time, purchase tax and S.E.T. would be abolished. A Green Paper was published as a basis for consultation with trade and professional associations and other interested parties. That procedure has been widely welcomed, and the Customs and Excise Department has had separate discussions with more than 300 organisations.
§ This process of consultation has been invaluable in planning the details of the 1372 tax with the object of ensuring that from the point of view of industry and commerce it will be at least as simple to operate as in any of the eight European countries which now have a V.A.T., and much simpler than in most of those countries. Our objective has been not merely to design a V.A.T. but to design the best possible form of V.A.T. There can be no doubt that the Green Paper procedure and the consultations which have followed have paid handsome dividends.
§ Last November I announced that I would publish the value-added tax legislation during the Budget debate instead of waiting for the publication of the Finance Bill as a whole. A draft of the relevant Clauses and Schedules will be available in the Vote Office when I sit down. This draft legislation forms an Appendix to a White Paper in which is set out an explanation of the main features of the tax. This will be a help both to the House, I hope, and to those outside. In the course of the Budget debates, my hon. Friend the Minister of State will be giving details of the tax. This afternoon I must of necessity concentrate on those aspects which are of wide general interest.
§ Tax-paid Stocks
§ Before I come to the tax itself, I deal with one particular aspect of the transition from purchase tax to V.A.T. which is both difficult and important—the treatment of stocks which will have borne purchase tax and which, being still unsold when V.A.T. begins, will then attract V.A.T. The problem of purchase tax paid stocks has been with us on a number of occasions over the years. It was not a problem for the previous Administration because it arises only when purchase tax is reduced. No satisfactory solution has hitherto been found. But the fact remains that if no relief were given many retailers and others holding stocks of purchase tax paid goods would seek to protect themselves by running down their stocks. Moreover, some retailers might increase their prices in order to recover both the purchase tax and V.A.T. on their goods.
§ This is a very difficult problem of transition, and I have considered a number of ways of dealing with it. In fact there is no perfect solution. It would be wholly impracticable to attempt an 1373 accurate stocktaking on 1st April of every one of the half million businesses concerned and then seek to estimate the purchase tax they had paid. What is wanted is a formula which is simple, which involves the minimum of additional work at a time when everyone will be occupied immediately before V.A.T. becomes operative with the preparations for V.A.T., and which yet gives traders a reasonable measure of relief. After consulting a number of those concerned, the problem will be tackled in two ways.
§ First, those dealing in readily identifiable goods will be able to use sale or return arrangements, so that if the goods are still unsold when V.A.T. comes into operation there will be no liability to purchase tax. Most cars and many consumer durables are, in fact, already sold under these arrangements, which work well.
§ For other goods purchase tax will end a short time before V.A.T. is introduced, so that in preparation for it retailers will have an opportunity to build up stocks which have not borne purchase tax.
§ Details of these proposals are given in the White Paper, and there will be further consultations with trade interests. This scheme will have the advantage of benefiting the cash flow of traders. Similar problems will arise in respect of stocks of goods subject to the Revenue duties if those duties are reduced to avoid increases in the total level of taxation of the goods concerned when V.A.T. comes into operation. The extent to which I can make such reductions must take account of economic circumstances nearer the time. I propose, however, to take a power, to be used only before the introduction of V.A.T., to make appropriate reductions in the Revenue duties by order.
§ Small Traders Exemption
§ Before I turn to the rate structure of the V.A.T., there is one general exemption I should mention. Most countries which operate a V.A.T. provide some means of excluding small businesses. Having examined the different methods, I have come to the conclusion that the best way is to provide for a general exemption governed by turnover.
§ In determining the limit, there are two considerations: the loss of revenue, and 1374 the need to ensure equity as between small and larger businesses in competition with each other. In those countries whore turnover is the criterion, the highest limit for exemption is £1,450. Bearing in mind, however, the need to keep the administration of the new tax simple, I have decided that there will be a general exemption for all businesses whose taxable turnover—including zero-rated items—does not exceed £5,000 per annum. This will exclude from the tax about half a million traders.
§ Rate structure and coverage
§ I now turn to the structure of the tax—both the rate structure and the coverage. In those countries which operate a V.A.T., the number of rates varies widely. I am referring to the number of positive tax rates, not including the zero-rate.
§ Most countries have several rates. For instance, France and Belgium have as many as four rates. Others have only one rate. It is self-evident that the fewer the different rates the easier the tax is to administer, the easier the tax is for the business community to operate, and the fairer and less distorting the tax is.
§ I am convinced that this is right. I have, therefore, decided that there will be only one uniform rate of value-added tax. What this rate should be I will return to shortly when I have described the coverage of the tax.
§ There is one area to which special considerations apply. Motor cars represent a major source of revenue from purchase tax—at present more than £300 million a year. To forgo a substantial proportion of this revenue would inevitably mean a significant increase in the rate of V.A.T. on all other goods and services. There will therefore be, in addition to the V.A.T., a separate tax on new and imported cars of 10 per cent. of the wholesale value, which will come into force at the same time as the V.A.T. The House should know that these two taxes on cars will together yield considerably less than the present 30 per cent. purchase tax on cars, and this reduction in yield should be reflected in car prices.
§ The Finance Bill will include a regulator power to change the V.A.T. rate between Budgets for the purposes of economic management, and this will, of course, apply to V.A.T. generally, including cars. 1375 I have, however, decided that the new car tax will not be subject to a regulator power.
§ Main exempted and zero-rated categories
§ I turn now to certain cases which I think the House will agree justify special relief.
§ All countries with a value-added tax have provision for a variety of reliefs. But there cannot be too many special cases or one of the main points of the new tax would be lost.
§ Before describing them I would remind the House of the difference between exemption from value-added tax and zero-rating. In broad terms, a firm which supplies zero-rated goods or services gets complete relief from value-added tax both on its purchases and on its sales. One which is exempt is completely outside the tax; it does not have to charge tax on its sales but it cannot reclaim the tax on its purchases.
§ As is the case in all European countries with a V.A.T., there will be exemption for a variety of financial services, including insurance. There will also be exemption for postal services, for education and health services, and for certain other areas details of which are set out in the White Paper.
§ As far as charities are concerned, value-added tax will apply only to taxable activities undertaken by way of business. So only those few charities which supply taxable goods or services exceeding £5,000 per annum will, in fact, be subject to tax. The vast majority of charitable activities will, therefore, be outside the tax, and the overall effect on their costs of the changes in indirect taxation, taking into account the abolition of purchase tax and S.E.T., is likely to be very small. When account is taken of the proposals I have already put to the House on the direct tax side, it is clear that charities will be substantial net beneficiaries from this Budget.
§ I come next to the main areas where relief will be given by zero-rating. First, food.
§
In our election manifesto we promised that V.A.T.
would not apply to food, except for those few items already subject to purchase tax.
1376
This undertaking will be honoured. Food, other than those foods now subject to purchase tax, will be zero-rated. Those items at present liable to purchase tax are estimated to yield about £150 million in the coming financial year, and if they were to be relieved altogether from V.A.T. there would have to be a commensurate increase in the rate of V.A.T. They will, therefore, be charged at the standard rate. The overall effect of these proposals, together with the abolition of S.E.T., will be a reduction in the burden of tax on food.
§ In the last Budget I said that newspapers, periodicals and books would be relieved of the tax. These, too, will be zero-rated. In the case of newspapers, zero-rating will apply not only to sales but also to advertising. This is right because there are special circumstances attaching to newspaper advertising, in particular the large volume of advertising by private persons. The relief will not apply to other advertising media.
§ Advertising on television, for example, will be undertaken almost exclusively by registered traders who will be able to reclaim the tax on this advertising under the ordinary accounting procedures of the tax.
§
In our election manifesto we also said that under a value-added tax
Special arrangements would be made for housing".
The details again are set out in the White Paper, but in broad terms what they amount to is that all new construction, whether of houses or of other buildings, will be zero-rated, while other transactions in land and buildings will be exempt. This means that new housing will be wholly relieved from V.A.T. What is more, it will also be relieved from the S.E.T. which is now a significant addition to housing costs. In addition, all rents will be exempt and there will be full relief for local authority rates.
§ Exports of goods will, of course, be zero-rated, as well as certain other items mostly connected with exports. One of the arguments which has been repeatedly put forward against a single rate tax is that there should be a special lower rate—as there is in some other countries—for such essentials as fuel—gas, electricity, coal—and passenger fares. I did consider these representations carefully but, as I have told the House, my conclusion 1377 was against a special lower rate for these items. But fuel and fares, like food and houses, are of special importance to poorer people, and I have, therefore, decided that they shall have the most favourable treatment, and be zero-rated.
§ Rate
§ I now turn to the question of the rate at which V.A.T. will be charged when it is introduced in a year's time. As with all future rates of taxation, a final decision can only be taken in the light of the economic situation at the time.
§ But I am sure that it is right, in order to help industry and commerce with its forward planning, that I should state now the rate which I have in mind. Indeed, I think it is right to go further and to provide for that rate in this year's Finance Bill. In order to allow for the needs of economic management at the time when the tax comes into operation, the legislation will also include a once-for-all power to substitute by Treasury Order, before 1st April, 1973, a rate within a range of 2½ percentage points on either side of the prescribed rate. In other countries with a V.A.T. there is a wide range of standard rates, from the lowest figure of 10 per cent. in Luxembourg up to the highest, 23 per cent. in France. The rate prescribed in the Finance Bill will be 10 per cent. The House should know that, even taking into account the special arrangements for cars, the yield will be less than the comparable yield of purchase tax and S.E.T. at current rates.
§ To sum up. The particular value-added tax designed for the United Kingdom will be at least as simple to operate as in any of the countries which now have a V.A.T., and much simpler than in most of those countries. What is more, no country in Europe has a lower standard rate than the one I propose.
§ Over the past years there has been much talk about the relative effects of the change to V.A.T. on different levels of family income. In particular, it has been suggested that the change from purchase tax, with its high rates on so-called luxury goods and low rates on so-called essentials, to a single rate of V.A.T. might bear more heavily on the poor than on the rich. Yet in practice these definitions of luxuries and essentials 1378 devised in the main 30 years ago have little relevance today. It makes no sense that, for example, television sets, electric, gas or paraffin heaters are taxed at 30 per cent., while items such as Persian carpets or the latest Paris fashions should be taxed at a mere 11¼ per cent. And I am sure hon. Members opposite will be hard put to explain why, to take two pertinent examples, boats should be exempt from purchase tax while pipes are taxed at 45 per cent.!
§ The V.A.T. I have outlined has been deliberately designed with the interests of low income families in mind. Food and housing will be relieved of the tax, and these are, of course, very important items in the budgets of lower income families. S.E.T., which at present enters into the cost of both food and housing, will go. If I had stopped there, it would have been open to question whether the change would be regressive. But I am going much further. Fares and domestic fuel and light will also all be zero-rated. The decision on fuel is almost as important in this respect as the decision on food, because fuel like food takes up a significantly larger proportion of the budgets of low income families, including, of course, pensioners, than of those who are better off. There is, therefore, no reason to fear that the change-over to V.A.T. will be regressive.
§ Purchase Tax
§ I have said that the stimulus to demand needed in this Budget should be sufficient to raise output in the first half of next year by about 2 per cent. As one means to this end—and to help to keep down prices—I have decided to take some further action on purchase tax now, and to do so in a form which will smooth the transition to V.A.T. From midnight tonight the 45 per cent. rate and the 30 per cent. rate of purchase tax will both come down to 25 per cent. The cost will be £135 million in 1972–73.
§ These changes, together with the cuts of last July, go a long way to reverse the successive increases in purchase tax made under the previous Administration, and I am glad to have been able to return the top rate of tax from the 55 per cent. at which it stood before last July to 25 per cent. at which it stood when my right hon. Friend the Home Secretary was Chancellor of the Exchequer in 1964.
1379§ These changes will be widely welcome in bringing an immediate reduction in prices.
§ This is a further step in the gradual two-year process of abolishing purchase tax and S.E.T. and moving to a V.A.T. In fact, the total overall effect of the whole process of the reform of indirect taxation starting from the time of my announcement in the last Budget and moving to a V.A.T. of 10 per cent. will be to reduce taxes on expenditure and so help to keep down the cost of living.