FINANCE BILL

HC Deb 09 May 1972 vol 836 cc1146-263

(Clauses 1, 9, 12, 63, 64, 71, 73, 110, and 112 and Schedule 4)

Considered in Committee.

[Sir ROBERT GRANT-FERRIS in the Chair]

Ordered,

That the provisions of the Finance Bill committed to a Committee of the whole House be considered in the following order, namely, Clause 1, Clause 9, Clause 12, Schedule 4, Clause 64, Clause 110, Clause 71, Clause 73, Clause 63, Clause 1l2.—[Mr. Barber.]

Clause 1

VALUE ADDED TAX

Question proposed, That the Clause stand part of the Bill.

4.15 p.m.

The Chancellor of the Exchequer (Mr. Anthony Barber)

Before coming to the main principles which are involved in the consideration of Clause 1, I wish to point out that there has been a genuine misunderstanding about the way in which subsection (2) of the Clause is expressed.

There was on the Notice Paper an Amendment, which has not been selected, which drew to my attention the misunderstanding which has arisen and it may he for the benefit of the House if I briefly explain what the misunderstanding is. It is that the Clause as drafted would import all the powers, including enforcement, in respect of all duties of the Customs and Excise. In fact, it does not do this. The VAT enforcement powers are specifically set out in the Finance Bill and there will be opportunity for these to be debated in Committee upstairs.

Clause 1 simply imports the general powers of management under the Customs and Excise Act, 1952, which the Commissioners have in respect of all "assigned matters ", as they are called, and it follows a purchase tax precedent which has given rise to no complaint over the years.

Nevertheless, I think that, as put here, it could give rise to misunderstanding—indeed, it has done so—and I therefore believe that it would be right to amend subsection (2) in due course by deleting all the words after "Commissioners" in line 2 on page 2; and in due course we will take steps to ensure that such an Amendment is made. I thought it might be helpful to clear that comparatively minor point out of the way at the outset.

A debate on Clause 1 of the Finance Bill is a debate on the general merits of VAT and Government policy governing indirect taxation. It follows, therefore, that any suggestion that Clause 1 should not be adopted would be designed to make all the VAT legislation inoperable. It would, in fact, be a rejection of the entire VAT concept, and one can only assume that those who take this view would be reasonably well satisfied with the taxes which VAT is designed to replace; namely, purchase tax and SET.

It is right that I should start by referring to some words which were contained in our election manifesto. We said: 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. During the early months after I became Chancellor of the Exchequer I gave detailed and long consideration to whether we should introduce a VAT, and eventually, as the Committee will recall, I announced in the Budget of 1971 that I had decided that we should.

It is right to recall—I said this last year in the course of our Budget debates —that when I became Chancellor I certainly, in the light of what was in our manifesto, had not then made up my mind whether we should switch over to VAT. It seemed to be highly desirable on all counts not merely to have all the advantages that one gets of being in office of finding out the way in which VAT operates in other countries but to have the benefit and advice of the expertise of the Customs and Excise on the mechanics of what was involved in introducing VAT.

Furthermore—and I know that the House will accept my word on this—I came to the conclusion that it would be right to move over to VAT whether or not we joined the EEC. Indeed, I announced the decision several months before the negotiations were complete.

VAT has an essential place in our far-reaching programme of fiscal reform which, as the Committee knows, extends into all parts of the tax system. From the days of Mr. Gladstone onwards indirect taxation has largely relied on a few selective revenue duties which single out various areas of consumption for heavy taxation, and in some cases very heavy taxation.

Our list of revenue duties of this kind is short, and it is interesting when one looks back over the history of indirect taxation to find that it has grown shorter in recent times, I suppose because in this way one acknowledges the dominance of the major duties while Governments have surrendered those of comparative unimportant revenue yield.

I believe it right that there should be a few major revenue-raisers of this kind, but alongside these well-tried money-spinners, which present few problems, our need is for a wide-ranging tax on the remaining field of consumer goods and services. Purchase tax, born of war and austerity in 1940, was a step in that direction. Selective employment tax, born of planning delusions in 1966, attempted to bring in the service industries as well, and attempted to force what was, in some mysterious way, supposed to be a desirable reshuffle of the country's labour force. I should like to say, first, something about those two taxes, which will go when VAT comes into operation.

Purchase tax, after 30 years, has reached the end of its useful life. Whatever its advantages, the fact is that its intrinsic defects have remained ineradicable despite a great many changes and despite many attempts both to simplify it and to eliminate the anomalies of which it has more than its fair share.

Sir Gerald Nabarro (Worcestershire, South)

Hear, hear.

Mr. Barber

My hon. Friend says "Hear, hear". No single Member of the House has done more to highlight the anomalies of purchase tax than has my hon. Friend over the years.

The simple fact is that any significant reform of purchase tax has become impossible. The tax applies to only a limited range of goods, with particular emphasis on consumer durables and semi-durables, and not at all to services. It is in that respect grossly unfair on particular industries and particular products. Furthermore, a sizeable area of consumer expenditure, on goods used both by consumers and by business and industry, could not be subjected to purchase tax without at the same time imposing a burden on industrial costs.

This is a defect of purchase tax which is, as I think is accepted by both sides of the Committee, inherent in the very nature of the tax. The distinction between business and consumer items under purchase tax has often involved, as we know from previous Finance Bill debates, very arbitrary borderlines, often depending merely on the size of an article. To give just two instances, refrigerators are taxable if their storage capacity is not more that 12 cu. ft., but larger refrigerators are not taxable although they are the same in every other respect. Similarly, electric water heaters are taxable up to a capacity of 50 gallons, but beyond that they are free of purchase tax.

There again, purchase tax has been bedevilled by its multi-rate structure, which has inevitably given rise to an even larger host of anomalies and administrative difficulties. On Second Reading, my hon. Friend the Chief Secretary pointed out many of the nonsenses that we have had to put up with over the years on this score. I need repeat only a few. Toilet soap is taxed at a high rate, yet toilet paper is exempt. Cutlery is taxed at the bottom rate. [Interruption.] It is very interesting that that is apparently what the Opposition really believe to be good sense. But that is not so with most people in this country. I ask the Opposition whether they believe that it is right that cutlery should be taxed at the bottom rate but that light bulbs should be taxed at a high rate. Is it right that an old person's television set should be taxed more heavily that the Paris fashions? This is inherent in the very nature of purchase tax.

However, what troubles me most about purchase tax is the difficulty in arriving at any convincing rationale for the distortion of choice which it imposes. The correction of one inconsistency inevitably gives rise to another, and the continual tinkering which has taken Place over the years only serves to establish the inherent defects of the tax. During 1971 we had to make no fewer than six Treasury orders amending the purchase tax tariff. This frequency of alteration, after 30 years of operation of the tax, provides an element of instability which is bound to create, and has created, uncertainty in the minds of manufacturers planning for production for the years ahead. If the yield of the tax is to be worth while, its rates have to be relatively high, because of the narrow base, and so the whole market is distorted in favour of goods fortunate enough to be outside its scope.

Mr. Joel Barnett (Heywood and Royton)

Will the Chancellor guarantee that there will be fewer Orders and Regulations under VAT?

Mr. Barber

VAT will be far less discriminatory than purchase tax—without any doubt. The only way of ensuring that it was not discriminatory at all would have been to ensure that there were no exceptions of any kind. I shall come to the reason why I chose to provide for the special reliefs.

Mr. Brian Walden (Birmingham, Ail Saints)

One is rather puzzled by the Chancellor's argument. Let us consider his example about refrigerators and their capacity. Is it not a fact that if a refrigerator is built into a house it will not be liable to VAT, whereas otherwise it will? Is this not exactly the sort of anomaly that the Chancellor is now condemning purchase tax for containing?

Mr. Barber

The hon. Gentleman makes that assumption, but I think he had better wait until the discussion in Committee elsewhere on the way in which this is to be dealt with. All that I can say to the hon. Gentleman—I think he will accept it, because he is an intellectually honest person and a man of great ability; we welcome him to the Opposition Front Bench—is that it is accepted by everyone, whether they think that changing to VAT is a good thing or a bad thing, that it is far less discriminatory than purchase tax. It is true that if one provides for any special reliefs of any kind, inevitably borderlines arise. But we most certainly will not have with VAT the sort of borderline problem which has bedevilled purchase tax throughout its history.

Another disadvantage of purchase tax is that, while retailers have always welcomed cuts in the rates, of the kind which they did not experience under the previous Government, whenever we have cut the rates there has been the perennial problem which has arisen concerning tax-paid stocks. Furthermore, it is well known and accepted—no one would deny it—that the tax is disliked by exporters. The reason is that it increases their export prices, through their overheads on stationery, office requisites and the like, and makes them that much less competitive than their tax-free competitors overseas. As a regulator of the economy, purchase tax is far from perfect because it has only a limited coverage.

Nonetheless, purchase tax does at least have some pretension to being a tool of economic management. If SET, on the other hand, is such a tool, it is certainly of the blunt instrument variety, the crudest of bludgeons. Even now it is not at all clear what SET was intended to achieve. But it is only too clear what it has achieved over these years.

So long as the main indirect tax was the purchase tax, which by its nature was confined to expenditure on goods, it could, perhaps, be claimed that the incidence of indirect taxation on service industries was lighter than on manufacturing industries. But I should have thought that no justification for saddling service industries with a tax riddled with as many absurdities as the SET is riddled with. After all, its selectivity created wholly artificial borderlines. The inequities that flowed from trying to differentiate between three classes of employer are too numerous to mention. One nonsense in particular will be familiar to all hon. Members, and that is the wholly artificial distinction between manufacturers, who get refunds, and wholesalers, who do not. So the result is that the manufacturer who orders his affairs in the artificial manner which is encouraged by SET will get refunds in respect of any wholesale activities he carries out. What justice or sense is there in that? The Opposition will agree, I think, that if SET had been kept, certainly this aspect would have had to be dealt with. Does anyone wish, as an act of Government policy, to drive wholesalers out of business? That is the direction in which SET was operating. The same kind of anomaly hits our specialist export houses and the retailer who tries to offer his own repair service.

There is only one consistent thread in all this, one which was apparently not intended and certainly not one that commends itself to the present Government, and that is discrimination against the small manufacturer who cannot do, or prefers not to do, his own wholesaling or exporting.

4.30 p.m.

Mr. F. A. Burden (Gillingham)

One of the worst aspects of SET was that buying houses, which were set up in this country purely and simply to buy merchandise for export abroad, had to pay SET on their staff. That caused them to cut back their staff and in many instances to cut back their purchases.

Mr. Barber

My hon. Friend is quite right. Those cases are also well known. It is true that any tax generates difficult cases. The peculiar feature about SET was the impossibility of establishing general rules laying down that degree of consistency which is the hallmark of a fair taxation system. Slight and wholly natural alterations in their activities could move firms in and out of the tax. What we had in SET was a tax which was anomalous in its very nature. Its economic effects were certainly no better. It heavily taxed essential services while rewarding the manufacture of the most trivial article. It pushed up industrial costs and added a further layer on export prices by taxing all kinds of services connected with exports.

The mere fact that VAT allows us to get rid of purchase tax and SET, is a powerful argument in its favour. However, its virtues are much more positive than that. Its principal advantage is its breadth of application. It is designed in principle to fall on all consumer expenditure on goods and services. Relief is allowed only for good reasons and in carefully defined areas. This broad base enables a large revenue yield to be obtained by means of a modest rate of tax. The wide coverage limits the distortive effect of high taxes on patterns of personal expenditure and therefore on trade.

In consequence, the allocation of productive resources will be more in accordance with real demand. The neutrality of VAT as a revenue raiser is, I should think, a commendation in the eyes of those even who oppose it. Moreover, the VAT system of deduction of input tax ensures that the tax bears only on the ultimate consumer with the minimum burden on industry. At the export stage, all the VAT which has previously been paid can be completely rebated.

Whatever view may be taken of the principle of VAT, I think that everyone will accept that as an economic regulator the potential of VAT is considerable. Because of its broad base, any rate adjustment required will be much smaller than is the case with purchase tax. As a result firms can look forward to more stability and feel more confidence in the future level of demand for their product. These are crucial matters when it comes to investing large sums in capital equipment.

I think it will also be universally accepted at the other end of the chain of production and distribution, whatever views may be taken about whether the tax should be applied in this country, that the retailer will no longer have the problem of tax-paid stock if the rate is changed, because under the VAT system his tax liability is reduced by the actual tax paid on his purchases, even if it were at a different rate. In effect, his stocks are held tax free.

All these are advantages inherent in value added taxation in general. The particular system proposed for this country has some special advantages. All along we have attached particular importance to keeping the tax simple. This we have done by deciding to have only a single rate of tax; by adopting a generous exemption limit for small traders; by providing for the use of existing commercial procedures as far as possible; and by preparing special simplified systems of accounting to help retailers.

As the Committee knows, we have also been at pains to cushion the impact of the tax on lower income families, by zero-rating or exempting a number of important items of expenditure. Some hon. Members tried at one point to raise a scare about the effects of VAT on food distribution costs, but that has now been scotched by my hon. Friend the Financial Secretary in his reply to the hon. Member for Walthamstow, East (Mr. Deakins). The VAT system ensures that no VAT enters into the price of zero-rated foods; moreover, the food distribution industry now bears a significant amount of SET which will disappear. As a result, the overall effect will be a reduction in the tax on food.

Mr. Denis Healey (Leeds, East)

The whole country will be interested in this: can the Minister assure the House and the country that the Government will in no circumstances introduce a positive VAT rating on food as a result of the harmonisation to which they are committed under the Treaty of Rome?

Mr. Barber

There is no obligation under the Treaty of Rome, and as a result of the decisions which have been taken by the Six to impose VAT on food.

Mr. Healey

Will the Chancellor answer the question.

Mr. Burden

Give him time.

Mr. Barber

I am trying to answer the right hon. Gentleman.

Furthermore, when we enter the Community we shall have a say in these matters. The right hon. Gentleman knows perfectly well that I cannot, regarding any future decision concerning any form of taxation, give an absolute assurance, any more than the right hon. Gentleman could give an assurance if he were the Chancellor of the Exchequer in a Labour Government that he would not put up these taxes as his predecessors have put up taxes when they have been in office.

Mr. Healey

The right hon. Gentleman has made the point that the British Government have the right to veto any steps towards harmonisation of which they disapprove. I am asking the right hon. Gentleman a question that is within his competence, that is to give an assurance that he will not agree in discussions which take place when we are in the Community, to the imposition of a VAT rating on food.

Mr. Barber

I am not prepared to do that. I believe everybody would agree that it would be wholly irresponsible and intolerable to give an assurance about future taxation of any items in this country. If the right hon. Gentleman would like to give an absolutely firm assurance, whether we have purchase tax, VAT, or SET, that in the event of a future Labour Government they will not under any circumstances allow any of those rates to increase, we shall be interested to hear it.

I hope that the House, in considering these matters, will not overlook the pervasive effects of SET in all sorts of sectors for which they express concern, whether it be housing and rents, repairs and improvements, entertainments and catering. Although there will be changes in the incidence of tax on particular commodities or transactions, particularly those which have been heavily taxed in the past, overall, as I have pointed out before, there are no grounds for thinking that the changes in taxation resulting from the introduction from VAT will be regressive.

The case in favour of VAT rests firmly on its own fiscal and economic merits. Those merits have, of course, already led a number of European countries in the same direction as we are now proposing to take. Most of these countries are existing or potential members of the EEC —but not all, for Sweden and Austria have also chosen VAT on its merits, although they are not candidates for membership for the EEC. I might add that in Austria there is the first majority social democratic Government since the war. What was one of the first actions taken by that Government? They decided to introduce a value added tax.

Consider also the example of Sweden, regarded by some as a Socialist Utopia. At present, the Swedish Government are proposing to raise their value added tax to 20 per cent. because they feel that this is the best and fairest way of raising the revenue.

The adoption of the VAT system is required by EEC Directives, and the decision to introduce a VAT in this country as a means of improving our tax system means that we shall not require any transitional period in this particular sphere. However, I hope that some of the misapprehensions stemming from the EEC overtones have now been put to rest.

So far—I should like to repeat this, because it should be made clear—the member States of the EEC have agreed only to introduce the system of VAT. They have not agreed on the harmonisation of rates or of coverage. Until such time as they do, they remain free to determine their own rates and coverage.

As a member of the enlarged Community, we shall naturally have a voice in the discussions about harmonisation. What is even more important, under Articles 99 and 100 of the Treaty of Rome, decisions of this nature must be unanimous. These discussions on the harmonisation of coverage and rates, which does not necessarily mean complete equalisation, still have a long way to go.

Mr. William Baxter (West Stirlingshire)

On VAT, I think that the Chancellor would concede that the heavier part of the burden will be borne by the poorer sections of the community. They will have to bear a considerable part of the value added tax. If it is on goods and various things which people use, it must affect the poorer sections of the community. Will the right hon. Gentleman give reasonable consideration to the possibility of a minimum income wage and allowances for the poorer sections of the community, because I think that should run in unison?

Mr. Barber

That raises a much wider question which I could not deal with on consideration of the Clause.

I should like to repeat what I said earlier. Taken overall, because of the special reliefs which we have provided, it is not true that this tax is regressive. This is a very important consideration. It arises because we have taken certain decisions, which I announced in the Budget Statement, which came as a considerable surprise to the right hon. Member for Leeds, East.

Mr. Healey indicated dissent.

Mr. Barber

I do not know why the right hon. Gentleman shakes his head, because he was surprised. He surely must admit that.

Mr. Healey

I was not surprised.

Mr. Barber

The right hon. Gentleman says that he was not surprised. I do not know where it is, but I am sure that I can produce for him his election address in which he specifically stated that the tax would be applied to fuel and fares.

Mr. Healey

Not in my election address.

Mr. Barber

That is interesting. We shall have it on record and bring forward his election address on another occasion.

The point is that it is time that indirect taxation in this country was spread in a less discriminatory fashion. Our particular form of VAT has been hammered out in intensive open consultation with those who are primarily affected. It has been well received by business men and industrialists who can see the solid merits of the system. It also meets the canons of social justice. It will replace two taxes which, to put it mildly, have been tested and found wanting. In short, it is the best instrument available for raising revenue from a broad sector of consumer expenditure.

I should add that there will inevitably be those outside this House who, very naturally, will be concentrating on interests or activities with which they are especially concerned. It is understandable that, before the introduction of the tax, they should not be fully alive either to the great advantages of a less discriminatory tax or to the very great disadvantages of making particular exceptions with the inevitable consequences for the rate and the inevitable anomalies and non-senses which have so bedevilled our taxation system in the past and which would follow if we were to go down that slippery slope.

Mr. Burden rose—

Mr. Barber

But our duty in this House is to take account of these broader considerations. It is in the very nature of the reform of taxation that it does not leave matters where they were. When I became Chancellor, I was urged by my right hon. and hon. Friends not to flinch from the reform of taxation merely because it posed problems. I accepted that advice. I, in my turn, now ask my right hon. and hon. Friends to support the Government in the task to which together we have set our hands and which, if we have the resolve and courage not to be diverted from our strategy, will be of great benefit to our country.

Mr. Burden

Before my right hon. Friend sits down, will he advise me on one point? He made the point that when VAT is introduced the retailer will be holding his stocks without tax having been paid. In fact, now that purchase tax is being paid the retailer has already paid tax and he puts his profit on the cost of the article plus the tax. In future, valued added tax will be charged by the retailer and his profit will be put on the prime cost of the article without tax so he will not be able to hide the fact that he is charging profit on the tax as well as on the prime cost of the article. Is it not also a fact that, because he will not have paid the tax, he will not he subjected to the problem of having purchase tax reduced and having to cover in his profit the loss which he makes because he has already paid the tax?

Mr. Barber

Certainly the conclusion of my hon. Friend's question is perfectly valid. It follows from the fact that, in effect, his stocks are held tax-free.

[Mr. E. L. MALLALIEU in the Chair]

4.45 p.m.

Mr. Healey

As the Chancellor has pointed out, this discussion on "Clause 1 stand part" is, in effect, a Second Reading debate on the principle of the proposals for value added tax. I regret that we cannot treat this part of the Finance Bill as a piece of legislation in its own right by having a proper two-day debate, followed by a Committee stage, followed by the normal procedure. At least, the Chancellor will agree that the proposal for a value added tax represents the biggest change in our tax system for a generation. Until now it has been very little discussed in the House. We have only just been given an idea of the broad shape of the tax as the Government see it. Many details are still unknown; so we hope to learn more in Committee upstairs.

The Bill gives the Commissioners of Customs and Excise unprecedented powers of both enforcement and definition. It also gives the Government the right to triple the yield of the tax within 12 months, if they so decide. By this time next year the Government could be raising £3,000 million from this tax rather than a simple replacement of the yield from purchase tax and SET. I know that the Financial Secretary will agree that we can go up to 12½ per cent. before the tax comes into operation, arid that the moment it is in operation it can be increased by a further 20 per cent., bringing it up to 15 per cent. in all, and, under another Clause, everything at present zero-rated can be removed and subjected to the full value of the tax. If the Government had no intention of removing things from the list in Schedule 4, presumably they would not have given themselves the power to do so by order.

A great deal of the previous discussion on a value added tax has turned out rather irrelevant to the specific proposals which we now face. The Chancellor rightly pointed out that this tax must be seen in relation to its rate, its coverage, and its yield, on the one hand, but, on the other hand, and more important still, as forming part of a total structure of direct and indirect taxation. Indeed, we find value added tax performing different functions in some countries which have already adopted it.

For example, in France value added tax was adopted largely because there was large-scale evasion of income tax at every level in the State and an extremely complicated and easily evaded form of sales tax. As a result the French have introduced an extremely complex form of VAT which fulfils very few of the criteria laid down by the Chancellor. It is highly discriminatory, there are four rates and there is very large-scale evasion. I will come to that later.

In Sweden, on the other hand, there is very high and very progressive direct tax on income, and, in addition, there is a range of taxes on wealth which we do not have in this country. There are a tax on wealth and a tax on gifts, and there is a tax on inheritance which starts at £2,400—one-tenth the starting level of the British tax—and begins at a rate of 45 per cent. It cannot be evaded because of the effective gifts tax. If we had a system of taxation of income and wealth like Sweden's, we might decide that there was a case for a value added tax as our main form of indirect taxation. But it will not be any surprise to the House to know that the Government are not introducing the value added tax against this background.

When the last Conservative Government considered introducing it the then Chancellor, now the Home Secretary, considered it as a possible replacement for purchase tax and for all or part of the profits or corporation tax. He was particularly concerned with whether or not our exports would be helped by a move from purchase tax and corporation tax to value added tax. The Richardson Commitee on Turnover Taxation, which he set up, came to an unequivocal conclusion which the Conservative Government of the day fully supported. Incidentally, all the criticisms of purchase tax by the Chancellor this afternoon and all the advantages which he claimed for value added tax as against purchase tax were directly repudiated and rejected by the Richardson Committee. I quote only paragraph 303: The purchase tax system in fact affords a more logical, efficient and economic means of consumer taxation than a value added tax. The administration of the purchase tax is established and well tried in this country, and the tax is capable of medication and extension. We can see no countervailing advantages which can justify the introduction of a value added tax in its place. I am glad to see that the Government have sufficient confidence in Mr. Richardson's economic judgment to have made him Chairman of the new Industrial Development Executive.

The Government are introducing value added tax for a completely different set of reasons which the Chancellor summarised in part in his remarks a few moments ago. The introduction of the value added tax is an essential part of the Government's general disengagement from the responsibility previous recognised by British Governments to control the economy according to certain social, as well as purely economic, objectives. The Chancellor has chosen the value added tax, as he told us this afternoon, because it is what he called "neutral and undiscriminatory", because it does not involve the sort of distortions of consumer choice involved in the multiple rates of purchase tax, and because it does not involve any fiscal interference with the laws of supply and demand which the Government claim to hold sacred. This is the theory, but the practice is very different.

The Chancellor asked whether I was surprised at the large number of zero ratings and exemptions which he has permitted. I said I was not. I expected earlier that the Government would introduce a value added tax which would tax food and fares. The Chancellor did everything this afternoon to suggest that my belief was justified by his total failure to answer my question about what the Government would do when it came to the job of harmonising coverage and rates with other members of the Common Market. But, as we all know, the Chancellor is very sensitive not only to the laws of supply and demand but to the laws of the ballot box.

Mr. Barber rose—

Mr. Healey

When the Government talk about Conservatives wearing a human face, it means they share at least one very common human feeling—a dislike of losing power. In order to get the Bill through the House at this stage, the Government have introduced a large number of changes in the elegant administrative structure of value added tax as described by the Chancellor this afternoon, and, like every other aspect of their economic policy where they have tried to temper Tory dogma with political expediency, it has ended in a ghastly muddle. If we look at the proposals in practice —

Mr. Barber rose—

Mr. Healey

—we find the present proposals in their present form fall heavily between two stools and give the worst of all worlds.

Mr. Barber

Will the right hon. Gentleman confirm that in his election address he stated—[Interruption.] I was not intending to intervene again, but when the right hon. Gentleman speaks about the Ballot Box will he confirm that he said that the Conservative Government would put a 20 per cent. tax on coal, gas and electricity?

Mr. Healey

Yes, I will confirm that, and I am asking the Chancellor to say that he will not impose such a tax. I asked him earlier in the debate. I asked him for an assurance that he would not increase the rates and extend the coverage by order as he has given himself the power to do under cover of harmonisation. He refused to give any assurance on this point, and I shall return to it later.

Let us look at this tax as it is presented to the House and not the Platonic idea of a value added tax. First, as the Chancellor said, it is intended simply to replace purchase tax and the selective employment tax and to produce roughly the same yield. In the form in which it is produced it is a retail sales tax collected in bits and pieces from consumers. But nearly half of consumer expenditure is zero-rated. On top of that there is a 10 per cent. standard rate applied to 1,500,000 registered taxable persons and there are another 500,000 persons exempted. So already there are three effective rates of tax for VAT—zero rate, standard rate, and a very difficult to define rate for those traders who are exempted. In addition, other indirect taxation is imposed at different rates. There are excise taxes on oil, petrol, alcoholic beverages and tobacco, and a special rate which is unique on motor cars.

There is very little left here of the elegance and economy attributed to value added tax by the Chancellor of the Exchequer this afternoon, and I shall seek to show that in the form in which it is presented to us in the Bill the tax is infinitely less economic than the taxes it replaces. It is open to evasion on a colossal scale, it is teeming with ridiculous anomalies and it is likely to be highly inflationary in its effect. I would like to deal with these points in turn.

5.0 p.m.

First, even the Chancellor will not deny that it is appallingly expensive and inefficient to collect. Purchase tax collected very nearly as much money with 2,000 officials from about 68,000 traders. Under the right hon. Gentleman's VAT there will be 500,000 traders who are zero-rated. But they have to keep invoices at every stage. They must be subject to spot checks by the Customs and Excise and the Inland Revenue, but at the end of the day they do not contribute a penny to the yield of the tax, because the tax is passed on at every stage. Zero-rating under VAT from this point of view is bureaucracy for bureaucracy's sake. It produces no advantage to the country. It is simply a form-fillers' paradise, and it affects 500,000 people.

I turn to the 1,500,000 taxable persons. They must invoice transactions at every stage, passing the tax on at every stage, with the 10 per cent. of the last stage being passed on to the consumer. The Chief Secretary attempted to dispute the figure I quoted of 50,000 additional persons required in business to operate this tax. I just ask him to give his own figure if he thinks it will be smaller, if he does not agree that the 50,000 larger firms out of the 1,500,000 involved are likely to require at least one extra person each to operate the tax.

The Chief Secretary to the Treasury (Mr. Patrick Jenkin)

When the right hon. Gentleman asks the same question as he asked on Second Reading, I can give him the same answer. We are having a great deal of déja vu in the right hon. Gentleman's speech. When the Customs put questions to firms in countries where the value added tax is already operating, asking them how many people they would save if they were relieved of the obligation of the administration, the answer was virtually none.

Mr. Healey

With great respect, that is not the question at all, because all those countries here VAT has so far been introduced suffered from extremely inefficient forms of turnover tax, cascade tax, or retail sales tax. The analogy between those countries and Britain, which, as the Richardson Committee pointed out, has an extremely efficient purchase tax, is totally irrelevant.

The burden on the Civil Service, I gather from the Daily Telegraph, is already becoming intolerable. There are talks of a strike against excessive overtime in the London area, even on the preparation of the tax. The Government claim that only 6,000 extra civil servants will be required to operate the tax. How do they arrive at that estimate? As I pointed out, purchase tax, which stops at the wholesale stage, requires 2,000 to deal with 68.000 taxable units.

The Neddy report says that about 7,000 would be required to administer an invoice-based system, even if initially it is extended only as far as the wholesale stage. In other words, the Neddy estimate was the estimate of those needed to operate the VAT at the wholesale stage, involving a very much smaller number of persons than the VAT being introduced by the Government. If it takes 2,000 to operate a purchase tax effectively for 68,000, why does it not require about 40,000 to operate a VAT with equally detailed and effective con- trol? I am certain that the answer is that the figure the Government quote is possible only if they are prepared greatly to drop the standard of control and to rely on random checks rather than the sort of continuous control which now operates.

I should like to quote the remarks of the Deputy Chairman of Customs and Excise, Mr. Radford, at a recent Financial Times seminar on the VAT, when he said: It will not be possible for our staff to visit VAT traders anything like as often as they visit the purchase tax trader.

Sir G. Nabarro

The right hon. Gentleman is surely omitting to consider the enormous impact of one new factory since Richardson, the proliferation in automatic calculating machinery, of a type often attuned specially to the value added tax, notably the electronic machines, and the fact that the overwhelming majority of small traders will use relatively inexpensive calculating machines, very often a single machine, to carry out work that would earlier have occupied many hands in their offices.

Mr. Healey

The hon. Gentleman will gladden the Chief Secretary's heart, because he is doing some good advertising for those who sell calculating machines. But the fact is that the type of invoicing required is in many respects not suitable, especially with the small traders, for calculating machines, and the introduction of calculating machines is bound, at least in the short run, to increase the costs of production.

I am sure the answer is that, to ensure that control does not collapse completely, the Government have given the Customs and Excise powers of enforcement which have been described by the Chairman of the Bar Council and the President of the Law Society as constituting a substantial infringement of the liberty of the subject. We have the extraordinary situation that under Clause 38 the Commissioners have the power to convict and fine a man without knowing the offence he has committed, without establishing the particulars of the offence. That is a juridical innovation into the system of British law which will appal all lawyers all over the country and anyone with a sense of common justice.

The Commissioners do not only have the power to convict and fine without knowing in detail what offence has been committed. They also have the right to enter premises at will, without a warrant, to inspect goods, even if the business concerned is not subject to VAT, which is absolutely astonishing.

Mr. Barber

I make no complaint about the right hon. Gentleman raising these questions on enforcement. It is not for me to do so. The Clause is concerned with the basic principle of VAT, but it is worthwhile pointing out for the record and the benefit of those outside the House that it is on a later occasion that all these matters can be debated. The right hon. Gentleman knows this perfectly well, and knows that if a good case should be made out for any changes in the enforcement or the penalty provisions changes will be made. The right hon. Gentleman was consulted about the Clauses which we should take on the Floor of the House and those which we should take upstairs. These matters will be considered upstairs, no doubt in great detail.

Mr. Healey

I would not accuse the Chancellor of being frightened to face the facts, but he pointed out in opening that this is in the nature of a Second Reading debate on a Bill which constitutes the biggest change in our tax system since the Second World War, if not since the First World War. We are now discussing a Clause which specifically refers to the establishment of a value added tax and deals with the rôle of the Commissioners in carrying out its functions. I know that the Chancellor wants to redraft the subsection in question as defined later in the Bill.

Just as the Chancellor has the right to pick the little things out of VAT which appeal to him, I have the right and duty—and I know that the Chair will call me to order if I am out of order—to point out that the Chancellor's claim that this tax is more economic and efficient than the taxes it replaces is a ludicrous opposite of the truth. I am seeking to prove not only that it will require many more people by far, but that they will not be able to supervise and control the calculation of the tax unless the Government give them the powers they have given, which I am glad to note the Chancellor now seems to be rather frightened of having given them. I hope we can rightly assume from the rather nervous interjection that he has just made that he is having second thoughts on the matter.

Mr. Ian Percival (Southport) rose—

Mr. Healey

I must get on. I do not want to upset the Chancellor by spending too long on particular issues that we shall be dealing with later upstairs.

I want to turn to the mountain of anomalies and injustices in the Bill. The right lion. Gentleman made fun of the anomalies in purchase tax. Anyone can do so. The hon. Member for Worcestershire, South (Sir G. Nabarro) has done it, and we know such anomalies exist. But they will be nothing to those which will be created by VAT because they will in many cases go to the heart of people's livelihoods. They are not the difference between tax on toilet paper and tax on toilet soap. They are the difference between survival and failure for many businesses.

My hon. Friend the Member for Heywood and Royton (Mr. Joel Barnett) referred to some of the anomalies on Second Reading. He pointed to the fact that if one buys fish and chips one will pay VAT if one eats them inside the shop but will not pay it if one eats them outside in one's car. The same goes for chop suey and chow mein bought at the increasing number of Chinese shops in this country.

Let us take first the question of the right to exemption for traders with a turnover of less than £5,000 a year. This cut-off of £5,000 falls right in the middle of one of the most thickly populated points in retailing. A man who is able to show that his turnover was £4,999 will be exempt. It is is £5,001 he will be subject to VAT. I shall come in a moment to the enormous temptation to fiddling and deceit which a cut-off at this point raises. This is a very serious matter because the Government themselves reckon that some 500,000 traders are under the £5,000 turnover limit. I would not be surprised to find that another 500,000 are between the £5,000 and £10,000 turnover limit. I should be interested to hear the Government's figures.

Also, of course, every trader who wants to be exempt and whose turnover might be a little over the £5,000 a year would have a tremendous incentive to fiddle various elements in his input or sales and not register them. It is still an open question, nevertheless, whether the value of exemption to the small trader—or rather the cost of exemption to him, because he has to pay on all his inputs—is greater than the misery of filling out all the forms if he decides after all to be subject to VAT.

Let us take the whole clutch of anomalies and injustices involved in the Government's decision that building shall be zero-rated, whereas maintenance and repair and the services of architects, lawyers and surveyors, whose operations are an integral part of the building process, are not. Again, we shall return to this matter in more detail later, but I want now to point out two or three major problems.

The Financial Secretary to the Treasury (Mr. Terence Higgins)

It is right to point out, if the right hon. Gentleman is to pick out, as he has done, points concerning the regulator, enforcement and the £5,000 limit, that he has been dead wrong in a number of his remarks. No one should take as correct what he has said until we have discussed it on the appropriate Clauses.

Mr. Healey

I find that interjection almost the feeblest I have ever heard. I do not know whether the Financial Secretary proposes to reply to this debate. If he intends to do so, perhaps he will do the Committee the courtesy of answering the points then.

Let us take the three anomalies arising from the distinction between new building, repairs and maintenance. How is it possible to distinguish, when a builder is doing development on an old house, between putting in a new floor—is that improvement?—and repairing the gutters —is that repairs and maintenance? Will not a builder be tempted to load all his overheads in every case on the zero part of what he is doing and not pay tax on the VAT-ed part?

5.15 p.m.

Then we have the development of a whole new industry of building activities, such as the installation of new furniture, carpets, and so on, into a house so as to escape VAT. There is the certain fact that the Government are to tax the services of architects, lawyers and surveyors, and to VAT repairs and maintenance done by established builders with a turnover of over £5,000 a year. This will mean an enormous amount of "fly by night" little firms offering to do repairs and maintenance without proper qualifications, houses built without proper services, without proper achitects' designs, and the general degradation of the whole standard of housing as a direct result of the distinction which the Government are seeking to draw in the housing sections of the Bill.

Then there are the injustices and unfairnesses. The Government claim simply to be replacing purchase tax and selective employment tax, but they are reintroducing entertainment tax over a whole range of enterprises which have been free of it for many years. Hundreds of small football clubs, for example, will have to go out of business if they have to pay VAT as proposed here.

Mr. Patrick Jenkin

Rubbish.

Mr. Healey

The hon. Gentleman may say "rubbish ". Again, we shall be discussing this in more detail when he will have the chance, if he is here, to answer the serious points put by the Football Association.

Entertainment tax is being introduced on theatres. Many theatres struggling to survive are likely to go under as a result. There will be a crippling blow at all the most enjoyable leisure activities of the people—sport, theatre and, indeed, music, which is something which should appeal to the Prime Minister even if it appeals less to some of his colleagues.

I will not make much at this time, because we shall have a full day on it perhaps later in Committee of the House, of the brutal and offensive affronts to social justice. How can the Government excuse putting children's clothes and shoes up by 10 per cent. next April while bringing fur coats down by 13 per cent.? The Chancellor claims that this is not a regressive tax; yet he is taxing crisps and ice lollies but is leaving caviar and smoked salmon free. Anomalies and injustices on this scale are an invitation to evasion.

Mr. Patrick Jenkin

The right hon. Gentleman is having his fun, but we are narrowing the difference between taxation on potato crisps and caviar.

Mr. Healey

That is a very good-humoured interjection which the Committee will treat in the spirit with which it was made. But I am sure that if the difference between the cost of crisps and caviar is narrowed from £4 10s. to £4 9s. 11d.—or 49p—the Committee will be absolutely delighted.

Mr. Patrick Jenkin indicated dissent.

Mr. Healey

We get a lot of general statements from Ministers but no facts and figures. I hope that we shall get them later. Perhaps the hon. Gentleman will tell us whether what I have said is true.

Anomalies on this scale are an invitation to evasion, especially when there is inadequate control. Under VAT we shall have 1,500,000 taxable persons instead of the 68,000 involved in purchase tax. We all know from Continental experience of the scale of evasion which VAT suffers. I assure the Committee that I have picked these examples from public print because I would not want it to be thought that I was encouraging anyone to defraud the Customs and Excise.

First, there is enormous scope for false invoicing—for selling more to the consumer than one actually declares—so that one can pocket the VAT oneself. There is enormous scope for forging invoices in order to get rebates. There is enormous scope for partially exempt traders to load all their inputs on to VAT-able sales, and in the service industries, as we know from experience abroad, many clients will conspire with the providers of services to conceal the real cost in order to avoid or reduce liability to VAT. This happened on a colossal scale in France. In France last year the estimate is that £1,000 million worth of VAT was lost through evasion.

In Belgium, much smaller, the estimate was £125 million worth of VAT lost through evasion. So much for the change to administrative simplicity and efficiency of which the Chancellor was talking a moment ago. This tax is an invitation to a general loosening and lowering of social morality. This is one of the heavy factors to be weighed in the scales against some of the advantages to which the right hon. Gentleman referred and which I would not dispute.

Many of the disadvantages of this Bill are due to the speed with which the Government are introducing this tax. In making his first speech on the first Clause the Chancellor had to admit that the second paragraph was wrongly drafted and said he would introduce an Amendment to replace it later. Already he has said that he is unhappy with the enforcement Clauses. There are innumerable uncertainties still left open.

We know that drink will carry VAT next year, but we do not know whether the excise duty will be reduced accordingly, or what will happen to stocks which the poor wine merchants or brewers have left on their hands on which full excise has been paid.

The situation is similar with secondhand cars. These form one of the most important items of expenditure for most ordinary people. I have never owned a new car in my life! We do not know how this item of expenditure will be dealt with. It will be handled somehow between the dealers and the Customs and Excise over the next year. A great deal of discretion is left after that to the Commissioners by way of definition which is far more than civil servants should be given in a matter of this importance.

Decimalisation was a far simpler change in our arrangements; yet it was given three years to take effect. The Government are trying to introduce this new tax system in 12 months, and yet they are under no pressure to do so. Maybe the Government would argue that we must have VAT when we join the Common Market, so the sooner we get on with it the better. We are under no obligation to introduce VAT before the end of the transitional period in 1978. Italy, which has been a member of the Market for 14 years, is still three years late in introducing VAT and has had permission to have an extra year's grace. I have no doubt that by 1978 the Italians will still be repeating that it is inconvenient to do it at that particular moment.

We must ask why the Chancellor is doing this in such a half-baked way, in such a rush—

Mr. Burden

Could I draw the right hon. Gentleman's attention to a statement made by his right hon. Friend the then Prime Minister on 8th May, 1967, when speaking about VAT: The agreement was that by 1st January, 1970, existing turnover taxes would be replaced by the value aded tax system."—[OFFICIAL REPORT, 8th May, 1967; Vol. 746, c. 1090.] He obviously accepted on behalf of the Labour Party that if we went into the Common Market we would have to give effect to this.

Mr. Healey

I have given way too often. The hon. Member has made the point that the regulations of the Common Market originally laid it down that member countries should introduce VAT by 1970. The Belgians were a year late, the Italians have not yet done so and Britain was under no obligation to do so. The Prime Minister signed up this Government to bring it in by 1978. What the previous Prime Minister and the last Government always said was that this was a bad tax but that if we could join the Community on acceptable terms in other respects we would wear VAT.

Mr. Burden

Not at all.

Mr. Healey

With great respect.

Mr. Burden

With great respect, I have it here in HANSARD.

Mr. Healey

The then Prime Minister was quoting the Treaty of Rome, not the policy of the Government. It is well within the recollection of the House that my party has always taken the view that it is against VAT but would be prepared to accept it if other terms of entry were acceptable. That still leaves open what sort of VAT we introduce and how fast. That is the issue with which I am dealing, and it is a question to which we must address ourselves.

Why is the Chancellor doing it in this half-baked way in such a rush when he gets nothing out of it which he would not get far cheaper and easier through purchase tax and SET, especially when, as the Richardson Report pointed out, purchase tax can easily be extended and it was proposed by the last Government to turn SET into a general pay-roll tax, had they won the last General Election? There can be only one reason why the Government are introducing VAT now in this form—because they think they will get it on the Statute Book with the minimum political fuss.

But they have the firm intention of changing the yield, the coverage and the rate in the coming years and to do it under the protection of the argument that they are pledged to harmonise the rates of coverage with the other Market countries. When that time comes—and it could start next year—the Government have given themselves the power to take all trades at present zero-rated out of that rating by order the moment the Bill is law. They have the power to increase the rate to 12½ per cent. before it comes into operation and to increase it to 15 per cent. the following week, again by order with no effective discussion here.

I believe—I could be wrong [Interruption.] If the Minister thinks so, he has every opportunity to reply later and quote relevant Clauses. What the Government intend is to produce a massive shift away from direct to indirect taxation. What they intend doing is what was contemplated by the Government in which the present Home Secretary was Chancellor but which carried out instead the recommendations of the Richardson Report—to cut income tax and profits tax in favour of a highly regressive system of indirect taxation. The Government have given themselves the power to do this. The Government have the right on the first day of operation of the tax to raise the rate to 15 per cent. as the standard rate and to increase the coverage by taking trades at present zero-rated and applying standard rating to them.

I estimate that the combination of the cuts in zero-rating and the increases in standard-rating could allow the Government to raise £3,000 million more next year from this tax, if they so wish. As they have given themselves the power it is not beyond the bounds of possibility that they may wish to do this, without any parliamentary discussion other than what is permitted on the affirmative order procedure at the end of a tiring day dealing with another issue.

The Government blame it all on the Common Market. Although there has been no agreement on harmonisation there has been agreement to harmonise and the Government have accepted the need to do this. The highest rate is 33⅓per cent. The only country which has a rate as low as the proposed British rate of 10 per cent. is Luxembourg, whose argements are not likely to carry the greatest weight when these matters are considered in the Community. We know that the Commission has made proposals as to what it wants. It wants two rates, the first being a lower rate of 5½–7½ per cent. covering food, at present zero-rated. The chancellor absolutely refused even to indicate the Government's intention on this matter when I asked him a question earlier. The Commission also intends to have a rate of 12 to 18 per cent. for the rest.

5.30 p.m.

The Chancellor can rightly claim that in its present form VAT is not as regressive as many of us had feared because of the large number of zero ratings and exemptions covering about 45 per cent. of the total consumer expenditure, and because of the low rate. But if we move to the French or German system, according to the calculations of Professor Brown the poor are likely to lose 3 per cent. of their living standard and the rich are likely to add 2 per cent. to their living standard. In other words, the introduction of harmonisation along the French or German lines would widen the gap between rich and poor by 5 per cent. That, of course, is what the Bill is about, and that is why the Chancellor is able to make these general remarks about the virtues of VAT although the Bill does not bear him out.

The real view of the Tory Party was well expressed by the hon. Member for Truro (Mr. Dixon) on the second Reading of the Finance Bill when he said: I would not be in the slightest disturbed if the rate of value added tax rose from the proposed level of 10 per cent. to perhaps, 12 or 15 per cent., because this would give us a wonderful opportunity of reducing the rate of direct taxation."—[OFFICIAL REPORT, 20th April, 1972; Vol. 838.] He was widely cheered by the benches opposite when he made those remarks. In other words, the proposals in their present form are a case of "Softly, softly, catchee Monkey." The Government get us on to the hook of the tax through the Bill and give themselves the power to hoist us on the hook by increasing the rates and coverage under cover of harmonisation.

Mr. Dan Jones (Burnley)

Could I persuade my right hon. Friend to ask the Chancellor whether he would care either to subscribe to that theory or to deny it?

Mr. Healey

My experience of getting the Chancellor to make a positive statement of intention on anything in the discussions on the Bill have so far been so disappointing that I do not want to submit myself to the risk of a further disappointment, although I have no doubt that my hon. Friend will take any opportunity that is offered to him to see whether he can do any better.

In their present form the VAT proposals are a feast for fiddlers and form fillers; they are expensive and inefficient; they are crammed with anomalies and are an invitation to evasion. Although at this stage they are not as regressive as many of us feared, they will nevertheless prove to be considerably inflationary. Most of the work done on this subject suggests that these proposals would lead to an automatic increase of at least 1 per cent. next year, but if we get the normal ratchet effect—that is to say, people not deducting when taxes are taken off but increasing to the highest permissible level when increases are put on—the increase is likely to be substantially higher and to have a serious effect not only on inflation but on the general prospects for our exports.

The proposals contain inside them a mechanism to change the whole structure of the tax so as to render it highly regressive and highly inflationary, as it already is in many Continental countries, to introduce a tax on food, housing, fares and fuel if the Government wish to do so, and to raise the rate across the whole board. This would be absolutely intolerable unless it were accompanied by a drastic improvement in social benefits and the introduction of highly progressive taxation on both income and wealth. But we know from the rest of the Bill before us that the intentions of the Government in this respect are exactly the opposite. The rest of the Finance Bill shifts the burden from the rich to the poor, from unearned income to earned income, from the prosperous areas to the depressed areas of the country.

The value added tax before us represents one more bloody sacrifice to the primitive gods of the market place to whom the Chancellor so regularly gives obeisance. I ask the Committee to reject Clause 1 and to reject with it the whole principle of the tax as constructed in the Bill. If, as I suspect, we fail to win the Division, I assure the Chancellor and the Committee that we shall fight every inch of the way on the Floor of the House and upstairs to try to make the best of an appalling job.

Mr. Percival

I do not propose to follow the right hon. Member for Leeds, East (Mr. Healey) in his tedious repetition of inaccuracies and exaggerations.

As a result of the generous indication given by my right hon. Friend in his opening remarks that he intends fully to meet the points which led my hon. Friends and me to table Amendment No. 79, yet another most cogent and convincing speech is destined to the nearest waste paper basket in the Library.

I am grateful to my right hon. Friend because I would not have been happy to support Clause 1 with subsection (2) as it stood.

I disagree with almost everything the right hon. Member for Leeds, East said, except for some of what he said about the enforcement provisions. Even there he was guilty of gross inaccuracy and overstatement. I tried to put him right, but he had not the courtesy to give way and be corrected, perhaps because he had been corrected so many times already that he did not want to be corrected again. He referred to the Commissioners as having "power to convict and fine ". The first time he said it I thought it might be a slip of the tongue, but when he said it again I thought it should be corrected because it is nonsense. The Commissioners have no power to convict or fine anyone.

Nevertheless, my hon. Friends and I who tabled Amendment No. 79, together with the CBI, the Law Society, the Bar Council, the Finance Committee of Conservative back benchers, the Legal Committee of Conservative back benchers, the Society of Conservative Lawyers and others are seriously concerned about the enforcement provisions. However, the detailed discussion of them will come later, and I have not the slightest doubt that my right hon. Friend will then show the same degree of interest and readiness to consider points of view as he has shown on Amendment No. 79.

As to the Clause that we are discussing, we felt that Subsection (2) might might be interpreted as bringing in not only powers of management but powers of enforcement. My hon. Friends and I wanted to make it clear right from the outset that we are most anxious to see a proper balance between the duties and convenience of the administrators on the one hand and the rights and convenience of the "administrated" on the other hand. We did not think that balance was properly struck in subsection (2). However, all is well, and my right hon. Friend has put Clause 1 right. I hope this generosity augers well for the future when we get to Clause 30 and thereafter, but for the moment I can only, and I do, thank him most warmly for having so speedily and fully met the point which my hon. Friends and I felt required consideration on this Clause.

Mr. Dick Douglas (Clackmannan and East Stirlingshire)

I listened with great attention to the speech of the Chancellor of the Exchequer and that which was made by my right hon. Friend the Member for Leeds, East (Mr. Healey). I was bemused by the Chancellor's plea that there had been wide consultation to achieve agreement on the structure of the tax which is proposed in Clause 1 and also as to the rate of exemption and zero-rating to be embodied in the Bill. If he has had extensive consultations about the procedures to be adopted in the Bill, I wonder how it was that he asked his officials to draft Clause 38 in the way in which it has been drafted. I appreciate that we shall be debating that provision on a later occasion, but I feel that we should be told why it is necessary to draft that Clause in that way.

The point to be remembered about VAT relates to the distinction between theory and practice. Theoretically it is a tax on the factors of production, but for practical purposes the tax as we now see it is a tax on consumption. If the theory of the tax is carried through, it would be a system which would increase efficiency. But in practice it is a tax which will be passed on to the final consumer and, depending on the relative strength of the trade union movement's bargaining power in the Community and the demand for its skills and products, VAT will be divisive, inflationary and regressive. If we examine the present form and structure of the tax, we see that it embodies in its essential ingredients for indirect taxation purposes the taxation system of France.

My right hon. Friend has pointed to the reasons for the EEC members wishing to adopt the French tax structure. Many of the EEC countries have taxation systems which are inferior to our own in terms of indirect taxation. It could be argued that the tax is an acceptable price to be paid for entry into the EEC, and, indeed, many people will argue the case for the tax on that basis. However, we know that the Conservative Government accepted the basis of VAT before the terms of entry were known, and, indeed, the Chancellor made great play in his speech with the fact that this was one of the proposals in the Conservative election address. It has been said that Labour might have given a similar undertaking.

I make no apology for the fact that I am a pro-European, but I have been essentially sceptical about the VAT. I supported the Labour Party manifesto which entered two caveats, one relating to CAP and the other to VAT. If a Labour Government had wanted to introduce this tax as an acceptable price of entry into the EEC, we should certainly wish to examine in great detail the nature and structure of the tax.

5.45 p.m.

The Chancellor emphasised the fact that the exemptions and zero-ratings appear to have come as a surprise to some of us, but he should have recognised that many Opposition Members were pressing him last year to indicate his policy with particular regard to foodstuffs. The Chancellor's usual phraseology was that food would be relieved of VAT, and we are pleased to see the zero-rating in this respect.

My right hon. Friend said that pressures in the Community to harmonise the structure of the tax, as well as the rates of tax, might force the present Government or any future Government not to have a zero-rating for food, but to include foodstuffs within the rating structure of the tax proper. Therefore, it is right that we should now be searching the Government's mind in order to discover their intentions and to see whether they wish wholeheartedly to continue to adhere to the policy of zero-rating of foodstuffs and to impose their veto on further discussion of rates of tax within the Community. It is right that we should get their intentions quite clear. It will be too easy to accept the structure of the tax and the rates of tax laid down in the Bill and then in future to find ourselves imposing a rate of tax on foodstuffs which is unacceptable and which would make the tax even more regressive than it is at present.

The Community countries introduced VAT because they already had a sales tax down to retail level and a cascade system of taxation within the general structure. However, Her Majesty's Government have made great play with the fact that they are replacing the two forms of taxation, SET and purchase tax, which have many deficiencies. I do not accept the case that the Chancellor has made against purchase tax or SET, but as a Co-operative Member of Parliament I must point out that much criticism has been levelled against SET. We argued that SET could have been adopted to produce a payroll tax. If we were to have a payroll tax and a corporation tax and if we got the agreement of our European partners, we could have had these two devices for taxing the same thing both in theory and in practice as we are in theory taxing under the value-added system. With a payroll tax and a corporation tax we would be taxing value added. Therefore, although in terms of nomenclature the situation is different, operating the two more acceptable devices in terms of administration and not passing on the tax to the final consumer would have operated in a much more beneficial manner to the Community in general.

Mr. Patrick Jenkin

I follow with interest what the hon. Gentleman says, but I would point out that one serious disadvantage of proceeding in that way is that there would be no way of putting a tax on imports or of giving relief on exports in the pattern he is seeking to describe.

Mr. Douglas

The Chief Secretary rightly points out that there is an administrative difficulty, but there could be a possible agreement with our European partners. If our European partners have a structure and rate of tax which better suits their tax systems historically, there is no reason for us to accept that pattern. Our pattern of historical development in terms of taxation is better than, for example, the French system. There is no reason why we should follow them if it is possible to secure agreement for remitting a proportion of the tax on exports. If we were to agree that our corporation tax plus our payroll tax amounted to the same as a 10 per cent. value added tax, it ought to be possible to make such a remission.

Mr. Christopher Tugendhat (Cities of London and Westminster)

It is not only the Common Market countries about which we are thinking. There are also the other members of GATT. One of the advantages of a value added tax is that it is possible to favour exports under the rules of GATT. The hon. Gentleman's proposal may have many merits, but it would be very difficult to get other members of GATT, especially the United States, to agree to this kind of modification simply to meet our own convenience.

Mr. Douglas

I quite agree. However, the United States is showing extreme misgivings under the GATT about the operation of the VAT. We have Italy, for example, which has huge remissions of taxation in relation to exports and which does not have the VAT. So the difficulty that the hon. Gentleman suggests arises whether we have the VAT or not. The difficulties in relation to GATT are enormous, and I could instance the problems that we have in looking at the tax system of Japan. However, that is a much wider topic, and I should be out of order if I attempted to pursue it now.

In criticising selective employment tax the Chancellor of the Exchequer said that large sums were collected in the form of revenue which were paid back to certain sectors of the economy in the form of rebates. That is exactly what will happen under the VAT as it exists at present. A large number of retailers will be zero-rated. But they are within the VAT system. They will have to show by their invoices the tax levied on their inputs, and they will have to reclaim it. I hope that we shall be told what calculations have been made of the cost of collecting each £1 of revenue.

The VAT is a more costly tax to collect than selective employment tax and purchase tax. In real terms, there is no additional flow in this sector to the Treasury. It is a nightmare for those who will have to administer it. Therefore, I cannot see any merit in rushing into introducing the tax before the end of the transitional period.

Mr. W. Baxter

While I agree with my hon. Friend that the tax will be a nightmare for those who have to administer it, it will be an even bigger nightmare for those who have to collect the tax in the course of operating their businesses. There is an incredible number of rules and regulations laid down by the Commissioners about the way in which records must be kept. It will necessitate a large number of additional people being employed by firms paying the tax.

Mr. Douglas

I accept my hon. Friend's point, and I have no doubt that from his own considerable business experience in Scotland he will seek an opportunity to expand upon it.

I turn, then, to the £5,000 exemption. As I understand it, the first time that the figure was mentioned was in 1963 in an article by Professor Prest. Has the Treasury made any calculation of what would be the equivalent value of a turnover of £5,000 in 1972 terms as against the time when it was first proposed in 1963? It strikes me as a very low figure. However, I do not intend to argue the case of the small retailer. No doubt my right hon. and hon. Friends will seek to raise the matter on some future occasion.

If the Government intend to introduce the tax, it is incumbent upon them to explain the facts and what they intend doing. When the tax was introduced in France the Government—not other private concerns or academic institutions— undertook to explain it throughout the country. If right hon. and hon. Gentlemen opposite think that the tax is so fair, I hope that they will try to explain it in the country and thus, if it is to be introduced, remove some of the difficulties from the minds of those who will have to operate it.

Sir G. Nabarro

I am very pleased to be called immediately after listening to the speech of the hon. Member for East Stirlingshire (Mr. Douglas) because there is an extraordinary contrast in our views on this important matter of the value added tax. The hon. Gentleman proclaims himself a supporter of Britain's entry into Europe but an opponent of the VAT. My position is exactly the opposite: I am an opponent of Britain's entry into Europe but a proponent of the VAT.

In those halcyon days when I was assaulting Treasury Ministers on the purchase tax, my efforts were all designed to lead to a single objective, which was the standardisation of the rate of tax and the spread of the tax over a much wider base. What I always objected to about the purchase tax was the relatively confined base and the multiplication of rates of tax, with the corrollaries which flowed from them.

On Second Reading I reminded the House that in 1950 and 1951 there were about seven different rates of purchase tax ranging from 100 per cent. at the top on electric fires down to 5 per cent. at the bottom. The latter rate excluded the zero rate which applied to a number of important exclusions from purchase tax. Over the years between 1951 and 1964, stage by stage the Tory Government contracted the number of rates until by 1964 there were only three, with a top rate of 25 per cent. and a bottom rate of 10 per cent.

I have no doubt that had the Tory Government been re-elected in 1964 they would have introduced not a value added tax, perhaps not a turnover tax, but a sales tax in one form or another which would have conformed to the twin desiderata that I have always supported in this matter: first, that there is no such thing as luxury in peacetime when goods and services abound, and, secondly, that all manufactured goods and services contribute to the nation's export trade, directly or indirectly. Thus, in my view, any sales or turnover tax which generally conforms to those twin desiderata is a form of tax which I support.

[Sir STEPHEN MCADDEN in the Chair]

6.0 p.m.

In the first Green Paper on VAT, Command 4621, published in 1971, it was made perfectly clear that VAT, as then promulgated in general outline by Her Majesty's Government, was a sales or turnover tax. It was for that reason that I gave my support to the general principle, though in a few moments I shall have a good deal to say about the operations of the tax, and I quote the exact words of the Green Paper at that time because I think that the Government have honourably implemented what they then wrote. They said on page 5: VAT is a form of turnover or sales tax. Like purchase tax and some other forms of turnover tax, VAT is a tax on final consumer expenditure in the domestic economy. That is exactly what I have always struggled to attain.

For myself, I want to urge on the Chancellor of the Exchequer that he does not submit to any special pleading at all during the passage of the Bill in Committee. I do not want to see cricket clubs put on zero-rating. I do not want football clubs to be put on zero-rating. I recognise that this small incidence of tax on sporting clubs of that kind may be represented as a resumption of entertainment duty, but I believe fervently in the simply principle that the wider the spread of the tax the lower the rate can be. Taken to an extreme, as I said on the Second Reading of the Bill, I should myself follow the European system of applying VAT to all food, fuel, transport and all essential services, because in that event the rate of tax—nobody can say precisely, save only after detailed Treasury scrutiny—would probably be half or less of the proposed 10 per cent. rate of tax in the Bill.

Mr. Tam Dalyell (West Lothian)

Has the hon. Gentleman calculated the effect of his proposals on what he is often pleased to call the bureacracy?

Sir G. Nabarro

I shall deal in a moment with this question of the increase in bureaucracy, because it is greatly exaggerated in the context of VAT. What I object to is the proliferation of unnecessary Government officials brewing up tea, occupying office space, and so on. I do not think there need necessarily be any huge increase in bureaucracy arising directly from VAT.

The wider the base of VAT, the better the opportunity for reducing the rate. I give an example in the context of fuel. Coal is specifically zero-rated as fuel, but fuel oil is taxed very heavily though it is a competitive fuel, and later on I shall move an Amendment for the removal of the fuel oil duty. Fuel oil and coal should both be zero-rated if we are to deal with fuel at all in the Bill, though I should myself prefer all these items to be brought into VAT in order to reduce the rate to the lowest possible level.

Under the old purchase tax arrangements which we are seeking to replace, the element of discrimination was disastrous in industry, trade and commerce. Take, for example, a case which is rarely quoted within the motor trade. We tax motor cars very heavily.

Mr. David Madel (Bedfordshire, South)

indicated assent.

Sir G. Nabarro

I am glad to see my hon. Friend the Member for Bedfordshire, South (Mr. Madel) nodding assent. He has the Vauxhall-General Motors works in his constituency. As I was saying, motor cars are heavily taxed, but the three other major constituent parts of the motor industry are exempt from purchase tax. There is no purchase tax on motor lorries, which is the second of the four parts of the motor industry. We place no purchase tax on tractors, which is the third major part of the motor industry. We place no purchase tax on components and spares, which is the fourth major part of the motor industry. All those four essential ingredient parts of the motor industry contribute equally to the huge volume of motor industry exports and the large scale employment of our people within that industry.

Under VAT it may be argued that if tractors are applied to the production of food—and they often are—they will be zero-rated, while tractors used for industrial purposes will not be zero-rated but will attract VAT. But there will be this element of equity, that the four parts of the motor trade will all contribute equally to this form of indirect taxation. There will not be the violent discrimination that there is under the purchase tax system.

I give another example connected with the internal combustion engine. We are all familiar with the expensive and luxurious power boat or cabin cruiser.

Mr. Denis Skinner (Bolsover)

Yacht.

Sir G. Nabarro

Yes, if it is a motorised yacht. These items have always been excluded from purchase tax. I see no reason for excluding from purchase tax a cabin cruiser which is sold at £8,000 but placing purchase tax of 30 per cent. on a Rolls-Royce motor car.

The Temporary Chairman

May I draw the hon. Gentleman's attention to two things? First, he should address the Chair, and not back benchers on the Government side. Secondly, it is not in order for him to move his place while he is addressing the Committee.

Sir G. Nabarro

I shall stand rigidly to attention and address you, Sir Stephen. Perhaps you would prefer that. But I have always perambulated up and down below the Gangway when I am not treading on the toes of my hon. Friends behind me.

The Temporary Chairman

I hope that the hon. Member will not question my ruling. It is out of order for an hon. Member to move from his place while he is addressing the Committee.

Sir G. Nabarro

I shall stand rigidly to attention and address you, Sir Stephen.

As I was saying when I was interrupted by the Chair, this violent form of discrimination inherent in the purchase tax system will disappear entirely with the introduction of VAT on the major industrial products with which we ought principally to be concerned in the Bill, and that, by itself, I regard as a major reason for supporting VAT at a constant rate. which is the rate of 10 per cent. proposed in the Bill, though it may be varied by 2½per cent. up or down—

Mr. Joel Barnett

What about the regulator?

Sir G. Nabarro

The regulator, for economic managerial reasons, has always been accepted by the two major parties in the House, and this minor latitude or variation in VAT is something which I do not regard as particularly significant. Later on we may legislate to vary VAT by even wider margins, but that must depend on considerations of economic management.

I now propose to say something about the allegation that VAT will create an enormous fiscal bureaucracy both in Government Departments and in industry, trade and commerce. That was possibly true at the time of Richardson and his report, but it is not true today. Every workshop, every office and every accounts department of every firm of any size has calculating machinery readily available. The fact that VAT is calculated on each invoice is of no consequence at all given adequate electronic and other types of office machinery to deal with it.

Mr. W. Baxter

Although adding machines may assist one to make various calculations for invoice and other purposes, machinery for keeping records will be vital in view of the instructions of the commissioners. For example, we are told in Clause 34(6): A statement contained in a document produced by a computer shall not be admissible in evidence by virtue of subsection (4) of this section ". Will the hon. Gentleman direct his attention not so much to adding machines but to what will be required to keep the necessary records mentioned in the Bill?

Sir G. Nabarro

It may be more convenient to discuss this matter when we come to the Clause to which the hon. Gentleman referred. I accept that it is not only a question of adding or calculating machines or computers. We are creating a vast, complex new system of tax assessment or collection. The Customs and Excise is being charged with this responsibility and will attune its requirements to the needs of industry, trade and commerce in such a way as to create the least possible dislocation and to entail the smallest amount of labour to make the returns that will be necessary. That is axiomatic in all the proposals in the Bill about VAT.

The number of bureaucrats, as they have been called, required to operate VAT has been grossly exaggerated. The SET system is cumbersome, wasteful and has created thousands of new jobs for collecting relatively small sums of revenue, especially having regard to the repayment, part-time worker, old-age pensioner and other facilities. As yet we have no reliable estimate of how many people will be saved on SET alone, and they all have to be set against the hypothetical increase in the bureaucracy arising from the introduction of VAT.

I favour this form of taxation, whether or not we join the EEC. Though com- plicated, it is much fairer and capable of considerable enlargement in the years ahead in such a way that it will spread the burden of taxation over a wider base more equitably. Once the system has been made acceptable and consumers are accustomed to the calculatioins within it, it will prove popular.

I shall vote tonight with enthusiasm, for a sales or turnover tax, in support of Clause 1, which I regard as progressive, harmonious, happy and relatively acceptable to the great majority of traders.

6.15 p.m.

Mr. A. E. P. Duffy (Sheffield, Attercliffe)

I agree with the hon. Member for Worcestershire, South (Sir G. Nabarro) that whether or not we were joining the Common Market, the House was moving in the 'sixties to the point when one day there would be introduced VAT or a turnover or sales tax.

Although tax reform has taken other forms, which have undoubtedly been an expression by Parliament of the need for new ways of encouraging, for example, investment—we all know of the disappointments and frustrations that have been felt on that account right up to the present—both parties when in Government have subscribed to rising levels of public expenditure and have known the problems of raising the corresponding revenue.

Hon. Members on both sides are also well aware of the disincentive effects of the existing rates of taxation. To that end Governments of both parties altered the tax structure in the 'sixties. When my right hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) was in office he was hailed as a reformer and his first Finance Bill was regarded as epoch-making. Yet we have since witnessed Finance Bills, some more than others, which have been a good deal more comprehensive and far-reaching in their proposals.

The scene seemed to have been set by the end of the 'sixties for a consideration of some such measure as is now before the House of Commons. I agree with the hon. Member for Worcestershire, South that this would have happened whether or not we joined the Common Market. Here I declare my interest as the hon. Gentleman declared his. He said he was an opponent of Europe but a proponent of VAT. Like my hon. Friend the Member for East Stirling-shire (Mr. Douglas) I am a European, but I hope I am not uncritical of any features of the EEC or any of its institutions. Tonight I shall try to take a balanced view of VAT. I do not say that in a patronising sense and I hope that my hon. Friends in particular will not take exception to my phraseology.

We must reckon on the nomination of VAT now, whatever reservations we may have, and we must consider it on its merits. There seems to be a good deal of support for the view that on both economic and social grounds VAT is admirably designed for a consumption-oriented society. It is argued on its behalf—on more than one side, and not merely by the Chancellor; it is argued elsewhere and especially by specialists—that it is neutral and that it does not discriminate against particular products as do purchase tax and SET. I spoke in favour of SET in the Finance Bill debates a year ago. If occasion required I would do so again now. I am an unrepentant supporter of SET and I dissociate myself from the remarks made about it by the hon. Member for Worcestershire, South.

It is said next on behalf of VAT that it will restrict tax avoidance, and especially tax evasion, while its impact on the taxpayer should be less harmful from the economic standpoint than those taxes which fall directly on income or capital. It is also claimed that it is simple in structure yet broad based in application and will prove a useful instrument of economic management.

It is highly probable, as I say, that if Britain were to remain outside the EEC we would still adopt VAT, just as Sweden and Austria are doing. Growing interest is being shown in it by the United States and Canada. I think the same interest would be evident here even if we were not joining Europe because we could not be indifferent to the introduction of VAT in those countries which were among our trading partners.

After a while value added tax will become a common feature of the whole of the Western world, quite irrespective of identifiable trade blocs. Moreover, if we are to enter the EEC, with its uniform custom dues, harmonisation must follow. I do not see how we can have one and not the other. Furthermore, as the hon. Member for the Cities of London and Westminster (Mr. Tugendhat) reminded us, it is an appropriate tax as well, especially appropriate for a country like ours, to assist exports and to discourage imports.

They are reasons, among others, that are being put forward on behalf of VAT. There is much merit in them, more in some than in others. Certainly they have to be argued out and cannot just be dismissed. But I believe that VAT should not be regarded as a miracle worker, especially in regard to the last point I made on its behalf. In my judgment, any spill-over benefits to exports would be small and, despite what the hon. Member for Worcestershire, South said, would still be controversial for some time.

Perhaps the strongest argument for VAT in Britain today is the need to raise more revenue as painlessly as possible. If we in the Opposition do not subscribe to VAT as strongly perhaps as the hon. Gentleman, we should be less than honest if we did not admit that VAT's potential as a means of raising revenue is greater than that of any other tax except income tax. The United Kingdom has long lacked a general tax which raises money right across the board from a wide range of goods and services. In my judgment, drink and tobacco duties have very little buoyancy left. Purchase tax and oil duties are levied at different rates and cover an arbitrary set of commodities. With the Government set on abolishing SET, services would escape the tax net altogether unless a substitute were to be brought forward.

Finally, there is no blinking one's eyes, certainly on the Opposition benches, to the discontent provoked among many working men by direct taxation rates—

Sir G. Nabarro

Hear, hear.

Mr. Duffy

—nor the welcome they would accord to any proposals, even in the direction of indirect taxation, that would provide relief of those direct taxation rates, especially as they apply to overtime.

On the other hand, value added tax as proposed in the Bill amounts to nothing less than blatant tax switching. Our taxes are effective in reducing inequalities of income before tax only at the point of surtax; that is to say, they become progressive only at the highest levels of income. We know that the lowest levels —we have had reason to know because of the sterling work of some of my hon. Friends in this Parliament, notably my hon. Friend the Member for Oldham, West (Mr. Meacher)—are quite progressive, not only on account of the tax threshold but also in respect of indirect taxation because of the very high specific duties on drink, especially beer, and tobacco, and the way in which they bear on low-paid workers. Over a large band of income in the middle reaches, the total burden of taxation is only proportional to income. That is why I advance the view that only in the higher reaches is our structure truly progressive.

I wonder, therefore, whether the tendency in this Parliament for, first, social benefits to be means-tested and, more recently, for rents to be means-tested will not soon be reinforced by value added tax, which could bear hardest on the mostest with the leastest, because value added tax, indirect, broad-based and indiscriminate though it may be, when applied to the consumer of goods and services could strike hardest at those who have nothing to spare in their weekly budgets.

The National Economic Development Council, in a national survey of industrial views, found no general consensus in favour of the tax—contrary to what the Chancellor said this afternoon—except that its introduction might help to clear up the present tax jungle and reduce taxation in certain spheres of higher purchase tax. On the other hand, there will be administrative costs and difficulties, as was pointed out by my right hon. Friend the Member for Leeds, East (Mr. Healey), as well as a proliferation of anomalies, which he also indicated and which suggests to me that my right hon. Friend is correct when he asks for more safeguards.

Unless the Government can show that reductions in taxation elsewhere are reflected in more stable prices—given stable import prices—they will find it very difficult to escape the charge that they have given yet another twist to the inflationary spiral in our society and that, moreover, they have also given our tax structure a regressive shift. There is, therefore, all the greater obligation on the CBI to persist in its present form of price restraint beyond July.

Secondly, by way of safeguards the Government must mount a massive information and education campaign. This is a matter of utmost urgency. After all, large sums have been spent by the Government on the Common Market campaign; but there is little evidence of such publicity being given to VAT. Yet the need is stark if the public, simply as consumers of goods and services, are to have any basis for measuring the comparative prices and alternative costs that will follow the introduction of value added tax.

I make five points in conclusion. Despite my attachment to the European case I find it very difficult to rid my mind of the suspicion that value added tax as envisaged and as likely to be applied will prove to be a regressive tax. Secondly, I do not see how it will be regarded by the public as anything else but an additional tax, given the present want of publicity and explanation, and that this therefore will not generate further inflationary pressure in our economy.

Thirdly—I shall not go into all the details as I did on Second Reading—it will increase the administrative costs not merely of government but especially of industry, and it will make its biggest impact on the small retailer and the small trader, of whom there are so many in our economy and to whom record-keeping does not come instinctively, Fourthly, it will constitute an additional burden on the tax-paying morality of our society. Unless the greatest care is exercised and, moreover, further publicity is provided, Clause 12 will create a new black market, an area of evasion.

Finally, I subscribe to the closing words of my right hon. Friend the Member for Leeds, East, though in different language, when I say that VAT, again given the experience of other countries in Western Europe, is being introduced in this country too soon and too fast in an inflationary situation.

Mr. David Mitchell (Basingstoke)

I have listened with fascination to the hon. Member for Sheffield, Attercliffe (Mr. Duffy). When he claimed that one of the first essentials today is for the Government to raise more money in taxation, I could see even more clearly demonstrated the great gulf that lies between Labour Members and Conservative Members.

Mr. Duffy

I apologise for interrupting the hon. Gentleman so soon, but I said "raise more revenue ". The difference is not merely subtle but also very important, and it is one which I thought did not separate the parties.

6.30 p.m.

Mr. Mitchell

I am grateful to the hon. Gentleman for his clarification. The reason that it will draw yet more revenue from a nation which is already over-taxed is not something to which I wish to subscribe. If value added tax were proposed by the Government as an additional tax, I should oppose it. This tax is to replace purchase tax, and selective employment tax. The straightforward question for hon. Members, in deciding whether to support or oppose this tax, is whether it is preferable to purchase tax and selective employment tax.

As this tax replaces purchase tax, it will mean a number of price reductions. As it will not apply to rents, rates and fuel, which together with food are the main components in the budget of the pensioner and the elderly person. it will obviously have a very limited effect on the cost of living.

I turn to the question of which tax—selective employment tax or value added tax—is better for Britain's economy at this time. The selective employment tax operated selectively, and principally on the service industries. In so doing it had a serious effect on the pattern and level of employment. Its purpose, which was clearly stated in the Budget debates on its introduction, was to drive people from the service industries into the manufacturing industries. It stemmed from the old world concept that belongs to the cloth cap trade union image of the last century, and which lingers in some parts of the Labour Party, that all workers in the service industries are carried on the backs of those who work in manufacturing and who produce the country's wealth.

The reality is that in a more advanced economy employment in manufacturing is fairly static. As production demand increases, new methods and new machines —electronic equipment, and so on—enable the increase in production to take place without a great increase in employment. The one sector of the advanced economy in which there is prospect of continuing and sustained growth of employment is the service industries.

Therefore it was a great tragedy when the Labour Government introduced a tax to apply selectively to employment and to that part of employment in which there was the main prospect of growth in demand for labour. The selective employment tax made a substantial contribution to the present very serious level of unemployment.

It is also necessary to consider the impact that the tax had on types of employment and the type of people who were paid off. Not only has there been a net reduction in employment and a massive growth in unemployment, much of which can be attributed to the selective employment tax, but those who were paid off because of the tax were such people as the disabled and pensioners, the marginally employable. These were the type of people who could have been done without before but who had been given jobs because they could be useful and because employers wanted to help them. They were the first people to be paid off on the introduction of selective employment tax.

Today, time and time again in shops, restaurants and such places one can find no service. One cannot tell whether the place is a self-service establishment. The common experience of people who sit down in restaurants is that they are so under-staffed that the customers do not know whether they have to go and get the food for themselves. When inquiries are made, time after time the statement is made that the selective employment tax increased the cost of employment to such an extent that employers deliberately tried to reduce the numbers employed.

Mr. Brian Walden rose—

Mr. Mitchell

I have already given way once. No doubt the hon. Gentleman will have the chance of making his own speech in his own way.

Mr. Walden

Not on this point.

The Temporary Chairman

Order. We cannot have two hon. Gentlemen on their feet at the same time. If the hon. Member for Basingstoke (Mr. David Mitchell) does not wish to give way, the hon. Member for Birmingham, All Saints (Mr. Brian Walden) must resume his seat.

Mr. Mitchell

Very well—I will give way.

Mr. Walden

The hon. Gentleman is quite wrong. If he has any evidence from the employment figures to sustain his case that the increase in employment has come from servicing rather than from manufacturing, I should be delighted to hear it. The figures that I have studied prove, for all the regions for which I have seen figures, entirely the reverse. The decline in employment is in manufacturing. Employment in the service industries is not being affected in the way the hon. Gentleman claims, whatever the intentions of those who originally introduced the selective employment tax may have been. This is a strong point in favour of SET.

Mr. Mitchell

That has convinced me that I should not give way. Obviously the hon. Gentleman failed to hear clearly what I said. He will see from the OFFICIAL REPORT tomorrow that I did not say that SET caused a reduction. I said that service industry was where the natural growth in employment would have taken place, should have taken place and in fact takes place in the more advanced economies, but it has failed to do so in Britain to anything like the extent that it has done in other economies at the same stage of development in Western Europe.

For confirmation of that let the hon. Gentleman go round some London shops and note how long he must wait for a shop assistant to come to serve him. Gone are the days when an assistant would come up to a customer and say "What can I get you, sir?" or "Can I help you, sir?". Now customers must queue at the cash desk to pay. This is one of the effects of selective employment tax, and it was stated to be an intended effect when the Bill was introduced.

Today we are asked to choose between that tax and the value added tax. It is a condition of our joining the European Economic Community that we accept the value added tax. The member States of the EEC had already chosen the value added tax because of its inherent advantages. The United States is now introducing such a tax—[Interruption.] This tax, at much higher rates, if the hon. Gentleman wants it that way, in some European countries, has been accepted as having substantial advantages. One of the principal advantages of the tax is that it is remitted on exports and is, therefore, an encouragement to exporters. As we enter Europe and opportunities for British exporters increase, we shall need something which will give a greater encouragement to our exporters.

I congratulate the Treasury Ministers on having fixed as low a level as 10 per cent. I hope that during the later stages of the Bill they will not accept Amendments to the Clause that would in any way set at risk the low level of 10 per cent. It is only by having a wide spread of tax that one can have such a low level at which to base it.

We are moving from taxing on earnings to taxing on spending. That must be to the benefit of the community at large. However, there is a question to which I am most anxious to secure an answer from my hon. Friend the Minister. As I understand the position, the tax applies when one of three things occurs: when the goods leave the premises of the vendor, when the goods have been available for collection for three months by the purchaser but have not left the premises, or when the goods have been invoiced. Does the further logical concomitant follow that during the transition period goods to which those transactions do not apply will not incur value added tax? If goods have already been paid for, invoiced or made available to the purchaser but have not been removed from the premises before value added tax operates, will they be exempt?

There are many people in the trading community who are anxious to know where they stand. Many members of the public who have purchased commodities which they do not propose to put into their homes at present are anxious to know exactly what the position will be. I hope we can have clarification from my hon. Friend.

Mr. W. Baxter

I think it will be agreed on both sides of the Committee that whatever tax is imposed or altered will bring acclamation and condemnation. I cannot think of any tax which could be imposed which would receive universal approval and acclamation. It is true to say that whatever a Chancellor of the Exchequer introduces is bound to be criticised and condemned.

The Chancellor, like the hon. Member for Basingstoke, (Mr. David Mitchell), devoted a great deal of his speech to the selective employment tax. I agree with much that has been said about that tax. It had great limitations. It did not add to the economy what its architect expected it to add. However, there is no need to go over that ploughed field again and harrow and re-harrow it. We can leave it as it is.

The question is one not only of selective employment tax but of replacing purchase tax. Purchase tax has a great deal to commend it and successive Chancellors of the Exchequer have found it a valuable tax with which to tax those luxurious items that the richer among us are capable of buying, leaving the tax off goods that the poorer members of the community require for their day-to-day life. There was not much wrong with the principle involved in that tax. That is why Chancellors of the Exchequer, of both parties, have kept it in operation for such a long time.

6.45 p.m.

It is now suggested that there should be a considerable revolution in our tax system. There is no doubt that value added tax has much to commend it, but it also has much to condemn it. If we were a more equitable society where there were not so many lower paid workers in our midst or underpaid old-age pensioners, their incomes would be such that they would have some degree of surplus in their purse to pay the extra tax that they will be called upon to pay even on household goods. The tumbler from which the Chancellor sipped his water will carry tax. That tax will be paid by rich and poor. That is the problem of value added tax.

Before we impose such an obligation upon the poorer sections of the community we should seek ways in which to overcome the difficulties: for example, as I suggested in an intervention to the Chancellor, a minimum wage or income taking into consideration not only value added tax but many aspects of our social services.

I believe that the day is opportune for a complete revolution of our tax and social service system. I give full marks to the Chancellor for devoting a good deal of his time and energy to trying to find a method whereby we can bring about this revolution. However, he has not got far enough. He has stopped midway and imposed a tax which will fall upon the least fortunate, the poorer section of the community.

Mr. Burden

I recall that it was the hon. Gentleman's right hon. Friend who imposed a tax on potato crisps. I would have thought that crisps were bought as much by poorer people as by the wealthy.

Mr. Baxter

That is an unfortunate example of the peculiarity of the House of Commons which brings it into disrepute. We are continually looking at the past and trying to score points from what somebody has said at a particular time in different circumstances. Many people, young and old, are beginning to lose faith in the House of Commons because of the sheer stupidity of Members in always harping on things that have happened before and making quotations out of context.

I appeal to hon. Members not to focus their attention and great ability on the past but to devote a little of their time, energy and brains—let us call them little grey cells—to what can be done in future for the well-being of our country. That may save any interruptions about what somebody said 20, 30 or 40 years ago.

The Bill has certain limitations and problems, for example, many people will need to be employed by the Government to put value added tax into operation. Of course we must give the Government the tools to do the job they seek to do. There is nothing to be gained by saying that a large number of civil servants will be required to carry out this onerous task.

However, that is not the end of the problem; it is only the beginning. Industry carries a great burden of responsibility which should be carried by Government Departments. Anyone who has a business and tries to operate the pay-as-you-earn or other tax systems knows that he has to employ a number of people for the sole purpose of carrying out the Government's rules and regulations vis-à-vis the tax system which may be introduced. There can be no question that under the Bill it will be necessary for private enterprise to add quite considerably to its staff to carry out the duties and responsibilities which will be placed upon it.

I pointed out to the hon. Member for Worcestershire, South (Sir G. Nabarro) that it was not just a question of adding machines being required. Even if computers were intoduced into a business —this is not evidence acceptable by the Commission—records of great intricacy and accuracy would still have to be kept so that no mistake could be made. If a mistake were made, considerable penalties would be likely to be imposed upon a firm or its managing director if perchance it could be proved to have been intentional. It is an extremely fine line of demarcation in a complicated Finance Bill to say that a man did or did not understand the exact implications of the measure which he was asked to implement.

We are not all lawyers. Many business people do not employ lawyers. We perhaps have part-time accountants. Ordinary people must try to find out their obligations under the law, and this law is very complicated in composition.

I need only draw attention to how the Bill will affect the building industry, in which I have some interest. It is very difficult to understand. On page 98, Schedule 4, under "Construction of Buildings, etc.", we see: Item No. I. The granting, by a person constructing a building, of a major interest in, or in any part of, the building or its Site. Can anyone tell me what that means? I have to give an interpretation of that. Can anyone tell me what Items Nos. 2 and 3 mean? I should like to know what my VAT obligations are in that respect.

Under "Notes" is it stated that (1) Item 2 does not include any work of repair or maintenance or the supply of any services to a person who himself supplies such services as are mentioned therein. Again, would someone be kind enough to explain to a layman what is required there? [An HON. MEMBER: "That is why we employ lawyers."]

Mr. Burden

On a point of order, Sir Stephen Would it not be wrong for anyone to give an explanation, since this does not come within the debate on Clause 1?

The Temporary Chairman

That is not a point of order. However, I am glad to have the opportunity of saying that I do not want to interrupt the hon. Member for West Stirlingshire (Mr. Baxter), but I well recall his interrupting the hon. Member for Worcestershire, South (Sir G. Nabarro) and drawing his attention to the wording of Clauses 34 and 37. I did not interrupt then because it was an intervention. However, it would be wrong to pursue the interpretation of Clauses 34 and 37 at this stage. I do not object to the hon. Gentleman making reference to those Clauses, but their interpretation should be left to consideration of the Clauses when we come to them.

Mr. Baxter

I could not agree more, Sir Stephen. I did not expect an explanation to be forthcoming. I merely posed the difficulties which I as a layman see in the Bill.

Clause 5(6) provides that The granting, assignment or surrender of a major interest in land shall be treated as a supply of goods. I contend that all this is extremely complicated. Surely an obligation will rest on the Chancellor of the Exchequer to give a more simplified version so that ordinary people will not be put into the unenviable position of not wanting to break the law but, by some mischance, breaking it unintentionally and being liable to have heavy penalties imposed upon them or their firms.

I do not want to go further into the matter as there are many hon. Members who wish to speak. However, I believe that direct tax as such will be weighted heavily against the poorer sections of the community. Therefore, we must have regard to that aspect of the matter.

If we as a Parliament do not relate income to expenditure—value added tax adds to the expenditure of not only the higher-paid but the lower-paid worker —and consider a whole new set-up of income structure based upon an entirely new concept, on which it would be out of order for me to give my ideas this evening, we shall be doing a great disservice.

I welcome the fact that the Chancellor is exercising his brains and ingenuity to find a more simplified method of tax. I agree with the principle that our tax system requires a complete overhaul. It has many limitations and there is room for great improvement. Irrespective of how we improve it, however, we shall never make tax as such a thing to cheer about and to be welcomed with open arms. I suggest that we should go further than has been attempted in the Bill.

Sir Robin Turton (Thirsk and Malton)

I have great sympathy with the hon. Member for West Stirlingshire (Mr. Baxter). He, like myself, thinks that SET was a mistake and that it should be abandoned. He too wants to devise a new system of taxation which is not regressive in character and is easy to operate.

I have reluctantly come to the conclusion that the Government are right to use a form of value added tax. My reason is that this is the age of the value added tax. It is a non-tariff barrier. When certain countries have a value added tax which is aiding exports, it is impossible for other great trading nations like ourselves to opt out. We have to get into it. Unless the GATT succeeds in defeating the evasion of free trade by the use of value added tax, I do not think that we can stay out of the party.

Under our system of purchase tax we are always at a disadvantage in trading compared with a country which has a value added tax. If we are to change from purchase tax to a value added tax, should we have it, as my right hon. Friend the Chancellor has chosen, at one rate with a certain amount of zero rating, or should we have two rates? I disagree with my right hon. Friend here. I prefer two rates. There is a difference between the luxuries and the necessities of life.

Mr. John Pardoe (Cornwall, North) indicated dissent.

Sir Robin Turton

The hon. Member for Cornwall, North (Mr. Pardoe) shakes his head. No doubt to him there is no difference, but to my constituents, to the old people, there is a difference. It is only if they have a win on the pools or a good bet on the races that they can afford a luxury. Their normal everyday expenditure is on the necessities of life.

7.0 p.m.

Mr. Pardoe

I shook my head because I wanted to challenge the right hon. Gentleman about this. This is one of the myths that has spread around the House of Commons on all sides. Will the right hon. Gentleman focus his attention on the problem of distinguishing between luxury and non-luxury goods on any level of income? Does he consider that a motor car is a luxury or is essential to a man living 40 miles from his work in a poor rural area such as Cornwall? Does he consider that tobacco smoked by old-age pensioners, attracting a very high rate of tax, is a luxury, or is it one of the essential commodities of life for them? Does he consider that a television set for an old-age pensioner—

The Deputy Chairman

The hon. Member for Cornwall, North (Mr. Pardoe) must not give too many illustrations in an interruption.

Sir Robin Turton

There are certain things which are quite clearly luxuries. Drink and tobacco are in the luxury class whether the person buying them has a low income or not. Equally, jewellery and fur coats come in the luxury class. But somehow we must get a lower rate for the necessities of life, and this has not been done. I appreciate the reasons of my right hon. Friend the Chancellor for doing what he has done but he must bear in mind that the other countries which apply value added tax, like France, make this differentiation and they have more thin one rate of tax.

We come to the major issue, the proposal by the Chancellor to zero-rate food. I think that a good part of my objection to having only one rate of tax is met if all food is zero-rated, but here again my right hon. Friend has made the mistake or following too slavishly one of his predecessors, in this case the right hon. Member to Birmingham, Stechford (Mr. Roy Jenkins), who in a most unfortunate Budget selecthed certain items of food and said that potato crisps, for example, were a luxury, and we now have the curious arrangement whereby some food attracts purchase tax and some does not. I think the matter should be looked at again. If the Chancellor is right to exempt food, as I am sure he is, it cannot be right to be bound by the definition laid down by the right hon. Member for Stechford in a previous Budget. I hope that this matter will be reopened.

The right hon. Member for Leeds, East (Mr. Healey) interrogated the Chancellor about what would happen if we joined the Common Market—which I hope we will not—and had to harmonise. We should be told before this debate ends what the Common Market countries are doing about food. As far as I know, five of those countries have value added tax on food and Italy, which of course does not operate value added tax yet, proposes to apply it to food. This should be explained in the course of the debate and we should be given more information about the committee of the Commission which is looking into harmonisation. Last year when I discussed this matter with members of that committee they told me they were proposing sometime next year to put harmonisation into effect. I asked whether, if we adopted the value added tax and excluded food, we would be bound to change with harmonisation. They gave me the unfortunate assurance that that was bound to be the case.

We should be clear about whether this is right or wrong, because there was a certain amount of doubt in the cross-play between the right hon. Member for Leeds, East and my right hon. Friend the Chancellor of the Exchequer this afternoon.

[Sir ROBERT GRANT-FERRIS

in the Chair]

Mr. David Crouch (Canterbury)

Would my right hon. Friend take into account that harmonisation can work both ways and that when we are in the Common Market it is possible that those five can see the wisdom of not applying VAT to food and might harmonise with us?

Sir Robin Turton

Five of the members of the EEC operate value added tax at the moment and one is planning to operate it. My hon. Friend the Member for Canterbury (Mr. Crouch) is one of the great optimists. He is what the French call "la gouvernesse Anglaise". He believes that when Britain goes in, everyone will follow her. That is a wonderful thought and a good old Colonel Blimp idea but I often wonder whether it is so well regarded abroad as it is in the House of Commons.

Mr. Barber

Perhaps I should clarify the position. Under Articles 99 and 100 of the Treaty of Rome decisions con-concerning coverage and rates have to be unanimous. This means that value added tax could not be applied to food without the consent of the British Government.

Sir Robin Turton

I am grateful for that assurance.

My only other point is a quite different one. I accept the value added tax for the GATT reason and also because of convenience because we have to move over to some other form of indirect taxation. But how will we deal with the transitional period? This is of vital importance to many traders. My right hon. Friend the Chancellor of the Exchequer said that For other goods,"— that is, not goods on sale or return— purchase tax will be ended by Treasury Order a short time before the introduction of VAT, so as to help traders to dispose of existing tax paid stocks and to re-stock ready for VAT."—[OFFICIAL REPORT, 20th April, 1972; Vol. 894, c. 778] The difficulty over this is the use of the words "short time". This has worried people. The requirements vary according to the trade. In my constituency I have the headquarters of one of the greatest clothing firms in the country. The period for the turnover of stocks is five months. Unless this period is made so elastic that it caters for all different goods, trade will be harmed because traders will not stock up with their needs for fear of double taxation.

I appreciate that this is not a simple problem. It is quite an easy matter to deal with it, in the Chancellor's words, for an enterprise with a short stocking-up period. But when dealing with clothing, including men's suits and women's skirts, for which there is a five-month turnover period, I cannot see how the Chancellor can surmount the problem in the terms of what he said on 20th April.

Mr. Dalyell

The right hon. Gentleman has raised a very urgent issue. At Gleneagles at the weekend I was a guest of the cake and biscuit manufacturers at their annual conference. They were extremely concerned because the vacation time from tax is to be two weeks. May I, through the right hon. Gentleman, ask the Chancellor how flexible the Treasury will be as regards the amount of time it will give in the clothing industry, in the cake and biscuit industry and in other industries?

Sir Robin Turton

I am grateful for the support of the hon. Member for West Lothian (Mr. Dalyell). We must have some reassurance for traders, because it is vital for the Chancellor to say something before it is too late and before people refuse to stock up because of the fear of double taxation. Up to now, although I have been in correspondence with the Treasury on the matter, we do not have sufficient reassurance for the trade. Therefore, I hope that some reassurance will be given to traders generally on this transitional period, tonight or at an early date in Committee.

Generally, I welcome the Clause. I was not persuaded by the argument of the right hon. Member for Leeds, East, and I wish my right hon. Friend the Chancellor every success in his endeavours.

Mr. Pardoe

My colleagues and I intend to support the value added tax in principle and to vote for the Clause. It is by no means a new part of Liberal policy to do this. It has been part of Liberal policy for 10 years, and was included in a report of the Liberal Party's Tax Commission in 1962 as part of a package for tax reform which was described by the present Chairman of the Parliamentary Labour Party, the right hon. Member for Sowerby (Mr. Houghton), as the most significant outline of major tax reforms published in recent years and breathaking in its sweep. It takes the Conservative Party 10 years to catch up with Liberal policy and the Labour Party rather longer, but no doubt it will get around to it eventually.

As for the speech of the right hon. Member for Leeds, East (Mr. Healey), I think he will look back on it as perhaps not one of his most honest efforts. It was the speech of a man of great intellect and natural honesty constantly having to employ that intellect in seeking to justify the twists and turns he is being forced to take. I found it a lamentable spectacle, a waste of a considerable mind. I did not find it an honest speech. I found it a carping speech. It is always possible to find such points as he made about any reform of taxation. Almost all the points he made against VAT today were made, some just as irrelevantly, about any changes in taxation over the past 10 years.

The basic philosophy behind the Liberal Party's espousal of VAT 10 years ago was contained in a memorandum of the time which said that we wanted to cut the burden of direct taxation on individuals and spread the burden to indirect taxation. We wanted to compensate those individuals and groups who might lose through higher indirect taxation by introducing a far more effective social security system to help them when they were really in need. The Chancellor has now announced new studies of negative income tax which may well help in this direction.

Mr. Robert Sheldon (Ashton-under-Lyne)

The hon. Gentleman said that the speech of my right hon. Friend the Member for Leeds, East (Mr. Healey) was not an honest speech. I expected that after that sweeping denunciation we should hear some evidence to explain why he thought so. If he is not going to adduce it, will he at least accept that his particular concern for an increase in indirect taxation is obviously quite counter to the views of my right hon. Friend?

Mr. Pardoe

I intend to deal with the points the right hon. Gentleman made on the question of the increase of income tax and the transfer as between direct and indirect taxation.

We also wanted to compensate for cuts in tax on those with high earnings by more effective taxation of transfers of wealth. Even then, we wanted to align our tax system with the Common Market, and we also wanted a far more effective distribution of income through the tax system to overcome poverty. I make no bones about this: I am a member of a distributivist party. I want to redistribute income. I do not believe our tax system so far has done so.

It was not just a matter of our wanting to go into Europe and, therefore, accepting those tax proposals that went with the European package. I believe, with the Chancellor, that this country would necessarily have come out in favour of a value added tax whether or not we were going into Europe.

7.15 p.m.

The Chancellor dealt first with the inadequacies of the taxes which VAT replaces: purchase tax and the selective employment tax. That is a perfectly legitimate argument, but it is not conclusive. There are always anomalies in any tax. The right hon. Gentleman point out that as we have known over the years there are masses of anomalies in purchase tax. There will inevitably be anomalies in the VAT, as the right hon. Member for Leeds, East said. He will no doubt have plenty of opportunities in future years to justify that forecast. But in certain parts of the country, particularly regions with a high incidence of service industries, such as the far South-West and some other development areas, especially Scotland and Wales, SET weighed very heavily, and a value added tax will put a smaller burden on them.

Therefore, I deal not with the disadvantages necessarily inherent in those two taxes but primarily with the advantages in the new tax. We can see it only in the context of all taxes and benefits. I am therefore very glad that a Committee of the House is to assess the whole incidence of benefits and taxation right across the board for the first time, because it is impossible to look at the effect of taxation on poverty and distribution alone without looking at what is coming in on the other side of the ledger.

I want to dispose first of all of one or two myths about our present taxation system that have been with us over a long period. First, it is generally assumed in the House and outside that we have a progressive taxation system which is effective in redistributing income. I challenge that view completely. Our tax system is not progressive. It has had virtually no effect over the years on the redistribution of income, still less on the redistribution of wealth.

I was first brought to awareness of this problem way back in the late 1950s by a review of a book by Professor Titmuss. The review, which appeared in the New Statesmen, was written my the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins). It clearly pointed out—and I went to the source material, to Professor Titmuss's book—that by using the income tax figures it was impossible to say how far redistribution had taken place, and that the official statistics tended to over-egg the pudding and very much to exaggerate the redistribution that had taken place. Since then a great deal of more sophisticated work has been done by people outside the Socialist way of thought. I hope that at least some other members of the Labour Party will read some of it.

An article in Economics and Statistics in August, 1966, by Merrett and Monk confirmed my view that our tax system was in no sense progressive. One of the conclusions they came to was that: It would be possible to replace the whole of Britain's taxes (other than surtax and the taxes excluded from our analysis) and replace them by a uniform sales tax at around 28 per cent., and if anything leave the lower incomes groups rather better off than they are under our present tax system. That absolutely challenged received opinion such as I have been led to believe it was then. It was confirmed in an article in the New Statesman in the same year by Robin Marris, who concluded: … Professor Merrett has made a very radical suggestion indeed. It flies in the face of socialist orthodoxy, but I am forced to confess that, despite my lifelong assumptions. I find it difficult to disagree with him. That was at least one Socialist view.

In another article, in New Society in 1970. Robin Marris also concluded: it is easy to make the British indirect tax system less regressive. All you have to do is increase purchase tax in a neutral pattern, or increase SET and or substitute a general sales tax or value-added tax". I agree with him, and I think a value added tax is by far the best way of tackling the problem that I have set out. The Opposition should start questioning their assumption about the way in which our taxes have worked over the years on the distribution of income and wealth. I want to redistribute income and to redistribute wealth, and I do not believe that our present tax system will do either.

Then, of course, the question arises: will VAT redistribute income? The National Economic Development Office, in its earlier study, concluded that a value added tax would have very little net effect on the distribution of income. The tax proposed in the Bill will. I believe. have very little net effect on the distribution of income, and I regret that. I would like it to have a much greater effect, and if it replaced more than two taxes, as I believe it should do—it might even be necessary to have a higher rate than 10 per cent. in order to do so—we could achieve a very substantial redistribution of income and perhaps wealth.

The right hon. Member for Leeds, East said that the Chancellor was in the process of "softly, softly, catchee monkey" in relation to the change-over from income taxes to expenditure taxes, and he was assuming, probably rightly, that at some future date a Government of one political complexion or another—probably a Conservative Government, because I expect it will be sooner rather than later—will use an increased rate of VAT in order to reduce income taxes. Why not? It is not long ago that the right hon. Member for Birmingham, Stechford, as Chancellor of the Exchequer, made it known openly that he was looking for ways of moving from the burden of taxes on income to a greater burden of taxes on expenditure. That, I think, is a perfectly acceptable means of reforming our tax system.

There are considerable grounds for switching from direct to indirect taxes. It would have been an extremely beneficial effect on the poverty problem. First, what is the effect of progressive income tax on incentive to work? I do not think that it can really be measured, but it must have some effect, and what is perhaps more important is that it is popularly supposed to have some effect. All of us have encountered this in the attitude of ordinary people to the problem of high rates of tax, as they think, on their earnings from overtime.

Income tax is a very unpopular tax. This is because it comes out of the pay packet. It can so easily be seen and challenged. The popularity of a tax is not absolutely conclusive, but radicals have to argue continuously against a low taxation philosophy. I take issue with the view that we are an over-taxed society. It is bunkum, since we are not over-taxed by comparison with any of the other industrialised societies with which we compete, but the one fact which is unique to this country is that out of our total tax burden income taxes take up a high proportion of the total, and have done over years. Since radicals want to get more revenue for their social purposes, and since we need more taxation and more tax revenues, it is better to take it from a less beneficial method of taxation than from a more beneficial one.

Secondly, a further reason for moving from indirect taxation to expenditure taxation is that we need a stimulus to savings, in the long term if not particularly in the short term. Direct taxes fall both on savings and consumption, while indirect taxes fall on consumption only. Savings redistribute wealth, which is one of the things I want to bring about, and they are also anti-inflationary.

Thirdly, indirect taxes can be rebated on exports and direct taxes cannot. Fourthly, we can far more easily control consumer expenditure in the economy in macro-economic terms through this broadly based consumer tax than we can with the panoply of purchase tax and other taxes now available to us. After all, purchase tax is only incidental on a fairly narrow range of the economy, on consumer durables, presumably those which the right hon. Member for Thirsk and Malton (Sir Robin Turton) would declare luxuries. I am not entirely certain how many of these things really are luxuries in the modern economy or to most ordinary people.

I am no longer certain, for example, that a washing machine is really a luxury to a housewife with children. I do not think that a motor car is a luxury. I am not sure that the television set is a luxury to an old couple stuck in the wilds of Cornwall, where there are no bus services because they have been removed by various Governments. I do not think that one can really categorise tobacco as a luxury, because it is one of the essentials of life to many old people —and that statement comes from one who detests tobacco smoke, does not smoke and has not done so since the age of 10.

I think it is far better to replace the taxes we have—purchase tax and selective employment tax—simply from the point of view of controlling the economy and it will be the better off for that reason. So my view is that VAT will not be a regressive tax, certainly not at the rate of 10 per cent. It would be a progressive tax if it replaced, for instance, such things as the very heavy incidence of taxation on petrol and on beer and tobacco because this ensures that the bottom 15 per cent. of income groups pay a higher proportion of their income in tax than do the broad band of the middle class.

That is why it is nonsense for Socialists to talk of reform of taxation which moves us from income taxes to expenditure taxes by saying that it is regressive. It is not regressive. Our present taxation system is regressive, and I want to make it more progressive. I believe that having a broadly based tax of this sort on consumption, which is a magnificently efficient revenue raiser, will enable us to go from replacing just two taxes to replacing many more, and finally redistributing income and wealth.

Mr. Peter Hordern (Horsham)

When I read the newspapers today I saw that the Opposition were to mount a full-scale attack on the value-added tax, to be led by the right hon. Member for Leeds, East (Mr. Healey). I looked forward to his speech with considerable interest, but I must say that, for one who talked about opposition to the tax and fighting it to the last man, the right hon. Gentleman, as a former Secretary of State for Defence, concealed his forces very well. One has detected in the debate all the usual signs of the hurrying and scurrying of the Whips to find more hon. Members opposite to speak. While I do not say that the comments we have heard so far have not been very good, they have been few, I think that the right hon. Gentleman's critique of the tax was very much concerned not with a broad criticism of the tax itself but with small and minor anomalies and difficulties that could occur with the tax.

The right hon. Gentleman referred in particular to anomalies, fiddles and fly-by-night firms. [Interruption.] If any hon. Member opposite cares to read HANSARD tomorrow he will find that this is largely what the right hon. Gentleman spent his speech in doing. He referred at one point to the fact that there was in the VAT proposals a considerable distinction between the tax to be levied on crisps and that to be levied on caviare. He obviously had not been told that it was the Labour Government which placed purchase tax on crisps and, in- cidentally, on pet foods, at the rate of 22 per cent. The present Government have narrowed the differential. I do not think that was a particularly happy point for the right hon. Gentleman to mention. As I understood it, his principal point was that the tax was likely to be regressive and that we ought to follow the example of Sweden, where direct taxes were very much higher than taxes on expenditure.

Mr. Healey

And on wealth, too.

[Mr. Crawshaw in the Chair]

7.30 p.m.

Mr. Hordern

And on wealth. I take that point. That is the position in Sweden, but we shall not have a tax anything like that in Sweden, nor would there be any conversations or negotiations within the Community suggesting that we should.

Indeed, every one of the European countries has a lower rate of direct taxation than ourselves. We also have a higher rate of indirect taxation than any of the European countries. If the right hon. Gentleman doubts that, I have the figures here. The indirect taxation is made up largely of the heavy Customs and Excise duty already referred to on hydrocarbon oils, alcohol and tobacco

Mr. Eric Deakins (Walthamstow West)

Would the hon. Gentleman not regard the social security payments by employers on the Continent as a form of indirect taxation?

Mr. Hordern

I have the figures nere and they include the social security contributions. I could read them out but I would ask the hon. Gentleman to accep[...] from me that taxes on incomes and expenditure are higher in this country than in the European countries.

Mr. Healey

Would the hon. Gentleman not agree that the present Government under these proposals propose to levy a lower percentage of their total revenue through VAT than any of the present or prospective members of the Market?

Mr. Hordern

Not only do I agree with the hon. Gentleman, but I say that it is a point in favour of the tax.

Mr. Healey

It is a good debating trick, but what the hon. Gentleman was discussing was the consequence of harmonisation with the rates of the other Continental countries. He was purporting to show that harmonisation would not involve an increase in the yield and coverage, and he has now confessed that the opposite is the case.

Mr. Hordern

Through no fault of his own the right hon. Gentleman was not present when the Chancellor made a brief intervention on this point. There has to be complete agreement on harmonisation by all member countries, so that there is no demand that we should harmonise our rates.

Mr. Healey

Nonsense.

Mr. Hordern

This is the position. My right hon. Friend made the point during an intervention, and, with respect, I prefer my right hon. Friend's version of the Treaty of Rome and the freedom which this Government have under it to that of the right hon. Gentleman.

That brings me to the point of the Opposition's position over VAT and our entry into Europe. I do not believe that the Labour Party could have been serious about entry into the European Community in 1967 unless it had then been prepared to adopt VAT. It is true that some hon. Members opposite were serious about it. I thought that the right hon. Gentleman was serious when he wrote that article in the Daily Mirror. Of course there were some hon. Members opposite who were serious about joining the Community then, but they are no longer on the Front Bench.

When the right hon. Member for Dundee, East (Mr. George Thomson) said that the terms brought back from Brussels by the Chancellor of the Duchy were satisfactory and would have been recommended to the Labour Government had they been in office, that must have implied an acceptance of the principle of VAT. They must have known that was the case. It is not as if VAT is a new proposal, produced out of thin air. The French have had it since 1954 and the Council of Ministers had decided to have a common form of VAT as long ago as 1967. It was the declared intention that VAT should be in force by 1st January, 1970. The right hon. Gentleman is right to say that Italy has yet to adopt the tax and it may be some time before it does so. We do not know. It is true that Belgium was a year late in adopting it. But it is also the case that Germany, France, Holland, the Netherlands and Luxembourg have all adopted the tax and did so by the due date.

There was never any possibility that we could join the Community without adopting VAT, and everyone knows this. The truth is that the attitude of the Labour Party towards VAT is a difficult one to understand. I understood from what the right hon. Gentleman said that his party is in favour in principle of joining the Community and accepting VAT, but not on the terms negotiated. The attitude of hon. Members opposite towards VAT seems to be "Yes perhaps sometime but not just yet."

In a negative way it is rather like St. Augustine, who said: Give me chastity and continency, but do not give it me yet. There is this different—that, whereas St. Augustine could at least have been assumed to have been enjoying whatever it was he was doing, there is no such guarantee that the Labour Party is enjoying anything at all. I gather that the Labour Party would rather have stuck to purchase tax and SET. That is the inference that must be drawn. What was SET if it was not a tax on employment adding directly to costs? I know of no other tax which was so hastily produced and which has caused so much confusion. Everyone knows that is the case.

VAT is a very different matter. The right hon. Gentleman knows that many associations I believe 300—were consulted about its form. Not only that but a Green Paper was published and then a White Paper with the frame of the Bill within it. There is no question but that on the issue of consultation and fairness VAT is to be preferred to SET. Then no one could say that purchase tax was free from objection. It has anomalies such as toothpaste being taxed more highly than confectionery. Whenever rates are increased—and they were increased frequently by the Labour Party—more anomalies appear. The Labour Party complains that VAT is a regressive tax, but all expenditure taxes are regressive and the degree to which they are regressive depends on the rates and the coverage.

It does not lie with hon. Members opposite to accuse this Government of regressive taxation when they put a 22 per cent. purchase tax on pet-foods, increased every single rate of purchase tax and even introduced a new rate of 55 per cent. The central point is that before the reductions in purchase tax made by this Government the yield was almost £1,500 million. That is enough to cover VAT by itself without taking into account SET. If one comes to discuss the real contribution the Government have made towards reducing taxation and lightening the burden on those who can least afford it, then it will be seen that not only are the Government proposing to do so by taking out purchase tax altogether but SET is thrown in as a bonus.

It is true that VAT will cover some items which were not chargeable before. On the other hand, it will not cover some items which were liable to SET, such as food and housing, lighting and heating. This point was put very fairly in a Labour Party "Talking Point", No. 6 of 20th March, 1970. It said: It is generally agreed that the main advantage of the value added tax is its universality. It is not confined to certain goods—tobacco, petrol—or to certain services. It is also important to bear in mind that the more exemptions there are to the tax the more expensive it is to administer. I thought that was a very fair point, well put by the Labour Party just before the General Election.

My hon. Friend the Member for Dartford (Mr. Trew) has shown in a most illuminating piece of research that more than 60 per cent. of people with incomes up to £15 a week will escape VAT, and of those earning up to £25 a week more than 50 per cent. will also escape it. Surely the way to deal with the regressive aspect of VAT is to raise the tax threshold on incomes and to increase the child allowance, the married person's allowance and the single person's allowance. This is just what was done by my right hon. Friend in his last Budget, which allowed about £1,200 million in a full year to be devoted to this aspect. My right hon. Friend referred to the tax not being regressive, and these are the clear advantages which have to be balanced with the disadvantages of the tax.

One thing is clear. Not only are we to have one single rate compared with different rates, all of them much higher, in the European countries, but the revenue from the tax as a proportion of the total will be significantly lower than that of all the other countries. It will take up 7½ per cent. in this country compared with 24 per cent. in France and 16 per cent. in Germany. The reason why we can afford to have such a low rate of VAT is that we have such a high rate of Customs and Excise duties on hydrocarbon oils, alcohol and tobacco. We derive 20 per cent. of our revenue from duties on those items, whereas all the other countries in Europe derive under 10 per cent. This is a particular advantage in that we can concentrate taxes on expenditure on the relatively narrow field of what would not be considered to be essentials—for example, tobacco and alcohol—and we can spread VAT very widely at a low rate on other forms of expenditure.

Our traders therefore stand at an advantage compared with European traders both as to the rate and as to the operation of the tax with only one rate. The right hon. Member for Leeds, East mentioned the Richardson Committee, but that Committee was not considering this form of VAT. The question of zero-rating was not dealt with by the Committee. Compared with our European competitors, our exporters will have a direct advantage in being zero-rated, and another advantage in being able to claim their inputs after one month has elapsed instead of the regular three-monthly period. So this is not only a fair tax but a helpful tax both in the way in which it will raise revenue and in its incidence.

For that reason I cannot see how any exemptions can readily or easily be made. While I have the greatest sympathy with some of the causes which have been the subject of Amendments to the Bill, it is inevitable that if any exceptions are made the same results will occur as occurred with purchase tax and SET. They will be followed by appeals for further exemptions and further zero-ratings, which will make the tax administratively more difficult and will he bound to increase the rate. It is not right to isolate VAT from the other tax reforms. It is a notable achievement to have secured a single expenditure tax at a single low rate. It accords well with the Conservative Party's attitude to taxation, which is that taxes should be fewer, lower and simpler.

7.45 p.m.

Mr. John Cronin (Loughborough)

The hon. Member for Horsham (Mr. Hordern) has made an interesting and amusing speech and I hope later to cover some of the points he made. He suggested that our proper anxieties about the regressive nature of value added tax could be assuaged by the circumstance that the Chancellor gave away substantial benefits to the low income groups in the last Budget, but he overlooked that, at the present rate of inflation, those benefits will hardly be worth anything by the end of the year. That is not, therefore, a complete reassurance. The VAT will have a continuous built-in regressive effect on low income groups.

The Chancellor's speech contained no mention of the effect of the tax on the cost of living. I can understand the Chancellor being shy about this because one of the most deplorable aspects of the Government's record since they have been in office is the steady spiralling of costs which has bedevilled our economy. I hope, therefore, that the Financial Secretary will tell us what effect the tax will have on the cost of living, because we are very much concerned about it.

The effect of value added tax in other countries has been to produce a considerable increase in the cost of living. For instance when the Netherlands brought in VAT there was a 5 per cent. increase in the cost of living in three months. When Norway brought in VAT there was a 6 per cent. increase in six months. In Denmark there was a 9 per cent. increase in six months. These are all massive increases which occurred within a short time.

Mr. Togendhat

I am sure the hon. Member for Loughborough (Mr. Cronin) is aware of the danger of taking isolated figures. Since he has given those figures, will he tell us what was the rate of inflation in the countries concerned immediately prior to the introduction of VAT and immediately after the period he has mentioned, so that we can see the figures in context and not merely in vacuo?

Mr. Cronin

I do not carry around with me reference books containing these figures, and one cannot produce the figures out of one's head. It is important to remember what has been the direct effect of the introduction of VAT and there can be no doubt that in those countries it was extremely inflationary.

Practically all the troubles from which this country has suffered in the last year or two have been caused by the increase in the cost of living. The industrial unrest, the miseries of the coal miners' strike and the railway go-slow have all been direct effects of the rise in the cost of living. We should be glad to know that there will be no further large increase in the cost of living which will increase industrial unrest, cause more strikes and increase the misery of the low income group.

One important aspect of VAT is that its collection has a built-in inefficiency compared with purchase tax. As my right hon. Friend the Member for Leeds, East (Mr. Healey) pointed out, purchase tax was collected by about 2.000 civil servants from about 68,000 firms, but the collection of VAT will involve supervising the records of about 2 million firms. About half a million of those firms will be paying no tax whatsoever because they will be exempted and about1½ million firms will be paying tax. We understand that a further 6.000 civil servants will be required, but what tends to be overlooked is that a lot of the work of the Civil Service will be taken over by employees of the firms paying the tax.

The great objection to having more and more civil servants is that we should be paying people for non-productive work. Exactly the same consideration applies from the point of view of economics if a clerk in ICI or Unilever is paid to do a totally unproductive job. If we take 50,000 of the largest firms which will be paying VAT, they will each require at least one full-time employee, probably even up to two or three employees, to be engaged on this work. We can think in terms of at least a further 50,000 people who will be employed simply on carrying out the clerical work and the calculations involved in the VAT. It does not matter whether the 50,000 extra people are civil servants or are employed by private industry; they will still be doing unproductive work. They could be engaged in adding to the wealth of the country instead of being employed to fill in forms and make calculations purely for the collection of the tax.

What strikes me when I look at this system is the enormous number of anomalies and difficulties that will arise from the tax. First, one cannot help being impressed by the dilemma of the small trader with a turnover of less than £5,000 a year. He has to choose either to accept exemptions and to be free from tax, or to pay the tax. But if he accepts exemptions, he must absorb the tax paid by his suppliers which must in turn increase his costs.

Mr. Robert Boscawen (Wells)

Does not the same thing happen today with purchase tax when a small trader has to decide either to increase his trade above £500 or to avoid paying tax by keeping it below a certain figure?

Mr. Cronin

That is not the same thing. Purchase tax is fixed on definite parts of stock, whereas this tax is based on turnover. I suggest that the small trader will find his competitive value greatly eroded by VAT and will come out of it very badly indeed.

I turn to the sort of anomalies which will be created in terms of the television rental provisions. These arrangements play an important part in the leisure life of the country. What will happen to them when VAT comes into operation since these contracts are based on the assumption that purchase tax has been paid? How will these contracts work after April, 1973, when VAT comes in? This will cause all kinds of anomalies.

I suggest that the Financial Secretary should direct attention to the position of the retailers of food. A medium size supermarket probably deals with around 40,000 items per week. It may be said that since food is zero-rated this will be no problem, but it must be borne in mind that one-quarter to one-third of all goods sold in a supermarket are non-food goods. How will those establishments cope with the enormous problem of deal- ing with all the form-filling and clerical work involved in this tax?

Then we have the problem of the fitted carpet effect. House buyers who wish to avoid paying VAT and who have houses with built-in central heating, kitchen furniture, cupboards, cookers, carpets or any other fittings will find that they are free of VAT, but if they buy those things separately after they have bought the house extra tax will have to be paid. I am wondering how this will work in practice. Will it drive up the cost of houses even higher than it is at present? This must surely be the general effect.

Mr. Peter Trew (Dartford)

If the hon. Gentleman looks at Schedule 4, Group 7, he will see that zero-rating relates to items of builder's hardware… of a kind ordinarily installed by builders as fixtures". Fitted carpets are not ordinarily installed by builders as fixtures.

Mr. Cronin

I accept that as a helpful contribution. I was thinking that such things as central heating, refrigerators and kitchen furniture might be installed by the builder. I agree that fitted carpets would not come into this category. However, this does not detract from what is known as the fitted carpet effect which will cause extraordinary anomalies.

What will happen to a firm with a turnover of more than £5,000 which wishes to avoid paying VAT? It will simply break itself into several smaller firms each dealing with specific items of production. For example, a boat builder could break up his firm into separate segments, one part making hulls. one making engines and yet another manufacturing rigging and sails. What will happen to a person who seeks to avoid tax on that basis? This could be done in numerous areas of industrial life. I have mentioned only a few of the difficulties, but it seems to me that we shall look back on the days of purchase tax as being relatively free of difficulty compared with the sort of difficulties which hang over our heads in regard to VAT.

Finally I wish to say a few words about the regressive effects of the tax which embarrass hon. Members on this side of the Commitee. The Chancellor of the Exchequer said today that VAT was less discriminatory and indeed was neutral in its effect. We rather liked purchase tax because it was discriminatory and not regressive in its effects. Certainly we feel that VAT will be regressive. People who have any kind of social conscience take pride in the discriminatory nature of purchase tax, which can be used to some extent to redistribute income. Value added tax will have no such effect; it will be uniform in its effect in spite of the zero rating of some commodies and the exemption of others.

Purchase tax as employed by the Labour Government had a socially desirable effect. It is much more satisfactory that a mink coat worn by a successful actress should attract a higher rate of taxation than a wollen vest worn by a retirement pensioner. Surely it is better that jewellery should attract a much higher rate of taxation than, say, children's shoes and clothes. Even with zero rating, the poor will be proportionately much worse off under VAT.

We should be thankful that the Chancellor has introduced zero rating, but I should like to know why he has introduced in the Bill powers to abolish such rating. Has this some sinister significance for the future? Does he eventually intend to put VAT on foodstuffs? I think there can be little doubt that this is the first stage in achieving this discriminatory, reactionary and anti-social effect. I say without hesitation that the VAT will be a weapon in the hands of the present reactionary Government, a Government which my colleagues and I regard with the utmost distress. I shall vote with enthusiasm against this tax tonight.

8.0 p.m.

Mr. Christopher Tugendhat (Cities of London and Westminster)

First, perhaps I might revert briefly to a point made by the hon. Member for Loughborough (Mr. Cronin) early in his remarks when, in reply to an intervention of mine, he said that he did not carry all the relevant figures in his head and was not a walking encyclopaedia. I sympathise with the hon. Gentleman. I, too, do not carry all these figures in my head.

But I have been disappointed by the arguments that we have heard from the benches opposite, of which the hon. Gentleman's speech was typical, and the bringing out of the air of certain figures about certain foreign countries without putting them in context. It is possible that prises rose by X or Y per cent. in a given country after the introduction of a value added tax. That is all very fine and interesting. But if one does not know at what rate prices were rising beforehand and at what rate they rose afterwards it is difficult to see the significance of the figures being put forward in evidence.

The hon. Member for Loughborough may be right, but this constant bringing out of the air of foreign examples without putting them into context does not carry the argument about what will happen with the introduction of a value added tax in this country one way or the other.

Mr. Brian Walden

In view of the hon. Gentleman's wise caution against doing that, is not it foolish to cite foreign examples of how firms have been able to cope with the tax given a tax structure different from our own? Does not the Chief Secretary continually do that in these debates?

Mr. Tugendhat

If my hon. Friend the Chief Secretary did as the hon. Gentleman suggests, he would be running that risk. But there is a difference between what my hon. Friend has been doing and what the hon. Gentleman alleges. My hon. Friend the Chief Secretary spoke about the results of questions which had been asked of firms in countries which now have VAT. They were asked whether, if the VAT were abolished, they would be able to reduce their administrative staff. My hon. Friend reported that they had said, "No ". I think that that is fair. They were not asked whether the introduction of VAT had led to an increase in the number of people whom they had to employ. They were not asked to compare the position now with what it had been. They were asked what would be the position now if VAT were removed. I think that that is a reasonable pointer in this context.

Mr. Brian Walden

I accept that, but it cannot be used as an example for saying that the introduction of the tax in this country will not lead to an increase in administrative staff in business. That is such palpable nonsense that it is no example, and I am sure that the hon. Gentleman will concede that gladly.

Mr. Tugendhat

The hon. Gentleman and I are in danger of running into a dialogue, but I cannot let that pass as the hon. Gentleman put it. I think that the remark of my hon. Friend the Chief Secretary about the position here and the position as it would be on the Continent was fair. It suggests, therefore, that VAT as such does not lead to a great increase. I think that that is a reasonable deduction to draw.

I do not suggest that one can draw any profound conclusions for this country from that statement. But I think that it is a reasonable point to make, and, in any event, in this country we must also think in terms of the taxes that it is reducing. Without going into detail, I am sure that the hon. Member for Birmingham, All Saints (Mr. Brian Walden) will agree that the introduction of SET and the handling of it led to an increase in the number of people employed by companies for these purposes. To some extent, the hon. Gentleman is comparing apples and pears and not factors which are totally alike.

The other point which disappointed me about the arguments of right hon. and hon. Members opposite on VAT was the position of the Common Market. Here I revert to a point made by my hon. Friend the Member for Horsham (Mr. Hordern). There is no point in trying to hide the fact that the Labour Party was in favour of joining the Common Market on the right terms and that it remains in favour of joining if the right terms can be secured. Right hon. and hon. Gentlemen opposite have always said that they did not like VAT and that they would introduce it as one of the prices of going into Europe but not on its merits. I appreciate the caveats entered by Labour Party spokesmen. Nonetheless they said that they would introduce VAT if the right terms were agreed. It was not a matter like Commonwealth sugar or New Zealand butter, being put forward as a sticking point in the negotiations. The idea that VAT would be introduced if we joined was always accepted. Therefore, when we argue about VAT now, it is difficult to see the great point of principle dividing us. Had Labour secured the terms that it wanted, it would have introduced the tax. The tax cannot be that bad, otherwise it would have been elevated to the primary position of Commonwealth sugar, New Zealand butter and the other considerations which played such an active part in the conversion of the Leader of the Opposition away from Europe.

Mr. Dalyell

What baffles some of us who voted in favour of the principle of British entry is why the Government feel it necessary to bring VAT in so quickly. If the hon. Gentleman will tell us why it has to be introduced so quickly, he will do us a great service.

Mr. Tugendhat

The enlightenment is likely to be brighter or more illuminating if it comes from the Treasury Bench than from a mere back bencher. But it seems to me that there are substantial arguments in favour of doing it now rather than later. When a Government have committed themselves publicly to a certain course of action, there is much to be said for getting on with the job with a reasonable degree of haste—though not over-hastily. If traders, business and industry know that the Government are committed to introducing VAT and that the Opposition are committed to it if they get the terms that they want in the Common Market, delay only leads to difficulty and uncertainty. Once one is committed to a course of action, it is right to get on with the job and remove the uncertainty attending it. Hanging about in the way that some suggest will do no good and will lead to the kind of uncertainty that we see in the steel industry, which does not know its future because it cannot know the result of the next General Election. Having made their position clear, I believe that the Government were right to move reasonably rapidly.

I am afraid that I have been diverted from my two main points The first is that, whether or not this country joins the European Community, there are substantial arguments in favour of a value added tax. At present, some 40 per cent. of our export trade is with countries which either have a VAT or are proposing to introduce one. What it more, those countries constitute our most rapidly growing markets. When right hon. and hon. Gentlemen opposite were in power they used substantial and sensible arguments in favour of metrication on the ground of international standardisation, because of our trade being with countries which were largely metric. Similar arguments apply to a value added tax.

That apart, the fact, that VAT encourages exports and its lack inhibits a country in that regard is an important consideration. Voices are now being raised in the United States in business and industrial communities in favour of a value added tax which they feel gives Europeans an unfair advantage over them in export markets. This is an argument which deserves to be heeded in this country. Given the fact that so many of our principal trading partners are adopting this form of tax, it is a pity that we should gratuitously put ourselves at a disadvantage compared with them.

The other substantial point, which has been dealt with fully by many hon. Members on this side of the Committee and by some hon. Gentlemen opposite, including the hon. Member for Cornwall, North (Mr. Pardoe), is that in many ways VAT will enable indirect taxation to be more evenly and fairly spread. At present about 70 per cent. of consumer taxes in this country fall on tobacco, alcohol and the running of a motor car. This is a heavy concentration, and it bears particularly hard on the poorer section of the community. Of the remainder of our consumer taxes, a heavy burden is borne by a certain limited number of consumer durables such as refrigerators. Clothing, too, is taxed, and this bears very heavily on the less-well-off section of society.

Hon. Gentlemen opposite have frequently quoted the Richardson Report and made play of the fact that Mr. Richardson produced a report which was hostile to VAT but is now lending his considerable services to the Government. It is fair to point out that the excellent report on VAT produced by the National Economic Development Office when Sir Fred Catherwood was running it at the time of the Labour Government made a number of substantial points in favour of VAT, and the point that I have made about our present system of taxes bearing heavily on the less-well-off is one of the most important points in that excellent document.

I know that the right hon. Member for Leeds, East (Mr. Healey) is new to financial affairs. Perhaps it is fair to tell him that, rather than study the Richardson Report which came out so many years ago, the report published only three years ago when his Government were in power might provide a better source of information and ideas for him. I am glad to see that the hon. Member for Birmingham, All Saints shares that view. The point that I have made is a substantial one in favour of the tax, and it means that when the regulator is used it will cover a much wider segment of the economy and will not bear so hardly, unevenly and unfairly on certain industries.

VAT has been widely praised outside the House, and it is generally accepted within the House, whether or not one is in favour of the tax as such, that the particular VAT which my right hon. Friend the Chancellor of the Exchequer has produced is a good example of the tax. The single rate and the relatively low rate have both been praised. I wish to participate in the praise that has been lavished upon my right hon. Friend, but there is one point that I must make on that score.

I appreciate that my right hon. Friend has consulted many outside interests and that many industries, trade associations, and so on, have had an opportunity to put their views. I appreciate that this has perhaps arisen out of more consultation than has ever been known before. Hon. Members on both sides of the Committee approve of the Green Paper system of consultation and all the rest of it, but I find myself rather unhappy at the implications of some of the speeches of Treasury Ministers and of reports in the newspapers arising out of the guidance given by Treasury Ministers about their attitude towards the possibility of making changes in the tax as it goes through the House, and their attitude towards exemptions.

Much as I support the idea of consultations with outside interests, and glad as I am that Green Papers should be published, we must not forget—and I say this in all humility as a relatively new Member—that laws are made here and not in consultation with outside interests. I very much admire the elegance and simplicity of the proposals which the Chancellor has put forward, but I am sure that he would not wish to claim that they are perfect in any way and incapable of improvement.

There are some important anomalies concerned with the position, for instance —to give only one example—of those who write books, such as myself, who will be well treated, and I am grateful for that, and people who paint and participate in the plastic arts. I mention that as one example. There are many difficulties, and I hope very much that the mere fact that considerable consultation has taken place with outside interests will not be put forward by Ministers as an argument for not making changes in the place in which, after all, changes are supposed to be made.

With that one caveat, I praise the Chancellor for the simplicity and elegance of his tax and say that if he makes changes we shall take that as a sign of strength and not as a sign of weakness.

8.15 p.m.

Mr. R. B. Cant (Stoke-on-Trent, Central)

I shall be brief and make reference to only two points. I must confess that I am pro-Common Market and pro-VAT, but I shall faithfully follow my right hon. Friend into whichever Lobby he goes tonight.

I agree with all those who have said that in the world in which we live, in which other countries are not only applying VAT but are expressing interest in it, we have no alternative but to follow suit whether the tax is a good tax or not. The General Agreement on Tariffs and Trade will never have any great influence even on behalf of the economic masters of the world in the context of the reduction of non-tariff barriers.

We have been told that the changeover from purchase tax and SET will not have any effect on the redistribution of income. That may be the case although, from what I have heard, I do not think that that is altogether proven. Certainly the Government will be faced with a serious decision in the future when, whatever hon. Gentlemen opposite may feel, the need to gather in increasing amounts of revenue, for one purpose and another presents itself.

Although I am quite happy about the 10 per cent. with zero ratings, exemptions, and so on, I and, no doubt, many others on this side of the Committee will watch carefully to see precisely what the Gov- ernment do in the future, because I do not feel that increasing rates of VAT will make a contribution to the welfare of the poor—far from it. If the Government start increasing the rates of income tax or reducing the rates of corporation tax, then I, perhaps for a change, will join the critics on this side of the Committee on this issue.

I am not a smoker but I drink beer, and I am worried in case VAT is superimposed on the existing enormous excise duty on beer. If that were to happen, the lot of the beer drinker would be very unhappy indeed and I do not think that the Chancellor has as yet given us anything that would offer consolation. The main point on this is that when future Budgets come around we shall be asking in Written Questions for some calculation of the gini co-efficient of income distribution as a consequence of increasing VAT.

My second point is one that has been made by many others. Why 1973? I have no desire to save the Prime Minister from electoral defeat. I think he must have a fairly well-defined masochistic streak in him if, for whatever reason, he proposes to introduce VAT at the very time when he is impressing upon us that inflation is public enemy No. 1. Although there is a nice equation between purchase tax, SET and VAT we know from the introduction of decimalisation that somehow or other traders will make a profit out of it and prices are bound to go up.

Cannot the Government be persuaded to make at least a little contribution towards winning the battle against inflation? As we know, inflation leads to wage increases, strikes and the rest. Cannot the Government follow a modified Italian example, so to speak? This is my request. If the hon. Member for Horsham (Mr. Hordern) were in his place, knowing his almost pathological interest in the state of the money supply I think he must certainly endorse the view that to agree to the introduction of VAT at a time when the Government seem bent on doing everything possible, through the money supply, to increase prices is folly. My concern is simply for the effect that all this will have on the people.

Mr. Burden

I find the attitude of hon. Gentlemen opposite rather amusing because it has been evident that those who took part in our Common Market debates in 1967 have all been swept aside. They have gone and in their stead we have an entirely new Labour Front Bench now discussing this issue.

Although the previous occupations have been swept aside, their views cannot be swept under the carpet. It was strange to hear the hon. Member for Stoke-on-Trent, Central (Mr. Cant) say that although he agreed with the introduction of VAT he nevertheless intended to vote with his colleagues against its introduction. This is an almost farcial state of affairs.

On a personal note, I welcome the promotion to the Opposition Front Bench of the hon. Member for Birmingham, All Saints (Mr. Brian Walden). I have listened to his speeches on many occasions with great interest. He is always most articulate, and I am sure he will prove a formidable addition to the Opposition Front Bench.

However, the hon. Member for All Saints made an unfortunate intervention earlier when, as one of my hon. Friends was discussing SET and pointed out that the right hon. Member for Cardiff, South-East (Mr. Callaghan), when Chancellor of the Exchequer, introduced it to drive excess labour out of service industries and into manufacturing, he leapt hurriedly to his feet and rather denied that that was the original purpose of SET. I trust that the hon. Gentleman now agrees that SET has absolutely failed in its objective.

Mr. Brian Walden indicated assent.

Mr. Burden

I am glad that the hon. Gentleman assents to that proposition. It has been a shockingly bad tax in every way.

Instead of stimulating employment in manufacturing, SET made everybody in the distributive trades see how much staff they could cut and there was enormous growth in self-service activities almost immediately after the introduction of this shocking tax. Above all, it showed the bad judgment of the Labour Party in fiscal matters of great importance.

Bearing that in mind, perhaps the speech of the right hon. Member for Leeds, East (Mr. Healey) was not surprising. In the past he has been greatly involved in defence matters, matters com- pletely different from those with which he has now become involved. Perhaps the Labour Party has had some difficulty finding men of Cabinet rank who are not committed to supporting the introduction of VAT. On this score, the right hon. Member for Leeds, East is clean, as are most of the present occupants of the Opposition Front Bench in this debate. Although they are clean on this score, they have a lot of explaining to do because we want to know exactly where they stand on various other matters.

When the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) was Chancellor he made it clear that in his view VAT would have to be introduced if we entered the EEC. But his colleagues on the benches opposite now imply that purchase tax is sacrosanct. We have gained the impression this afternoon that, whatever happens in Europe. the Labour Party will hang doggedly on to purchase tax.

Do hon. Gentlemen opposite appreciate that we are the only country with purchase tax and that a considerable number of countries have introduced VAT? Why, if we are so right—presumably those other countries have examined these matters—and if purchase tax is so much better than VAT, have they not introduced purchase tax into their fiscal systems?

I trust that the spokesman who winds up the debate for the Opposition will tell us the present view of the right hon. Member for Stechford on VAT. May we also be told the views of those financial spokesmen on the benches opposite who were at one time negotiating for Britain to enter the Common Market?

VAT becomes chargeable only at the point of ultimate sale to the retail customer. Although there are intervening charges, they are all paid back, until the final and ultimate point of sale to the customer is reached. Indeed, it has other advantages over purchase tax. I know from considerable experience that one of the advantages is that now, when the value added tax is applied, the retailer does not have to lay out large sums of money in tax before he sells the article. He collects it, and it is then paid to the Government. Indeed, there is also the other extremely valid point that it does not mean that if an article does not sell readily he has paid tax at a rate considerably above the real selling value of the article.

Another point is that under VAT it is not possible for the retailer, as now happens with purchase tax, to charge his retail price not only on the price of the article but also on the tax, because with VAT tax is imposed afterwards, and this should help to some extent to keep down prices.

[Mr. E. L. MALLALIEU in the Chair]

8.30 p.m.

I refer for a few moments to the present attitude of the Labour Party. Are they in favour of entering the Common Market?

Mr. Deakins

No.

Mr. Burden

There we have "No ". I should be happy if the right hon. Member for Leeds, East would intervene and say whether it is still Labour Party policy to enter the Common Market if they consider the terms reasonable.

Mr. Healey

Of course it is, and we have said so a million times. What the hon. Member seems incapable of recognising is that, just as he and his hon. Friends regard the common agricultural policy as a ludicrous nonsense which they have to accept for the sake of what they see as the benefits of entering, we regard VAT also as a ludicrous nonsense which we would have to accept if we could get satisfactory terms on other issues, including, above all, the common agricultural policy.

Mr. Burden

That is a very interesting admission. Until the right hon. Gentleman intervened, the hon. Member for Walthamstow, West (Mr. Deakins) said, "No, we do not want to enter the Common Market—full stop". Then, when I offered the question to the right hon. Gentleman, he said, "Yes, it is still our policy to go in if we can negotiate the right terms". No one in the country, certainly no one in the House, has heard one word from the Labour Party about what they would consider to be acceptable terms.

Mr. Deakins

Rubbish.

Mr. Burden

It is no good the right hon. Member for Leeds, East screwing up his eyes, because that is so. He has also, this afternoon, launched an absolute all-out attack on VAT. Yet a moment ago he said" If we could get the right terms in other directions, then we would accept VAT ". He has also said that if a Labour Government could get the right terms in other directions, they would accept the common agricultural policy.

The previous Prime Minister stated emphatically—it is no good the right hon. Gentleman swinging about—that this is one of the prices of entry to the Common Market, that the common agricultural policy is not negotiable and that it was accepted by the Labour Party. Equally, he said that VAT was one of the things that they would have to assume. Earlier today, when I intervened during the right hon. Gentleman's speech he tried very hard to write-off something that his right hon. Friend the then Prime Minister had said about the whole question of VAT. Of course, we accept that it depended upon getting the terms that the Labour Party considered were right. But which part of the Labour Party? Quite a few right hon. and hon. Members of the Labour Party sitting below the Gangway say "We would not go in in any circumstances".

Mr. Healey

What about differences on the hon. Gentleman's side?

Mr. Burden

No, the right hon. Gentleman must just take it. Quite a number of hon. Members opposite say "In no circumstances will we go in". There is certainly a considerable number of influential right hon. and hon. Members of the Opposition, who were involved in the negotiations conducted by the Labour Government, who say "The terms now are absolutely right and we could get no better". There are also other hon. Member of the Opposition who say "Yes, but because it was the Tories who negotiated these terms, we shall say that we shall go back to try to get some better ones".

So for which part of the Labour Party does the right hon. Gentleman speak? What his right hon. Friend the then Prime Minister said about VAT is in no doubt. I hope that the right hon. Gentleman will forgive me for having the temerity to suggest that if he is to take on the task of shadow Chancellor, he should take an early opportunity of looking up some of the things which some of his predecessors have said, both in office and as shadow Chancellor. If the right hon. Gentleman were to do so he would find that in the debate on the European Communities in 1967 the then Prime Minister said: Here we are talking about Article 99 of the Treaty of Rome"— this refers to VAT— which provides for the harmonisation of turnover taxes, excise duties and other forms of indirect taxation. In making this provision, the immediate concern of the countries of the Community was to get rid of the distortions to trade which resulted from the existence in some of the countries of what are called cascading or cumulative turnover taxes for which only arbitrary allowances could be made as the goods concerned passed from one country to another.… It was only a few weeks ago… that agreement was reached on even the first step towards this harmonisation. The agreement was that by 1st January, 1970, existing turnover taxes would be replaced by the value added tax system. The agreement at present allows exemptions for particular categories of goods."—[OFFICIAL REPORT, 8th May, 1967; Vol. 746, c. 1089–90.] It is no good the right hon. Gentleman saying that there is no need now to do anything until 1978. In 1967 the right hon. Member for Huyton (Mr. Harold Wilson) was negotiating to join the Common Market and, had he succeeded, he tacitly accepted in those remarks that this would have to be introduced by 1970.

Mr. Healey

Oh, no.

Mr. Burden

Oh, yes, he did. The right hon. Gentleman accepted that VAT would have to be introduced. The Opposition Front Bench, which has been fulminating about VAT all day long and how they will retain purchase tax, now admit that, if their aims to go into the Common Market had succeeded, they would have introduced VAT and that it must be introduced if we go into the Common Market.

I feel sure that the hon. Gentleman who is to wind up will make it perfectly clear that, whatever arguments may have been advanced today, the Labour Party, if it succeeds in its aim of going into the Common Market on terms which Opposition Members still say that they will negotiate, will automatically accept that which Opposition Members have today stated is completely unacceptable —namely, VAT.

In any case, what is VAT? What is the difference between purchase tax and value added tax? In effect, although the range of articles may differ, the taxes do precisely the same thing. Purchase tax increases artificially the basic price of the article to which it is applied. The value added tax ultimately does precisely the same.

The value added tax will be of great advantage in many ways. It will certainly be of great advantage to British exporters. The removal of SET will be acclaimed by the many overseas buying houses in Britain which have only one object—namely, to buy British merchandise for export—and whose costs here have been escalated by the imposition of SET. The removal of SET will ease their costs in Britain and help our exports.

I believe that the introduction of VAT will do away with something which has for a long time been a blight on manufacturing industry. I refer to the uncertainty which is created in manufacturing industries and in wholesaling by possible changes of purchase tax. It will give confidence to manufacturers and will not increase the cost of living.

The argument that it is going to bite very hard on the poorer members of the community is completely fallacious. If we look at the range of goods on which purchase tax is already placed it will be found that the Opposition have already increased the cost of living through taxation and increases of purchase tax on a great many of the poorer members of the community on whom the proposed value added tax will have far less impact than purchase tax has had.

Mr. Dalyell

I do not know whether the hon. Member for Gillingham (Mr. Burden) was fulminating, but his fulminating was not entirely in the direction of Clause 1.

I was rather curious about what was going on in the head of the Minister of State, Treasury whom my hon. Friend the Member for Birmingham, All Saints (Mr. Brian Walden) and I were interrupting. As the hon. Member for the Cities of London and Westminster (Mr. Tugendhat) said, there is a real issue here and if the only defence his hon. Friends can give is that we must not hang around, there is a very real question to be asked.

My right hon. Friend the Member for Leeds, East (Mr. Healey) asked "What is all the hurry about?" I can understand an obligation to introduce VAT by 1978 but it seems extraordinary, when there are so many corrections to be made in the legislation, that we have to have it this year. Is there no more to be said on this issue than was said by the hon. Member for the Cities of London and Westminster that, once having decided to do it, it must be done quickly? If there is such a hurry, what thought is being given to the transitional period?

The right hon. Member for Thirsk and Malton (Sir Robin Turton) and other hon. Gentlemen have been asking through out the day about the transition period for certain industries. British industry is extremely concerned about what will happen. I have no knowledge of the clothing industry but many of us have constituency interests in the food industry. To what extent has any thought been given to the food industry in the amount of flexibility the Government are to offer in relation to the so-called holiday period?

I will return to a subject I raised in an intervention. Manufacturers in the cake, biscuit, chocolate and confectionery industry, as my hon. Friend the Member for Birmingham, Northfield (Mr. Carter) knows very well, are desperately concerned. I speak on behalf of a firm in Livingston new town and a number of other new firms but he speaks of a wider industry. There was a conference during the week-end, the annual general meeting of the Cake and Biscuit Alliance, where it was spelled out in some detail exactly what would happen. I give this as one example for time reasons but there are many other examples.

At present, with few exceptions all these goods bear some degree of purchase tax as they leave the manufacturer. So, without special action, all stocks in the hands of wholesalers and retailers on 1st April will have borne purchase tax and will have to bear VAT. To avoid this the so-called holiday period from taxation, needs to be announced, first well in advance, and, secondly, from 1st January, 1973, for special Easter goods, and from 1st February, 1973, for other goods.

This is perhaps not the time to go into the details of the problems of the confectionery industry. However, for how long are we to be told by the Tory Front Bench "It is all a matter of negotiation. Nothing has been decided, there has to be consultation with people outside the House, and then we will tell you"? There seem to be issues of considerable substance involved. There is no reason why we should not be told at a very early stage precisely what kind of tax holiday period the Government Front Bench have in mind. If the Financial Secretary shakes his head knowingly, will he take this opportunity of clearing the matter up? There may be a good reason but none of us have been told throughout the day the reason for the hurry or what is to be done about the transition period. If I am making invalid or lightweight points, let us be told, because it will shorten my speech and possibly some of the proceedings in Committee.

I can only take it, from the silence of the occupants of the Government Front Bench on a fairly easy matter on which they should be forthcoming, that either they do not know or there is no good will. If this is to be their attitude throughout these proceedings, some of us will be more long-winded than we otherwise would be.

8.45 p.m.

Mr. Sheldon

We heard my hon. Friend the Member for West Lothian (Mr. Dalyell) ask whether his points were invalid or lightweight. Those of us who have had the pleasure of knowing him over many years know that those are adjectives which we would least ascribe to points or questions which he puts before this Committee or any other body before which he argues. His point was important. We have not had an answer to it so far from either Ministers or backbenchers opposite.

What is the reason for the hurry with the introduction of this legislation? We know, with some degree of certainty, that the Chancellor of the Exchequer has a great yearning to go down in history as one of the fundamental reformers of the tax system in this country. I should be the last to wish to deny him that position, as this is a matter in which I have been most interested over many years.

Suggestions are frequently made that the reform of the tax system is the prelude to the improvement of the economy. When arguments of that kind are put forward I have to voice my scepticism.

Looking at successful economies throughout the world, I seem to find that they owe little to the tax laws within which those countries operate. I will give one example which might serve as a remind of the limitations of tax upon economic performance. I refer to Germany. At the time of Germany's economic miracle, at the time when it was expanding at a faster rate than any other country in Europe, it had to suffer the enormous problems, complexities and injustices of its cascade tax, when it put tax upon tax upon tax as goods made their way from one industry to another and finally to their consumers. At that time Germany was undergoing its own economic miracle.

It is important for us to be clear that at the end of the day it will be little distinction for the Chancellor if he busies himself with these tax reforms while at the same time we endure the problems of 1 million unemployed, low investment, and minimal growth.

I mention this not in any carping spirit but because it is important to see tax reform in its proper perspective. Although this is a matter of great importance which requires our close attention, it cannot be a substitute for economic strategy, only a supplement to it.

I do not have a frantic like or dislike of the value added tax. It is supposed to be a tax on consumption. However, like many taxes, it can be looked at in different ways. After all, it is a tax on added value. The value added, as goods pass through any particular firm or factory, is a combination of both the payroll and the profits tax. It is the payroll—all the salaries and wages—and the profits taken by an enterprise. Therefore, we could call it a payroll and profits tax, because that is what we are taxing.

What makes the value added tax different from a payroll and profits tax? Many of my right hon. and hon. Friends would have no quarrel with a payroll and profits tax. The Committee will recall that I and my hon. Friend the Member for Heywood and Royton (Mr. Joel Barnett) have, year after year, put forward proposals for a payroll tax to replace SET. But what makes it different from the kind of payroll and profits tax that so many of my hon. and right hon. Friends would like to see is the emphasis by the Government that the tax must be passed on, or may be passed on, and this makes it a consumption tax. If we think in terms of manufacturers doing their best to minimise the tax by efficiencies of labour and modest restraint in profits, it can be seen that the difference is in the emphasis rather than in the design.

Mr. Geoffrey Rhodes (Newcastle-upon-Tyne, East)

I am following my hon. Friend's point closely, but is it not a fact that there is no real evidence from the use of VAT within the Common Market that what he is suggesting has happened? Any close examination of the incidence of VAT within the Common Market and I spent a lot of time in the Community countries when the tax came in—shows that it was passed on to the consumer. Those hon. Members on the Conservative benches who opposed selective employment tax on the ground that it was passed on to the consumer are inconsistent now in supporting VAT. I can speak with a clear conscience on this because in eight years on these benches I have never voted in favour of SET.

Mr. Sheldon

My hon. Friend's record on this matter is well known and he is amplifying the point I was making that the value added tax to be introduced by the Government is a tax on consumption because they are clearly urging that the tax be passed on. But, if in the alternative form it was urged that the tax be not passed on the same method would be used to tax payroll and profits. This is the point I was making, and my hon. Friend quite rightly says that the way in which the value added tax has been operated and the way the Government will operate it will pass it on to the consumer.

I look for a number of qualities in any new form of taxation, and for me there are four simple tests. A good tax should raise money according to the ability of the individual or the organisation concerned to pay. It should be fair and preferably should help towards a greater redistribution of wealth. It should have beneficial effects upon the economy and it should have ease of administration. In this last respect we must consider the additional 6,000 civil servants who will be needed.

The Chancellor of the Exchequer said that the value added tax had been praised because it was neutral. He said that this was a commendation for the tax even in the eyes of those who opposed it. To me this is not an advantage. I do not see any benefit from a tax which is neutral in its effect. A good tax should have some social purpose as an essential ingredient in it. There cannot be anything apparently more neutral than a poll tax, and that is hardly a good tax.

As my hon. Friend the Member for East Stirlingshire (Mr. Douglas) said, this VAT is regressive. If it is desired that an essential ingredient of a tax system is that it should have some social purpose it must discriminate. Where there is discrimination there must be categorisation, and once there is categorisation there are anomalies. This is an inescapable element of a fair tax. If a tax does not have a social purpose and it is neutral it can be efficient but it will also be unfair. What I have against the value added tax is that it has no social purpose and is neutral. Worse than that, it has gross anomalies.

With purchase tax we had a system which was basically fair, because it was discriminatory. Of course there were anomalies, because there was an attempt to redistribute, to charge more for certain articles held to be luxuries and less for those held to be necessities. But the anomalies of purchase tax were an essential price for the fundamental fairness that underlay the system. We find that the value added tax is unfair; it is not discriminatory, yet it has the added bonus of giving anomalies as well. At least the anomalies of purchase tax were there for a social purpose. The anomalies of value added tax are inherent in the tax, and it offers no advantages in compensation.

Therefore, we on this side say that we should have made a neutral value added tax discriminatory in other ways. We should have attempted to introduce changes in other kinds of taxation to alter the neutral effect and provide discrimination of the kind we had in purchase tax, by an amount that would bring about a reduction in the prices of those goods which we hold to be essential for the wellbeing of the people of this country.

The odd thing is that the principle that there should be some discrimination is one which the Government have accepted in the end. But, most peculiarly, they felt it was unique and could apply only to motor cars; they conceded the principle that purchase tax should go in hand with value added tax but said that it would apply only to motor cars. We on this side should ask why the tax was exclusively reserved for motor cars. Why was it not considered for any other article of a high luxury kind?

Let us look at some of the anomalies. We can have a lot of fun with them. I shall mention just one or two now. Under the tax we have anomalies which have nothing to do with fairness, which either result from bad drafting or are inherent in what is an unsatisfactory tax. For example, we are now to tax small matters like distilled water, even the water that goes into iced lollies. Those from the north who come up for the Cup and charter an aeroplane will have to pay tax, but if they go to Paris they will pay no tax. Those who finally depart this life depart from it in a partially-taxed coffin, wrapped up in a wholly-taxed shroud. We can go on and on with the anomalies. The important point is that they are obtained without any improvement in the redistributive effects of a tax and without any attempt to relieve some of the very important elements that should be free from tax in the way that any socially-just economic policy should be able to provide.

I do not believe, and nothing I have heard in the debate has led me to believe, that the economy will be improved now or in the next few years as a result of the introduction of the value added tax. Therefore, we must ask, as my hon. Friend the Member for West Lothian asked, why it is being introduced now. The value added tax and the car tax are to bring in about £1,600 million in a full year. The old purchase tax and selective employment tax, taking the reduction in the 1972 rates of tax, brought in slightly more. So there is no increase in revenue on an annual basis. The sums are roughly the same. Comparing the £1,600 million with the £16,000 million-plus that was to be raised in taxation in 1972–73, one must ask why the Government are juggling about with a tax whose yield is not large by comparison with the total revenue raised by other forms of taxation.

9.0 p.m.

We have the inconvenience of this Bill. Do not let anyone be under the impression that the part dealing with VAT is only 50 Clauses and so many Schedules. A whole host of regulations and orders are not included in the Bill when many of them should have been. Had they been included, there would have been a mammoth Bill. Part of what should have been included in the Bill has been left out, just as so much has been left out of the European Communities Bill in a manner which we find unsatisfactory.

Even accepting that the Government believe the price to be worth paying, we must ask what their final intentions are. They have not gone to all the trouble of engaging 6,000 extra civil servants merely to deal with the problems of evasion which my right hon. Friend spoke about, nor just to replace one tax with another. That cannot be what it is all about. The new tax will not improve the economy. It is unnecessary for entry into the EEC. So we must probe the Government's true intentions.

We get a clue in the rate of the tax—10 per cent. It is a round number, and an easy number to start with—and an easy number to raise during the years to come. We did not get a satisfactory answer even when the Chancellor intervened to say that that could not be applied to food without the consent of the United Kingdom Government. He did not give us the views of the United Kingdom Government. Are they firmly against taxation on food? Is it their intention to resist the taxing of food? Of course we know that it could not be applied to food without their consent, but what are their intentions? This is a suspiciously easy entry into the EEC, and the new tax is something that we should watch with great care because it is clear that the Government, with all the effort and discussions of the last year or so, have not gone to all this trouble just to get a replacement for purchase tax. There is more to it than that. We ask the Government to tell us and not keep us in the dark as they have kept us in the dark on a number of other matters.

The Bill manifestly needs considerable amendment. The Financial Secretary to the Treasury told us in the debate on the Budget when talking about the staff of the Customs and Excise: They have received more than 700 representations about VAT and have discussed it with more than 300 groups, in some cases on a number of occasions. As a result, we have been able to meet many of the points made. Later, he said: This means that we cannot, having accepted the principle, reasonably at later stages begin to accept this or that Amendment to include or exclude this or that detailed item."— [OFFICIAL REPORT, 23rd March, 1972: Vol 833, c. 1803–5.] As final confirmation of the view of the Government we have today's article in the Financial Times over the by-line of John Bourne, Lobby Editor, The heading is: Barber to stand firm on VAT". We know that the Government will resist all these Amendments. I find it insufferable that the Government should consider that because this Bill has received the scrutiny of industry and commerce, because it has been inspected by the Civil Service, it is so perfect that it need not be looked at or amended here. If the House of Commons cannot change the Bill I do not know what is the purpose of bringing it to this Committee. We are not experts no one here ought to claim to be experts—but what we ought to know, what we ought to repre. sent, is what the British people consider to be a fair tax on any of these matters.

The Government take a grave risk if they ignore the opinion of the people in the final formulation of this tax. There must be the acceptance of an understanding that this Bill, like any other which comes before the House or a Committee, will be amended in the light of argument and discussion. In considering this Bill with its massive allocation of orders and regulations of a kind rarely seen and reminiscent of the European Communities Bill it may be that our scrutiny will show our procedures to be rather inadequate. It is clear from some of the things said by members of the Government about the Bill that what they were thinking about was not what was in the Bill but what was in the regulations and the orders which they have discussed but which this Committee has not yet seen.

One of the saddest aspects of this Bill for me has been the way in which the House of Commons has been excluded from discussion. Like many others, I have had discussions with industry on various topics to do with the Bill. On one occasion I was discussing this with a number of people from an industry and they asked me whether I had read the discussion paper circulated by the Government. I was ashamed to admit that I had not seen it because I was not allowed to see it. This veil of secrecy which the Government have thrown over their proceedings extended to refusing to give me permission to see a document which was freely circulated within industry. There have been a number of such documents. I have tabled Written Questions and I have asked the Financial Secretary whether I could see those documents and he has refused. So we come to a debate of this kind when the Government say they have had representations from industry and discussions with it, when it is said that there has been scrutiny by the Civil Service, but the House and this Committee have been excluded from it. It is sheer effrontery to come to this Committee and say that there will be no Amendments. This is intolerable and unacceptable.

There is a need to amend their Bill more than most Bills. This arises simply from the points of contact which it has with the community at large. There are a number of matters which we discuss in Finance Bills which have limited application. This Bill applies to every man, woman and child in the country. It deals with children's clothing, with people who feel ill and go to the chemists, with every small shopkeeper, and when the Chancellor talks about his generous tax exemption limits for traders there will be a hollow laugh from the cigarette and tobacco kiosks which will find themselves having to pay VAT and having to organise themselves for it.

In this connection I want to quote from a letter in The Times Business News of 3rd May dealing with this generous exemption limit for small traders. It said: Not many retail businesses are making much of a living for their owners on a turnover of less than £5,000. So when MPs buy their next packet of cigarettes from a little old lady in their station kiosk, they should spare a thought for the VAT problems she will have next year. And the thousands like her. This generous exemption limit will produce not only problems for those people but also the difficulties of evasion and avoidance to which my right hon. Friend the Member for Leeds, East (Mr. Healey) referred.

We must remember the last words spoken in the House of Commons by the right hon. John Boyd-Carpenter in a speech to which many of us listened with affection. He said that any Chancellor of the Exchequer must come to the House prepared to make some concessions. The Chancellor of the Exchequer would be flying in the face of precedent if on an important new tax he failed to accept some of the arguments put to him which by their very nature he will not hear from industrialists and civil servants. He should be prepared to keep an open mind and not close it as he seems to have closed it before coming to the Committee.

The VAT is a new and complex tax. There is no immediate requirement for it and we of the Opposition—and I am hopeful that many others in Committee will join us in this—will seek to amend the Bill during our long discussions. I do not believe that a case has been made out for VAT in this form at these rates and at this time, and I shall ask my hon. and right hon. Friends to oppose it.

Mr. Higgins

In replying to the debate on the Motion "That the Clause stand part of the Bill" I will first comment on one or two of the speeches made by right hon. and hon. Gentlemen opposite. Many hon. Members on both sides of the Committee have said that they believe the time is ripe for reform of our indirect tax system, and the principle of the tax which we are debating has been endorsed by several hon. Members on both sides of the Committee.

The hon. Member for Sheffield, Attercliffe (Mr. Duffy) said that we should consider VAT on its merits. He said that it is admirably designed for a consumption-oriented tax; that it is nondiscriminatory; that it will restrict avoidance and evasion—a point which is somewhat in conflict with what the right hon. Member for Leeds, East (Mr. Healey) said in opening the debate; that it is simple in practice and broadly based in application; that it will be a useful instrument for economic management—a point which the hon. Member for Ashton-under-Lyne (Mr. Sheldon) does not seem to appreciate and that we should adopt VAT even if we were outside the EEC. The hon. Member for Attercliffe went on to make points of criticism of which I have taken careful note and to which I shall come presently, but I agree very much with what he said and there is merit in the reasons he gave for VAT. The hon. Gentleman went on to say that VAT is not a miracle. I am even prepared to agree with him on that. Nevertheless it is a major part of the reform of taxation in which the Government are engaged, a reform which is generally recognised as the most important this century.

9.15 p.m.

Some points have been raised which are based on misunderstandings and will be more appropriately taken up when we discuss the details of the various Clauses. I would not in any way wish, as the hon. Member for Ashton-under-Lyne has said, to anticipate those debates. We hope that there will be careful scrutiny of the Bill. I agree with the hon. Gentleman that this is a matter in which the House of Commons has a vital role to play. I hope we shall be giving this matter detailed scrutiny as it proceeds on the Floor of the House. I made this absolutely clear in the course of the speech to which the hon. Gentleman referred. I said that I would not wish to anticipate the views expressed in Committee or on Report.

Having started on that non-partisan note, I turn to the speech of the right hon. Member for Leeds, East. I must confess I cannot promise to be non-partisan about that speech, which bore a remarkable resemblance to the speech delivered by the right hon. Gentleman on Second Reading. Apart from one or two passages, it was almost identical.

Mr. Healey

Why not?

Mr. Higgins

The right hon. Gentleman asks "Why not?" I hope we are not going to have the same speech on every Clause. I hope we shall have careful detailed scrutiny based on sound homework. I cannot say that the right hon. Gentleman's speech seemed to reflect any great depth of homework. I am sorry to say I found some of his remarks in many ways irresponsible. He suggested that I should take up these matters in my winding-up speech and I propose to do so.

I intend to deal with the right hon. Gentleman's comments on enforcement. I will read carefully what he said, but my hon. and learned Friend the Member for Southport (Mr. Percival) drew attention to one of the right hon. Gentleman's statements that the Commissioners will have the power to convict and fine. This is simply not the case. It is irresponsible for any hon. Member, particularly a right hon. Member on the Opposition Front Bench, to seek to put forward early in the opening stage of our debate that kind of remark, for which there is no foundation. This is a serious debate and this is why I considered it right to intervene in the right hon. Gentleman's speech to put on record that I thought he was wrong on a number of points.

Mr. Healey

The hon. Gentleman will recall that his right hon. Friend the Chancellor of the Exchequer was deeply uneasy about Clause 38. Of course the Commissioners themselves do not constitute the court, but they present the case for prosecution. The powers given to the courts by the Bill are totally without precedent in the jurisprudence of this country and have come under the most serious attack from the Presidents of the Bar Council and the Law Society. This is a serious point and I hope the hon. Gentleman will not try to ride away from it with a totally irrelevant piece of debating detail.

Mr. Higgins

The right hon. Gentleman is wriggling and he knows it. The fact is that he made an irresponsible statement this afternoon. We can return to this point at a more appropriate stage in the Committee. The right hon. Gentleman also seeks to put into my right hon. Friend's mouth words which he did not utter. In my view the right hon. Gentleman was irresponsible, and again we shall be happy to answer his points later in the proceedings on the Bill.

The second point I wish to take up is the extraordinary misapprehension of the right hon. Gentleman about the position of potato crisps and caviare. It was the Labour Government which put the tax on potato crisps in the first place, and it is the present Government which are reducing the tax. The change to VAT will reduce it still further.

Mr. Joel Barnett

Will the hon. Gentleman allow me to intervene?

Mr. Higgins

No; I should like to finish this point. We have not taxed caviare and the right hon. Gentleman when in Government never put forward a proposal to do so. I wondered why this should be so. I recall the statement by Hamlet, in talking to the players: The play, I remember, pleased not the millions; twas caviare to the general. No doubt the right hon. Gentleman was more preoccupied at the time with generals than with caviare. However, as I say, we have narrowed the differential between the tax on potato crisps and the tax on caviare.

I also take up the more important point that the right hon. Gentleman made—

Mr. Barnett

Before the hon. Gentleman goes on—

Mr. Higgins

No. I shall not give way. I have a great deal to say. The right hon. Gentleman—

Mr. Barnett

Will not the hon. Gentle. man give way?

Mr. Higgins

No. The right hon. Member for Leeds, East made a very serious point about the ability in the Bill to increase taxation by order. He made a number of statements, and he repeated the point that he had made on Second Reading. I take it up now because I do not wish there to be any misunderstanding.

In his Budget Statement my right hon. Friend the Chancellor of the Exchequer explained that in order to help forward planning he proposed to announce a year in advance the rate which the tax was likely to be. He prescribed in the Finance Bill a rate of 10 per cent. But in order to allow for the needs of economic management between now and the time when the tax comes into operation Clause 9(2) provides for a once-for-all power to substitute by Treasury order before 1st April, 1973, a rate not lower than 7½ per cent. nor higher than 12½ per cent. There may have been a misunderstanding of this provision. I make it clear that it is a once-for-all provision as distinct from the VAT regulator power contained in Clause 9(3).

The once-for-all power in Clause 9(2) can be used only before the tax has started. Unless economic circumstances require the operation of the power, the starting rate will be 10 per cent. If there needs thereafter to be a change my right hon. Friend has taken power to do that. The regulator power in Clause 9(3) will enable the rate of VAT to be altered by order up to 20 per cent. of the existing rate after the tax has been introduced.

On Second Reading the right hon. Member for Leeds, East said that the Government were giving themselves power continually to increase the rate of VAT by Statutory Instrument. The right hon. Gentleman said: They are giving themselves power in the Bill to make the rate 121 per cent. even before the tax comes into operation, to go up to 15 per cent. in 1974 and up to 18 per cent. in 1975. They propose to take power to do this simply by Statutory Instrument, debated at the fag-end of a busy day in this House…"—[OFFICIAL REPORT, 20th April, 1972; Vol. 835, c. 809.1 That is not the case, and we ought to be clear what the position is. If one studies the Bill the once-for-all power could, if the economic management necessitated, raise the rate to 12½ per cent. before the tax came into operation. In theory if it in turn became necessary to use the regulator power during 1974 to increase the rate of tax, a 12½ per cent. rate could be increased to 15 per cent. But such an increase would have to be consolidated in substantive legislation before any increase could be made under the regulator power. This would give the fullest opportunities to discuss the matter in Finance Bill debates. There can be no question of a second increase under the regulator power in the way that the right hon. Gentleman suggested. If that is so, I presume that the right hon. Gentleman will wish to withdraw what he said on Second Reading.

Mr. Healey

Certainly I do. I admit I was mistaken on Second Reading. However that was not the point I made today. My point today was one that the hon. Gentleman has confirmed, which is that it is open to the Government under the powers that they are giving themselves in the Bill within a year from now and within a week of the coming into operation of VAT to impose a rate of 15 per cent. over all, and, furthermore—

Mr. J. Bruce-Gardyne (South Angus)

Or 5 per cent.

Mr. Healey

—to increase the coverage so that it covers all the items at present zero rated. The hon. Gentleman is not disputing that, and that was the whole burden of the point I was making this afternoon.

Mr. Higgins

The final point made by the right hon. Gentleman arises on another Clause, and no doubt we shall debate it at length when we get there.

I wish to clarify the position, and I am grateful to the right hon. Gentleman for saying that he was mistaken on Second Reading. We are glad to have his correction on the record. The point I want to make is a simple one. It is that the powers are symmetrical. They are there both to increase tax by this amount and to decrease it by this amount.

If the public are concerned about this, I can only tell the right hon. Gentleman that we on the Government side of the Committee are happy to stand on our record of tax changes between 1951 and 1964 and between June, 1970, and today. Whether the public would feel the same confidence in the right hon. Gentleman's record, I leave them to decide. It is extraordinary that the right hon. Gentleman should put up this enormous bogey man when our record is as good as it is and that of the party opposite is just the reverse.

I now turn to some other points which have been made. Whatever the views about the economic merits of VAT, since the publication of the White Paper there has been widespread recognition of the way in which the VAT system has been discussed with the parties involved. I do not accept the point made by the hon. Member for Ashton-under-Lyne. There is a strong case for doing this in advance of introducing legislation so that the legislation is in the best form possible by the time that it comes to the House, which can then scrutinise it in the normal way.

The preparation for this change has been the most thorough in modern times. The consultations are continuing because many technical questions have to be ironed out and we are doing as much work as possible on this. If the House approves the Bill, by the end of the summer explanatory literature will be sent to as many firms as possible setting out the mechanism, scope and coverage of the tax and what people will have to do. Hon. Gentlemen opposite have urged that we should give the maximum publicity to this tax so that people will understand it, and that is what we intend to do.

What I find extraordinary this evening is the way in which hon. Gentlemen opposite say that the whole thing is being rushed. The right hon. Member for Leeds, East said that this was all being introduced within a year. The fact is that we set out our proposals quite clearly in a Green Paper issued a considerable time ago. It is incredible that right hon. and hon. Gentlemen opposite should say that this is all being done in a rush when we have published the White Paper and we have brought in the Bill. This change will not be introduced until April, 1973. Selective employment tax was introduced by the previous Government out of the hat, without a moment's warning, without any consultation and with all its faults upon its head. I find the right hon. Gentleman's argument extraordinary.

Mr. Dalyell

If it has all been so carefully thought out, why is it that we do not know more about the transitional period?

Mr. Higgins

The question of the transitional period does not arise on this Clause. My right hon. Friend spelled out the position in his Budget speech. It is a matter on which we shall need to have consultations. The time when the transitional period is announced will have to be judged in the light of the economic situation and after taking into account how long a period seems to be appropriate in the circumstances.

[SIR ROBERT GRANT-FERRIS in the Chair]

9.30 p.m.

I wish to take up some other points that have been made about the VAT machinery. There are some aspects of the working of VAT that I should perhaps particularly mention because they have not been fully understood. One point about which there has been a good deal of misunderstanding is the operation of what is known as the VAT credit mechanism, which is the system for the deduction of input tax.

Perhaps some people have been misled by published examples which follow the tax through on a single article from the point of manufacture, through to the wholesaler, on to the retailer and eventually to the customer. As I look at the Green Paper I see that there could have been an appropriate improvement in that it gave an example of one item passing down the chain, and in many ways this might have been misleading. We should have placed more stress not on the position of the individual item but on the question of the accounting period.

Some people seem to have been led to think, mistakenly, that they will have to wait until they have sold a particular batch of goods before being able to claim the input tax paid on that batch at the time of purchase. This is not so. Input tax paid on goods bought in any tax period can be deducted in the tax return for that same period, even if the goods are still in stock.

This means, in effect, that the stock will be held tax free, so that the retailer's money is not tied up in goods on his shelves, as now happens with purchase tax. This is a somewhat technical point which I wish to get over clearly. In other words, traders will not have to wait until they have sold their goods before being able to claim the input tax.

This brings me to some concern which has been expressed about cash flow. It is true to say that, given the arrangements which exist on dates of settlements and so on, a number of traders will find that their cash flow improves. They will also have the benefit, as compared with SET, of not having to make a forced loan to the Government, which was in many ways one of the more iniquitous features of SET, which, unlike VAT, had an adverse effect on companies' cash flow.

The same principle applies to capital equipment, services and so on. The buyer takes the tax deduction right away and any effect on his cash flow should, in general, be positive. These are some of the advantages which have not yet been fully appreciated.

It is this credit mechanism which is the distinguishing feature of VAT and which makes it different from a cumulative or cascade tax, which applies at each point of production or distribution with no relief given for tax paid at earlier stages. The disadvantages of cascade taxes are well known. A number of Continental countries have tried them but have replaced them with VAT.

A cascade tax discriminates between different methods of marketing, taxing some things once or twice but others several times over, so that it favours vertical integration. In principle, VAT is different in that it does not have any built-in incentive to vertical integration of production or distribution. It has the virtue that a very efficient producer or distributor pays a lower rate of tax whether or not he is vertically integrated.

It might be helpful if I commented on the accounting periods. The White Paper explains that the prescribed accounting periods will usually be three months, with a period of grace of up to one month for the purpose of calculating the amounts of input and output tax and sending in the tax return. Some people may have accounting systems which are not based on calendar months, and we shall be seeing what we can do to tailor the tax periods to fit their accounting practices more closely.

Where the input tax is expected to be more than the output tax as a general rule, perhaps because the trader's outputs are zero-rated foodstuffs or exports, the accounting period will normally be one month, and the Committee will appreciate that this is to the advantage of the trader.

The Customs will not delay making repayments, still less hold back repayments to credit them against future tax liabilities. If a trader is due to be repaid money, he will get it promptly, unless, for example, there is a sudden claim for substantial refund, when normally he will be a trader who pays tax. In designing the machinery of the tax as a whole, it has been our concern that there should be as little interference as possible with normal trade practices.

I turn to one or two more general points which stem perhaps from the remarks made by the hon. Member for Ashton-under-Lyne. No doubt in the debates on later Clauses we shall have a great deal of special pleading of one kind or another. There are three points. I should like to make on matters which arise about the principle embodied in this Clause.

First, a number of representations which we have received and deputations which have come to make representations have argued that VAT will discriminate against a particular service or product. But apart from the broad blocks of expenditure which my right hon. Friend proposes to relieve from the tax—which everyone, I think, would agree cover the basics of life—VAT is a comprehensive tax. The point I was seeking to make on Second Reading was that if one accepts the principle of the comprehensive tax, that is something which will obviously influence one's decisions about exemptions. But in proposing to charge particular items to VAT we are not discriminating against them but refusing to discriminate in favour of them. If one has a comprehensive tax pleas for special treatment or discrimination must, I think, be looked at in the light of this.

If we are to broaden the tax base and have the advantages of this for economic management—and they are very considerable, as I spelt out on Second Reading—it will mean that some items will be taxed which have not hitherto been taxed. This is a necessary result of having a tax which is comprehensive and having a broader base and economic advantages will flow from it.

I make two other very quick points before I conclude. With regard to VAT, the broad blocks of expenditure which I have mentioned have been given relief by my right hon. Friend. This means, because we have not got a completely comprehensive tax, that we are bound to have some borderline problems. But the lines which have been drawn are lines which, to coin a phrase, are at the saddle point. Generally speaking, if one tries to move any of those lines a little further on a particular border, one is likely to slide a long way before one could call a halt at a sensible point. The early history of purchase tax demonstrates what an anomalous and inequitable system emerges once one begins to slide down such a slippery slope.

For that reason it is not meaningful to ask what will be the cost of this or that concession. In answering that, one would need to take account of all the other concessions which would then be pressed. As my hon. Friend the Member for Basingstoke (Mr. David Mitchell) and my hon. Friend the Member for Horsham (Mr. Hordern) have pointed out, once such a process begins the standard rate would have to be raised higher and higher. Eventually one would be raising no revenue at all.

Mr. Brian Walden

I hope the hon. Gentleman will give us a little more on that point, because if the Committee took him at his word on that, there would be virtually no purpose in having any discussion on zero rating or exemptions.

Mr. Higgins

The point I am making is very simple. It is that if one accepts the principle of a comprehensive tax, obviously the House will need to look at all the various debates and reach a decision accordingly. I am seeking to establish that one would need to look at the consequences of having this or that particular concession. I stress as strongly as I can that on this matter one will need to look at the consequences. and no doubt we shall do that in great deail in the forthcoming debates in the Chamber.

Mr. Healey

The hon. Gentleman keeps calling this a comprehensive tax. The fact is that it covers only 55 per cent. of consumer expenditure, because he has zero rated or exempted another 45 per cent. A very large number of the proposals for zero rating which the Committee will be discussing in the next few days could not conceivably make a difference of more than 2 or 3 per cent. in the total of consumer expenditure. It really will not be good enough for either side of the Committee if Treasury Ministers in dealing with these points say "We are not prepared to concede £5 million here because that would mean that we had to concede £1,500 million altogether". It is just as possible to quantify the consequences of making concessions on the individual items proposed in our Amendments as it has been for the items which the Government have already zero rated or exempted.

Mr. Higgins

I am surprised to see an ex-Chancellor on the opposite side of the Committee nodding in agreement with that. It is an extraordinary proposition that we should consider making this or that concession without paying regard to the consequences flowing there-from. No doubt we can go into that in great detail later.

The hon. Member for Loughborough (Mr. Cronin) raised in particular the question of the cost of living. At the time of the announcement in the 1971 Budget of the decision to introduce VAT much was made of the supposed effect on prices. Indeed, the Leader of the Opposition held forth at great length in the Budget debate last year.

The effect of the switch would depend on the rate and coverage of the tax and any consequent effect that would have on prices. We now know that the tax will be levied at a rate of 10 per cent. and that food, rent, fares and housing will be relieved. Last year's prediction of the serious effect this tax will have on the cost of living can be seen to be unfounded.

In this context it is worth pointing out that, looking at the overall effect of the reform of indirect taxation which we began in the 1971 Budget, this is estimated to reduce prices in that period, not to increase them.

Much has been said about the social effects of the substitution of VAT for purchase tax and SET. During the debate the point was made from this side, and not only from the Front Bench, that there are no grounds for supposing that the changeover will be regressive. This is in sharp contrast with the assertions which have been made by hon. Members opposite.

On 23rd March my hon. Friend the Member for Dartford (Mr. Trew) quoted —I refer to c. 1738—figures which strongly support the view which I am now putting forward. The research division of the Library had calculated what proportion of family budgets in the 1970 Family Expenditure Survey would have been free of VAT. The figures given by my hon. Friend were broadly correct, and I will remind the Committee of them.

The figures show that the proportion of family budgets escaping VAT is higher for those with incomes in the range £10 to £15 a week than for those in the range £20 to £25 per week, and higher for those in the range £20 to £25 a week than for those in the range £35 to £40 a week. The figures show that the change does not benefit high income families relative to those with lower incomes. This is not surprising because, as I said earlier, we have gone to considerable lengths to zero-rate items such as food, fuel and fares and to relieve housing as far as practicable, exactly in order to avoid a regressive result from the changeover.

Finally, to take up a point made by the hon. Member for Ashton-under-Lyne and a number of other hon. Members, there is a vast distinction between the two sides of the Committee as to whether to discriminate, in the way that purchase tax does, by having a multitude of rates. We on this side believe that there is great virtue in having a single rate. The proposals for a single rate have been very widely welcomed.

We accept that there is this difference of philosophy between the two sides. What I find incomprehensible is the way in which the right hon. Member for Leeds, East and his predecessor and the hon. Member for Ashton-under-Lyne seem to feel that the present purchase tax in some way achieves its objective. It is well known that a great many items which nowadays no one would regard as luxuries were charged at very high rates of tax, though they may have been regarded as luxuries in 1940. The opinions expressed by the right hon. Gentleman's predecessor and by the right hon. Gentleman are extraordinary. Does the right hon. Gentleman suppose that only the rich buy television sets and washing machines? Does he think that electric and paraffin space heaters, electric irons, light bulbs, radio sets, proprietary drugs and medicines, all of which were previously at 30 per cent., are purchased only by the opulent? Does he suppose that gramophones, cosmetics and other items which were charged at the top rate of purchase tax are only possessed by the well-off? The answer is that the distinction which purchase tax makes between luxury and essential goods no longer holds. For virtually every so-called luxury item there is a cheaper version. There are cheap cameras as well as dear cameras. There are expensive record players and cheap ones, and so on.

The discrimination of which right hon. and hon. Gentlemen are apparently in favour is discrimination which has not worked in practice, and it is not justified. What I want to be clear about this evening, and I believe the Committee should be clear about it as well, is that we are carrying out a major reform of our indirect tax system. That will be of great benefit to the country and the management of the economy.

The Opposition's alternative is to stick with purchase tax and selective employment tax. Both those taxes have been completely discredited. It is high time we moved to a more rational system.

9.45 p.m.

Mr. Deakins

Most taxes in this country are not imposed on the basis of their contribution to social justice. But at least it may be said of purchase tax and SET that they did not have and do not have the socially regressive effects which are likely to flow from value added tax at 10 per cent. or any other rate that is imposed.

The Financial Secretary to the Treasury has told us that this is going to be the most comprehensive tax ever introduced. Although the hon. Gentleman has excluded food, transport and education, he is bringing in a lot of goods and services which have never been taxed before, such as holidays, entertainment, communications and many other aspects of everyday life which affect ordinary people. They have never been taxed before directly or indirectly, whether through purchase tax or SET.

I will put the record straight since a number of my hon. Friends have spoken in this debate in favour of value added tax. Their dispute with the Government is merely on the question of timing and the propriety of introducing value added tax in advance of our entry into the Market. I assure the Government benches that there is a considerable body of opinion on this side, which was rather unrepresented in the debate, which fervently believes that direct taxation is a far more progressive form of taxation than indirect taxation. Far from increasing the burden on the poorer section of the community through an extension of indirect taxation and relief of direct taxation, the way we should go in future —I hope the next Labour Government will take this to heart—is to increase direct taxation not only on income but on wealth, and steeply reduce the rates of indirect taxation, if not cut them out altogether.

The major difference of principle which divides the two parties has for some reason not come out in debate. It may be that a number of my hon. Friends who are pro-Marketeers happened to be in favour of value added tax. There is no doubt about it that we have no assurance from the Government that the burden of this tax will be relieved on poor people by a consequent raising of social security benefit. Pensioners, the disabled, widows and the unemployed will be the people who suffer. They are not the people who are affected at the moment by direct or indirect taxation, purchase tax to any large extent, or SET. However, they will be affected very directly one way or the other by the burden of this iniquitous tax. Although few working-class people complain about the level of direct taxation, for every one who complains about direct taxation on overtime there are 100 who complain about price rises and the cost of living. It is that that we should have in mind.

Let the Conservative Party, if it wishes, and as it has done in the last Budget, have the interests of surtax payers and high direct tax payers at heart. The Labour movement stands or falls on its devotion to the cause of the people who sent us here and whom we represent. If we accept this tax we are betraying their interests, because it will raise the cost of living and they will not be compensated for it. Therefore, I hope that on a matter of principle my right hon. and hon. Friends will divide the Committee, marching into the Lobby really believing what they are saying and voting for.

Mr. Crouch

I am not sure whether the hon. Member for Walthamstow, West (Mr. Deakins) was speaking for the official Opposition, but he has made his views extremely clear on this tax. I could not take a more opposite view. During the several hours of the debate we have not heard those views expressed by other hon. Gentlemen. In fact, we have heard an extremely muddled expression of views, not a strong expression against the tax. [Interruption.] I do not want to discuss where I have been all day, but I have been here throughout the debate. [Interruption.] I went out at one time to have some supper, but I did not have caviare or potato crisps.

The point of my brief intervention is to say that I welcome the advent of value added tax to replace the uneven, arbitrary, and thoroughly unequal purchase tax and selective employment tax.

We have heard exclamations of disgust and dismay from the Opposition that we are rushing to impose this tax on the country. However, my hon. Friend the Financial Secretary has given a clear answer: that the Government allowed well over a year for discussion and consultation with interested parties throughout the country. I have found this period extremely valuable for discussing this subject with traders, manufacturers, retailers and others who are particularly concerned at the advent of a change in our taxation system. I welcome the Government's approach and the Green Paper which gave us so long for consultation.

Consultation is not a matter which must be confined to people outside the House of Commons. Suggestions have been made on both sides that consultation must now take place in Committee of the whole House and in Committee upstairs because we want the opportunity now, and in the next two days, of examining and consulting with the Government some of the details of the application and administration of this tax.

I have some sympathy with the right hon. Member for Leeds, East (Mr. Healey) who, in an intervention at the end, made the most constructive remark of any which he has made all day when he pointed out that there might be some further exceptions and exemptions and zero-ratings which should be considered in Committee. I hope that my right hon. and hon. Friends on the Treasury Bench will not prove inflexible. We know that the Chancellor is never inflexible. He has a ready ear when we express our views to him. I hope that he and his colleagues will continue to be flexible.

I do not entirely agree with my hon. Friend the Member for Horsham (Mr. Hordern), who, perhaps reflecting an almost official Treasury view—[Interruption.]—perhaps in the shadows of that great Department—said that he hoped that there would be no more exceptions and exemptions because we could not afford to extend them too far.

Some pressures are being brought to bear on hon. Members, which will be considered at a later stage in our Committee deliberations, for further zero-rating and exemptions. I hope that my right hon. and hon. Friends will listen to them and that we shall have consultation and debate upon them.

I am concerned about one point of administration on which I believe we should have consultation and which I hope will be looked into very closely. I refer to the failure of the value added tax section of the Finance Bill to allow for any relief of bad debts incurred. This is a concession allowed under the purchase tax system. I have had some consultation and correspondence with the Financial Secretary on this matter. I understand the view of the Treasury to be that it cannot allow both the customer and the supplier to enjoy a tax credit in the case of value added tax as this would mean virtually allowing a double taxation relief.

The Exchequer maintains that if the Treasury now allowed a claim for a tax refund to the supplier—that is credit in respect of the supply of goods or services for which he has not been paid—this would mean that it would be suffering a double loss of tax. I do not believe the Treasury need suffer such loss of tax. Why cannot the Customs and Excise debit the account of the person who has gone bankrupt and has not paid for the goods and services he has received by the amount of input tax already credited to him in respect of his purchase of goods and services? If the debtor has become insolvent the Customs and Excise will already have top priority in claiming money owed to them and will be in a much better position than any other creditors. If Clause 41 VAT is given such priority over other debts in the event of bankruptcy on winding up.

Question put, That the Clause stand part of the Bill:—

The Committee divided: Ayes 232, Noes 200.

Division No. 170	AYES	[9.56 p.m.
Adley, Robert	Green, Alan	Oppenheim, Mrs. Sally
Alison, Michael (Barkston Ash)	Grieve, Percy	Osborn, John
Astor, John	Griffiths, Eldon (Bury St. Edmunds)	Page, Graham (Crosby)
Atkins, Humphrey	Gummer, J. Selwyn	Page, John (Harrow, W.)
Awdry, Daniel	Hall-Davis, A. G. F.	Pardoe, John
Baker, Kenneth (St. Marylebone)	Hamilton, Michael (Salisbury)	Parkinson, Cecil
Baker, W. H. K. (Banff)	Hannam, John (Exeter)	Percival, Ian
Barber, Fit. Hn. Anthony	Harrison, Brian (Maldon)	Pike, Miss Mervyn
Beamish, Col. Sir Tufton	Haselhurst, Alan	Pink, R. Bonner
Bell, Ronald	Hastings, Stephen	Pounder, Rafton
Bennett, Dr. Reginald (Gosport)	Havers, Michael	Powell, Rt. Hn. J. Enoch
Biffen, John	Hawkins, Paul	Price, David (Eastleigh)
Biggs-Davison, John	Hayhoe, Barney	Proudfoot, Wilfred
Blaker, Peter	Heath, Rt. Hn. Edward	Pym, Rt. Hn. Francis
Boardman, Tom (Leicester, S.W.)	Hicks, Robert	Quennell, Miss J. M.
Body, Richard	Higgins, Terence L.	Ramsden, Rt. Hn. James
Boscawen, Robert	Hiley, Joseph	Redmond, Robert
Bossom, Sir Clive	Hill, John E. B. (Norfolk, S.)	Reed, Laurance (Bolton, E.)
Bowden, Andrew	Hill, James (Southampton, Test)	Rees-Davies, W. R.
Bray, Ronald	Hordern, Peter	Renton. Rt. Hn. Sir David
Brocklebank-Fowler, Christopher	Hornby, Richard	Rhys Williams, Sir Brandon
Bruce-Gardyne, J.	Hornsby-Smith.Rt.Hn.Dame Patricia	Ridsdalo, Julian
Buchanan-Smith, Alick(Angus,N&M)	Howell, Ralph (Norfolk, N.)	Rippon, Rt. Hn. Geoffrey
Buck, Antony	Hunt, John	Roberts, Michael (Cardiff, N.)
Bullus, Sir Eric	Hutchison, Michael Clark	Roberts, Wyn (Conway)
Burden, F. A.	James, David	Rossi, Hugh (Hornsey)
Campbell, Rt.Hn.G.(Moray&Na!rn)	Jenkin, Patrick (Woodford)	Russell, Sir Ronald
Carlisle, Mark	Jessel, Toby	Scott-Hopkins, James
Chapman, Sydney	Johnson Smith, G. (E. Grinstead)	Sharpies, Richard
Chataway, Rt. Hn. Christopher	Jopling, Michael	Shaw, Michael (Sc'b'gh & Whitby)
Chichester-Clark, R.	Kellett-Bowman, Mrs. Elaine	Shelton, William (Clapham)
Churchill, W. S.	Kershaw, Anthony	Skeet, T. H. H.
Clark, William (Surrey, E.)	Kilfedder, James	Smith, Dudley (W'wlck & L'mingtom
Clarke, Kenneth (Rushcliffe)	Kimball, Marcus	Soref, Harold
Clegg, Walter	King, Evelyn (Dorset, S.)	Speed, Keith
Cockeram, Eric	King, Tom (Bridgwater)	Spence, John
Cooke, Robert	Kinsey, J. R.	Sproat, Iain
Coombs, Derek	Kitson, Timothy	Stanbrook, Ivor
Cooper, A. E.	Knight, Mrs. Jill	Steel, David
Cordle, John	Knox, David	Stewart-Smith, Geoffrey (Belper)
Corfield, Rt. Hn. Frederick	Lamont, Norman	Stokes, John
Cormack, Patrick	Legge-Bourke, Sir Harry	Stuttaford, Dr. Tom
Costain, A. P.	Le Marchant, Spencer	Sutcliffe, John
Critchley, Julian	Lewis, Kenneth (Rutland)	Tapsell, Peter
Crouch, David	Lloyd, Ian (P'tsm'th, Langstone)	Taylor, Sir Charles (Eastbourne)
Crowder, F. P.	Longden, Sir Gilbert	Taylor, Edward M.(G'gow,Cathcart)
Davies, Rt. Hn. John (Knutsford)	Loveridge, John	Taylor, Frank (Moss Side)
d'Avigdor-Goldmld, Maj. -Gen. James	MacArthur, Ian	Taylor, Robert (Croydon, N.W.)
Dean, Paul	McCrindle, R. A.	Tebbit, Norman
Deedes, Rt. Hn. W. F.	McLaren, Martin	Temple, John M.
Digby, Simon Wingfield	McNair-Wilson, Michael	Thatcher, Rt. Hn. Mrs. Margaret
Douglas-Home, Rt. Hn. Sir Alec	Maddan, Martin	Thomas, Rt. Hn. Peter (Hendon, S.)
Orayson, G. B.	Madel, David	Thompson, Sir Richard (Croydon. S.)
du Cann, Rt. Hn. Edward	Maginnis, John E.	Thorpe, Rt. Hn. Jeremy
Dykes, Hugh	Marten, Neil	Trafford, Dr. Anthony
Eden, Sir John	Mather, Carol	Trew, Peter
Elliot, Capt. Walter (Carshaiton)	Maude, Angus	Tugendhat, Christopher
Elliott, R. W. (N'c'tle-upon-Tyne, N.)	Mawby, Ray	Turton, Rt. Hn. Sir Robin
Emery, Peter	Maxwell-Hyslop, R. J.	van Straubenzee, W. R.
Eyre, Reginald	Meyer, Sir Anthony	Vickers, Dame Joan
Farr, John	Mills, Peter (Torrington)	Waddington, David
Fenner, Mrs. Peggy	Miscampbell, Norman	Walder, David (Clitheroe)
Fidler, Michael	Mitchell,Lt.-Col.C. (Aberdeenshire.W)	Walters, Dennis
Flnsberg, Geolfrey (Hampstead)	Mitchell, David (Basingstoke)	Ward, Dame Irene
Fisher, Nigel (Surbiton)	Moate, Roger	Warren, Kenneth
Fookes, Miss Janet	Molyneaux, James	Weatherill, Bernard
Fortescue, Tim	Money, Ernie	Wells, John (Maidstone)
Foster, Sir John	Monks, Mrs. Connie	White, Roger (Gravesend)
Fox, Marcus	Monro, Hector	Winterton, Nicholas
Fry, Peter	Montgomery, Fergus	Wood, Rt. Hn. Richard
Gardner, Edward	More, Jasper	Woodhouse, Kn. Christopher
Gibson-Watt, David	Morrison, Charles	Woodnutt, Mark
Gilmour, Ian (Norfolk, C.)	Mudd, David	Wylie, Rt. Hn. N. R.
Gilmour, Sir John (Fife, E.)	Murton, Oscar	Younger, Hn. George
Godber, Rt. Hn. J. B.	Neave, Airey
Gorst, John	Noble, Rt. Hn. Michael	TELLERS FOR THE AYES
Gower, Raymond	Normanton, Tom	Mr. Victor Goodhew and
Grant, Anthony (Harrow, C.)	Nott, John	Mr. John Stradlins Thomas
Gray, Hamish	Onslow, Cranley
NOES
Albu, Austen	Golding, John	Oakes, Gordon
Allaun, Frank (Salford, E.)	Gordon Walker, Rt. Hn. P. C	Ogden, Eric
Allen, Scholefield	Gourlay, Harry	O'Halloran, Michael
Archer, Peter (Rowley Regis)	Grant, George (Morpeth)	Oram, Bert
Armstrong, Ernest	Hamilton, William (Fife, W.)	Orbach, Maurice
Ashley, Jack	Hamling, William	Oswald, Thomas
Ashton, Joe	Hannan, William (G'gow, Maryhill)	Paget, R. T.
Atkinson, Norman	Harper, Joseph	Panned, Rt. Hn. Charles
Bagler, Gordon AT.	Harrison, Walter (Wakefield)	Parry, Robert (Liverpool, Exchange)
Barnes, Michael	Hart, Rt. Hn. Judith	Pendry, Tom
Barnett, Guy (Greenwich)	Haitersley, Roy	Pentland, Norman
Barnett, Joel (Heywood and Royton)	Healey, Rt. Hn. Denis	Perry, Ernest G.
Baxter, William	Heffer, Eric S.	Prescott, John
Benn, Rt. Hn. Anthony Wedgwood	Houghton, Rt. Hn. Douglas	Price, J. T. (Westhoughton)
Bennett, James (Glasgow, Bridgeton)	Hughes, Rt. Hn. Cledwyn (Anglesey)	Probert, Arthur
Bidwell, Sydney	Hughes, Mark (Durham)	Reed, D. (Sedgefield)
Boardman, H. (Leigh)	Hughes, Robert (Aberdeen, N.)	Rees, Merlyn (Leeds, S.)
Booth, Albert	Hughes, Roy (Newport)	Rhodes, Geoffrey
Boyden, James (Bishop Auckland)	Irvine,Rt.Hn.Sir Arthur(Edge Hill)	Richard, Ivor
Bradley, Tom	Janner, Greville	Robertson, John (Paisley)
Broughton, Sir Alfred	Jenkins, Hugh (Putney)	Roderick, Caerwyn E.(Br'c'n&R'dnor)
Brown, Bob (N'c'tle-upon-Tyne, W.)	Jenkins, Rt. Hn. Roy (Stechford)	Rodgers, William (Stockton-on-Tees)
Brown, Hugh D. (G'gow, Provan)	John, Brynmor	Roper, John
Buchan, Norman	Johnson, James (K'ston-on-Hull, W.)	Rose, Paul B.
Buchanan, Richard (G'gow, Sp'burn)	Johnson, Walter (Derby, S.)	Ross, Rt. Hn. William (Kilmarnock)
Callaghan, Rt. Hn. James	Jones, Barry (Flint, E.)	Sheldon, Robert (Ashton-under-Lyne)
Cant, R. B.	Jones, Dan (Burnley)	Shore, Rt. Hn. Peter (Stepney)
Carter, Ray (Birmingham, Northfield)	Jones, Gwynoro (Carmarthen)	Short. Mrs. Renee (W'hampton.N.E.)
Carter-Jones, Lewis (Eccles)	Judd, Frank	Silkin, Rt. Hn. John (Deptford)
Castle, Rt. Hn. Barbara	Kaufman, Gerald	Silkin, Hn. S. C. (Dulwich)
Clark, David (Colne Valley)	Kelley, Richard	Silverman, Julius
Cocks, Michael (Bristol, S.)	Kerr, Russell	Skinner, Dennis
Cohen, Stanley	Kinnock, Nell	Small, William
Coleman, Donald	Lamborn, Harry	Smith, John (Lanarkshire, N.)
Concannon, J. D.	Lamond, James	Spearing, Nigel
Conlan, Bernard	Latham, Arthur	Spriggs, Leslie
Corbet, Mrs. Freda	Lawson, George	Stallard, A. W.
Crossman, Rt. Hn. Richard	Leadbitter, Ted	Stewart, Rt. Hn. Michael (Fulham)
Cunningham, G. (Islington, S.W.)	Lee, Rt. Hn. Frederick	Stoddart, David (Swindon)
Cunningham, Dr. J. A. (Whitehaven)	Leonard, Dick	Stonehouse, Rt. Hn. John
Dalyell, Tam	Lestor, Miss Joan	Summerskill, Hn. Dr. Shirley
Darling, Rt. Hn. George	Loughlin, Charles	Taverne, Dick
Davidson, Arthur	Lyon, Alexander W. (York)	Thomas, Rt. Hn. George (Cardiff.W.)
Davies, Ifor (Gower)	Mabon, Dr. J. Dickson	Thomson, Rt. Hn. Q. (Dundee, E.)
Davis, Clinton (Hackney, C.)	McCartney, Hugh	Tinn, James
Davis, Terry (Bromsgrove)	McEthone, Frank	Tomney, Frank
Deakins, Eric	McGuire, Michael	Torney, Tom
Dempsey, James	Mackenzie, Gregor	Tuck, Raphael
Doig, Peter	Mackintosh, John P.	Urwin, T. W.
Dormand, J. D.	Maclennan, Robert	Varley, Eric G.
Douglas, Dick (Stirlingshire, E.)	Mahon, Simon (Bootle)	Wainwright, Edwin
Duffy, A. E. P.	Mallalieu, J. P. W. (Huddersfield. E.)	Walden, Brian (B'm'ham, All Saints)
Dunnett, Jack	Marks, Kenneth	Walker, Harold (Doncaster)
Eadle, Alex	Mason, Rt. Hn. Roy	Wallace, George
Edwards, William (Merioneth)	Mavhew, Christopher	Weitzman, David
Evans, Fred	Mellish, Rt. Hn. Robert	Wells, William (Walsall, N.)
Ewing, Henry	Mendelson, John	White, James (Glasgow, Pollok)
Faulds, Andrew	Mikardo, Ian	Whitehead, Phillip
Ferny hough, Rt. Hn. E.	Millan, Bruce	Wiltey, Rt. Hn. Frederick
Fisher, Mrs. Doris(B'ham.Ladywood)	Miller, Dr. M. S.	Williams, Alan (Swansea, W.)
Fletcher, Ted (Darlington)	Milne, Edward	Williams, W. T. (Warrington)
Foley, Maurice	Mitchell, R. C. (S'hamplon, lichen)	Wilson, Alexander (Hamilton)
Foot, Michael	Morgan, Elystan (Cardiganshire)	Wilson, William (Coventry, S.)
Forrester, John	Morris, Alfrad (Wythenshawe)	Woof, Robert
Freeson, Reginald	Morris, Charles R. (Openshaw)
Galpern, Sir Myer	Moyle, Roland	TELLERS FOR THE NOES
Gilbert, Dr. John	Mulley, Rt. Hn. Frederick	Mr. James Hamilton and
Ginsburg, David (Dewsbury)	Murray, Ronald King	Mr. James Wellbeloved.

Question accordingly agreed to.

Clause 1 ordered to stand part of the Bill.