VALUE ADDED TAX (Hansard, 18 October 1972)

§ The Financial Secretary to the Treasury (Mr. Terence Higgins)
I beg to move That the Input Tax (Exceptions) (No. 3) Order 1972 (S.I., 1972, No. 1167), dated 1st August 1972, a copy of which was laid before this House on 9th August, be approved. It may be appropriate if again I say a few words about the Motion and then answer any questions that hon. Members may put. I should like to clarify what was said a few moments ago. What I said about uncertainty was related to the suggestion that the Government should delay the introduction of the tax. The Government's timetable has been set out 408 clearly and we see no reason for not going through on schedule.
This order is particularly concerned with a number of matters that we discussed in the Finance Bill debates. The normal way in which VAT works is that a taxable person may under the operation of the credit mechanism take credit for the tax invoiced to him on the goods and services that he purchases for the purpose of his business. But all countries with a VAT have found it necessary to restrict this right to claim credit for tax in the case of certain goods and services, particularly those likely to be used for both business and private purposes. In such cases there is scope for inequity between individuals and for tax avoidance.
The order provides that the tax on goods and services supplied to a taxable person and used by him for the purposes of business entertainment—other than that provided for overseas customers—shall not be deductible as input tax. The intention to make the order was announced in the White Paper on VAT Cmnd. 4929, at the time of the last Budget.
"Business entertainment" covers entertainment and hospitality of any kind provided by the taxable person or a member of his staff. It includes not only the provision of meals, drinks and so on, but accommodation, entertainment at theatres and so on. The scope of the order is similar to that of the provisions under the Income and Corporation Taxes Act. 1970, which withholds income and corporation tax relief from business entertainment expenses. The wording of the tax provisions is not identical, however, as the bases of the taxes vary, VAT being a tax on consumer expenditure and income and corporation taxes being taxes on income and profits.
We believe that the order implements the proposals that we put forward in the White Paper and subsequent financial debates. I believe that it is well understood by the House, but if there are any matters that hon. Members would like me to explain, I will certainly attempt to do so.

§ Mr. Tam Dalyell (West Lothian)
In paragraph 2, sub paragraph (3) we have this fascinating phrase: "hospitality of any kind". I was just a little curious 409 to know why the Treasury should add words which may be considered gratuitous: "of any kind". Why not just say "hospitality"?
It is a bit of a give away. Here we are in the middle of the week of the Chequers talks, arguing about £2 a week extra. I shall not try to expand this—it would be out of order—into a whole economic debate, but I would say to the Financial Secretary that there is a bit of a contrast between the stringent talks which may be necessary at the economic summit this week and this idea of "hospitality of any kind" because it stretches things a bit far.
I am all for theatres, and we have had arguments before about the need for help for theatres, but it sticks in the craw a bit that theatre-going should be included in this kind of arrangement. There is an almost bottomless pit.

§ Mr. Joel Barnett (Heywood and Royton)
I am sorry that my hon. Friend the Member for West Lothian (Mr. Dalyell) did not feel that he should go on and give us some more examples of the kind of hospitality he thought might be envisaged. As I understand it, the type of hospitality to which he is taking exception would be disallowed as an input. Some of the types of hospitality for overseas customers could include a type of hospitality to which my hon. Friend might take exception. I have no doubt that some hospitality is given to overseas customers which, knowing my hon. Friend's frugal habits, he would take exception to.
One accepts the need to disallow as input this type of expenditure and I note that it has been done by drafting which, as far as I can see, is broadly in the same language as Section 15 of the Finance Act, 1965. I recall those 1965 debates with great interest, because the wording of that Section was objected to very strongly by hon. Members opposite when we sought to disallow entertainment expenses as business expenses, but I note that they have lifted words directly from Section 15 for the purposes of the Finance Act, 1972, although it seems not quite the case with Section 15(8), which is rather more specific. That refers to gifts. "Gift" was classed as enter- 410 tainment in that sense and we do not seem to have that now.
We have all sorts of other definitions of business entertainment, and my hon. Friend will be interested to know that hunting, shooting, fishing and golf are also incorporated. It is thus possible to take an overseas customer on a yachting trip, or a hunting, shooting and fishing trip, and this would presumably be hospitality, but I am not sure why this part of Section 15 relating to gifts has not been incorporated.
I have also noted that in the words of paragraph 3 of the order, taken from the Finance Act, 1965, we are told that unless the entertainment is provided for an overseas customer of his and is of a kind and on a scale which is reasonable, having regard to all the circumstances. I do not know what experience the Financial Secretary has had of defining "reasonable" or of the difficulties, the Inland Revenue has had of defining "reasonable". For example, would it be considered reasonable to take an overseas customer to a strip club or to the Bunny Club, and to pay out large sums of money to entertain him? Many overseas customers like to be entertained rather lavishly. An Arab sheik would probably want something which by any definition most people would consider unreasonable. It would be interesting to know from the Financial Secretary what he understands to be the meaning of reasonable, having regard to all the circumstances.". There is one anomaly with which I would like him to deal. If a business man travels from Manchester to London and eats a meal with an overseas customer, the cost will be allowed. If he eats the meal with a home trade customer, the cost of the meal both for the customer and for himself will be disallowed. But if he eats the meal on his own before going to see the customer I understand that the cost will be allowed, both for Inland Revenue purposes and as an input, because that is the same as the Inland Revenue rule. But if he can eat on his own and it is an allowable input, what about when he eats with a fellow director to discuss the company's business? Will that be an allowable input for the purposes of VAT, or will it be disallowed because it is disallowed as a benefit for Inland Revenue purposes?
411 We and industry are entitled to clarification. I am sure that the Financial Secretary is, as ever, ready to clarify the whole matter for us.

§ Mr. Higgins
In the speech of the hon. Member for West Lothian (Mr. Dalyell) we went from rhetoric to reversal, in that he had the whole thing back to front. I can well understand that he might have objected if we had not introduced the order, in the context of the tripartite talks, saying that we would not disallow input tax on business entertainment, but the fact is that we have done so. Therefore, I would have thought that he would support the order.
Similarly, I would have thought that the hon. Gentleman would welcome the clearly comprehensive expression hospitality of any kind as against just "hospitality", which he might have thought was too narrow or not all-embracing. Therefore, his arguments did not bring the hon. Gentleman to the conclusion which he seemed to think. They supported both the order and the wording.
I was a little worried about the origin of the wording. I understand that the expression hospitality of any kind comes from the Income and Corporation Taxes Act, 1970, but, as the hon. Member for Heywood and Royton (Mr. Joel Barnett) rightly pointed out, it was based on the proposals of the Labour Chancellor in 1965. I am not sure that that is a pedigree with which I find myself in sympathy, but it seems to have proved over the years to have been not inappropriate, and it seemed to us reasonable to use the same expression. There are some slight differences between the Inland Revenue and Customs and Excise position, because of the differing nature of the two taxes.
The hon. Member for Heywood and Royton raised some questions with regard to gifts. I am now basing my remarks on my understanding of the tax and of our debates in Standing Committee, where he will find that these matters were discussed at some length. For example, he will recall that gifts of under £10 in value are free from VAT under 412 Schedule 3 of the Finance Act, and it cannot be effected by Statutory Instrument. If I am not correct in that, I will write to him and make the position clear.
The hon. Gentleman also spoke of the definition of "business entertainment". It is quite true, as he said, that that includes the provision not only of meals but also of drinks, accommodation, entertainment at the theatre, night clubs, and so on; and also recreational facilities such as hunting, fishing, shooting, golf, yachting, and the like. This, again, follows the provisions of the Income and Corporation Taxes Act, 1970.
The hon. Gentleman also referred to the position with regard to the entertainment of business clients from overseas and visiting this country, and those in the country. The Inland Revenue position is that entertainment of overseas clients is allowable—and a similar position would appertain here—but that it would be disallowed in the case of domestic clients. The position of the person entertaining a particular client conforms to that provision.
The hon. Gentleman also asked about the position of particular employees travelling to meet clients in one category or the other. Again I speak from my own understanding of the position and not with advice, but as I understand it, that will in the normal course of events be a business expense if the person is going about his ordinary business. But one would need to look at the facts of the case. The matter has no doubt been considered in the Inland Revenue context and it would probably be appropriate that the same rules should apply. Again, if I am not correct in that, I will let the hon. Gentleman know.
The temper of the debate on this order has been somewhat less exotic than that on the previous order, and I gather from what the hon. Member for Heywood and Royton said—and, indeed, from what the hon. Member for West Lothian said, although perhaps it was not what he sought to argue—that the two hon. Members are not unsympathetic to the order. I therefore hope that they and the House will feel able to approve it.
I might just added that, in page 35, General Guide No. 700 makes some remarks about gifts and free samples. 413 which are not totally irrelevant to what the hon. Gentleman said.