SUB-CONTRACTORS IN CONSTRUCTION INDUSTRY (Hansard, 13 June 1974)

§ Mr. Michael Shaw
I beg to move Amendment No. 38, in page 15, line 42, at end add— '(5) In section 29(4) of the Finance Act 1971 leave out "30" and insert "33"'. Clause 19 makes various amendments to the Finance Act 1971, particularly in respect of those sections dealing with what is known in the construction industry as "the lump". In view of the tremendous interest which has always been evinced from hon. Members opposite on the question of "the lump", I am sorry that more hon. Members are not here to discuss it this evening. In making the amendments to that legislation in 1971 nothing seems to have been done about Section 29. Perhaps I may give a summary of what is intended.
It was realised that there were gangs of men in the construction industry who received sums of money for their efforts from the main contractor and failed to pay any tax on their remuneration. It was felt, rightly, that that system should be brought to an end. Therefore, it was made clear in Section 29(4) of the Finance Act 1971 that, on making a payment to such a gang, the main contractor shall deduct from it a sum equal to 30 per cent. … and the sum so deducted shall be paid to the Board of Inland Revenue and 1949 shall be treated for the purposes of income tax and so on. In other words, a deduction was made at the rate of 30 per cent. That was handed to the Inland Revenue and was treated as a payment of tax by the members of "the lump".
This year, the Bill seeks to increase the basic rate of tax from 30 per cent. to 33 per cent. I am averse to being called upon to pay 33 per cent. as my basic ate of tax when, as far as I can tell, the members of the various "lumps" throughout the country may well get away with 30 per cent. I may be wrong. Perhaps I have not read the various provisions properly. My amendment is designed to explore whether my reasoning is correct.

§ Mr. Bruce-Gardyne
I am not sure whether I support my hon. Friend the Member for Scarborough (Mr. Shaw). I confess that I am a little concerned about the impact that the Government may have if they succeed in their purpose of eliminating the tax advantages of "the lump". Of course, the amendment is designed to ensure that the members of "the lump" pay the same standard rate of tax as the rest of us—an entirely proper proposition. I shall explain my anxiety.
First, however, I agree that, considering the excitement generated in the Labour Party on the subject of "the lump", it is remarkable that so few Labour Members are present to listen to the debate. I have never believed that what caused the excitement in the Labour Party was the fact that "the lump" was escaping the tax net. What is much more serious in the eyes of the Labour Party is that the members of "the lump" tend to escape the trade union net. To escape the tax net is venal, but to escape the trade union net is an unforgivable sin — so it is surprising that not more Labour Members are present to take part in the debate.
My anxiety concerns the impact which I believe the Government will have—if they succeed, through this clause, in eliminating the tax or non-tax position of "the lump"—on the prospects of fulfilling our expectations from North Sea oil. This may seem a remote proposition to the Financial Secretary but in reality it is not remote at all. Last week, I visited 1950 a number of the offshore oil installations off the east coast of Scotland. Time and again I found that the constructors operating on this plant were depending on "the lump" for any sort of labour force at all, because such is the rate of taxation which people working on those sites find they are facing that unless they can take advantage of "the lump" they are not prepared to work a five-day week or even a three-day week.

§ Mr. F. A. Burden (Gill Ingham)
My hon. Friend is adopting a very dangerous attitude. If the trade unions find that "the lump" is to be allowed to be free of tax, what is to stop the trade unions from demanding that all wages of their members shall also be free of tax?

§ Mr. Bruce-Gardyne
If my hon. Friend will allow me I shall come to that point, as I was about to do. Of course, I do not defend the special tax regime which members of "the lump" have enjoyed. What I am saying is that so long as we have the sort of level of taxation on the earnings which people can earn in the construction industry on work of this kind —which is designated as a work of national importance—we shall not get the work done.
Of course, one solution is to lower the rate of taxation. The crux of the matter was very well exposed in an extremely interesting answer which the Financial Secretary gave the other day to his hon. Friend the Member for Was all, South (Mr. George). His hon. Friend asked if he would list the tax thresholds for a single person, a married childless couple, a married couple with two children under 11 with four children, two over and two under 11, for each year since 1945. The reply was fascinating, because it demonstrated that in the period up to 1955-1956 the tax threshold was at or above the average earnings level for such a family. Since then it has gone down and down and down, and today it is down to 52.4 per cent. of average earnings.
The consequence is that men on these construction sites for North Sea oil— who, the Financial Secretary may or may not be aware, have very high earnings— may find, if they are caught in this tax net, that they are paying very substantial sums in taxation to which they are not used. That is something they do not 1951 accept. The idea that resistance to the tax net is confined to the wealthy is an illusion indulged in only by hon. Gentlemen, like the Financial Secretary, who do not visit these installations and see what is happening. At one installation I saw the labour force had to be doubled to meet the requirements. That was because of the scale of absenteeism— again, because of the tax regime imposed on people with take-home pay of £60 a week.
This is a serious problem. These construction firms have been relying to a considerable extent upon "the lump". I fully recognise, from the tax point of view, the objections to "the lump", but if it is removed the work will not be done.
Tonight the Financial Secretary should reflect on the fact that the Chancellor of the Exchequer is going round the capitals of Europe hypothecating our future North Sea revenues as security for foreign borrowing to sustain the balance of payments. If, now, through Clause 19, we succeed in destroying "the lump", the Chancellor may find that the North Sea oil which he is hypothecating away does not come on stream in time—or not on the scale he expects by 1980.
Of course, the right answer—the only sensible answer—to this problem is to bring down the taxation on average earnings and above, so that these people do not lose the incentive to give of their best to develop those natural resources, but so long as we do not do that, and if Clause 19 is successful in its operation, I have no doubt at all that there will be a significant effect in delaying the arrival of the resources of North Sea oil on which the Government are counting so much.

§ The Financial Secretary to the Treasury (Dr. John Gilbert)
We have had two rather contradictory contributions from the hon. Members for Scarborough (Mr. Shaw) and South Angus (Mr. Bruce-Gardyne). It seemed that the hon. Member for South Angus was failing to distinguish between "the lump" as such and tax abuses that have been connected with "the lump". We are talking about attacking the tax abuses rather than the principle of "the lump". There is nothing in the clause which makes it impossible for "the lump" system of payment 1952 to be continued in a perfectly reasonable way over a large part of the construction industry.
It is always a pleasure to follow the hon. Member for Scarborough in any debate. He was good enough to say that he might have been under a misapprehension as to why we were not changing the tax deduction of "the lump" to bring it into line with the basic rate of tax. I think there is possibly a misapprehension here. When the 30 per cent. deduction rate was first introduced we were not on the unified tax system. The 30 per cent. rate was only a close approximation to the basic rate. There is nothing that necessarily binds the two rates together, either in theory or in practice.
I can relieve the hon. Gentleman's mind of the anxiety that he or any basic rate taxpayer would be having tax deducted at 30 per cent.—33 per cent. under the Bill—whereas the man on "the lump" would be getting away with something less. The deduction for the purposes of "the lump" is taken without any allowance for personal reliefs or expenses of any sort. It is an immediate deduction from the top slice without any allowances whatever. The two are not on all fours.
In our view, to adjust from 30 per cent. to 33 per cent. would make for considerable administrative difficulties. As I am sure the hon. Gentleman, who has great experience in these matters, will recognise, the Revenue is dependent to a large degree on contractors to operate the scheme for it. It is anxious to keep their good will. These calculations are often made in difficult and inconvenient physical conditions on site, and it would not be in the interests of good administration or co-operation between the Revenue and the main body of the construction industry to change from the now quite familiar 30 per cent. to the relatively awkward fraction of 33 per cent.

§ Mr. Michael Shaw
I thank the Minister for that reply. It had not escaped my notice that Section 29 came into force in 1972–73 and the basic rate of 30 per cent. came into force in 1973–74. I felt it was clearly envisaged that the basic rate would be 30 per cent. and, therefore, this rate had been included in the 1971 Act. I felt it was worth having a word on this to show quite clearly that these 1953 two would not be completely linked in future. I fully accept that there may well be problems if the attempt were made to link them. Accordingly, I beg to task leave to withdraw the amendment.