HC Deb 22 January 1976 vol 903 cc1631-60

8.0 p.m.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

I beg to move, That an humble Address be presented to Her Majesty, praying that the Income Tax (Sub-Contractors in the Construction Industry) Regulations 1975 (S.I., 1975, No. 1960), dated 28th November 1975, a copy of which was laid before this House on 2nd December, be annulled. I declare my interest as a director of a building firm. Indeed, I have obtained the necessary form and am about to try to have a photograph taken in case any activity of the firm requires the production of a sub-contractor's certificate. It is about the need for that certificate that my right hon. and hon. Friends feel that many searching questions must be asked.

The first question is, why is it possible to obtain these forms—indeed, they have already been sent out—before these Regulations have received the approval of the House?

It is wrong for the Treasury to seek to bring this scheme into effect by sending out forms before approval has been given to the Regulations. I am aware of the correspondence between my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) and the Chief Secretary who talks about setting the wheels in motion. That is all he is doing. It will not be compulsory for anyone to send a photograph with this form until tonight, if the Regulations are approved. But that is not good enough. I believe that the Government should have brought the Regulations forward earlier if they intended to distribute forms to those concerned. Many hon. Members will have had protests from their constituents about the sudden imposition of this form and the photograph without anyone being able to inform them of the statutory authority for it.

I should like to separate the two main themes in this debate. First, the Opposition do not want to vote against the Regulations in so far as they are designed to stop tax evasion. We cannot connive at tax evasion.

The other issue concerns the "lump". I think that we are missing greatly the presence of the hon. Member for Liver- pool, Walton (Mr. Heffer) and others who see these Regulations as a means of bringing to an end, or severely restricting, what is known in the building industry as the "lump" and is called more circumspectly by the Treasury "labour-only sub-contracting" in the building industry.

Whatever may be the details of the ways of stopping tax evasion, my right hon. and hon. Friends and I would like to make it clear that the "lump" is not only an old established process in the building industry but might be highly beneficial. There is a general feeling in the country that we have reached the point where there are too many big units—too many amorphous corporations and organisations—and that it is probably counter-productive in terms of men's efforts and incentives. If, by breaking up the building industry into small firms and sub-contractors, we can again get a spirit of enterprise, we should welcome it. It would also free people from the restrictions imposed by monopolistic unions, which carry greater powers over their members than in the past, by stopping them doing those things which are to the advantage of the national economy.

We do not want to restrict the activities of labour-only sub-contractors. I am sorry that hon. Gentlemen who have tried so hard in the past to do this are not here to debate the matter on this occasion. This is the second opportunity that they have had. I remember the first opportunity when the relevant clause in the Finance (No. 2) Bill 1975 was discussed on the Floor of the House at the special request of the particular group of hon. Members on the Government side who wished to debate it. Not one of them turned up on that occasion.

The case for destroying the "lump" has gone by default because nobody has been prepared to argue it. In fact, we utterly reject it and wish to make it clear that it is no part of our policy to discourage people starting their own firms.

In some respects the Regulations are not wide enough, and in one respect they are perhaps too wide. The number of people engaging in activities who can, if they wish, defraud the revenue of that which is its due is far greater than the number of labour-only sub-contractors in the building industry. After all, there are draughtsmen in the building and engineering industries, there are the so-called moonlight painters and plasterers, and there are many professions in engineering and rural pursuits where the contract is labour-only and cash. This is a growing practice which is likely to grow faster as the Government go on increasing the rates of taxation and the marginal rates of taxation upon extra earnings. The Government must recognise that this is a problem of ever-growing scale, that it is now of wide proportions, and that there will be a great increase in it.

We welcome this sub-contracting, but do not welcome that it is a device for tax evasion. We shall have to think of new ways of collecting taxation. I should prefer taxation to be so low that people would not wish to go in for these devices. We must realise that PAYE is the only system upon which the revenue can rely. The more people can get out of PAYE, the more difficult it will be for the revenue to collect income tax from the bulk of the working population. Therefore, we must begin to think seriously about this whole problem.

I have doubts whether the proposal in the Regulations is the right way to deal with the problem. I shall point to the dangers by deploring the extension of the scheme in one particular direction. Local authorities are included in the definition of contractor or sub-contractor. Therefore, when a local authority employs a contractor, it has the power to pay gross the bill which it finally gets or to deduct 35 per cent. if the contractor cannot produce the certificate. That has two dangerous trends. One is that it tends to get to the point where, except for large and reputable firms, the Government will seek to take 35 per cent. off all honest transactions between people. If the scheme were extended in that way, it would be intolerable because every employer would be subject to a 35 per cent. deduction. That means that the contract arranged between employer and employee or between purchaser and supplier would become the subject to a tax on every occasion. The mind boggles at the prospects of the size of the revenue if that were done. I doubt whether it is what the Government want.

The second direction in which this proposal is obnoxious is that it eventually begins to give to local authorities the power to decide which firms should have 35 per cent. deducted from their bills and which should not. Indeed, they may make it a condition of contract that they deduct 35 per cent. from everybody, certificate or not. We would be wise to eschew any system in which there is power to discriminate in this way. That is one of the defects of the regulations.

Although we are not prepared to deny the Treasury these Regulations, I hope that I have indicated some of the dangers which may arise. I hope that we shall have some constructive ideas from the Chief Secretary, telling us how he sees the future development of the tax in relation to this problem. It is quite clear that this is not a satisfactory solution on a wider front, and it is likely to be applied on a wider front if we are not careful.

I have some points of detail to make on the Regulations which would have been better taken in Committee, if there had been more time, and if the Regulations had been incorporated in the schedule rather than in this instrument. The amount of form filling and clerical work is immensely increased.

Under Regulation 25, the main contractor has to return to the Treasury weekly vouchers for the payments he has made to all sub-contractors. For a sizeable firm of main contractors this can be a mammoth task. It is not quite the same as for a big factory with one place of business. The sub-contractor may be working in dozens of sites all over the country, and he has to set up a series of small site offices, from which these weekly vouchers, certifying payments to sub-contractors, must be sent.

This in itself is a mammoth addition to bureaucracy, and I think that the time is coming when employers may strike it the mounting cost of collecting the revenue. People paying VAT are beginning to talk about striking, or of demanding payment for their services. This defect in the scheme can only be regretted.

Is it necessary for the vouchers to be returned weekly? Would it not be possible for them to be returned, say, three-monthly? I cannot see the need for a weekly return.

The next obnoxious feature concerns the small firm—particularly the new firm starting in the sub-contracting business, which must have a track record of three years before it can obtain a certificate. This is particularly hard, because the problem resulting from not obtaining a certificate is one of cash flow. There is no other real disadvantage, because any tax over-paid can be recovered, and any tax under-paid will no doubt be recovered by the Revenue.

The real problem is that cash flow will be restricted if a certificate is not obtained. This means that the small firm, and the new firm—which by definition is short of cash—will be put at a disadvantage in relation to the large firm, which is likely to be able to finance its operations whether it obtains a certificate or not. Again, the small man is put at disadvantage by these Regulations.

Some might argue that there should be no certificates at all, in order to even up the competition between large and small. I do not go that far, but I think it is another serious defect in the scheme, and I am sure that the Chief Secretary would acknowledge it.

Next, there is the undesirability of demanding proof of third-party insurance before a certificate can be granted to a firm. Nobody would cavil at the need for third-party insurance, or deny the Government the right to insist upon it. We have had these arguments in the past, and the argument is settled. But it is undesirable for the Treasury, in the pursuit of a tax objective, to insist that a matter related not to tax or the Revenue but to safety and insurance, should find its place in these Regulations. I hope that the Chief Secretary will acknowledge that it is odd for the Revenue to be insisting on this, and that he will find a better way of ensuring third-party insurance among sub-contractors.

The main contractor is placed in a difficulty, because the responsibility for deciding whether a certificate is false or true still rests with him. He still has to decide, on seeing the certificate, together with the photograph, whether it is genuine.

The problem in the past with enforcing certificate 715 has been that it has been very easy to forge. It has been easy to buy certificates in some public houses. These certificates have not been proof against transfers. I am not at all sure that the addition of a photograph will make them any better. I can imagine some clever people adding beards and moustaches, and slightly altering the slant of their eyes. It would not be too difficult to fake these photographs, but still the main contractor is responsible if he makes a mistake.

I remember corresponding with the Chief Secretary about a small builder in my constituency who failed to deduct what was then 30 per cent. from the account of one of his sub-contractors. He was taken to court by the Revenue for the tax unpaid by the sub-contractor. This action brought him to his knees. It was a simple slip and in no sense criminal. It merely showed gullibility or neglect, but the contractor who made the slip was virtually bankrupted by it.

The responsibility is still with the contractor in this new form of certificate, but it is much more difficult for him now, because the mere production of a certificate with a photograph is not enough. The contractor has to look at the man who is brandishing the form before him and to decide whether the man is like his photograph.

I do not know whether it would be in order for me to ask the Chief Secretary to produce his passport, but I would bet that the photograph in it does not in any way resemble him. It may well have ben taken 10 years ago, when he was even more handsome and beautiful than he is today.

I doubt whether it will be possible to lay on the main contractor the responsibility for deciding whether a man is like his photograph, or to make the contractor responsible for the payment of very large sums of money if he gets it wrong.

If the sub-contractor's certificate has been withdrawn at any stage, how is the main contractor to know? This point has been raised with the Revenue by the builders, and it is very important. Some sub-contracts can last a year or two, and if in the course of that time the Treasury refuses a certificate, or the renewal of a certificate, to a certificate-holder, how is the main contractor to know that he must henceforth deduct 35 per cent. He cannot know unless somebody tells him, and the last person likely to tell him is the sub-contractor. Therefore there should be some process whereby the Revenue should inform all main contractors in the case of the withdrawal of a certificate.

What is the territorial application of the Regulations? It is not stated whether they apply in the Isle of Man, the Channel Islands and Northern Ireland. Do they apply overseas? Suppose a British contractor, working in the Gulf, employs a British sub-contractor on a contract for the Shah of Iran? Does the 35 per cent. have to be deducted? What is the limit of the jurisdiction of the Regulations? This is an important point, because British contractors are doing a great deal of work overseas. Indeed, expansion is possible only if they are working overseas, because the Government have not been particularly successful at home in stimulating prosperity in the building industry. The territorial jurisdiction should he made absolutely clear.

I turn finally to the question of this obnoxious photograph. I have already expressed doubt whether it will be as foolproof as the Chief Secretary seems to think. In addition, many people find it extremely obnoxious to have to use signed photographs in connection with what are purely tax matters. We feel that it is an obnoxious distinction that the Government, who are not prepared to insist on identity cards for dealing with terrorism and the Irish problem, are prepared to use them in their pursuit of tax dodgers. That seems a very odd priority, especially as the Financial Secretary only a few minutes ago warned the House that we should not try to grab the last penny of taxation by measures which were too expensive. The Chief Secretary should be wary of trying to grab the last penny of tax by measures which are too obnoxious. Many people find the suggested use of photographs very obnoxious.

In the hope that the right hon. Gentleman will take on board some of the lessons of the way in which this matter is moving and that there will be some original thinking by the Government in finding less obnoxious ways of collecting tax, we do not intend to divide the House, but I should be grateful for answers to the questions that I have put and to those which my hon. Friends will no doubt want to put. I should also be grateful if he would animadvert upon the dangerous direction in which this family of legislation is taking us.

8.22 p.m.

Mr. Peter Hordem (Horsham and Crawley)

I should like to follow the very good speech of my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) in one matter—the important question of the additional powers that the Revenue is seeking, particularly the use of photographs.

There is no question that there has been considerable tax evasion by building sub-contractors. It has been estimated by the Revenue, and in debates in Committee on the Finance Bill, at £10 million. But I do not think that the Revenue or the Government have claimed that every member of the "lump" or every subcontractor is a tax evader. The question that we should ask is whether the powers that the Revenue has sought and been granted by the Finance Act 1975 are efficient or in need of strengthening.

There is an extraordinary contrast between the powers in that Act and those which obtained until then under the Finance Act 1971. The powers under the 1971 Act needed to be strengthened, but I am not convinced that the new powers were necessary or that the reason for them was purely fiscal.

It is well known that the trade unions have been against the "lump" for a long time, simply because their organisation in the building industry is small and ill-organised. A characteristic of the industry is that many people in it are not trade unionists; they are independently-minded people, many of them young, who set up small businesses in the industry in which they trained. There are about 360,000 self-employed people in the industry—a considerable number—who have no trades federation.

The Building Trades Federation represents large and organised firms, and there is no one to speak for the considerable body of self-employed people except, perhaps, Members of Parliament. A body as large as that should have its voice heard. I certainly see no reason why the self-employed should be branded by having to carry permits—that is what they are—with photographs attached if they want to receive tax concessions.

As my hon. Friend said, many of these people are Irishmen. It is a curious irony that although the Government do not insist that Irishmen should carry identity cards for security reasons, they are now forcing many of them—and Englishmen, too—to carry cards with their photographs attached for tax reasons. There is nothing wrong with the "lump" so long as its members pay their taxes. That is the only issue before us.

It is up to the House to decide whether these additional powers are reasonable. I believe that they go too far. The previous measures were ineffective, and led to widespread evasion, but that was because the Revenue's powers were generously interpreted. The Revenue issued thousands of tax exempt certificates which might not have been issued under a stricter interpretation of the Act. There is no doubt that many were forged and many were traded in pubs. They were known as "green cards", and I believe that the going price was £50 a time. But that was the fault of the certificate itself, which the Government will now, quite properly, put right. It was just as much the fault of the Revenue for issuing the old cards much too freely.

The right course is to make the conditions of issue of these certificates much more strict. That has been accomplished, by last year's Finance Act. Under the new conditions, any business which is to have this tax concession without deduction of the 35 per cent. rate must, first, have a bank account. Second, it must be carried on from proper premises with proper equipment, stock and other facilities.

Third, the applicant must have complied with all the obligations of the Taxes Act 1970 for the preceding three years. That is an important point. It means that a new entrant to the building industry who wants to carry out subcontracting will not be able to obtain the same benefits as are available to those sub-contractors who have been in the business for more than three years. That may not have a considerable effect, but it will have some effect in persuading people that it is not worth while to start up their own businesses as subcontractors.

New entrants also have to follow the National Insurance Acts and to be quite clear under that. They have to provide, for public liability, a policy of not less than £250,000. For the first time these Regulations apply to companies as well as to partnerships. Some partnerships may be sizeable firms, carrying out business in different parts of the country. The position is that in order to get exemption from the tax a partner has to produce his certificate and perhaps travel hundreds of miles to Scotland, or even to the Orkneys and Shetlands. That will put a considerable strain on a great many people which, in itself, is undesirable. Therefore, it will be much more difficult for new entrants to the building industry.

The fact is that the trade unions do not want more sub-contractors. They do not want more independent people in the industry. They would much rather that everyone was on a general register and in large firms, so that the trade unions and unionism could spread among those firms. That is their objective, and that is what the Government support.

Those who operate these businesses are perfectly entitled to do so as long as they pay their taxes. However, there is no doubt that the effect of the legislation will make it more difficult for new entrants to the business to carry on their affairs.

Finally, I turn to the question of the photographs on the certificates. This was not mentioned in Committee when we discussed the Finance Bill. There is no reason why people should be branded in this way just for tax purposes. I do not accept what the Chief Secretary said, in answer to a Parlamentary Question put to him, that this is in any way comparable to a photograph for security reasons. A photograph for that purpose is entirely reasonable, because the safety of others is involved. However, no one could say that the existing powers, which I have already outlined, are not sufficiently stringent. Not only are there the powers, which are effective enough, but if the rules are broken there is a fine of £5,000. That is a considerable deterrent.

What would be the position of a main contractor if he passes the holder of a certificate as being the person shown in the photograph? Surely he would be in some way liable if that person, who has produced the tax exemption certificate with the photograph attached, has been accepted by him? The fine is considerable. I hope that the Chief Secretary will deal with this matter. Does the main contractor have any legal liability at all? That position should be made clear. I see no reason why the Revenue's work should be done for it.

It was Ernest Bevin who said that the kind of foreign policy for which he was working was one in which a British citizen could go to any country he liked without a passport. The Labour Party has come a long way since then. Under this proposal 360,000 men will have to have a passport which is issued not for their own security, or for that of other people, but for tax reasons. I do not like this provision. It will be used as a precedent by this kind of Government. I hope that the Chief Secretary will put forward more convincing reasons than have so far been produced in Committee. This is an unfortunate precedent, and I hope that it will go no further.

8.32 p.m.

Mr. J. Grimond (Orkney and Shetland)

I support a great deal of what has been said so far about the Regulations. I shall not go over them again. Anyone of liberal sympathies in any party must be somewhat alarmed about the proposal for a photograph. It is another encroachment of the bureaucratic State. Further, it is most extraordinary that no such precaution is taken against conceivable terrorists but it is enforced against those who may conceivably offend against the tax laws—laws which are so incredibly complicated that practically everyone offends against them.

I support what has been said about sub-contractors in the construction industry. The salient feature of this country is that production is falling while obstruction after obstruction is put in the way of production. It would appear that the Government are more anxious to ensure that the trade unions are not offended than they are to increase production.

The particular aspect on which I want to comment is that which affects my constituency. Sub-contractors are an important element in industry in my constituency. Unlike possibly the rest of Britain we are desperately short of building resources. There is an immense demand from oil-related industries from every sort of construction. At the moment, the project on the Island of Flotta, which is the first pipeline to be brought to my constituency, is seven months behind schedule. In Shetland there is demand for housing, roads and construction of almost every sort. Any sensible Government would he encouraging all the various types of activity in this industry.

Only today representations were made to me about a matter which is not directly before the House but is related to the Regulations. That is the demand, as I understand it, that contractors will have to insure for a public liability of up to £250,000. The idea of contractors in the more remote islands of Orkney and Shetland—to which oil is coming, incidentally—undertaking this sort of thing is absurd. Clearly, this provision may have been designed to have some effect in the great cities, but these small men are not likely to run up public liabilities of £250,000.

There is great anxiety, which to some extent I share, about the growing demand in Scotland for separation. But can one wonder that people in my constituency are attracted to the idea of trying something new, when productive industry, essential to housing and construction of various sorts that is desperately needed at present, is hampered by Regulations which cannot conceivably have taken into account the situation in such places as Orkney and Shetland?

I do not particularly want to place undue emphasis on my constituency, but it so happens that these Regulations have come on the very day that I received these representations, and I think that they are quite justified.

I conclude by returning to my main theme. It is a most extraordinary sense of priorities that the Government should be putting obstructions in the way of people who are trying to contribute to the productivity of this country. No one approves of tax evasion, but it seems to me that that can be adequately dealt with, or dealt with to the maximum possible extent, under existing Regulations. If one wants to deal with tax evasion, the thing to do is to make taxation simpler and rather less oppressive. No amount of photographs and Regulations will persuade people that taxation is either intelligible or justifiable.

Lastly, this House should not pass Regulations demanding that for the sake of the Inland Revenue people should carry about photographs of themselves when we have been faced for six or seven years with absolute defiance of the law in Belfast and Northern Ireland generally, and terrorism of a very unpleasant sort and yet the Government are not prepared to enforce similar Regulations to help in stamping out terrorism.

8.38 p.m.

Mr. Graham Page (Crosby)

As the right hon. Member for Orkney and Shetland (Mr. Grimond) and my hon. Friends the Members for Cirencester and Tewkesbury (Mr. Ridley) and Horsham and Crawley (Mr. Hordern) have said, there is nothing wrong with the "lump", either legally or morally. In many cases it is a very beneficial form of trading and contracting. However, we must recognise that it is open to abuse from the taxation point of view.

These Regulations seek to prevent that abuse by placing heavy administrative burdens on the main contractor. My hon. Friend the Member for Cirencester and Tewkesbury mentioned the burden that is imposed right at the end of the Regulations. Certainly the penultimate Regulation, concerning the weekly return of vouchers, is a burden on the contractor.

There is the rather vague liability in Regulation No. 23, that the contractor shall make every effort reasonable in the circumstances to obtain such a voucher in respect of every such payment made to him. I wonder what is meant by "reasonable in the circumstances."

There are then some rather oppressive Regulations, such as Regulation No. 12, paragraph (1) of which says that the inspector, for any reason which he sees fit, may at his discretion make an assessment on the contractor in the amount which, according to the best of his judgment, he thinks may be owing. That amount becomes payable 14 days after the assessment is made, and not 14 days after notice has been given to the contractor. That is an unusual use of the Chancellor's power to make such Regulations.

Paragraph (1)(b) of Regulation 11, under which the contractor has to pro- duce documents, sweeps up all documents which may be specified by the authorised officer. Apparently, whether or not they happen to be in the possession of the contractor, documents may be specified by the authorised officer and the contractor is then under an obligation to produce them. He is subject to penalties if he does not. This is an abundance of legislative caution, which may place considerable burdens on the contractor if a meticulous inspector requires him to carry out every letter of the Regulations.

I want in particular to refer to Regulation 4, headed "Death of contractor". This says that If a contractor dies, anything which he would have been liable to do under these Regulations shall be done by his personal representatives. The Select Committee on Statutory Instruments, of which I have the honour to be Chairman, considered the Regulations, and that Regulation in particular, Here I express the Committee's gratitude to the civil servants who gave evidence about it. What concerned the Committee was that under general law a personal representative is liable only for the assets that come to his hand. The witnesses readily agreed to that, and said that it was the intention that the Regulation should go no further. But, as is shown in the Third Report of the Select Committee, they relied on the general law overriding the Regulation. They agreed that the personal representative of a contractor would not be called upon to make payments out of moneys that had not come to him from the contractor.

Throughout the Regulations there are several provisions for the payment of money by the contractor. He may die bankrupt or insolvent, leaving no money. If he does, and if Regulation 4 is taken literally, the personal representative will have to make payment out of his pocket. The Committee was given the assurance that that was not the intention, but it would be simple to give effect to that assurance in the Regulation.

I believe that if the personal representatives received no money, or insufficient money to meet the contractor's liabilities, the court should have to say "Parliament has passed this. It has considered the Regulation and has left these words imposing an absolute duty on the personal representative, without any qualification." Therefore, I hope that the Minister will think again and consider whether it is necessary to have amending Regulations.

After all, this Regulation, fortunately, does not come into operation until a further Statutory Instrument from the Treasury brings it into operation. There is good time yet to make an amendment and bring in an amending Order. I hope that the Minister will not disregard a Report from the Statutory Instruments Committee. That Committee works hard on these matters. So do the servants of the right hon. Gentleman who give evidence. Our reports to the House are selective. The Committee does not report every case on which it hears evidence; it is often well satisfied by the evidence that it receives. In cases in which it is not satisfied, and it reports to the House, I hope that the House will heed its Report and, if necessary, make corrections in the Statutory Instruments.

8.46 p.m.

The Chief Secretary to the Treasury (Mr. Joel Barnett)

I begin by congratulating the hon. Member for Cirencester and Tewkesbury (Mr. Ridley). I know that he has often spoken from the Opposition Front Bench, but I hope that this is now a more permanent situation. I am sorry to see him shaking his head to that suggestion, because I find him much more responsible when he speaks from the Dispatch Box. He does not seem to have quite the reactionary attitude he normally displays. I think that it has some effect on him. In another way I have always found his reaction and reactionary attitudes charming. As the hon. Member knows, I am very fond of him. I am, however, sorry that he has shaken his head, suggesting that he will be on the Opposition Front Bench only for a short period.

Before I deal with the detailed points that have been raised, particularly by the hon. Member for Cirencester and Tewkesbury, I wish to say something about the Regulations. These Regulations put the administrative flesh on the revised subcontractors' deduction scheme introduced by the Government in last year's Finance Act. The Regulations provide the rules governing the way in which the scheme is to be operated in pay offices on thousands of building sites throughout the country. They replace Regulations made in 1971 and 1972 which dealt with the administrative arrangements for the original 1971 deduction scheme.

The Regulations come into effect in two stages. The first stage came into effect on 23rd December and activated those Regulations which enable sub-contractors' tax certificates to be issued before the new scheme starts. The second stage, which activates the remainder of the Regulations which deal with the operation of the new scheme, will come into effect on a date to be announced in due course. It will probably be some time in the summer.

Although this year's Finance Bill and these Regulations revise the 1971 scheme, they do not change the general principles underlying it. The Opposition, when in Government, designed and introduced the original scheme to deal with the widespread tax evasion in the construction industry, particularly by those using the "lump" system. I was pleased to note that everyone who has spoken tonight would in no way wish to support tax evasion of this kind. This is in no way a criticism of those many honest people, self-employed, whether in the sub-contracting industry or any other industry, who do a first-class job and pay their taxes in full without any evasion. It is ludicrous to suggest that what we are doing here is in any way an attack on that kind of person or trader.

We supported the 1971 scheme. Its intention was to ensure that a deduction was made from all payments to subcontractors unless a sub-contractor could satisfy his main contractor that he was the holder of a special Inland Revenue certificate. Those certificates were intended to go only to honest sub-contractors who could be relied upon to pay their taxes at the end of the year like other self-employed people.

Unfortunately I have to tell the right hon. Member for Orkney and Shetland (Mr. Grimond) that a lot of things have gone wrong. With the benefit of hindsight it can be said that the scheme was introduced too gently and perhaps with insufficient recognition of the determination there would be to abuse it. That is always the problem with any tax system. Many hon. Members regularly ask for a simple tax system. The fact is that any tax system that is introduced is, regrettably in many ways, within a short period of time not just avoided—which is perfectly legal—but evaded. That is what has happened here.

In practice, the 1971 scheme has proved to be riddled with loopholes. Tax evasion has continued and remains a national scandal. The abuses have been well documented. Certificates and other documents have been openly bought and sold; certificates have been forged and contractors have often been unable to tell whether the persons presenting the certificates to them were genuinely certificated or impostors, and less scrupulous contractors have failed to inspect certificates at all.

There were also legislative weaknesses. It was too easy to qualify for one of the new certificates, and many have been obtained by unreliable sub-contractors who have no intention of meeting their tax obligations. There was also a let-out by what might be called the disappearing one-man company trick for companies which were not covered by the deduction arrangements. Under this many subcontractors who are unable to obtain certificates have set themselves up as one-man companies in order to obtain payment in full and avoid the deduction, leaving the company as a shell and disappearing before the Inland Revenue can get the tax or their accounts. For example, one company registered abroad, but now untraceable, was known to have been receiving payment at the rate of £3 million a year without any tax being paid.

The result of all this was that at one time, in addition to companies which did not need certificates, we know now that there were over 400,000 genuine certificates in existence, a substantial number of which were clearly being used by people other than their rightful owners. There were also an unknown number of forged certificates in circulation. We can never know exactly the amount of tax being lost, but the best evidence we have indicates that it is a minimum of £10 million a year, and probably a great deal more.

Although, as hon. Members have said, there are times when one may not want to go too far in administrative action, when tax evasion is on this scale it would be an appalling neglect by any Government or the House of Commons not to take action to deal with it. Clearly, this situation could not go on, and I doubt whether any hon. Members or anyone else would want it to continue.

We took action in the Finance Act 1975 and these Regulations tie up the ends. In the Finance Act, for example, we extended the deduction arrangements to cover all companies, instead of just sole traders and partnerships. Therefore, it will not be possible in the future for someone to turn himself into a company simply to avoid or evade the tax. We have toughened up the qualifying conditions for obtaining a certificate. The administrative weaknesses, on the other hand, such as the faulty design of the certificates are dealt with in the Regulations.

I hope that the Opposition, who introduced the scheme when they were in office and have seen it so abused, will now support our attempts to put it right. I am pleased that they do not intend to vote against it. I feel sure that they will not want the evasion, and the criminal activities that have grown up with it, to continue. Tax evasion is not just a matter between the evader and the Inland Revenue. It is a matter of concern to the community as a whole. One of two consequences must flow from that. Either tax rates for everyone else must be that much higher than they would otherwise be or the Budget deficit, and therefore the borrowing requirement, must be that much larger. When the evasion is of this order the effect is not inconsiderable.

A number of Conservative Members have criticised the proposal that the new certificate should incorporate a photograph of the owner. That was the burden of the complaint of most Conservative Members. It seems that they are in danger of getting the whole matter completely out of perspective. The inclusion of the photograph is merely one of the ways in which the certificate is being redesigned. It is absurd to suggest that a certificate of this description—I have a copy of the type of certificate that will be used and it is rather like a bank cheque card but with a photograph incorporated—is a terrible abuse of personal liberty.

There are literally hundreds of organisations throughout the country that are issuing certificates incorporating photographs. I know that the hon. Member for Horsham and Crawley (Mr. Hordern) said that it is sometimes necessary for a certificate to incorporate a photograph for security reasons. I take it that the hon. Gentleman had in mind the type of pass that is carried by Members of Parliament. However, there are many organisations which issue certificates that incorporate photographs, and one of the purposes is to save money. For example, British Rail issues certificates bearing photographs for student concessionary travel. There are a variety of other areas in which similar documents are used for security reasons. It is a considerable exaggeration to suggest that the issue of a certificate of this description is of such a serious nature as has been suggested.

The existing certificate issued under the 1971 scheme is a simple piece of paper with a space for the completion of the owner's name, the number of the certificate and the date on which it expires. I do not criticise the Opposition for having produced a document of that sort when in Government. Probably none of us realised the efforts that would be made by certain elements in the construction industry fraudulently to abuse the certificates. However, the plain fact is that they have been a disaster. Large numbers of them have been forged and even now these are in circulation. Others have been altered, having been sold by or stolen from their proper owners. Because the certificate is such an unsophisticated document, such activities are not easily detected. Many dishonest sub-contractors, unable to obtain certificates of their own, are using impersonation or forgery to obtain payment gross, and then disappearing before the Inland Revenue can catch up with them.

Before paying a sub-contractor without deduction of the 35 per cent., a contractor is meant to check that the sub-contractor is the owner of a valid certificate. It has been suggested that, instead of introducing a new certificate with a photograph, we should apply pressure to contractors to carry out a proper inspection of existing certificates. The problem is that very often contractors cannot tell from the old style of certificates whether the certificate that is presented to them is genuine and owned by the individual who presents it.

Contractors cannot be experts on forgery and impersonation. To expect too much from them would have two unsatisfactory results. Some contractors would become discouraged and would give certificates little or no inspection. That would compound the felony and the tax loss. Other contractors, determined to carry out their statutory obligations in full, would hold up payments to sub-contractors until they could be absolutely sure that they were paying out on a genuine certificate. That could cause major cash flow problems to sub-contractors and administrative headaches for contractors.

Mr. Norman Tebbit (Chingford)

In dealing with the problems which must arise between the sub-contractor and the contractor, will the right hon. Gentleman say something about the problems which may arise if during a sub-contracting operation the sub-contractor's certificate is withdrawn? How will the contractor know about that and what should he do when confronted with such a situation?

Mr. Barnett

I understand why the hon. Gentleman could not be in the Chamber at the outset of this debate, but that is a question that has already been raised. I said that I should be dealing with such points after dealing with the Regulation as it stands. A large number of detailed points have been raised.

I was explaining that we are having completely to redesign the certificate. Instead of being a flimsy piece of paper it will be a plastic card of the type that I have indicated to the House. It will be similar to a bank cheque card. It will have engraved on it the owner's name, national insurance number and certificate number. It will also have various security checks on it, which should make it virtually unforgeable. I am sure nobody can complain about those changes.

But we still have the problem of the sub-contractor who obtains someone else's certificate and impersonates him, thereby seeking to deceive contractors. We gave this problem a good deal of consideration, and it was clear to us that the best way to enable the contractor to check that the certificate has been presented by the right person is by having a photograph on it. Let me make one point clear, because there has been some misunderstanding about it. The photograph is not there so that the Inland Revenue can inspect it. It is there as a protection for the sub-contractor, to prevent other people using his certificate to obtain payment in his name. Most of all—this will answer the point made by the hon. Member for Chingford (Mr. Tebbit)—it is a protection for contractors, who are, in the last resort, liable for any tax they fail to deduct—because they will be able positively to satisfy themselves that the presenter is the proper owner. I must emphasise that the photographs are required for this purpose of identification alone.

Some suggestions have been made—not in this House but elsewhere—about what they might be used for. I can give an absolute assurance that a photograph will remain the property of the Inland Revenue and is not, and will not be, available for inspection by anyone else or for any other purpose than tax. The overwhelming majority of honest sub-contractors have not objected to the proposal for photographs, probably because they realise that it will be the most effective check on the rampant misuse of documents. They will also know that the rest of the tax-paying community are sick and tired of the way in which those on the "lump" have been able to milk the Exchequer at their expense, and they see no reason why proper action should not be taken to prevent them doing so in the future.

Those responsible for tax collection—both Treasury Ministers and the Inland Revenue—are sometimes attacked for seeking to collect tax when it is too late—when, for example, the taxpayer has already gone bankrupt or fled the country. These new arrangements are intended to prevent the tax loss before it happens, instead of pursuing it after it has. For this alone, it surely deserves a welcome.

When we introduced this revised scheme in the last Budget, we announced that the Inland Revenue would consult the construction industry about its implementation, so as to reduce to a minimum the interference with normal day-to-day business. We have honoured that promise. Detailed discussions of a num- ber of the matters dealt with in these Regulations have taken place between the Revenue and representative organisations. From the Revenue's point of view, the discussions have been most helpful. I hope that the representatives of the industry feel so as well.

The Regulations now contain a number of features reflecting points that the industry has put to us. In particular, the arrangement laid down in Regulation 22 is designed to assist contracting and subcontracting companies who have a large number of contracts running at any one time.

The point was made by the industry that where a company operates on a nation-wide basis and with many individual contracts in hand at any one time there could be serious difficulties in arranging for their certificates to be inspected by all their main contractors.

We have done two things to deal with this problem. First, we are proposing to have a special certificate for these companies, which will be in the company's name, not that of an individual director, so that it can be circulated to main contractors by post or by local agents, and not have to be presented personally. Secondly, Regulation 22 provides an alternative method by which this type of sub-contractor can obtain payment without deduction. He can provide the contractor with a declaration of the details of his certificate and ask the contractor to make the payment into a nominated bank account, of which he has previously notified the inspector of taxes. If the contractor has any doubts about the genuineness of the declaration, he checks with the Inland Revenue that the bank account details tally. I believe that these arrangements will greatly assist the practical administration of the revised scheme and, in particular, will ensure a smooth transition as we move from the old, existing scheme to the new one.

Perhaps I may now deal with the many points raised in this brief debate. The hon. Member for Horsham and Crawley asked about the liability of a contractor who failed to check a certificate and paid a sub-contractor in full. The subcontractor might, for instance, be using someone else's certificate. In these circumstances, the contractor will lay himself open to having to pay the tax that he should have deducted. This was one of the problems under the old system through which we lost a considerable amount of tax. With the new certificates, it will be much easier for the main contractors, and I believe that we have helped them.

Mr. Hordern

Will the main contractor be liable to a fine of £5,000 as well?

Mr. Barnett

No, he will just be liable for the tax he should have deducted.

The hon. Member for Cirencester and Tewkesbury asked how a contractor would know if a sub-contractor's certificate had been withdrawn. The Inland Revenue does not intend to circulate all contractors in these circumstances but it will tell contractors who are known to have recently engaged a man whose certificate has been withdrawn. If a contractor has not been told and pays a gross wage in good faith, no action will be taken against him.

The right hon. Member for Crosby (Mr. Page) raised a point about which he and the Select Committee on Statutory Instruments, of which he is the distinguished chairman, have been concerned. We pay very close attention to what the Committee does because we know that it does not report to the House everything that comes before it. He and his Committee are worried that under regulation 4 personal representatives might have to discharge the liabilities of a deceased contractor. This Regulation is an exact copy of Regulation 12 in Statutory Instrument No. 1779 of 1971 which it replaces.

There has never been any problem of the old version being interpreted in the way the right hon. Member fears. A similar provision also appears in a PAYE Regulation No. 33 of Statutory Instrument No. 344 of 1973. This provision has existed in the PAYE Regulations since 1944 and it has never been suggested that it involves personal liability on the part of representatives. I can understand the right hon. Gentleman's concern about the strict legal position, but I am advised that no court would be likely to interpret the Regulation in the way which worries him and his Committee.

The principal purpose of the Regulation is to enable us to ask a personal representative to make a return that a deceased contractor was liable to make. For that purpose, it places the representative under the same obligations as the contractor, including the obligation to account to the Revenue for amounts the contractor had, or should have, deducted on payments to uncertified sub-contractors. There is an overriding principle that the personal representatives are liable only to extent of the assets of the estate they are administering. The only exception is in the case of devastavit—in layman's terms, a wrongful dispersal of assets. We did not consider that there was any difficulty in relying on a general principle of law in interpreting this Regulation. If it had been our intention, which both the right hon. Gentleman and the Committee conceded it was not, to recover these amounts from the personal representative's private funds, it would in our view have required very clear and express terms to achieve such an objective.

The right hon. Gentleman suggested that it would clarify the position to include a proviso limiting liability to the assets in the estate, and I appreciate his concern about that. However, there would be problems there, too. To do that in the present Regulations alone would have the opposite effect and would throw real doubt on the scope of the PAYE Regulations and other provisions which did not include the words. Any contractor's executor who had to deal with both PAYE obligations and the obligations under these Regulations would feel that his liability was wider under the one than the other. I can assure the right hon. Gentleman and the Committee that an explanation of the extent of the liability will be given in the explanatory booklet which we are to issue, and it will make clear that the provision does not involve a charge upon the representative's personal assets.

Mr. Ridley

Is it not a bit unfair that the main contractor's liability to pay tax in respect of a defaulting sub-contractor might be very much greater than his entire assets? In other words, the fine on him for his negligence or carelessness or his failure to observe that the certificate is bogus or forged could be unlimited. He might secure a contract for £1 million and sublet £999,000 of it. His liability would therefore be enormous compared with the size of his stake. Is it a fair principle that the risks a contractor faces are commensurate not with his offence but with the size of the subcontract which he has let?

Mr. Barnett

I think the sort of example the hon. Gentleman has given is unlikely to occur. If I were that contractor and I knew that by not deducting tax from a particular firm I would be leaving myself open to that kind of liability, I would be more than a little negligent in not ringing up the Inland Revenue to find out whether the certificate was genuine. More often than not the sub-contractor used will have been used for a long time by the main contractor, and the main contractor will know that there has not been impersonation and forgery, and he will know that the certificate is valid.

The right hon. Member for Crosby also raised the question of the powers of collectors to demand money within 14 days. The 14-day period is already well established in PAYE tax, with the amount deducted being payable 14 days after the 5th of each month. All this amounts to the contractor simply holding someone else's tax. It is not the main contractor's money. It is money he has deducted from a sub-contractor who does not have a valid certificate, and it is not unreasonable that he should pay it over as quickly as possible.

Mr. Graham Page

I realise that the provision is partly a repetition of the PAYE provisions, and I understand the 14-day period. But that is not quite the position in the Regulations. That can be an assessment at any time and for any reason which the inspector thinks fit. Within 14 days of the inspector thinking fit and making the assessment, the money becomes payable without any notice in this case to the main contractor.

Mr. Barnett

In practice, I should be surprised if inspectors of taxes behaved in the way suggested by the right hon. Gentleman. As I have said, this money does not belong to the main contractor who has deducted it. We are not being unreasonable.

The hon. Member for Cirencester and Tewkesbury—ever ready to find unusual questions to put to me—asked about territorial coverage and whether a contractor or sub-contractor could be found liable if he had not deducted tax for something he had done in Saudi Arabia or elsewhere. The area covered is the United Kingdom, that is to say, England, Scotland. Wales and Northern Ireland, but not the Isle of Man or the Channel Islands. It also includes territorial waters. To that area must be added installations to which the Mineral Workings (Offshore Installations) Act 1971 applies.

Several hon. Members referred to the three-year rule and the condition that requires a sub-contractor to have been within the tax net for three years before he can obtain a valid certificate. That condition is not, strictly, part of the Regulations. It is a statutory condition contained in the Act. Judging by what was said by the hon. Member for Cirencester and Tewkesbury and the hon. Member for Horsham, there is some misunderstanding. There would be no need for a man who had been on PAYE and who suddenly became self-employed to have three years' Schedule D assessments before being able to get a valid certificate. His period under PAYE would count. In that sense the arrangements for the self-employed would not be so harsh as was suggested.

The type of person who would be affected is the immigrant who has no tax record, the school leaver with no tax record and the person who comes out of prison with no tax record for the previous three years. A normal trader would not experience that difficulty. Most traders, even if they have been in business only for a short time, will have some PAYE record before going into business.

Under this scheme and these Regulations, inspectors of taxes will have discretion in the allocation of the valid certificate. My experience of inspectors of taxes has always been that they use their discretion fairly in the allocation of certificates. They have made clear to industry that they do not intend to withhold or withdraw certificates for any small matter. Only a serious matter would cause the withholding or withdrawal of a certificate.

The right hon. Member for Orkney and Shetland conjured up the difficulties of a small trader in one of the islands in his constituency having to bear the burden of a £250,000 public liability insurance as one of the conditions. It is possible that even the smallest of contractors who did not take out a public liability policy for the sum of £250,000 could find himself in much greater difficulties. For example, there has recently appeared in the Press a report about a fire started by a painter's blow torch causing £8 million worth of damage. In the past, considerable penalties have been awarded against small sub-contractors. From discussions we have had with the industry, it is our understanding that this kind of public liability policy is by no means excessive.

Several hon. Members, including the hon. Member for Cirencester and Tewkesbury, asked about the voucher scheme. I was asked whether vouchers could be returned three-monthly rather than weekly. One of the weaknesses of the present scheme is that vouchers are returned too late for the Inland Revenue to catch people who are misusing them. That is one of the reasons why we are closing the loopholes and why vouchers will be asked for weekly. In that way the Revenue will be able to catch the defrauders while they are still on the site, which has not been possible hitherto. Special arrangements have been introduced to reduce the administrative burden of the major contractors.

These schemes were devised in close consultation with the industry and at its request. The hon. Member for Cirencester and Tewkesbury raised the question why local authorities should be deemed to be contractors within the scheme. This has nothing to do with the Regulations but it is part of the Finance Act. The local authority situation is still under discussion between the industry and ourselves. The purpose of deeming local authorities to be contractors, which is the same provision as was included in the Conservatives' Act of 1971, is that they frequently engage in contractual arrangements with construction firms usually through their own contracts department. If local authorities were not deemed to be contractors the payments they made would fall outside the scheme and there would be a loophole for the "lump" and other uncertificated sub-contractors to obtain considerable work—as we understand it, 50 per cent. of construction work at present is handled through local authorities and the Department of the Environment —without being subjected to the 35 per cent. reduction.

Mr. Ridley

Does that not indicate that there should be an inquiry into direct labour? If direct labour is the cause of this very damaging new provision—admittedly it was in the previous Regulations—should we not tighten up the rules under which direct labour operates, by circumscribing direct labour rather than sub-contractors?

Mr. Barnett

Like the hon. Gentleman, I am concerned to keep down the level of public expenditure by having as few further inquiries as possible. However, I am not in favour of abolishing direct labour because I do not go along with the hon. Gentleman's view on that subject. I do not think it is as serious a matter as the hon. Gentleman has indicated. Indeed, his own Government, which he from time to time supported, included the same provision in their Act. It worked perfectly well.

Mr. Tebbit

The Minister is right to say that there was provision in the previous Conservative Administration's Act. The difference is that until these Regulations become law non-corporate bodies only are included in the net. Now that corporate bodies are included, the net is widened to such an extent that the whole principle is changed.

Mr. Barnett

When I tried to explain this matter earlier I thought that the hon. Gentleman was nodding in agreement. He may have been nodding off, but I thought he was nodding in agreement. One of the major abuses of the 1971 scheme was the facility with which single contractors or sub-contractors were able to form companies, evade tax and get away with substantial sums of money. Therefore, the fact that the large companies which operate nation-wide will have this special type of certificate and special scheme which will be nothing like so onerous—indeed it was a scheme which was prepared in conjunction with the industry—

Mr. Tebbit

I agree with the Minister that it is essential to bring corporate bodies within the provisions because of the amount of fiddling which has gone on. However, my point is that the bringing in of corporate bodies changes the nature of the issue of the local authorities being regarded as main contractors. Therefore, many more people are now caught in the net than under the old Regulations.

Mr. Barnett

I entirely accept that. One of the difficulties in this scheme has been to differentiate between the big or the small perfectly genuine company and the one-man disappearing type of company. In order to ease the path for the larger companies—the companies which operate nation-wide—we have introduced this scheme which we think will be helpful.

Finally, I should like to deal with the point made by the hon. Member for Cirencester and Tewkesbury, which was raised with me in correspondence by the right hon. and learned Member for Surrey, East (Sir G. Howe), about issuing the forms to sub-contractors and asking them to apply for the new contract. As I explained to the right hon. and learned Gentleman in our correspondence, the application forms were sent out as quickly as possible after the new legislation received the Royal Assent to give firms in the industry time to get their applications in and examined and their new documents prepared before the scheme came into force. The danger is that a firm which delays could find that it does not get a certificate in time and will have to suffer the 35 per cent. deduction. As I assured the right hon. and learned Gentleman, and I assure the House, inspectors will accept applications from sub-contractors who refuse to supply photographs and will proceed with the processing of them, leaving the question of the photographs to be sorted out when the Regulations become law.

Mr. Ridley

The right hon. Gentleman must realise that if we were to prevent the Regulations coming into force tonight—there are enough of my hon. Friends present to do that considering the right hon. Gentleman's audience—he would have incurred public expenditure illegally by sending out these forms. How would he justify that? The right hon. Gentleman would be in the same position as his right hon. Friend the Home Secretary when he collected television licence money illegally. How would the taxpayer be reimbursed? That is the danger of what he did.

Mr. Barnett

The hon. Gentleman has got carried away with himself again. We were merely sending out the forms. We were not collecting any tax on them. The old situation still applied. There was no question of collecting tax illegally. I hope that the hon. Gentleman is satisfied. I suppose it is always asking a lot, but, knowing his good nature, I am sure that he is.

I hope that I have replied adequately to all the questions which were put to me.

Mr. Tebbit

I apologise for having been late getting here, but the debate came on earlier than I expected. One point still worrying many people in the industry concerns the appeals procedure when a certificate is refused. As the right hon. Gentleman knows, if it is refused on the ground of the company's tax record, the Commissioner's discretion cannot be reviewed by the appeal body. What is the position in those circumstances? Is there any form of appeal for someone who has been refused a certificate on the ground of his previous tax record?

Mr. Barnett

No. That appears in the main Act. It is not in these Regulations. There is no appeal in those circumstances. I have considerable sympathy with this problem. Even if a sub-contractor has not fulfilled every dot and comma under the terms of the Regulations and the Act, the inspectors will use their discretion reasonably. In my experience, they always have, and I have no doubt that they will in these circumstances. A rigid appeals system in that kind of situation could do positive damage to the sub-contractor. I have looked into the matter closely, because I was concerned to see how it would work. I will certainly keep a close eye on it to see whether any changes are necessary.

I hope that the House recognises that these Regulations, which have emerged after considerable discussions between ourselves and the industry, will be helpful to all concerned. I am sure that we all want this scandalous evasion of tax brought to an end. Therefore, I am happy to recommend the Regulations to the House.

Question put and negatived.