"In section 8 of the Taxes Act (personal relief), after subsection (1B) there shall be added the following subsection:—
(1C) If the claimant is liable to Class 2 and Class 4 contributions under the Social Security Act 1973, the deduction to be allowed under this section shall be increased by an amount equal to income tax at the standard rate on that part of his contributions which corresponds to the contribution payable by an employer in respect of an employed earner"".—[Mr. Paul Dean.]
§ Brought up, and read the First time.
§ Mr. Paul Dean (Somerset, North)
I beg to move, That the clause be read a Second time.
The clause seeks to give relief to the self-employed. It looks a somewhat technical matter, but the point is a simple 494 one—namely, that the self-employed should be given tax relief on that part of the national insurance contribution which corresponds to the employer's national insurance contribution which is regarded as a business expense.
The background to the new clause is that substantial new taxes and other burdens have been placed by the Government on the self-employed and small businesses. Although there have been some reliefs in the Finance Bill, they have been tiny in comparison with the addition impost imposed in the last two years. The self-employed and small businesses have, in my judgment, had a raw deal.
§ Sir John Hall (Wycombe)
On a point of order, Mr. Speaker. I believe that the microphone my hon. Friend the Member for Somerset, North (Mr. Dean) is using cannot be working. At this end of the Chamber it is almost impossible to hear his remarks.
§ Mr. Dean
I am grateful to you, Mr. Speaker, and to my hon. Friend for drawing attention to the matter.
I was saying that in my view the self-employed and small businesses have had a raw deal, because their burdens have increased, are increasing and should be diminished.
I wish to remind the Government that on 13th January this year a resolution was passed which read as follows:That this House recognises the importance of the self-employed and the small independent business in the industrial, commercial and social life of the nation; accepts their major contribution to the maintenance of employment and the restoration of Great Britain's economic health and calls on Her Majesty's Government to find means of alleviating the taxation and other burdens which threaten their existence, and to conclude as quickly as possible the reviews of national insurance provision for the self-employed both at home and witthin the EEC.Ever since that resolution was passed by the House—it is over four months now—we have been waiting with great anticipation for Government action to implement it. Indeed, that anticipation was sharpened on the 17th February this year when, in reply to a question which 495 I put to the then Prime Minister, I got as part of the answer:It was a good resolution and the House accepted it, with our support."—[Official Report, 17th February 1976; Vol. 905, c. 1124.]Therefore, we had a resolution passed by the House on 30th January and shortly afterwards the then Prime Minister said that it was a good resolution passed with the support of the Government. We are entitled to ask what action the Government have taken and intend to take to implement that resolution.
It is not only a matter of a resolution of the House. We are also dealing with a section of the community which is vital to the economic and social health of the nation. One has only to consider a few examples which clearly illustrate that, under present conditions, the self-employed and small businesses have one hand tied behind their backs with the burden which they are bearing, whereas with a little encouragement they could transform the employment situation in our community.
One recognises that there are something like 800,000 small businesses in our community. If each one could be persuaded to take on one extra man or woman, that would have a dramatic effect on the employment situation of the country. If on the other hand, through increasing burdens, each of those 800,000 firms had to sack one extra man or woman, that too would have a dramatic effect on the employment situation.
Another aspect, which I believe is of great significance in the context of the Bill, is that we are living in the age of the ailing giant, the large public corporation, nationalised industry or large private enterprise concern, with a bad track record but an insatiable appetite for taxpayers' money. If we are to restore our economic health, we must pay more attention to encouraging small businesses to make the contribution which they can to the health and life of our nation.
A third point is that if one looks for the qualities of private enterprise or innovation, where does one look? One looks to the small independent business. If one wants to find good working relations, where the boss knows the employees and the employees know the boss, where does one look. One looks to the small business. If one wants to find a good example of 496 productivity, where does one look? One looks to British farmers, in the majority of cases family businesses run by the boss and his family. If one wants a good example of hard work, long hours and service to the community, where does one look? The shopkeeper, the doctor, and the parson are very good examples of this. This is the backbone and, in my judgment, the importance of this somewhat technical new clause.
What has happened since that resolution of the House was passed on the 30th January this year? One of the first things that happened was a big increase in national insurance contributions in April. I am not disputing that an increase was necessary and that some increase should be paid by the self-employed like everyone else. In terms of implementing the resolution of the House, however, the Government have obviously, through this additional impost, taken on a minus mark.
The increase in tax relief in the Budget means that in many cases the self-employed are worse off. For example, a self-employed person with taxable profits or gains of £5,000 a year is now paying an extra £104 a year in national insurance contributions out of his net income. But the tax concession in the Bill for a £5,000-a-year family man with two children is only £87.50. So he is clearly worse off. Again, the lower limit for class 4 contribution liability has remained unchanged at £1,600, despite the fall in its real value. This means that many self-employed people who hitherto did not pay the class 4 contribution at all have been drawn into that net.
Those two examples illustrate the additional impost in national insurance contributions, which has not been compensated for by the tax reliefs in the Budget. It is true that there are some reliefs in the Budget which will be of some help. The changes in corporation tax and capital transfer tax will bring some assistance to this group. The reductions in the penal rate of 25 per cent. of VAT will also help, although it is disappointing that we still have multi-rate VAT, a low starting point, VAT on bad debts and the VAT bureaucracy which causes so much unhappiness to the self-employed. But at least the halving of the 25 per cent. rate is some help.
497 Another modest measure in the Bill is the improvement in the provisions for retirement annuities for the self-employed. However, although the amount which can be put aside is raised from £1,500 a year to £2,250, that does not itself restore the value of the original figure when it was introduced in 1971. That would require a figure much nearer £3,000. In addition, there has been no increase in the percentage of earnings which can be put aside. That remains at 15 per cent.
Thus, although there have been improvements, the provision that the self-employed can make for themselves is still trailing behind in real terms and is inadequate when compared with the financial provision allowed to employees in both public and private sectors—[An HON. MEMBER: "Civil servants]—ineluding civil servants. These reliefs, welcome though they are, are tiny in comparison with the new imposts applied in the last two years. That is why I suggest that we now have an opportunity in the new clause to do a little more on the national insurance side.
I recognise that this is not the time to debate the details of national insurance, and I merely say in passing that it is, of course, right that the self-employed, like other sections of the community, should help to meet the growing cost of benefits. I believe that the combination of the class 2 flat-rate contribution with the class 4 contribution, which is the nearest equivalent to the earnings-related contribution, is probably the best and fairest method of ensuring that the self-employed pay their fair share. But in assessing what that fair share should be, and in support of the new clause, I suggest that we have to take into account that the self-employed do not get all the benefits available in the National Insurance Scheme.
They are not entitled to the benefit of the Industrial Injuries Scheme or the earnings-related sickness benefit. If they travel abroad in the EEC, they do not have the medical and other benefits that are available to the Community as a whole. If one looks at their claims record, we all know from our own experience of the self-employed that they will go on working when many other people will be drawing sickness benefit 498 and taking a week off work. We also know that many of them continue working full-time long after the normal retirement age and, therefore, are postponing drawing their pension. We know, too, that many of the self-employed are also employers and have to pay the employer's contribution as well as that of the self-employed.
I know that the Government will say the national insurance position is being considered and that we must wait until that consideration is complete. If the Minister intends to use that argument, it really is not good enough. In the new clause my hon. Friends are not asking that the whole of the national insurance contribution for the self-employed should be tax deductible. We are simply asking that that part of it which corresponds to the employer's contribution should be tax deductible and that in this respect the self-employed should have the equivalent benefit which is available to the employer. When this subject was last debated in the House on 10th June last year, the Minister of State—who I am glad to see is here listening to the debate and is to reply tonight—also replied on that occasion. My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) moved an amendment somewhat similar to the clause I am now moving.
I want to quote just one of the arguments which the Minister of State used on that occasion, because I suspect that he will use it again tonight. The hon. Gentleman said:As for the employer, he is in a rather different situation. He is not getting any benefits. By law, he has to pay part of these contributions in order to run his office; it is a business expense and it is wholly and exclusively paid for the running of his business, and so is allowable."—[Official Report, 10th June 1975; Vol. 893, c. 276.]That, of course, is true, but I submit that it is only part of the argument. After all, the self-employed person has to find his contribution out of his own pocket. As I have said, he is often an employer as well, and being also an employer he has also to find the employer's contribution out of his own pocket. In this situation both these contributions are personal to him in his family business. The more he has to pay in contributions, the less there is for his family or to plough back into the business.
499 When we are dealing with the employer in a public corporation or a nationalised industry we are dealing with a very different situation. We are dealing in the first place, in the majority of cases, with a salaried employee. Even the so-called employer is a salaried employee. We should be talking not about an employer's contribution, but about a company contribution—a contribution which comes out of the firm and in no sense comes out of the employer's pocket. Indeed, the employer, in this instance, for national insurance contribution purposes is an employee like everybody else in the firm and, like everybody else, he should pay an employee's contribution and be entitled to the full benefits of the scheme.
I submit that the analogy that the Minister used last year does not stand up. We ought to take into account the different levels of responsibility and, therefore, the relative burdens of the contributions on the individuals concerned. With the self-employed, the responsibility is more direct. It is more personal to the self-employed and to the small family business. I suggest that one way in which we can recognise this responsibility is by providing the tax relief proposed in the clause.
The final aspect which I should like to mention briefly is that of cost. The Minister will no doubt tell us what the clause would cost. I have made my own estimate of its financial implications. I made my estimates from a Written Answer in Hansard of 22nd May 1975. I calculate that the loss of revenue to the National Insurance Fund would amount to about £50 million a year. When we consider that the fund receives over £1 billion a year in contributions, I suggest that £50 million is a comparatively small sum.
We are talking about a proposal for this year. It is clear from the Government Actuary's figures that the National Insurance Fund will be able to meet its liabilities for pensions and other benefits this year without any increase in contributions. There are sufficient resources in the fund to do that. Therefore, it would be possible for the proposal in the clause to be put into operation without any increase in national insurance 500 contributions or any additional call on the taxpayer being required. It may be said that some increase may be necessary in the next year, but national insurance contributions are looked at each year when pensions are increased. If any small increase required to make up this loss of revenue were spread over all contributors, the increase would be so small that it would hardly be noticed by those concerned.
I suggest that if the Minister were to try to use the argument of cost, it would not stand up for this year, in view of the resources available in the National Insurance Fund, and it would not stand up for other years either.
This is a modest measure of additional relief that can be provided for the self-employed, who feel extremely strongly on this matter. If the Government were to concede the point, they would be doing something to redress the balance between the self-employed and the small business and employees generally. On those grounds, I commend the clause to the House.
§ Mr. David Mitchell (Basingstoke)
The purpose of the new clause is to correct an unfairness, to right a wrong, and to end a discrimination against the self-employed. I urge the House to support my hon. Friend the Member for Somerset, North (Mr. Dean).
I think that it is as well to remind ourselves of the background to the clause. When the Government took office, they undertook to increase pensions for the retired. We all recognised that that meant that there would have to be an increase in contributions to the National Insurance Fund, but none of us expected that that increase would be shared out so unfairly.
Under the increases which the Government brought in two years ago, the contribution of the employer was considerably increased. The contribution of the self-employed was savagely increased. The employee's contribution was reduced. The unfairness of reducing the contribution of the average employee, although at the same time savagely loading the contribution of the self-employed, aroused a wave of anger which was expressed by associations and societies such as the National Federation for the Self-Employed, the self-employed action groups and others 501 with which hon. Members will be familiar.
In this year's uprating of national insurance contributions the Government recognised that they had been unfair last year. They partly corrected the situation. However, I believe that they have not corrected it sufficiently, on two principal grounds. First, the benefits for the self-employed are markedly different. There is no unemployment benefit for the self-employed, although unemployment benefit under this Government forms a substantial call on the National Insurance Fund.
There is no sickness benefit for the self-employed while they are on holiday in Europe if they are in hospital. I am glad that the Government are looking into that matter. Perhaps the Minister will say whether any progress has been made in changing the arrangements so that the self-employed may benefit from free hospitalisation while they are in the EEC countries. So far the Government have not reported any move to the House. There is no redundancy payment for the self-employed. These important features are often undoubtedly overlooked by the Department when it inquires into the matter on an actuarial basis.
Many self-employed do not draw the benefits to which they are entitled. If a self-employed man who runs a corner store, sweet shop, or newspaper or milk round has backache, influenza, or ingrowing toenails, he does not visit the doctor, obtain a certificate, and go off work for a week or 10 days until he feels better. If he does that, he will find when he returns that his livelihood has been substantially damaged. What does he do? He continues working and recovers in due course. However, he will not have drawn the national insurance sickness benefit to which he is entitled and which the Ministry, I assume, takes into account when analysing the proportion of benefit attributable to the self-employed.
I refer next to retirement benefit. Many small business men for various reasons—perhaps because they cannot sell their businesses or because their business is their way of life—continue working long after their age of retirement and do not draw the retirement pension, which is the largest expense borne by the National Insurance Fund. There are con- 502 siderable reasons why the self-employed do not obtain full benefit at present.
My hon. Friend the Member for Somerset, North was right to move this clause. It will ensure that the self-employed are put in the same position as employees—that is to say, that half, or whatever the precise proportion is, of their contribution is not allowed against tax, although the other half is allowed. The self-employed should be treated in exactly the same way for tax allowances as the employee in relation to the employer's contribution.
Let it not be forgotten that to earn the additional amount required this year the self-employed person must earn a substantial sum gross at his top rate of tax to be able to find the net additional contribution. I think of people such as hospital consultants who are higher earners among the self-employed.
I urge the House to support the clause.
§ Mr. Dafydd Wigley (Caernarvon)
I support the clause. If I have a criticism, it is that it does not go far enough to help a group of people who have suffered so much over the past few years for various reasons, some of which can be attributed to the Government. Some are perhaps inevitable effects of the changes in the economly. Nevertheless, the people concerned need some redress.
However, I remind Conservative Members that it was their system, introduced in 1973, that opened the door to this possibility. It is possible that if they had had the benefit of hindsight, they would not have chosen the same system. They would certainly not have done so if they had foreseen how it would be used by the Labour Government. However, that is no reason for not supporting the clause and pressing the need for benefits to be made available to the self-employed.
If the figures at which the contributions were introduced two years ago were right then, the threshold of £1,600 must certainly be reviewed now if it is to be equitable. The way in which it is biting is having a severe effect.
Secondly, the benefits are severely restricted. Many of the self-employed would not be taking advantage of the benefits, because of the nature of their 503 work, unless they had to. It is inequitable that people should pay a bigger contribution and that the effort required to make the payment should be even greater when they receive only a portion of the benefits they should receive. If we believe in a Welfare State that meets people's requirements, that belief should apply equally to the self-employed and employees.
The self-employed have been hit by the cost of living in many ways, including the escalation of rates over the past three or four years, which has probably hit the small business man harder than anybody else. They have also been hit by changes in the taxation system. The introduction of VAT imposed an extra burden on them because of the extra bureaucracy. They have either had to pay somebody to deal with it or have had to work much longer hours themselves. The effect of inflation is often much greater on the small people, a factor which has been recognised in previous Finance Bills.
The clause is a small step towards alleviating the burdens on the self-employed. The Government are duty-bound to consider particularly the £1,600 threshold if they can say that they have sympathy wth people at the receiving end of the taxation system.
I hope that the clause will not merely be added to the Bill but will be carried by a large majority. Hon. Members on both sides of the House have constituents who come to them every month with this problem. It is no use giving them sympathy in our surgeries if we do not back it up tonight with our votes. I support the clause wth great enthusiasm.
§ 10.0 p.m.
§ Mr. Geraint Howells (Cardigan)
I declare my interest, having been self-employed all my life. My colleagues and I lend our support to the attempts being made to persuade the Government to accept the new clause, which will bring some relief to the self-employed and small businesses.
The self-employed sector has been the backbone of economic life in many parts of Great Britain, especially in my own area of Mid-Wales and counties like Carmarthen, Merioneth, Cardigan and 504 Montgomeryshire. Self-employed people have played a major role there in recent decades.
My hon. Friend the Member for Truro (Mr. Penhaligon) was told in a Written Reply in April last year that my constituency had a higher proportion of self-employed people than any other area of Great Britain. A total of 30.1 per cent. of my constituents are self-employed. In Montgomeryshire, the figure is 27.3 per cent. and in Carmarthen 25.9 per cent. Those are the sorts of levels in rural constituencies.
Many people do not realise that there are 1.9 million self-employed workers in this country. About 1.5 million of them are men—equivalent to 10 per cent. of the male working population. The 400,000 self-employed women represent 4 per cent, of the female working population.
It is interesting to note the percentage of self-employed people in various age groups. Seven per cent. of the self-employed are aged under 24, 20 per cent. are between 25 and 34, 47 per cent. between 35 and 54, 20 per cent. between 55 and 64 and 6 per cent, over 65. The regional distribution is fairly even except in East Anglia, the South-West, Wales and Northern Ireland.
Agriculture, the professions and service industries have heavy concentrations of self-employed people. For example, 20 per cent. of shopkeepers are self-employed, compared with 13 per cent. of farmers, 11 per cent. of professional people and 8 per cent. of construction workers. In addition, most of our authors, musicians and artists are self-employed. Many self-employed people are employers. About 4 million people work for them. That is why my hon. Friends and I are keen that the Government should accept the new clause.
There are many views about what the term "small businesses" should include. Some people mean firms with fewer than 200 employees, while others include all private companies. Statements about this sector can be misleading unless it is clear what criteria are being used.
Small firms have declined more in the United Kingdom than in any other industrial country, and there is a direct correlation between the health of the small business sector and general economic success. Countries like Germany, 505 Japan and the United States, with powerful Government Departments to promote the interests of privately owned companies, have a vigorous small business sector and much more successful industrial progress.
Many hon. Members share my view that the self-employed sector plays such an important role in the economic life of Great Britain that there should be a Minister to look after its interests and to ensure that self-employed people are able to employ more workers in an attempt to solve our unemployment problem. The Minister will be aware of the job creation scheme. Could he consider helping the self-employed to create jobs in that sector under a similar scheme? That would help to alleviate many of the problems of unemployment among the self-employed.
Successive Governments in the United Kingdom have encouraged large multiple economic units at the expense of small businesses. The scales are now weighed so deliberately against the individual that it is essential that the self-employed should be helped if this imbalance is to be corrected.
The decline of the small business sector is largely due to four factors—high taxation, the burden of legislation, unfair competition, and planning controls and development schemes. The self-employed in my view have few material resources and must depend on human resources. It is madness to kill off small businesses.
One vital asset provided by them is choice. Bigger is not necessarily better, and small is not only beautiful but efficient. To bureaucratic minds small businesses may seem untidy because the many disparate elements do not fit into neat packages.
One of the problems worrying the self-employed is the rating system. There is no Government subsidy for commercial rates as there is for household rates. In addition, the self-employed have worries about capital transfer tax and value-added tax. If New Clause 11 is accepted by the Government tonight, it will give a great deal of benefit and relief to the hard pressed self-employed.
§ Mr. Andrew Welsh (South Angus)
I support this new clause as a small con- 506 cession to the self-employed. Probably it is the Conservative way of making amends for introducing the 5 per cent. levy in 1973, which has now been raised to 8 per cent. and which should, in my view, be abolished.
The self-employed are badly in need of a boost. The small business man is harassed by the present economic situation and the burden of inflation. An additional problem which he faces is the fact that by definition a small business has a very small margin within which to work and therefore it is unable to take the heavy economic pressure put upon it.
Small businesses supply valuable goods and services and provide much needed employment. They need Government assistance to help with their problems. At the moment they have to soldier on under a taxation structure which seems to be designed to prevent a man from going into business. The tax system is capriciously designed to hinder instead of help. There is also the burden of Government-inspired paper work and the apparently meaningless yet constant demands of form filling on men who simply want to go about their business of supplying goods and performing services. The Government cannot be unaware of the small business man's intense dislike of the value-added tax system, which has turned him into an unpaid tax collector.
Then there is the 8 per cent. levy and the national insurance anomalies which have engendered a great deal of anger and frustration among members of this economic group. The SNP has long made obvious its total opposition to the 8 per cent. levy. The sooner it is abolished, the better. If, however, the Government and the Conservative Opposition insist on keeping this levy, let them give back some value for money to the self-employed.
Anomalies such as the Common Market reciprocal health agreements create a great sense of injustice among the self-employed, who are the only exception to the rights and privileges taken almost for granted by every other citizen. No wonder there is a reaction which the Government now face from the self-employed.
507 It is ironic for a Scottish doctor to go to a Common Market country and be unable to take advantage of health agreements, while at the same time having to treat people who come to this country from the Common Market. Even small 508 taxation concessions such as those proposed will taste very sweet indeed to the self-employed and to small businesses.
Therefore, I am happy to give the new clause my support as a very tiny step in the right direction.
§ Mr. Peter Mills (Devon, West)
I am grateful for the opportunity to say a few words. I am certainly not an expert in this subject but I have one or two small points to make, particularly concerning the self-employed in the rural areas.
The main theme of my hon. Friend the Member for Somerset, North (Mr. Dean) when he opened the debate was the need for encouragement to be given to the self-employed. The self-employed have been a pretty discouraged lot for some time. I believe that what my hon. Friend said was absolutely right. The self-employed need encouragement. They need help. That is why I am prepared to support the clause tonight in regard to relief for the self-employed. It would go some way to help this section of the community. Over the past few years the self-employed have certainly had a very difficult time. It has been a struggle to survive. I do not believe that the Government have created the climate in which these people can flourish.
The House must recognise that we need the self-employed. We certainly need them in the rural areas and the small towns. The self-employed and the small family businesses have done a tremendous job in the rural areas, and in particular in my own area. They not only provide a service. They provide employment as well for many other people.
In our villages we benefit from the efforts of the small shopkeepers, the small farmers and the small businesses of every sort. We have especially benefited from the sorts of business which, unfortunately. have had to cease trading lately, in particular the small garages and agricultural repair shops which service the rural community. We have seen them go out of business over the years because of the difficult climate in which they have been trying to operate. I believe that they need to be encouraged for the benefit of the community as a whole, and in particular the rural areas, especially in relation to the problem of employment.
It is a very real tragedy when a small garage or agricultural repair depot or shop goes out of business. We usually find that there are two or three other people who are out of work as well, so that it 510 is extremely difficult then for people to find alternative work. Unless something is done, in many instances the rural areas —I do not wish to exaggerate—will be in trouble and depopulation will continue. Not only do we need these people. We want to stop the depopulation of our rural areas, which is taking place on a quite alarming scale. Only those who have a constituency which is affected know exactly what I mean. I believe that this depopulation and drift away from the rural areas is wrong. It is not what is wanted. It must be stopped. The small measure we are thinking about tonight would, I believe, help to arrest that position.
I hope that I shall not be out of order, Mr. Speaker, in saying that the clause is not the only help to the self-employed that is needed. Much more needs to be done in taxation, rates and many other respects to create a better climate so that the self-employed may continue in business. My hon. Friend the Member for Basingstoke (Mr. Mitchell) was right in saying that the present position was unfair. As I said, I am not an expert in these matters, but my hon. Friend is, and the House would do well to listen to what he and my hon. Friend the Member for Somerset, North said tonight. The clause would help to rectify the unfairness which my hon. Friends have described.
We can no longer take for granted that self-employed people will continue in business. Enough is enough. Many are sick to death of the position they are in. It is easy to say that Mr. Mills the grocer or Mr. Mills the agricultural engineer will continue to stay in business because he has to go on, but unless something is done to encourage and help him he will not continue in business. We need the self-employed in rural areas probably more than anywhere else. The Minister should not take them for granted. It gives me great pleasure to support the clause.
§ Mr. George Cunningham
I shall be brief. In speaking on this subject I am conscious that I am bound to say things which I have said many times before in the House over the past two years when 511 the subject has been debated repeatedly. I am also conscious that there is something about this subject which brings out the worst in some of us and perhaps in all of us.
It is desirable that to the maximum extent we should identify the area of agreement that exists with regard to the self-employed between those who disagree on other aspects. There should be complete agreement that on the whole the self-employed perform an essential function for the country and that they have some special qualities which are particularly worthy and which should be admired, respected and mentioned.
It should also be said that because the self-employed pay tax under Schedule D they have legitimate opportunities for escaping their tax obligations and postponing the payment of tax. The fact that the self-employed have those opportunities is no reason why we would be justified in imposing penal conditions to counterbalance those advantages in another aspect of the treatment of the self-employed. In those two respects there should be general agreement, and we should concentrate on the points on which we disagree.
§ Mr. David Mitchell
The hon. Gentleman said that the self-employed were escaping their tax obligations. That they pay their tax later instead of earlier may be an advantage, but to say that they are escaping their obligations is a charge which I hope that on reflection the hon. Gentleman will withdraw.
§ Mr. Cunningham
I would withdraw it if I had made it, but I did not make it. It is incontestable that anyone who pays tax under Schedule D has the advantage of paying tax some time after—often quite a long time after—he has received the income. Anyone who is sane would prefer to get income first and to pay tax later. That is the advantage that a self-employed person enjoys.
The self-employed have greater opportunities than others to inflate their expenses. Some take advantage of those opportunities. After all, we were not born yesterday. We know that some people will take the opportunity to reduce tax obligations. It may be that even one or two hon. Members know of 512 someone who has taken advantage of that situation. We know that such opportunities exist. Some self-employed persons take them and others, to their great credit, do not. But that does not matter for the purposes of the present argument. It would not be right to balance an advantage in one sector against a disadvantage in another.
The new clause, looked at in isolation —I have said this in much greater detail in Committee in the past—is correct. Of course it is true that the self-employed should get tax relief on some part of their contribution. The wording that the hon. Member for Somerset, North (Mr. Dean) has chosen roughly reflects the proportion on which they should get tax relief. It puts them in a situation comparable to that of the employee and the employer, the employee getting no tax relief on his contribution and the employer getting tax relief automatically on his contributions. If the self-employed person were paying the proper gross contribution the clause would be right, and in isolation it is right anyway.
The self-employed person should enjoy this tax relief, but if—I stress "if"—under present regulations he is being asked to make a gross contribution which is too low, that is something that it is legitimate to take into account. If a self-employed person is contributing less to the National Insurance Fund and yet continuing to take out of it what he is now taking out, or more, that can only mean that other contributors to the fund—namely, employees and employers—will have to contribute something more. If that situation continues, it will show up a larger deficiency in the National Insurance Fund. We cannot give that advantage to the self-employed without taking the cost of it from the other contributors to the fund.
This all depends on whether the self-employed are currently being asked to pay too little or, as most hon. Members seem to agree, too much to the National Insurance Fund. I have no intention of going over all the arguments that others and I have gone over before on many occasions as to whether the self-employed pay enough into the fund for what they get out. There are certain facts that are beyond dispute. First, the self-employed do not get all the benefits that are paid for from the National Insurance Fund. 513 However, the benefits they receive are those that are the most expensive, except for unemployment pay. The benefits to which they are entitled constitute approximately 85 per cent. of the outgoings of the fund, but the contribution they make is not 85 per cent. of the total of employers' and employees' contributions. In logic, that is what it should be.
If we were prepared to make a change in the gross contribution due from the self-employed, it would be right that tax relief should be given. The net effect of doing both things would be to leave the burden on the self-employed not all that much different from what it is now. The people who would benefit from the change would be employees and employers, whose burdens would fall. It would be the Treasury which would suffer. It would be contributing a higher proportion to the National Insurance Fund than at present, and it is high time that it did. The Treasury is the real villain of the piece, not employees and employers.
I am glad that the hon. Member for Basingstoke (Mr. Mitchell) has at last come round to the point which I have been urging upon him for the last couple of years—namely, that the self-employed must, in common sense, retire a bit later on average than others. The Department of Health and Social Security admitted that the self-employed retire, on average, one and a half years later than other people. The Government should attempt to give that some actuarial expression to justify lowering the contribution below the 85 per cent. figure.
In talking to the self-employed, I have found that they feel very het up indeed about the subject. They are not led to think about it more clearly or to understand the facts about it any better by the excited ravings in which some Opposition hon. Members too easily indulge. It is our job not to encourage wrong ideas about the contributions but to try to get the people to whom we talk to understand the facts and to try to correct the relatively small anomalies that exist.
§ Mr. Kenneth Clarke
The hon. Member for Islington, South and Finsbury (Mr. Cunningham) may be actuarially and mathematically right, but he will find that the self-employed do not accept the bogus insurance basis on which their contribu- 514 tions are based. We have heard earlier in the debate about national insurance funds which are notional and do not exist except as an accounting device. The contributions are regarded by the self-employed as a social security tax, and they will not accept the hon. Gentleman's argument. They are outraged by the way in which this tax has been handled by this Government, which means that they now pay a higher proportion of their earnings than does an employee. All the sophisticated actuarial, academic arguments will not reassure them that the system is correct. We should abandon the present so-called insurance system and adopt a social security tax system. That is what it really is.
§ Mr. Cunningham
The hon. Member for Rushcliffe (Mr. Clarke) has proved one of my points. He said that the self-employed will not understand and that they feel that this is an outrage. I know that they are outraged. That, however, is not the question. The question is, are they right to be outraged? We have a duty to establish the facts. There is nothing wrong with actuarial proceedings. If one changes the contributions of the self-employed, one must alter the contributions of the employers and the employees.
The hon. Member for Somerset, North said that one could give advantage to the self-employed at an infinitesimal cost. As I said before, that is what I call the Zachariah fallacy. It is the notion that one can take people whose names begin with "Z" and absolve them from all tax and other contributions, because other people will have to pay only a small amount to make up for it. That is not fair. We should work out the proper gross contribution that the self-employed should pay to cover the benefit to which they are entitled.
Subject to the qualification by the hon. Member for Basingstoke that the self-employed must marginally tend to retire later and that they probably make use of sickness benefit less than other people, when there is a gross contribution on that basis, we should then remove the anomaly that the self-employed are not entitled to the tax relief to which employers are entitled.
§ 10.30 p.m.
§ Mr. Giles Shaw (Pudsey)
I intervene briefly because I should like to take up 515 what the hon. Member for Islington, South and Finsbury (Mr. Cunningham) has said. I accept that if we look at the matter in strict actuarial, mathematical terms, there is a distinction in the way in which we have so far looked at the problem of the self-employed and the contribution they are prepared to pay for the benefits they obtain. Where I part company with the hon. Gentleman is that I believe that the position of the self-employed, as a sector of contribution to the economic effort, has been gradually eroded over the years. That is the context in which it seems to me that there is basis for supporting the new clause.
What the self-employed are arguing is that in practically every walk of life they have a contribution to make. They do not seek to isolate themselves and say that they provide all the services for the community in this or that profession or industrial activity. What they say, and where we as a House must agree with them, is that in practically every walk of life, be it professional, industrial, manufacturing, service or distribution, they offer a proportion of the services available to the consuming public and that that proportion has brought them less satisfactory returns.
We look at the employer and the employee in the generality of industrial development and say that, of course, industries should be given a subvention to make them profitable, to help them to retain employment and to help them with their stock appreciation and tax. But as long as this criterion is available at levels that the self-employed cannot reach, they feel that as a sector in our economy they are less than adequately recompensed. When it comes to the matter of simple assessment of contributions, it is the background information as to the way they are treated which in my judgment affords a real lever on their behalf in support of a new clause such as the one we are describing.
I know of no major industry which is not significantly dependent upon self-employed persons. I think in particular of the distribution of manufactured goods. Reference has already been made to services such as those provided by garages or the professional services of accountants or lawyers. But the whole distribution 516 system is largely dependent upon the self-employed. It is not easy merely to separate our responsibility for ensuring that we maintain adequate services and distribution from our responsibility for maintaining adequate services in manufacturing industry and employment. It is the imbalance in attitude to those who are employed in industry and services which adds extra weight to the arguments we are seeking to put from this side of the House.
I fully understand that the Government must be concerned that, if a con. cession is given for this particular group of taxpayers or insurance contributors, it must mean a re-spreading of the burden. Obviously that is understood. But the question is whether the total national well-being would be that much marginally better or worse off as a result of the redistribution. We are involved in a balancing act. We are involved in taking a decision as to where the balance of advantage would lie.
I suggest to the Minister that the Government's main concern at this time must be the generation of wealth. It must be the recovery of activity within the economy. Given that as a global objective, the contribution which the self-employed make can, and should, be formidable. To encourage it to be so is a legitimate objective of the Government, and certainly of the Opposition.
The self-employed also, by definition, give services. They generate wealth and they provide employment. That is exactly the contribution which major manufacturers also make. But why should we regard the sector which is labelled "self-employed" as being somehow a sector which does not deserve as much encouragement as we are prepared to give to the manufacturing sector. Traditionally, the only answer has been that they have substantially less power than people employed in industry. They do not have the major trade unions backing them. That is the biggest simple differential between the self-employed and the employed. In management or in the work force, there are organisations which are prepared to operate to the advantage of the employer or of workers. The self-employed, through their general movement, have now corrected this imbalance. The House 517 must recognise this and accept the new clause within the niceties in which it is drawn. I believe that the principle that the clause would create is far more important. It is that this House must come to terms with the contribution that the self-employed make to our economy. It must recognise that the contribution is just as valuable as the contribution made by the major manufacturing sector, and it must recognise that the organisation of the self-employed has now reached a point at which the House must give due regard to its aspirations and give it encouragement. It is the encouragement of the self-employed that is behind the new clause, and that is why it deserves full support.
§ Mr. Robin Maxwell-Hyslop (Tiverton)
Government supporters seem to be trying to have it both ways. On the one hand, they say that the benefits to which the self-employed are not entitled but to which employed people are entitled are not expensive benefits to provide anyway. On the other hand, they refuse to make them available to the self-employed. They cannot have it both ways.
The new clause not only stands on its own feet: it is also part of a general redress of grievance. After all, the selfemployed—farmers and garage proprietors—have accidents at their work, but they are denied industrial injury benefit and graduated sickness benefit. If Labour Members say that these benefits do not cost much anyway and, therefore, the self-employed are not entitled to any reduction in contribution, why not allow them to have these benefits?
We have pressed this point time and again, but the Government have not lifted a finger to extend these benefits to the self-employed. We are therefore constrained to fall back on another form of redress, which is to allow them to have tax relief on their contributions, which is analogous to the tax relief which would be received by an employer on the employer's contribution.
The bogus 85 per cent. figure which is bandied about appertains, of course, to the gross contribution by an employer and an employee before the employer receives tax clawback on it. The self-employed do not pay 85 per cent. of the net total contribution of employer and employee combined.
518 I do not know the exact figure—it will vary from firm to firm, and a firm which is not making a profit will not secure clawback because it is not paying tax—but the generality of firms which are profitable are, of course, receiving tax clawback in respect of their employer's contribution.
The hardship which the self-employed suffer is not confined to this element of taxation. And we are talking about a tax. It is dressed in the trappings of a social security charge but it is a general tax, just as for many years an illusion was perpetrated by the Treasury that the annual tax on a car went into a Road Fund. It was referred to as the Road Fund for many years after such a fund ceased to exist. It was simply a vehicle for raising money. The 8 per cent. surcharge which the self-employed are called upon to pay is just another vehicle for raising money.
Therefore, the first question to which we address ourselves is whether this is a reasonable way of raising money from the community in general. The second is whether it is reasonable to confine this vehicle for raising money to one category of people—the self-employed—and not extend it to other categories with the same income.
Is it now in order to justify a positive answer to that which the Government clearly hold: that it is necessary to establish the proposition that a group of people who on average work longer than employed people, who take greater risks than employed people and who, unpaid, collect tax for the Government in a way that employed people do not should nevertheless be singled out for this unique tax? We should like to place them in the same position as other people who are earning their livelihoods.
But the clause does not do the whole of that. It refers to the contributions being tax deductible. That is a minor request to make of a Government who have imposed this tax on this restricted group of people. The clause should commend itself to the whole House, irrespective of individual Members' political affiliations.
§ Mr. Robert Sheldon
We have had an interesting debate with echoes of that 519 which took place on a previous occasion last year. When the hon. Member for Somerset, North (Mr. Dean) dealt with the problems of the self-employed, he naturally found a great deal of sympathy in the House. The hon. Gentleman talked about the value of their work and the ideals that embody so many of the aspirations of small businesses. The hon. Gentleman also echoed the comments of my hon. Friend the Member for Penistone (Mr. Mendelson), who last year, in a very moving speech, pointed out the particular role of the small business man. with his roots in the community, having his customers located in that community and offering initiative and enterprise both to his customers and to the area in which he lived and worked.
It is no surprise to anybody who looks at these matters dispassionately that we have the work and the interest of the self-employed very much in mind. We certainly see them as a fundamental, necessary and important part of our whole industrial set-up.
In fairness, the hon. Member for Somerset, North went a long way towards recognising these points when he went so far as to accept increases in national insurance contributions as being necessary. He fairly pointed out the improvements that have been made to the limits for tax relief on retirement annuity contributions, and he might have added the simplified schemes for VAT and a number of other matters of importance to the self-employed that probably lie outside the main confines of this debate.
I think that we all understand and recognise the importance of the self-employed. At the same time, we must consider certain consequences that arise from the new clause.
It provides for tax relief for the self-employed covering that part of the national insurance contribution that corresponds to the employer's share of the employee's contribution.
We must decide at an early stage what are the critical questions that we need to ask. The nearest we got to that was in a speech of notable clarity by my hon. Friend the Member for Islington, South Finsbury (Mr. Cunningham), who dealt with the kernel of the whole question. We must consider not only what contributions 520 the self-employed pay but what benefits they are entitled to and what they actually get. We have to look at how the benefits to which they are entitled and the benefits which they take up compare with the actual cost of running the scheme.
One complication strikes us at the outset. Many of these people are not self-employed all their lives. However, let us leave out that complication. If the self-employed paid the full cost of the benefits to which they are entitled, they would pay roughly 85 to 90 per cent. of the combined class 1 contributions. Even at the new level of contributions, they will be paying no more than about 70 per cent. of the corresponding contributions payable for employees for the same benefit. We may compare the 8 per cent. payable by the self-employed with the 14½ per cent. payable by the employee and employer together. When we allow for benefits to which the self-employed are not entitled, that figure of 14½ per cent. would be reduced to approximately 12 to 12½ per cent., against which they pay 8 per cent. That is one important statistic. It is not the final statistic, but it is important in view of the line of argument that we need to pursue.
My hon. Friend the Member for Islington, South and Finsbury, in a notable contribution that will repay careful study, divided the contributions payable by the self-employed into two parts, equivalent to the contributions payable firstly by the employee, and secondly by the employer who has his part of the contribution allowable for tax. I do not think that I go along with him on this point. However it certainly must be considered.
My hon. Friend asked that the self-employed should pay their full national insurance contributions. But, if I understood him correctly, he made two provisos: first, that their contributions should be reduced by reference to the proportion of the benefits to which they are entitled, and, secondly, that the contribution should be further reduced by the proportion of the benefits which they do not take up for various reasons, some of which were put by the hon. Member for Basingstoke (Mr. Mitchell). The hon. Gentleman made the point, which we fully accept, that, although the self-employed are not liable for the same level of contributions, they do not—this is on 521 the basis of our own calculations—take up all the benefits to which they are entitled. They are not entitled to unemployment benefit, so they cannot take it up.
On the question of sickness benefit, it is much harder for the self-employed to close their businesses than it is for employees to stay away from work when they are ill. From our own experience, we know that in many cases self-employed people tend to retire later as they may have a contribution to make in the running of their businesses. Whether they retire later for reasons of involvement or finance, or because they want to make fuller provision for their own retirement, in cases known to us individually their retirement age tends to be later.
The 8 per cent. payment by the self-employed has often been called a tax. But social security and retirement benefits must be paid for out of contributions. We must address ourselves to the question of what is a fair and reasonable contribution that should be made by the self-employed.
The self-employed receive benefits. There is no tax relief for their contributions. The employee receives benefits and there is no tax relief on his part of the contribution. On the other hand, the employer receives tax relief on his part of the contribution but receives no benefit himself. That aspect fits in quite well.
I now turn to the benefits that the self-employed receive for their contributions. I shall not go through the large number of benefits that were pinpointed by the hon. Member for Basingstoke and others. However, the self-employed are entitled to receive the most expensive benefits. Three-quarters of the cost of all national insurance benefits is for retirement pensions. That is by far the most important aspect.
We need to know not only the benefits to which they are entitled but to analyse the benefits that are being taken up. I hope to see the results of an inquiry into the position of the self-employed which, I understand, the Department of Health and Social Security is carrying out. I think that it will make clear the advantages which I believe the 522 self-employed receive and which I have no wish to diminish.
Although I sympathise with the objective of the clause, I do not think that it is the way to proceed. When we understand the relationship of costs to benefits, we can have a debate rather more fundamentally directed to the main problems.
§ Mr. David Howell
The Minister gave a sad response to a debate in which the voice of Britain as a whole was heard. We have had speakers from every corner of the United Kingdom except Ulster, which is a pity, because Northern Ireland has many self-employed who have played a magnificent part in preserving the economic fabric of the Province against terrorism.
We had first an excellent speech by my hon. Friend the Member for Somerset, North (Mr. Dean), who, together with my hon. Friend the Member for Basingstoke (Mr. Mitchell), has played a powerful part in bringing to the attention not only of the House but of the whole Whitehall machine the interests of the self-employed and smaller businesses in a way which was not appreciated by the political parties in the 1960s. My hon. Friends deserve credit for their part.
My hon. Friends were joined by the hon. Members for Caernarvon (Mr. Wigley), Cardigan (Mr. Howells) and South Angus (Mr. Welsh), from the smaller parties, who explained the enormous significance of the self-employed in their areas. We are dealing with a major army, not a small minority that can be swept under the carpets of the makers of national strategies. They have a significant part to play in our economic recovery.
The hon. Member for Islington, South and Finsbury (Mr. Cunningham) and my hon. Friend the Member for Pudsey (Mr. Shaw) both reminded us, for rather different reasons, that we should look at the problem of the self-employed and their national insurance contributions as a whole. That is the right approach. It should be seen in the context of their overall position. If we look at it narrowly, we are inclined to come to too arithmetical and narrow conclusions.
The self-employed have been a forgotten army in the making of national 523 strategy. They have heavy tax burdens. We all do, but they have special difficulties. They have burdens resulting particularly from the administration of VAT. Dramatic and strong feelings about the matter have been discussed recently, and we shall debate it later. The self-employed have hanging over them the notorious and poisonous Section 20B in Schedule 6, which allows tax inspectors to break into people's houses at night on income tax matters. These are threats to the self-employed, as they are to other people.
On top of that, the self-employed—certainly those who are small employers as well as being self-employed—have major burdens of legislation. Above all, they are an enormous group who have yet been totally overlooked and excluded by the metropolitan-minded Whitehall and Westminster makers of economic policy. That is the negative side of their position. We have been round the course on benefits many times and discussed their contribution rates and the benefits they receive. We know that they do not get unemployment benefit or injury benefit and that they tend to retire late, so that they do not torm the full burden on State funds of retirement at the normal time.
My hon. Friend the Member for Basingstoke graphically reminded us that the work of the self-employed is never done. They cannot knock off whenever they wish. Their work goes on continuously. If they stop, their earnings stop. The hon. Member for Cardigan suggested that we might be dealing with as many as 1.9 million people, nearly half of whom are also employers, employing another 4 million people.
When Labour Members below the Gangway say that cutting public expenditure would reduce employment, we should say that if they are looking for jobs let them look to this sector. Jobs could be provided here if there were a return to profitability and a reduction in interest rates and if legislation did less to prevent people taking on hands. That is why this is such an important debate and why this sector and these people will be ignored at our peril.
We have argued the niceties of the 85 per cent. and other arithmetical points 524 about the relationship of the contributions and benefits of the self-employed. It is now time not for an interdepartmental inquiry—which seems to have been hanging in the air for a long time—but for a full public inquiry into the contribution levels in relation to benefits, whether they are justified and how they compare with the benefits received by other sections of the community. The self-employed and their representatives, in their increasingly strong and vocal organisations, should be able to give evidence. Let us have the whole thing out and consider it objectively.
This sector should be greatly supported. Where were these people when the grand strategists sat down at the Chequers weekend to carve up the nation? What annexes to White Papers have they written? We know the answer —none. They do not fit into the Socialist strategy of a corporate State or into a national plan.
It is sometimes said that we should help these people, but they are not the sort to ask for help. They ask merely that the penalties and unfairnesses should be lifted from them and that they should have a fair deal. They ask not for help or grants, but for fairness.
We should have a public inquiry. This has been a valuable debate initiated by my hon. Friend the Member for Somerset, North. I advise my hon. Friends to demonstrate our feelings on this matter by voting for the new clause to show that we care for these people.
§ Question put, That the clause be read a Second time:—
§ The House divided: Ayes 182, Noes 200.
§ [For Division List No. 242 see col. 615]
§ Question accordingly negatived.