VALUE-ADDED TAX—THRESHOLD OF REGISTRATION

HC Deb 12 May 1977 vol 931 cc1572-623

(1) Paragraphs 1 and 2 of Schedule 1 to the Finance Act 1972 (liability to be registered) shall be amended as follows.

(2) In paragraph 1, in the provisions before the Table, for "£5,000" (in both places) there shall be substituted "£10,000" and in the second column of the Table for "1,750", "3,000", "4,250" and "5,000" there shall be substituted respectively "3,500", "6,000". "8,500" and "10,000".

(3) In paragraph 2 for "£4,000" (in both places) there shall be substituted "£8,000" and for "£1,250" there shall be substituted "£2,500".

(4) This section shall not come into force until 1st September 1977'.—[Mr. David Howell.]

Brought up, and read the First time

Mr. David Howell (Guildford)

I beg to move, That the clause be read a Secondtime.

The First Deputy Chairman

I remind the Committee that with this we are to take New Clause 8—Value-added tax registration threshold

Mr. Howell

Our new clause proposes that the annual threshold of taxable supplies at which it is necessary to register for VAT should be raised to £10,000 from the £5,000 which was fixed when the tax first came into operation in April 1973. Our view is that if £5,000 was right then £10,000 is right now. Strictly speaking, up to April this year the indexed amount would have been about £9,600, but it can be argued that by the time the Bill becomes law in August £10,000 will be the more accurate figure.

That is our view, and it was also the view of those on the Liberal Bench. They have an amendment on the Notice Paper which, unfortunately for them, you did not find yourself able to select, Sir Myer. That amendment indicates that they hold a very similar view as it contains the figure of £9,600. It is presumably still their view, as they have rightly pledged to be unswerving, as one would expect a political party to be, in their principles and beliefs. We look forward to their support when we press our new clause.

Our view also used to be the view of the right hon. Member for Heywood and Royton (Mr. Barnett), who told the Standing Committee considering the 1972 Finance Bill: I consider that there is an overwhelming case for the figure of £10,000".—[Official Report, Standing Committee E. 24th May 1972; c. 163.] If the present Chief Secretary thought then that there was an overwhelming case for £10,000, he presumably thinks that there is an overwhelming case for a much bigger figure now, although I suppose that it would be naive to imagine that we could get consistency from him on this matter or anything else.

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

The hon. Gentleman has obviously been doing a great deal of research. Would he care to tell us what the then Conservative Financial Secretary said?

Mr. Howell

I could read all that the then Conservative Financial Secretary said, as reported in Hansard, but we are looking for consistency from the right hon. Gentleman in this matter and we are finding something very different.

Mr. Joel Barnett

I am sorry that the hon. Gentleman cannot answer that question. I thought that he had read the whole debate. I am always consistent in these matters and am very consistent in listening to arguments and being convinced by them. I have now been convinced.

Mr. Howell

We hope to convince the right hon. Gentleman a little more. Indeed, we think that we shall do so before we are through. Anyway, for the moment the right hon. Gentleman has changed his view, and that cannot be disguised. But we hope that the Liberal Party is still with us, in line with its principles and beliefs.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

Surely the then Financial Secretary was entirely consistent, because he thought that the figure should be £5,000 then and he now thinks that it should be nearly £10,000, which is exactly the indexed increase of £5,000. The Chief Secretary thought that it should he £10,000 at that time, and if he were consistent he would argue that it should now be exactly £20,000.

Mr. Howell

My hon. Friend illuminates all too painfully clearly the point I am trying to make about the Chief Secretary's stance on this matter, but the Chief Secretary can be reassured that we expect very little else.

We shall soon come to amendments tabled by the Government to raise the threshold, not to the £10,000 that we think to be the right level consistent in real terms with the original £5,000 but to £7,500. That amendment is a rather late arrival on the Notice Paper and occasioned some surprise. I have heard it suggested that it has something to do with the Liberal Party. If that were true, it would be a frustration of the majority concern of Parliament and of an objective that we could attain if we had a vote.

It would be a great pity if the hon. Member for Cornwall, North (Mr. Pardoe) persisted in claiming that that amendment was a fruit of the Lib-Lab pact. If it is, it is a very withered fruit. It is considerably less than we should have achieved in open and above-board debate and vote. If that is claimed to be an achievement, we seem to have reached a new law of parliamentary dynamics in that what the majority want and can achieve if the matter is put to a vote is prevented by the Lib-Lab pact, or the pact ensures that we achieve something less. That is a pity from the point of view of the workings of Parliament.

If the threshold were raised to the £10,000 that we want and that the Liberals wanted until last week, it would help many self-employed people in particular. I agree with those who say that it would not help many traders because their turnover or taxable supplies are usually in excess of this figure. But there is no doubt that many self-employed people, such as freelances, and people doing part-time work over and above a salaried job, have taxable supplies or a total taxable income in about this area, and if the sum were raised to £10,000 a great deal of heavy work falling on those people and on the Customs and Excise would be reduced.

If the figure is raised to the £7,500 that the Government want, it will obviously help many fewer people. Let us take, for example, a case where expenses are, say, £3,000 for a self-employed man running a business. That is a price at which he can hardly obtain a good secretary. If we add on income of £100 a week, we are already over £7,500. Therefore, the truth is that the £7,500 proposed by the Government is not very much. It is no more than a tiny concession to the Lib-Lab arrangement. It is not in line with what would be achieved on the Floor if the Committee were allowed to press the matter to a genuine vote and the Liberals were allowed to break away and follow their principles.

Mr. John Pardoe (Cornwall, North)

Will the hon. Gentleman confirm that it is, in fact, current Conservative Party policy, as stated in Conservative Party documents and as promised to the National Federation of Self-Employed, that the threshold must be raised to £20,000? Why has the Conservative Party compromised these sacred principles?

Mr. Howell

The hon. Gentleman is wrong. That is not Conservative Party policy. We have said that the threshold should be at least £10,000. We also argue that it should be reviewed in line with inflation thereafter. The figure of £20,000 comes from inside the hon. Gentleman's mind, not from Conservative Party documents or official Conservative Party policy.

But perhaps I shall carry the hon. Gentleman with me when I say that the need to raise the threshold at all, or to have this debate, would be much reduced if the VAT administration were less formidable than it has become in recent years; if we were to return to the single positive rate instead of the 8 per cent. that the Chancellor felt obliged to go to, for reasons that we all recall, in 1974, and the 12½ per cent. at which he eventually arrived by way of 25 per cent.; if we had a simpler accounts basis for smaller traders on the lines proposed by the Conservative Party in a recent document; if we simplified the VAT 100 form, again on the lines we have proposed; and if there were a better means than at present of calling to public account the administration of our tax system, both the Inland Revenue and Customs and Excise, possibly through a Select Committee procedure. There would then be less worry about entering the VAT labyrinth and more readiness to participate in this kind of discussion, without feeling that one will be caught up in impossible bureaucratic tangles and weighed down with appallingly heavy statistical returns.

There is a very important point to which I hope Ministers will one day give attention. They have not yet given a great deal of attention to improving the public accountability of tax administration, including in particular VAT but also the Inland Revenue. When that is tackled, the worries about dealing with VAT, for example, will be reduced.

4.30 p.m.

If all these things were done, there would be less pressure, although there would still be some, to raise the threshold. As it is, in the absence of these things and in the recognition that not everyone will be happy wherever the threshold is drawn, we think that the case stands and we therefore commend New Clause 1 to the Committee. We are entitled to look to the support of all those who believe it right in principle to adopt the sort of level we propose. They include the Liberal Party and the Scottish National Party, which has put down an amendment seeking a rather higher figure. Those who believe it right used to include the Financial Secretary himself, but he has modified his views in the light of events. That is perhaps the best way to put it. If we had half a chance, they would, indeed, include a majority of hon. Members. That is why we put this proposal before the Committee, and I commend it.

The Financial Secretary to the Treasury (Mr. Robert Sheldon)

Value added tax was introduced in 1973. It was heralded, when we debated it in 1972, as a broad-based comprehensive tax, free from anomalies. Those who made that claim were perhaps exceeding reality, but VAT has become an established part of the fiscal structure and obviously cannot remain unchanged for ever.

While I supported a number of the provisions of the 1972 Finance Act which gave birth to VAT, I accepted that we might come to regret the loss of some of the advantages that we had under the old purchase tax system. This is not a suitable time to mourn once again the loss of the purchase tax structure, under which one had to deal with limited numbers of rather more knowledgeable people on taxation matters, because they were large-scale traders. Nevertheless, some difficulties arose from the creation of VAT, which deals with very many more people than the old purchase tax system did. While, therefore, mourning the virtues of the old system, we have had to learn to live with the new.

New Clause 1 seeks to double the turnover level of £5,000. That is the level above which an unregistered trader has to register. It would also double the £4,000 below which the turnover must fall before he is able to deregister. The proposal forms part of the general system that the Conservative Opposition have tried to put forward in their belief that many of these allowances and limits ought to be indexed in some way.

Of course, VAT needs to be reviewed from time to time—all limits based on financial grounds must be examined afresh from time to time—but without the precise policy of indexation. Indexation in this case is particularly inappropriate. I give an example stretching back to purchase tax days.

When purchase tax was introduced in 1940, it was fixed at the level of £2,000—a large sum in those days. Soon after, it was reduced to £500, and there it remained until the end of the purchase tax system in 1973. In other words, it remained at the same figure for over 33 years, during which the annual inflation rate was not as large as it has been recently, although overall inflation was substantial.

The present level for VAT was fixed in 1972, at the beginning of the system. Only those who sought to explain that it was the most perfect system devised by man could maintain that that was a figure against which all changes should be indexed. The reality is that any sensible person would accept that the figure reached was an attempt to get the tax started. It is a guide in a mathematical equation. We should have a few years' experience of VAT and how people react to it before an alteration is made.

That was the principle under which purchase tax was introduced, and subsequently altered, and that is the principle under which VAT should have been introduced. This is not a question of dogma. It is experience that should be the guide as to how VAT could be varied over a time. But so intense was the pride of parenthood of those who introduced VAT that they looked at it in this rather narrower way.

New Clause 1 is far from being an ideal way of making these changes. Continental countries have, in general, had longer and wider experience of VAT than we have, and they have considerable variations. None of them, however, comes near either the limit that we have imposed or the one which the new clause seeks to bring about. West Germany has a threshold of less than £3,000; Denmark has a threshold of less than £500; in Belgium and Italy virtually all traders have to be registered.

There is, of course, the problem of unfair competition which these other countries and we have to take into account. For example, we have received representations from the construction industry, among others, expressing concern about the possibility of unfair competition between registered and unregistered traders.

Mr. Nigel Lawson (Blaby)

I am not clear what point the right hon. Gentleman is attempting to make. Is he saying that it is Government policy to bring the threshold for VAT registration closer to the thresholds in use in the European countries to which he has referred? If that is not Government policy, what is the point of his remarks?

Mr. Sheldon

I was seeking on a philosophical basis to show that New Clause 1 does not have the validity that the hon. Gentleman may, or may not, accept. He is not always at one with his Front Bench, so his position is anomalous, making it difficult for us to know the status of his interventions at any time. I was trying to show the range of thresholds applicable in Europe. The hon. Gentleman knows that, during the discussions on the sixth directive of the Commission relating to VAT, I sought to provide as open an opportunity as I could to bring about this increase.

Nevertheless, it is not a bad idea to look at the experience of other countries, because, even if one does not need to accept that experience, one can learn from it in a way which those who thought out this tax for introduction here did not necessarily always follow. My belief in these matters is less based on dogma than the Opposition's was when they introduced the tax. My attitude has been formed in the light of our experience since the introduction of VAT.

Mr. David Howell

I agree with the high sentiments of the Financial Secretary in aiming to make comparisons. Does he agree that it is also not a bad idea to look in detail at the situation in other EEC countries? If he did so, would he not admit that there are a number of schemes and arrangements which very much modify the effect of the threshold figures that he has stated and which, in some cases, make the effect of the figures that he has quoted totally different from that which would prevail in this country? If he is making the argument in those particular terms, he must set all the facts before the House, and not just those that suit his argument.

Mr. Sheldon

The hon. Gentleman will know that in this country we have a number of schemes for small traders. We have a wide range of such schemes, but they are limited by the need to make them readily available and readily comprehensible. There is no a particularly important point that the hon. Gentleman can make in that respect.

However, we are considering what the threshold should be and how it should take account of the experience that we have gained in the four years since the introduction of the VAT system.

Mr. Michael Spicer (Worcestershire, South)

I am not quite sure what the gist of the Financial Secretary's argument is. Is it that the original threshold, when set at £5,000, was set too high in real terms? Is that what he is saying?

Mr. Sheldon

I was maintaining that so far from being the consequence of an understanding as to what it ought to be, it was necessarily set at a fairly arbitrary level, even though it was sought to be defended by those concerned. But we now have the advantage of seeing in practical terms the experience of what the level of the threshold ought to be, and of being able to come to the House of Commons giving the benefit of the experience of Customs and Excise in carrying out the obligation to keep a close watch on these and other matters relating to VAT.

The tax has been in operation for four years now. In the lifetime of any tax as important as this that is not a long time. One of the more important elements of this matter, because of the complexity of this new tax, to which the hon. Member for Guildford (Mr. Howell) and many others have frequently drawn attention, and because of its effects upon large numbers of people, is that there is a need for a considerable period of stability.

This has been advantageous. At the beginning there were many problems. They have now either been resolved or been diminished because of the greater understanding. Ideally, I should have preferred a period of stability even longer than that which we have had up to now and to retain the threshold. However, I understand the widespread support for the increased threshold, and the representations that have been made to us. I am prepared to accept that it is time for an increase of a moderate nature. That is the reason for the Government amendments.

Concerning the practical arguments for limiting the change, there are a number of procedures that will be involved in the deregistration and a number of problems that have not so far been met by Customs and Excise. That is because we are dealing here not with the odd number of deregistrations and registrations that have obviously been a feature year by year, but with what could be a substantial number of deregistrations over a very short period.

It is because of that and because I believe that we should allow VAT to continue in much the same form until greater experience is obtained by those who operate it that we are proposing that the new registration threshold limit should be increased by 50 per cent., from £5,000 to £7,500, and that the deregistration limit should be increased by the same percentage, from £4,000 to £6,000.

The purpose of these two levels, the registration level and the deregistration level, is obviously to prevent a kind of see-saw effect as traders come above the threshold and then fall below the threshold, deregister, and then come above the threshold subsequently. Therefore, one wants an interval between those two limits of the kind that we have had previously. I know that the new clauses take this matter into account. We are grateful for the widespread understanding of this important factor.

4.45 p.m.

It is not possible to forecast the exact number of traders who will seek to deregister, because a number of such traders obtain net payments of VAT themselves, and we must assume that they will remain registered. A number of others obtain their business through the supply of goods or services to registered traders, and they may well decide on commercial grounds to retain their registration because it is useful for their customers.

The Government amendments will enable more than 50,000 traders to apply for deregistration if they believe that it would be worth while. The revenue reduction that we expect to arise from this will be a figure somewhere between £5 million and £10 million.

We have put forward 1st October as the date for the Government amendment to take effect. That is to allow for these changes to become operative in that period, as a new clause will be needed at a later stage to relax the current provision for the payment of tax on stocks and assets, which we shall obviously be having to take into account.

Mr. John Farr (Harborough)

Is the Financial Secretary saying that he estimates that the annual cost will be between £5 million and £10 million and that 50,000 traders may well avail themselves of this opportunity? If so, will he say why, despite letters to his right hon. Friend and several Questions, culminating in a Question six weeks ago when this specific question was asked, I was informed that the information was not available and that it was impossible for the Treasury to calculate how many traders would benefit?

Mr. Sheldon

As I have mentioned, it is a tentative estimate. In the light of the new clauses and the Bill, obviously a considerable amount of effort had to be put into establishing the effects of these proposed changes. I mentioned at the outset that the figures that I was giving were only very broad estimates. I hope that the hon. Gentleman will accept the nature of the accuracy of the figures that I am providing.

Mr. Peter Walker (Worcester)

I intervene on a point of information. The Government have obviously looked into this matter in order to table their amendments. What proportion of the total is 50,000? How many are registered at present, and what proportion will it mean? Also, if the limit were raised somewhat higher, has the right hon. Gentleman any figures to indicate how many more traders would fall into this position?

Mr. Sheldon

Yes, but perhaps I may reply to the whole debate and come up with more figures which should be of help to the Committee. At this stage I want to give an indication of the Government's attitude.

I believe that the new clause, as amended, will be able to provide the means of maintaining some of the advantages that Opposition Members claim for traders. I myself feel that the most important aspect of VAT is the level of comprehension that is possible for the ordinary person using it. I think that that is increasing with time. Everything that we can do to make this a more readily understandable tax and one that people can operate in a more practised way will be to the advantage of the VAT system and of those concerned in trade generally.

Mr. David Price (Eastleigh)

I do not believe that this debate on the new clauses and the Government amendments need cause either side of the Committee to get very up tight. It seems to me that what we are dealing with basically is the application of the de minimis principle to VAT. With the small exception of those hon. Members whom I regard as belonging to the hair shirt brigade—I notice that they are not present for the debate—there is nothing in principle that need divide us. The hair shirt brigade consists of those who regard all forms of taxation as a salutary form of penance and who, when they see a happy shopkeeper, assume that he is being under-taxed and is putting his fingers in the till. No hon. Member currently present falls into that category, because I see that the Labour Benches below the Gangway are empty. Therefore, we can assume that we are at one and agreed that it is perfectly proper to apply the de minimis principle to the VAT threshold.

I should like briefly to put to the Committee some important reasons in favour of raising the threshold as part of the de minimis principle. This principle was established when VAT was brought in at £5,000 a year in 1973. First, my hon. Friend the Member for Guildford (Mr. Howell) has already shown that to bring the threshold back to its real value in April 1973 the figure should be nearly £10,000. The latest figure that I have from an answer to a parliamentary Question this week is that, to be at the April 1973 value, it should be £9,750. My hon. Friend said £9,600. Therefore, his argument that by the time it is implemented £10,000 is not an unrealistic figure should be accepted by all of us. I believe that the Financial Secretary supported my hon. Friend's figure, because he pleaded for stability and said that the Government amendment would stabilise the tax.

I shall be interested to hear from the hon. Member for Cornwall, North (Mr. Pardoe) why the figure should be £20,000. I have some sympathy with that view. However, the new clause fulfils the proposition adumbrated by the Financial Secretary regarding what he and his Treasury colleagues want. I believe that he should accept the new clause now in order that we may move on to the next new clause without further argument.

Secondly, I believe that moving from £5,000 to £10,000—in 1973 terms, from £2,500 to £5,000—will relieve the Customs and Excise—the tax gatherers—of a great deal of work.

We know from answers to questions earlier this year that there are about 250,000 VAT payers, each with an average tax liability of only £160 a year. Acceptance of the new class would make a positive contribution to the cost effectiveness of tax gathering. I suspect that the Financial Secretary has a sneaking regard for this argument because, in a somewhat nostalgic throw-away line, he talked about the advantages of the old purchase tax when the Treasury dealt only with larger and more clerically sophisticated companies.

We know that VAT gives rise to "aggro" between the taxpayer—above all, the small business man and the self-employed—and the tax gatherer. Therefore, I should have thought that the Customs and Excise and the service generally would be greatly relieved if the new clause were accepted.

Thirdly, there is the unofficial tax gatherer—the taxpayer who pays VAT. I have no doubt that this form of tax is particularly difficult for the small business man and, above all, for the independent self-employed. We all know that these taxpayers have the greatest difficulty in coping with the necessary bureaucracy involved.

Those, then, are three substantial reasons for supporting the new clause.

The only ground upon which the new clause could be opposed and the Government's amendment preferred would be one of cost. Again, I had an answer to a question on this matter earlier this week. I shall give the figures, because we have not had the relevant Hansard this week. I asked what would be the loss of revenue in 1977–78 if the exemption limit were to be raised to £10,000. The reply was that it would cost an estimated £45 million. If the limit went up to £15,000, it would be £75 million. The hon. Member for Cornwall, North may care to note that if it went up to £20,000, it would be £95 million.

On what rate of inflation are these estimates made? One of the features of VAT is that it is a buoyant tax. Therefore, it rises with inflation. If the rate of inflation is higher than the figure upon which the estimates were made, the tax will produce more revenue to the Treasury that it is anticipating getting this year. There are good grounds for assuming that this will happen, because inflation continues to increase.

Looking at the Financial Statement and Budget Report 1977–78, we see that the Budget forecast for value added tax in 1976–77 was £3,650 million and that the outturn was £3,750 million. Therefore, last year the Treasury got £100 million more coming in from VAT than it had budgeted for. I suspect that was because the rate of inflation was higher than was forecast at the time.

I suggest that we shall have a similar situation this year. In the first four months of this year the rate of inflation has been higher than was anticipated by the Government. Therefore, I conclude that, without any charge of being reckless or having little regard for the fiscal consequences, we can accept the new clause.

As we know from the figures that I have quoted, the Government estimate that if the exemption limit were raised to £10,000, itwould cost £45 million. I have calculated that if they are 2 per cent. out on the rate of inflation, the reduced revenue produced by raising the threshold will easily be covered by the higher revenue arising from the extra inflation. Therefore, if the Financial Secretary is to convince the Committee that his lower figure is to be preferred to the higher figure in the new clause, he must tell us, first, on what rate of inflation these estimates are made. Secondly, does he wish to revise that estimated rate of inflation in the light of current experience? I suggest that if he answers those two questions directly, we shall have a clear justification for accepting the new clause. Indeed, as always in these matters, I am astonished at our moderation.

Mr. Peter Walker

I apologise to the Financial Secretary for not being present for his opening remarks. That was due to a phone call that I was taking.

I declare a vested interest as someone registered for VAT who has probably already committed many criminal actions by accidentally failing to recall in my declarations some broadcasting fee or a fee for a newspaper article. Anyone who is registered for VAT in a small way knows the complication and worry involved in keeping the appropriate records and making the returns in the proper way.

When the Conservative Party decided to set up a committee under the chairmanship of my hon. Friend the Member for Guildford (Mr. Howell) to look into ways not only of streamlining and improving the administration of VAT, but of taking the burden away from as many people as possible, I was delighted. I hope that the final work and conclusions of that committee will result, when given the opportunity, in some positive action.

I apologise if any of the matters that I wish to raise were made clear before I came into the Chamber. If the new clause is accepted, how many people would have some option of deregistration under VAT, as opposed to the 50,000 to whom the Financial Secretary referred? Presumably some estimates have been given to him. I realise the difficulty of calculating how many of the 50,000 will take advantage of the option, but a tolerably intelligent guess can be made. Surely the Customs and Excise has already calculated the impact that this proposal, if accepted, will make on its workload.

I should also like to know how many people could opt for deregistration if the higher figure of £20,000 were utilised. I think that the more people who can remove themselves from the liability for this tax, the better. The compensation of simplification and, indeed, revenue to the Government by going for a flat rate at a somewhat higher level than the lowest rate now makes good sense. One of the complications in the administration of VAT is the double level.

5.0 p.m.

Since, in the amendment the Government, are showing some desire to simplify and eliminate the process for a substantial number of people, surely they must have considered a higher rate to obtain all the revenue of last year, as opposed to this relatively small increase in the threshold. How does the Minister see the balanced argument in terms of small businesses? Many small businesses in the early days found reason to complain about the manner in which various inspectors were examining their books and demanding to see them. There were many complaints about the attitude adopted. In fairness to the Customs and Excise Department many complaints were taken up, and the situation has improved. There has been a smaller volume of complaints in recent months. I welcome that improvement.

A case concerning a constituent of mine was reported in the Press today. If the evidence given by the business concerned is correct, alarming attitudes have been adopted by the inspectors. Many small business men who read of such visits to private houses are genuinely frightened and anxious about the tax. It causes a great deal of anxiety to those small businesses that cannot employ professional staff to supervise the tax. I hope that the Government will go for the option to lift the threshold to the maximum level and relieve that anxiety.

Mr. Pardoe

I welcome the Government's compromise amendment to the new clause. The Conservatives sounded pretty miserable about the amendment. They do not think it is a concession of any merit. Well, they would not, would they? The hon. Member for Guildford (Mr. Howell) is usually quite a cheerful soul, but in this debate he has had a hangdog look. His voice has sunk further and further into his boots. He must try to cheer up. He says that far from having achieved anything by getting the threshold raised from £5,000 to £7,500, the Liberal Party has somehow sold the pass.

According to various Press reports the hon. Member for Guildford blamed me for the whole thing. The Financial Times states that he said: This is another fruit of the Liberal Party deal with the Government. The Daily Mail and The Guardian do not agree with that. The Guardian states that The Liberal Party won another Budget concession from the Government yesterday, when Treasury Ministers decided to raise the VAT level to £7,500 from the present £5,000. The Daily Mailstates that The Chancellor Mr. Denis Healey, gave in to pressure for the change after Liberals made it clear that they would insist on the turnover levels being raised.

Mr. Lawson

Will the hon. Member explain clearly which level he prefers—£9,600, which is the level in the Liberal new clause, or £7,500 which is the level in the Government amendment to the Conservative new clause?

Mr. Pardee

The answer is £9,600. But, I actually prefer a higher level. I should really prefer a threshold of £20,000.

I want to give the hon. Member for Blaby (Mr. Lawson) a lesson in parliamentary arithmetic. There is no certainty that the new clause will have the majority approval of the Committee—however I and my hon. Friends vote. There was no certainty that there was a majority in favour of a reduction in petrol tax. On recent occasions when the members of the Liberal Party and members of the Conservative Party have voted against the Government, the Government have won, partly because of the absence of the Ulster Unionists.

Mr. Lawson

Three Liberals did not vote.

Mr. Pardoe

On yesterday's vote the Government won by a majority of two.

The First Deputy Chairman

Order. That matter does not arise on the question of the threshold of VAT.

Mr. Pardoe

I am arguing why I am prepared to accept a bird in the hand rather than two birds in the bush. I am entitled to argue why I think it is unlikely that the new clause will go through, whereas the compromise agreed with the Liberal Party and the Government will go through. I think that I am entitled to adduce figures—

The First Deputy Chairman

The hon. Member should not forecast the result of the vote. He has made his point. I do not see why we should go over what happened yesterday after a debate on agriculture. Let him keep his argument to the minimum.

Mr. Pardoe

I am arguing that the amendment involving £10,000 would not be carried. That is why I prefer the Government amendment. I was challenged by the hon. Member for Blaby about a vote that took place last night. I do not see why I should not use figures from that vote to illustrate my point.

A total of 32 Conservative Members were absent paired last night. Three Liberals were paired. But the Liberals were paired with the sick. That is better than pairing with those who want to go out to dinner. The Ulster Unionists were absent. That is why the new clause will not be carried. That is why I prefer to accept the amendment involving £7,500 which has been agreed by negotiation, than take a risk on the £10,000 proposition.

The Liberal Party cannot by itself change this tax threshold. Indeed, the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) during the Second Reading of the Finance Bill said The hon. Member for Cornwall, North spoke as though he were going to get this tax knocked out of the Bill by himself, but he has to persuade 285 Conservatives to feel that they should lend him their support in what he seeks to do. It is not Just a question of his persuading himself."—[Official Report, 28th April, 1977; Vol. 930, c. 1627.] I do not think that I can convince that number of Conservatives to turn up and vote tonight, or any other night. If I had been able to do that two nights ago we should have established the principle that no one in this country should pay more than 50 per cent. of his income in tax. Unfortunately that amendment failed.

It is possible that there are some monetarists in the Conservative Party who would decide not to increase the public sector borrowing requirement by voting for a reduction in petrol tax nor, indeed, vote for the increase in the VAT threshold. That is why I have taken the view that I have taken on the amendment.

I say to the hon. Member for Blaby and other Conservative Members that a new clause involving £9,600 appears on the Order Paper in my name. I would rather have that threshold than £7,500 but I do not think that I could achieve it.

Mr. John Cope (Gloucestershire, South)

I think I am correct in saying that the first vote is likely to be on the Second Reading of the new clause. That is likely to go through. Presumably the Government will not oppose the first vote. The vote on the amendment is the one that is likely to be in dispute.

The First Deputy Chairman

The hon. Gentleman may be slightly misleading the House. The first vote will be on the Question "That the clause be read a Second time". That is all.

Mr. Cope

I think that is quite correct, with respect, and I was assuming that that vote will be carried because the Government will not oppose it. The first opportunity for the hon. Member for Cornwall, North (Mr. Pardoe) to demonstrate any disagreement with either the Government or the Opposition will come on the vote which will follow that, on whether the clause as read a Second time should be amended. He can vote with us on that to oppose the Government's amendment and leave it at £10,000. If there is not a majority for the Conservatives and Liberals and anybody else voting together, the figure will revert to £7,500. The hon. Member is not in a dilemma about choosing. He can vote with the Conservatives with equanimity.

Mr. Pardoe

When the hon. Gentleman has finally twisted himself around parliamentary procedure, he will find that his version of events is not quite what will happen.

Mr. Cope

Why not?

Mr. Pardoe

I advise the hon. Member to wait until the votes are cast. In any case, the main point of the debate is not just about what the actual level of threshold should be.

Mr. David Price

Yes, it is. That is exactly what it is about.

Mr. Pardoe

It is not. Some far more important questions are being raised, because we are dealing with a very bad tax. We are dealing with the left-overs of a very bad Government—the Conservative Government—for even with a threshold of £10,000 there would still be a very large number of the problems which were dealt with in earlier speeches.

In general, one would like to say "Let us leave the tax alone", but major changes have to be made. It cannot be left alone. The tax is far too bad for that. If we leave it alone it will be subject to the random law of perversity that things get worse the longer they are left.

In an ideal world, taxes should not be introduced other than for reasons of efficiency and sound economics. The first question which should be asked of any tax—and we have to ask it again this afternoon in dealing with threshold—is whether the tax is an efficient revenue raiser. Next, will it have beneficial economic effects? Thirdly, would people prefer to pay their taxes in this way rather than in another way? The best tax is one to which the answer to all those questions is "Yes". I am afraid that VAT, at whatever level of threshold—and we are only patching it up by changing the threshold—is a bad tax on all those counts.

It might be worth while recalling what the Conservative Government said was the purpose of this tax when they produced their Green Paper back in 1971. They said: The existing pattern of indirect taxation in this country is open to the objection that it is selective and is based on too narrow a range of expenditure. Selective taxation gives rise to distortion of trade and personal consumption patterns, and can lead to the inefficient allocation of resources. The Green Paper went on, quite rightly, to argue that there should be a more broadly based structure which, by discriminating less between different types of goods and services—

The First Deputy Chairman

Order. I think that the hon. Member for Cornwall, North (Mr. Pardoe) is now going pretty wide of the purpose of either the new clause or the amendment. He is now seeking to discuss the whole question of value added tax and whether it serves its purpose. I have to rule that all we are discussing is the threshold and not the actual existence of value added tax.

5.15 p.m.

Mr. Pardoe

The fact is that the anomalies which we are trying to put right by raising the threshold are very important anomalies, and they are anomalies to which I intend to address my speech. If you, Sir Myer, say that that speech cannot be made in the House of Commons I shall quite understand. If you did say that, however, it would make the House of Commons an even more fatuous place than I believe it to be now.

How does VAT fulfil the promise? It is not and has never been able to replace the revenue that—

The First Deputy Chairman

The hon. Member for Cornwall, North has indicated that he is prepared to accept my ruling. If he wants to make that speech he will make it outside the House and not in the Committee stage in the House of Commons. I am ruling that particular aspect of his speech out of order.

Mr. Pardoe

I quite understand, Sir Myer, what you are trying to do.

The First Deputy Chairman

I hope that the hon. Member is not imputing to me any ulterior motives. All I am doing, as the custodian of the Standing Orders of the House, is to see that these Standing Orders are kept to strictly.

Mr. Pardoe

I am debating anomalies which have been caused as a result of problems arising out of the present threshold of the tax. Will you please tell me, Sir Myer, whether I am entitled to argue that the threshold of the tax should not be raised ideally to £10,000 but to £20,000 or £50,000?

The First Deputy Chairman

It is strictly in order to argue that.

Mr. Pardoe

That is precisely the argument that I am attempting to make, but it is taking rather a long time to get to it.

We have to look, therefore, at the whole question of compliance costs and administrative costs for people at the lower end of the taxpayers' scale. I am now talking about a very large number of VAT payers—not just those who are in the range of £5,000 to £7,500 or up to £10,000, but people way above that, certainly up to a level of about £50,000.

I am indebted for evidence of this to two studies. The first is a survey of the compliance costs of VAT for 29 Bath retailers carried out by Michael Godwin of the Centre for Fiscal Studies at Bath University, and reported by him in an article in the September 1976 issue of Accountancy. The second study of the collection and administrative costs is by E. W. Sweeting, who was until recently Director of Accountancy Services for the Ministry of Defence Procurement Executive. This study was reported by him in an article in the Accountant of 24th March 1977. These surveys show that successive Governments have not taken the compliance costs sufficiently into account.

In the amendment we are as much dealing with compliance costs as we are with the direct administrative costs of collecting this money. Indeed, Governments never seem to recognise that these compliance costs exist at all. Certainly no attempt has ever been made by Government to estimate them.

It would be an excellent thing if in future all new taxes or changes of taxes were accompanied by a memorandum from the Treasury estimating the effect on the taxpayer of the compliance costs, just as we insist on being told the revenue effect and the effect on the number of civil servants and the administrative costs of legislative changes. All these questions have been legitimately put to the Minister during the course of the debate so far.

Compliance costs are, broadly speaking, those costs over and above the liability for the tax itself which are incurred by a taxpayer in paying the tax. They include the cost to the taxpayer of collecting the tax, accounting for it, preparing tax returns, and actually making the payment itself. The Bath study is a terrifying and damning indictment of VAT as it was devised and introduced by the last Conservative Government and as it now operates with our present threshold.

I am not here concerned with commencement costs, Sir Myer, because in any case that would be out of order. I am concerned with the permanent and continuing costs of compliance as shown in the study of the Bath retailers. For 25 of these 29 retailers in the city of Bath, the average estimated compliance cost in the year 1973–74 was £140 and the average liability for tax was £179. To have to undertake £140 worth of extra work in order to pay the Government £179 of tax must be some kind of record in lunacy. It means that the compliance costs of these retailers were 78 per cent. of their total tax liability. That is really crazy. But there is worse to come, for 10 of these retailers actually spent on average £115 in compliance costs in order to claim back from the Government an average of £842. And they call this a tax. It is a sort of inspired madness.

The deeper one delves into the survey of the compliance and administrative costs the worse it gets. The compliance cost of seven grocers in this sample are estimated at £1,428. Yet their total liability for tax was only £98. What kind of Government was it that imposed on sonic harmless, inoffensive and hard-working grocers a tax which in 1973-74—the latest period for which we have the figures—cost them 14 times as much to collect, account for and pay, as the Revenue actually derived in tax? No wonder retailers and small business men are angry about the tax. It is only because the British are a peaceful and long-suffering people that they have not marched on the House or perhaps on Conservative Central Office long ago.

The Minister may say what Governments always tend to argue when they are urged to adopt a higher threshold, that the system seems to work on the Continent with very low thresholds. I believe that the Minister mentioned that today. On the Continent VAT is a good tax with a low threshold because there is virtually no zero rating. But the zero rating of food and other items in this country has been regarded as a political necessity by Governments who believe that an across-the-board tax such as was first envisaged, though not applied to food, was a political impossibility. Zero rating made the tax very inefficient, and for that reason I do not believe that the tax should have been introduced.

Let us consider whether something can be done with the threshold level to try to improve the tax. In his article in the Accountant on 24th March, Mr. Sweeting tries to link compliance costs and the direct administrative costs of the Customs and Excise to establish a total cost of collecting the tax from smaller and not-so-small retailers. Let us consider some of the horrors that he exposes. He makes it clear that he is not blaming the Customs and Excise Department, but that the nature of the tax and its present threshold are to blame. The article says: What accountant with the best interests of his clients at heart would automatically recommend sales and purchases day books and ledgers for businesses with an annual turnover of less than £50,000? Only an unimaginative pedant. They are costly and time-consuming to run. He is not commenting on some super-collectivist scheme dreamed up by centralising State Socialism. This tax was introduced by the supposed lovers of efficiency and enemies of bureaucracy—the Conservative Party. According to the Customs and Excise, there were 1,250,800 persons registered as VAT payers on 1st March 1976. They paid a net amount of £3,385,000 in tax. But it is when we come down the scale that we run into difficulties, because 367,000 of them—29.4 per cent. of the total of taxpayers—received refunds of £618 million, and those refunds cost the Customs and Excise Department a farther £20 million to administer.

Therefore, 367,000 businesses or persons are made to go through the whole costly business of filling in VAT forms and keeping VAT books simply to enable the Government to repay them £618 million. It may be said that refunds are essential as a part of the tax and must not be confused with collection or compliance costs, I accept that to a certain extent.

Let us turn to Mr. Sweeting's calculations on retail distribution which is where the real impact comes because these costs are laid obscenely bare. On 31st March 1976 287,000 retailers were registered as VAT payers. Of these, 143,000 had annual turnovers below £20,000. They paid tax of £18 million which cost the Customs and Excise £8 million and Heaven knows how much "aggro" to collect, and that does not seem very sensible.

If we then add the problem of compliance costs which admittedly are difficult to estimate, but it can be done, to the direct administrative costs we can see that the whole picture is even worse. Those with a turnover of less than £20,000 paid £18 million in tax, and in addition to the £8 million that it cost the Customs and Excise to collect the money, there were compliance costs of £23 million. That is absolutely crazy. Compliance and collection costs were greater than the tax paid for 216,000 retailers with turnovers of less than £50,000 in 1973–74.

Of course it would be impossible to raise the threshold to £50,000. For one thing, our European partners would not stand for it. In addition, there would be a great outcry from those with turnovers of more than £50,000 complaining of unfair competition. I am less impressed by that objection than others might be. I see nothing to be lost and everything to be gained by discriminating positively in favour of small business, and this kind of action would be such discrimination. Of course, we should have to put up with the objections of those above the threshold, but that would apply whether the threshold was £10,000, £50,000, or any other figure.

It is, however, certain that we cannot allow such an argument to outweigh the sheer nonsense of levying a tax which costs more—in total administrative and compliance costs to the taxpayer—to collect than it yields in revenue from all those below the £50,000 threshold.

We could do many other things to simplify the tax. The Financial Secretary referred to a study which is being carried out by the Conservative Party. We in the Liberal Party have been involved in an intensive study too, and many others are doing the same. Many changes could be suggested to the structure of the tax to enable a lower threshold to be administered profitably both in terms of compliance and direct administrative costs.

It seems, however, that we must go in one direction or the other. Either we must change the tax virtually out of all recognition—that means abolishing the input and converting the tax to a straight sales tax—or raise the threshold substantially. That is the basic choice which is more important than the question of whether the threshold should be £7,500 or £10,000. An increase on that scale would not take many people out of the net and would not solve the basic problem demonstrated by the figures I have quoted.

I hope that the Government will look at the studies which have been done. I hope they have done their own studies of compliance costs. They have detailed figures from the Customs and Excise about direct administrative costs. I hope they will put these together in a major study before next year's Finance Bill so that we can either make the tax a profitable and efficient revenue raiser or decide that we must raise the threshold substantially.

5.30 p.m.

Mr. Douglas Crawford (Perth and East Perthshire)

I wish to refer to new Clause 8, which has been grouped with new Clause 1 and stands in the name of my right hon. Friend the Member for the Western Isles (Mr. Stewart).

This is a matter that has often exercised members of the Scottish National Party. I have noted what the Financial Secretary said about the need to maintain stability, but there is not much stability in business when inflation rates are running at 15 per cent. to 20 per cent. The Government may have moved a little on this issue, but they have not moved enough and they have moved grudgingly.

An amount of £5,000 in 1973 is not the same as £7,500 today; in fact 1973's £5,000 is much nearer today's £10,000 and it could be that 1973's £5,000 will be next year's £12,500. Hence our selection of our threshold. There is not another Finance Bill until 1978, and it is possible that even £10,000 will be eroded by this time next year.

I am sorry that the Liberals have gone back on their original proposal of a threshold of £9,600. After hearing Northern Ireland Questions today and knowing the mood of Ulster Unionist Members, I would have thought that with Liberal support the Government could perhaps have been defeated on this.

The cost of raising the threshold to £15,000 is £75 million, and presumably the cost of raising it to £10,000 would be in the region of £50 million. VAT may or may not be a good tax, but the methods of assessment impose a huge burden on small business men.

I take the point that the Financial Secretary made about fair competition and realise that any cut-off point must be arbitrary. I am sure that we have all been approached from time to time by small business men with truly horrific stories about the unconscionable amount of time they have to spend filling in forms in order to cut a swathe through the bureaucratic crop that the VAT regulations represent.

I have been approached by constituents who are in near despair in their efforts to contend with four tax rates—zero, exempt, 8 per cent. and 12½ per cent. They spend far too much time filling in forms. It sometimes takes up the whole of a Saturday or Sunday morning—time that should have been spent in leisure.

Despite what the right hon. Member for Worcester (Mr. Walker) said, there is, on the other side of the coin, bureaucracy among the VAT-men themselves. It is not unknown for VAT inspectors to spend a great deal of time going through the books of small companies with small turnovers, and the cost of that must be prohibitively high. I have had personal experience of this. One is prompted to ask if the VAT-men are compensating for their inability to police the large companies by taking it out on the smaller ones. Our amendment will not remove this inequity but at least it will alleviate it to some degree.

It cannot be repeated too often that the small business sector is one of the most important in the economic firmament—important per se, and also because it is today's small companies that sometimes contain the seeds of tomorrow's large companies. Tall oaks from little acorns grow.

The purpose of taxation should be to maximise revenue, and revenue can be maximised only if businesses are left as free as possible from bureaucracy and allowed to get on with creating wealth—making two blades of grass grow where there was only one before. Excessive interference by the VAT-men, especially in small companies, does not greatly assist the creation of wealth.

As long as Scotland remains joined to the economic and political union of the United Kingdom, it will continue to suffer from raging inflation. This is why we seek to raise the threshold to £10,000, or £12,500, or even more. We shall vote against this niggardly concession that the Government, in concert with the Liberal Party, have produced.

I hope that we shall have support and that not too many unpaired Tories will be getting themselves into further fumbles over devolution at the annual conference in Perth. I hope that the Conservatives will turn out in force to support us tonight.

Mr. Farr

I support the new clause moved by my hon. Friend the Member for Guildford (Mr. Howell) and I welcome the suggestion that the threshold level should be raised to £10,000. I think that it would be sensible to raise it to a much higher level.

I intervened about half an hour ago when the Financial Secretary was speaking, because I had a series of Questions, all directed to him, which were tabled in January this year. I asked him for the annual cost, in terms of lost revenue, of raising the threshold from £5,000 to £20,000 and £50,000. The answer I got, to paraphrase the Financial Secretary, was that it was unrealistic to assume that persons registered for VAT who would be entitled to substantial repayments would not wish to remain registered voluntarily.

It is a pity that I should receive that sort of blocking reply to a Question that was tabled in the usual way on the Order Paper. This is the only way that hon. Members can have access to information, and when Ministers give this sort of rather curt blocking answer it tends to bring Parliament and the whole Parliamentary procedure into disrepute. This is especially so when, four months later, the same Minister gives the House the information in great detail. He has given us the cost of raising the threshold to the levels that I suggested, and to other levels, and has indicated the number of persons involved. That was all that I sought to ascertain when I tabled my questions.

Mr. Robert Sheldon

There is an enormous difference between a parliamentary Question, when one is limited by the actual cost incurred in undertaking a thorough study about the amount of revenue lost, and a decision made by the Government, with the necessary requirement for us to tell the House how much our amendment will cost. One proposition is quite unacceptable in terms of cost, because of the amount of study that would have to be undertaken. The other is an essential part of an undertaking of any Government. The hon. Member should know that normally I give a great deal of attention to trying to give as much information as possible in parliamentary answers.

Mr. Farr

I fully agree with what the Minister has said about his attention to parliamentary answers. That is why I was surprised at what had occurred. His record in the past had been good. I was even more surprised when I sought an elucidating answer from the Chancellor and I received a similarly negative reply from him. This was positively discouraging.

I have sought to raise this matter on a number of occasions because of the representations that I have received at a number of meetings that I have attended, held by the National Association of Independent Businessmen. These meetings, entitled "Survival of Small Businesses" have been held throughout the country in recent months and have indicated that one of the causes for the decline of small businesses in recent years has been the incidence of VAT, and in particular the present very low level of the threshold at £5,000. I am attending another of these meetings shortly, in the Midlands, and there will be, as in previous meetings, almost unanimous representations from all over the East Midlands requesting that the VAT threshold be raised not to £10,000 but to £15,000 or £20,000.

My hon. Friend the Member for Guildford (Mr. Howell) has emphasised that a considerable burden has been added to the tasks of small business men. The hon. Member for Cornwall. North (Mr. Pardoe) made some very good points resulting from a document showing an analysis of what happened to retailers in Bath. Some of those points were extremely telling. I do not have a document of that nature on which to draw. However, I have evidence that is almost as telling—namely, the records of small concerns that are going out of business completely because of the many burdens placed upon them by the Government. They are having to cope with masses of paper work, and they have been very much hit by the incidence of VAT and certainly by the present level of the threshold.

I am sorry to see one of the occupants of the Government Front Bench laughing at my comment. It is nothing to be amused about. It is an undoubted fact that since the Government came into office small business men and traders are finding it difficult to keep their heads above water. The work has not increased merely marginally, but has multiplied to a considerable extent. That has been one of the main causes of the difficulties faced by such businesses.

I wish to refer to the campaign which has been waged in the East Midlands in recent weeks to raise the VAT threshold from £5,000 to £20,000. I have received many letters complaining of the impact of the present low threshold on the viability of small businesses. It has been pointed out that the smallest firms do not have the clerical capacity to work out these complicated figures or to handle the VAT paper work in a proper manner. This also causes a disproportionate amount of work for the Inland Revenue officials who have to administer the scheme. This point was underlined by the hon. Member for Cornwall, North.

Further evidence has come to light on this matter, and I should like to put it before the House. It has been discovered that many people are now being deterred from setting up their own businesses by the prospect of having to become involved in VAT administration. From the very beginning, they do not have a chance to breathe before they face the nightmare problems posed by the ramifications of VAT. I have already said that I have unsuccessfully tried to obtain some information from the Treasury showing the total cost to the Exchequer of raising the VAT threshold. Many of those who have approached me on this subject have given evidence about their experiences and the difficulties they have faced in compiling VAT returns on businesses with very small turnovers. This has definitely affected the viability of such concerns.

In one case, even though the burden of VAT resulted in the failure of the business concerned, a fine was imposed. There are side effects of the present threshold level. The smaller business is not competent to handle the paper work that is part of the VAT system. Far too great an amount of bureaucratic and court time is taken up in dealing with trivial amounts.

5.45 p.m.

I had hoped that my hon. Friend the Member for Guildford would be a little more forthright in the line he took in moving his new clause, but I have every confidence that when we move to the Government Benches we shall take a more vigorous and energetic line on the VAT threshold. I am confident that it will be raised to a higher level than is now proposed.

Even if the clause is accepted, it will only just keep pace with the decline in the value of the pound since the present £5,000 was introduced. Although I shall vote with my colleagues tonight, I know that we shall have another go at raising the level to a much more realistic one to give some relief to those who are acting as tax collectors. When we occupy the Government Benches, one of the first things we shall do is to raise the VAT threshold in a realistic manner.

Mr. Jim Spicer (Dorset, West)

I wish to refer to the contribution made by the hon. Member for Cornwall, North (Mr. Pardoe). It appears that part of the rigours of the new regime that we now have to suffer involves having to listen to long lectures delivered by Liberal spokesmen as a substitute for any effective information about their policies. The hon. Gentleman, by a series of winks and nods, suggested that the Liberals will tonight vote on our clause. It was accompanied by other shakes and nods of the head indicating that they had done a deal with the Government which would set the threshold below the rate that we propose in the clause. It is ironical that by so doing the Liberals can have it both ways. I suggest that the Committee is entitled to know what the Liberal Party will do in this respect. Since all I have been given is yet another wink and a nod, we shall obviously have to wait and see.

I wish to take up the Financial Secretary's plea about stability. The right hon. Gentleman is a little like Canute asking the waves to stay back—after the right hon. Gentleman had been drowned rather than before. In the period under consideration between 1972 and the present, we have experienced inflation of 100 per cent. This explains why it is logical to press for a 100 per cent. increase in the threshold. That would give stability because in real terms it would return the threshold to the level which, for better or for worse, it occupied in 1972.

The Financial Secretary suggested that there was no reason for him to accept the level that was proposed and agreed in 1972. He then set out the arguments. That led me to intervene to ask whether he was arguing for a reduction in the threshold. He appeared to deny that he was asking for a reduction, but that is certainly what he will achieve if the Government's amendment to our clause is accepted. In real terms there will be a considerable reduction from the original rate proposed and accepted in 1972.

In replying to the right hon. Gentleman, I would adopt the argument put forward by my hon. Friend the Member for Harborough (Mr. Farr) and also by the hon. Member for Cornwall, North—namely, that there are very good reasons, far from reducing the threshold, for raising it to a considerable extent. I join my hon. Friend in hoping that a future Conservative Government will raise the threshold in real terms.

The classic example on the fundamental problems of turnover is shown by what happens in garage concerns. In most cases they are small businesses which often have an annual turnover—I do not know the average figure—of between £50,000 and £100,000 per year. Such businesses find it extremely difficult to comply with VAT regulations. I agree that the logical conclusion of that argument would be to raise the threshold well beyond £10,000 a year to £15,000 or £20,000. Far from reducing the current threshold, the Government should be considering raising it, a least marginally. They are not doing that tonight.

One of the problems in debates on allowances and thresholds is that the figures are not usually given in real terms. The Government usually present their case by saying that they are giving an increase and making a generous step. In fact, as we see tonight, it is usually not generous. The increase that the Government are apparently giving is, in fact, a considerable reduction. I ask the Government at least to consider keeping the threshold at the level proposed in real terms in 1972, otherwise the argument that the Financial Secretary put forward about reducing the rate does not hold good.

Mr. Cope

We should be grateful for small mercies in that the Government are going some way along the road that we have suggested. However, we should look this particular gift horse in the teeth carefully. We should consider it from an arithmetical point of view.

As is often the case when we put down such amendments, my hon. Friends have obtained figures by putting down parliamentary Questions, and more figures have been given by the Minister in his speech. The Financial Secretary said that 50,000 traders would probably be taken out of the VAT net by the Government's proposal to set the threshold at £7,500. He also said that the cost of that to the Government was estimated to be between £5 million and £10 million.

Mr. Robert Sheldon

I shall give some more figures later, but the figure of 50,000 that I gave referred to the number of people who could claim deregistration.

Mr. Cope

I apologise. I do not wish to mislead the Committee, and I shall come back to the figure of 50,000. I accept that that is the number of people who might claim, but we do not know that they will do so. The Government said that the cost, if they all claimed, would be £5 million to £10 million, and that means £100 or £200 of VAT saved by each trader. Of course, in introducing that figure of £5 million to £10 million, the Government have obviously taken into account—it is a big spread—various assumptions about the number of people who would come out of VAT on that basis. However, we also know from a parliamentary Question put down by my hon. Friend the Member for Eastleigh (Mr. Price) that 250,000 traders pay £160 or less in VAT. That figure, of course, falls into the bracket of £100 to £200 that was given by the Financial Secretary in his calculations. There seems to be some divergence there that I hope can be cleared up during a later intervention from the Financial Secretary. It has been said that 50,000 traders might be able to come out, but a much higher number of 250,000 traders seem to be paying such a small amount of VAT. Of course, the £100 or less in VAT that is paid by those 250,000 traders is their gross payment.

We know from figures that were given to us by the hon. Member for Cornwall, North (Mr. Pardoe), who has now left the Chamber and who referred to an article by Mr. Sweeting in the Accountant saying that at that level it cost £8 million to collect £18 million, that out of the £160 that is paid by each of the 250,000 people only £100 arrives net at the Treasury. We need to be clear about these figures when taking a decision on the limits proposed in the new clause and in the Government's amendment. The hon. Member for Cornwall, North was right in what he said about compliance and administrative costs for the Customs and Excise. That is the key to the decision that the Committee must shortly take.

There must be a point—it is certainly above £7,500, and probably above £10,000—at which this tax begins to be negative to the economy. There must be a much higher point at which it must have a more or less negative effect and certainly little positive effect for either the economy or the revenue. It would be helpful if the Financial Secretary could tell us whether the figure of £5 million to £10 million that he gave was a net or gross figure. It may be gross—although from what the right hon. Gentleman said I have assumed that it is net. It would be helpful for the Committee to know the gross figure. Of the £20 million of tax that the Government will collect, will £10 million be spent in order to collect a net figure of £10 million?

The big leap forward in simplification that is sought by the hon. Member for Cornwall, North might be achieved through a major increase in the threshold limit. It is more likely to come from a move to the accounts basis that we shall be discussing later in Committee when we debate two new clauses which have been put down—one of them in my name—on that subject. However, I cannot follow up that point now.

The hon. Member for Cornwall, North has now returned to the Chamber, so I should like to reiterate the paint that I tried to make in an intervention to his speech because I do not think that he grasped it. I see that the hon. Member is taking some high-powered advice from my colleagues on the Opposition Front Bench, obviously on procedural matters.

On this occasion the Liberal Party can have its cake and eat it. After the Liberal Party has voted, as we and the Government shall do, for the Second Reading of the new clause—which would be doing nothing out of the ordinary—it must then decide whether to vote for the amendment. If it votes for it, it will be voting against the £10,000 limit and for the £7,500 limit. Presumably, if the Liberal Members vote for the amendment with the Government, if they all turn out in force and there are no slip-ups in the machinery, the amendment will be carried However, if the Liberal Party votes with us, the limit will not be £7,500 but will be higher than that. There is no practical question whatever of the limit being less than £7,500 by the end of the evening. The only question is whether it will be £10,000, and the Liberals must direct themselves to that question. We shall see in due course, since they are not prepared to tell us now—as apparently, they are not—what decision they will make.

6.0 p.m.

Mr. John Loveridge (Upminster)

I suppose it is something that the Government have seen the light, even if they have seen only a little light. Certainly I and my colleagues have been pressing for this threshold to be raised during the last two years. We should have liked to see it raised by a greater amount, but at least what has been done shows some measure of increased sense and good will on the part of the Government.

I cannot help wondering how the figure of £7,500 was arrived at. It seems a strange figure to choose. How small are the businesses affected by the exemption supposed to be? This is the key question. Are they supposed to be one-man or two-man concerns—or has that not even been considered by the Government?

Do the Government want more employment? If so, the exemption limit should be set at a figure that allows one-man businesses to take on a second man. We have heard that 250,000 firms and self-employed people would be freed from VAT if the present limit were doubled. Even if only a segment of those businesses took on a second man, this would go a long way towards helping with our unemployment problem.

However, the Government have fixed the exemption at £7,500 and that is just too low to allow a second man to be taken on without the discouragement to the firm of entering the VAT net. The average output per man in this country in terms of gross domestic product was about £4,300 last year. This is arrived at by taking the GDP per head of the population according to the latest issue of "Economic Trends" and adjusting it for the total employed labour force in mid-1976. That is an approximate figure—no doubt the Government could give us the precise sum—but it is accurate enough for us to see that the output of two men last year would have averaged £8,600—£1,100 more than the proposed exemption.

Is it the Government's intention that the exemption should apply only to the one-man bands? It is at this stage of growth in tiny firms—the first step to expansion—that there are the biggest fears and anxieties in the owner's mind. When he considers whether to take on a man or perhaps two women, part-time, he wonders about the economy, as well he might. This is the wrong place from every angle to put any impediment in his way by taking him out of the class that is exempted from VAT.

Help and encouragement should be given at this first point, yet the Government are giving notice that the discouragement of enterprise starts when a firm takes on its first help. The paper work starts here. The head of a tiny firm will have heard much about bureaucracy, about paper work, about the troubles that he will have to face as the firm grows and about the endless legal paraphernalia that Parliament has passed that he does not understand. He knows nothing of solicitors, and he has probably never read an Act of Parliament, yet it is at this moment, when he wants to take a step forward and to provide a job for someone, that the Government ring the warning bell that he will go into the VAT network if he dares to give one man a job.

The Government should consider setting the threshold at a level above the normal anticipated output of two men at work. There would not have to be a very great increase and it would be an encouragement to the provision of a number of jobs. The small business sector is likely to be proportionately more helpful in providing jobs than is large industry, because the owners of small firms have always had to work near the limits of their capacity. In industry generally the position is different. For example, output is now little different from the levels during the three-day week. There is vast spare capacity and often substantial overmanning. That is not the case with tiny firms, and that is why the VAT limit should be lifted. Even the smallest upturn in economic conditions will find many of these small firms thinking of expansion. They are ready. They do not have the spare manpower, and they will therefore be the fastest sector in taking on new men.

Mr. Peter Rees (Dover and Deal)

On a point of order, Sir Myer. Would it not be appropriate for the sitting to be suspended until the Government Front Bench spokesman returns? Surely the courtesies of debate demand that Ministers should at least listen to contributions from the Opposition.

The First Deputy Chairman

I expect that there is a good explanation for the Financial Secretary leaving the Front Bench. However, the Government Whip is there to acquaint him of the important contributions that have been made.

Mr. Farr

Further to that point of order, Sir Myer. Ah!The Minister has returned. Now we can have a proper debate.

The First Deputy Chairman

I am sure that the Minister has been away for no longer than was necessary.

Mr. Loveridge

I am grateful that my colleagues feel that the Financial Secretary should be here to listen to what I have to say. I hope that the points he has missed will be conveyed to him by the Government Whip and that he will do me the honour of reading that part of my speech that he has missed.

Mr. Peter Rees

Say it all again.

Mr. Loveridge

The two Front Bench speakers are anxious to take part in the debate shortly, and I do not wish to hold up our proceedings by going back over what I have said. The Government ought to enable small firms to take on a second man and to encourage them to do so by raising the VAT threshold above the figure of two men's average output. That would have meant a limit of £9,000, or more now allowing for inflation. The Government should not stick to helping the one-man bands but should encourage the two-man bands as well.

Mr. Robert Sheldon

To show that I had taken the hon. Gentleman's argument fully on board before I had to leave the Chamber, for obvious reasons, for no more than one minute, may I point out that his suggestion would not meet his objective? He gives the salaries to be expected by two men but has not taken account of other expenses, and even modest expenses would be almost certain to result in the gap between the salaries and a turnover of £10,000 a year being exceeded.

Mr. Loveridge

The Minister is under a misapprehension. The figure of £4,300 to which I referred is the contribution of the average working person to the GDP for 1976. It is, therefore, a fair figure for the average firm. Of course there will be a wide spread of figures in various firms, and not all firms would be freed if my proposal were accepted. However, many firms would be freed from VAT. I appeal to the Government to try to meet this point and, if there is any error in my figures, to calculate for themselves the figure required to allow a second man to be employed in these firms. It would be a great shame for any Government to give discouragement at the first creative moment of a tiny firm's expansion.

Mr. Peter Rees

This is a clause of considerable importance and I am gratified that the Financial Secretary has returned to listen to the contributions that I and my hon. Friends hope to make. The clause can be justified by the inexorable ravages of inflation, and there is no need for me to add to what my hon. Friend the Member for Guildford (Mr. Howell) said about the characteristic inconsistence of the Chief Secretary to the Treasury. Those of us who have had the privilege of taking part in Finance Bill debates in previous years have had occasion to notice them.

The principal justification, however—the one that I wish to concentrate upon—is the number of people that will be taken out of the VAT net, which will result in a simplification of the administration and an easing of the taxpayers' burdens. The Financial Secretary was disposed to resist the new clause, citing the need for stability. Would that he had shown those sentiments in his approach to capital transfer tax, income tax, capital gains tax and the whole battery of direct taxes, and the amendments to them, that we have had to debate over the past three years.

The right hon. Gentleman and his right hon. and hon. Friends have in the past been frantically radical in their rapacity. So this is a novel change of heart, a change of front. But, in fact, I assume that it is only a piece of blatant officialise written into his brief by the Customs and Excise. VAT is a broadly-based indirect tax. By its very nature it is hound to affect a great number of people and turn a great number of people into involuntary tax gatherers.

Some of my hon. Friends have exemplified the various categories affected—the small individual trader, the small professional man, the small business man, the small shopkeeper, the old lady, perhaps with a weekend paper round, or the person with the small sweet shop. All these have been swept into the net. That is not to say—I turn to the hon. Member for Cornwall, North (Mr. Pardoe)—that the tax is bad in itself. I now recall the attitude that the Liberal Party took in the bright days of 1972, but I assume, since the Liberals voted with such conviction for our adherence to the Common Market, that they must also have supported the necessary and inevitable consequences—indeed, almost a precondition—of our entry into the Common Market. It may be that the hon. Member for Cornwall, North will seek to catch the eye of the Chair and explain the inconsistency of the Liberal Party on this theme.

Mr. David Howell

The hon. Member for Cornwall, North (Mr. Pardoe) may wish to intervene, but at the time the Liberal Party was solidly in support of VAT and the hon. Gentleman described it as "magnificently efficient revenue raising" which would enable us to go from replacing the two taxes to replacing many more and which would be a redistribution of income and wealth. I am as surprised as my hon. and learned Friend that the Liberal Party appears to have changed its attitude.

Mr. Rees

I am grateful to my hon. Friend, who has done a rapid piece of research and confirmed my suspicions. It may well be that the hon. Member for Cornwall, North has been reading the Accountant, which he did not previously read.

Mr. Pardoe

I was about to intervene just before the hon. Member for Guildford (Mr. Howell) did so. Yes, I did support VAT and I do so now in principle. What I was arguing was not that it was a bad tax in principle—it is a very good tax in principle—but rather that, because it does not have as wide a base as it has in Europe, it has become. a bad tax. It is for that reason that the people at the lower end of the scale will be paying less revenue to the Government than they are paying out in administrative costs and compliance.

Mr. Rees

As always, the hon. Gentleman wants it every way. But I shall leave him with his portentous responsibility to explain to the country at large, and his constituents in particular, why he would like an extension of VAT to food, children's clothes, shoes and other such items. There may be a good case, but—

6.15 p.m.

The First Deputy Chairman

Order. The hon. and learned Gentleman is now going wide of the matter under discussion. He should come back to the question of the threshold that we are discussing in relation to VAT.

Mr. Rees

I am deeply apologetic. I was tempted by the rather ill-judged and ill-considered intervention of the hon. Member for Cornwall, North to go rather wider than I had intended.

Mr. Pardoe

So it was my fault, was it?

Mr. Rees

All I wish to say is that I do not wish to find myself on any platform with the hon. Gentleman defending his particular position. In fact, the tax affects such a wide number of people, in small businesses or in a small professional way, that the Committee needs to be assured that the threshold is no higher than it need be and that the administration is as sensitive and humane as it possibly can be. We know from bitter experience that nothing for which the Chancellor is responsible is either sensitive or humane. But we shall hope perhaps to detach the Customs and Excise from him in due course.

Let me make it clear that nothing I am saying this evening is intended as a criticism of that devoted body of men, the officers of the Customs and Excise. It may well be that individual officers are too zealous, but that will always be so in a great organisation. It may even be that individual traders are a little too quick to resent criticism and investigation. There was a sad case in my constituency where certain traders refused to discuss their affairs with a certain Customs officer. I hope that that kind of difficulty can be ironed out. I hope that the Financial Secretary will be quick to receive representations from individual hon. Members on that kind of problem.

The hon. Member for Cornwall, North—I apologise to the Committee for again returning to him—spoke so ponderously and at length. Some of his points were a most peculiar kind of Liberal gobbledegook and can be left unanswered and unlamented. He regurgitated a great deal of raw material prepared for that useful and important study on which Professor Sandford of Bath University is engaged into the compliance cost of VAT. That work was well worth undertaking, and I hope the Financial Secretary will pay attention to Professor Sandford's conclusions. I hope that on another occasion we shall be able to amplify the debate to deal with the compliance costs of taxes generally. This is a subject on which not enough has been said either in this Committee or in the House as a whole.

The Government's amendment is a curious compromise. It is, of course, the product of that loveless and immoral alliance. The many imperfections of that alliance are already evident, because from time to time we have had to scrutinise with distaste its products. The hon. Member for Cornwall, North embarked on intellectual contortions at massive length to justify an act of calculated pusillanimity. By every kind of logic and common sense he should be voting for the new clause. It will be interesting to see how he and his right hon. and hon. Friends vote when put to the test, unless the Financial Secretary allows the new clause to go through without a Division.

I myself cannot understand this newfound timidity of the hon. Member for Cornwall, North and his hon. Friends. It must be that he has in mind his newfound friends on the Government Front Bench and is frightened that he might just tilt them over the edge and provoke them to call a General Election. That is the only justification for the course he has advocated tonight. I preferred the rather lighter touch that the hon. Gentleman had before he engaged in this alliance. Indeed, his words now fall like lead on an apparently empty Chamber.

Mr. Pardoe

It is not very full for the hon. and learned Member.

Mr. Rees

Where are the hon. Gentleman's hon. Friends or the hon. Friends of the Financial Secretary? [Interruption.] The Financial Secretary can turn to the Patronage Secretary's representative, but the hon. Gentleman does not add much in numbers to the hon. Members supporting the Financial Secretary.

If there is any logic in the position of the hon. Member for Cornwall, North he must surely support the clause moved by my hon. Friend the Member for Guildford. It would take out a calculable number of people who are unable to cope with the complexities of VAT. They have to cope with the administrative work, often after hours, during weekends or in their holiday period. I know of one such constituent who calculated that he had to spend one working day a month—probably his calculation was a modest one—dealing with these matters. If we can relieve him of those burdens, we shall have done a good night's work.

I hope that at the end of the day the Financial Secretary will not be too proud to admit that there is possibly more to be said for the new clause than he at first appreciated when he discussed it with his devoted civil servants. Let him rise to heights to which he has sometimes—rarely, I regret—risen in Committee, throw away his notes, which no doubt say "Resist", and say that this is something which, in the interests of good administration, humanity, indulgence if you like—

Mr. Pardoe

I cannot stand it any more.

Mr. Rees

—to a hard-pressed body of men, should be accepted.

Mr. David Howell

The Financial Secretary advised the Committee to reject the Opposition's new clause, using the argument that we needed some stability in the handling of value added tax. We hear a great deal nowadays about stability. We heard about it from the Leader of the Liberal Party. Stability was supposed to come when the pact came—since when, we have had nothing but political chaos and economic instability of a scale far in excess of anything that we have seen before.

Now the Minister tells us that he opposes our new clause on the grounds of stability. If he will forgive me, it is a bit much to be treated to lectures about stability from a Minister whose colleagues in the Treasury gave us first the 25 per cent. luxury rate of VAT, discovered that they had made a terrible mistake, changed it to 12½ per cent. and claimed that as a solid achievement for industrial strategy. We do not accept that argument. I heartily agree with my hon. and learned Friend the Member for Dover and Deal (Mr. Rees).

Other than that, the arguments from this side, from all parties, have been put excellently both by the hon. Member for Perth and East Perthshire (Mr. Crawford), representing the Scottish National Party, and by the hon. Member for Cornwall, North (Mr. Pardoe), speaking for the Liberal Party, who obviously has done a lot of work on this and who put the case very well for raising the thresholds substantially.

I was surprised, however, to hear the hon. Member for Cornwall, North talk about a rotten tax from a rotten Government when, as we have now reminded him—perhaps he did not need reminding—he was strongly in favour of VAT and argued at the time of its introduction that it had been Liberal policy for 10 years, saying that he regarded it as a "major and significant advance" and so on. Perhaps those two positions can be reconciled, but the Committee has not yet heard how.

As I have said before, we accept in good faith the problems and the position of the Liberal Party and the hon. Member's judgment that £7,500 is the best that he can get as a threshold—although he added that he wanted something higher. As my hon. Friend the Member for Gloucestershire, South (Mr. Cope) has perceptively reminded the hon. Gentleman, he can now put his beliefs precisely to the test. If Liberal Members—those who are not properly paired, if I may mention that kind of arrangement—vote with us, we might get the £10,000 that the Liberal Party wants, as the hon. Gentleman told us in an interesting and forceful speech.

If we fail and the Government get their amendment, we shall still have the £7,500, which is the compromise that the hon. Member for Cornwall, North judges to be the best he can get. Therefore, a very favourable prospect is opening up for the hon. Gentleman in which he can have it either way. I appeal to him to give it a swing. Let him see whether he can actually use the votes available to him and his right hon. and hon. Friends to support us and the figure of £10,000. There is a sporting chance, and he will still get his compromise.

Mr. Pardoe

The hon. Gentleman is making out that he is anxious to win the vote on this clause and to defeat the Government's amendment and thus achieve the full £10,000 threshold. In that case, why is the Conservative Party today on only a two-line Whip, and how many of the 285 Conservative Members will vote tonight?

Mr. Howell

The hon. Gentleman knows something about the whipping system. We shall have here our full complement of those who are not properly paired, and I hope that the Liberal Party will have the same. We look forward to seeing them in our Lobby. They support the £10,000 level, and the Leader of the Liberal Party has pledged that the Liberal Party will not compromise their principles and beliefs.

Here is an excellent chance for them to stick to that pledge, unless they want to compromise the pledge that they will not compromise their principles and beliefs. I appeal, therefore, to Liberal Members and I remind them that there is a sporting chance. This will not harm their precious pact with the Labour Party. I do not think that Ministers will be too cross with them. Even if they are, the Chief Secretary and the Financial Secretary are not too bad even when they are cross, so Liberal Members should not be too nervous.

I have heard that the hon. Member for Cornwall, North, who has taken a constructive part in this debate, is a swashbuckling chap. I have never seen that side of his character, but if he goes around buckling swashes or whatever he does in his constituency let me appeal to that side of his character. This is a gambling situation, and he has a real chance to show that his party is on the side of a free Parliament and on the side of a parliamentary system which will deliver a majority in favour, if the thing is fairly put to the test, of raising the threshold by this amount.

Some of my hon. Friends have said that £10,000 is not enough, and they may be right. Others have said that wherever we have a threshold there are always difficulties and problems on either side. Nevertheless, if £5,000 was right when this thing started, in logic £10,000 must be right today. I believe that if we can vote this matter out open and above board, to use the phrase used by the Liberals about their pact, we will win. I hope that the Liberals will come along.

I hope also that the Scottish nationalists will come along. Their spokesman spoke feelingly about the matter, and they have a new clause on the subject. I hope that the Ulster Unionists will join us. No part of the United Kingdom would benefit more from the raising of the threshold than Ulster. There is no part of the United Kingdom where small business has been more magnificent in more appallingly adverse circumstances and where it deserves more to have every possible help. I hope that the Welsh nationalists will join us too.

Together we can push a Government who do not really have an interest in or love for the self-employed and for small and independent business into doing something which they do not want to do but which would help far more than merely raising the threshold to the compromise level of £7,500.

I therefore ask hon. Members to support the new clause and to reject the Government's amendment. I ask them to raise to £10,000 the threshold for the annual limit below which it will be unnecessary to register.

Mr. Robert Sheldon

The hon. Member for Guildford (Mr. Howell) asked the Liberals—I think I got his words right—not to compromise their beliefs. I took fully the point made by the hon. Member for Eastleigh (Mr. Price), who did not see it in those terms. He said that there was no dogma in these matters. We are talking only about what the thresholds should be. To judge from the speech of the hon. Member for Guildford and others, however, there may now be such things as the high threshold party and the low threshold party. They would have a limited political platform.

6.30 p.m.

We are discussing sensible arrangements that should be undertaken to assist traders and at the same time ease the problems of those moving into and out of the scope of VAT, as well as to retain revenue and to have a system that we can defend in the House. I see these matters in the same way as the hon. Member for Eastleigh. It is a pity that we have not had more speeches of the sort made by the hon. Gentleman. Such speeches could have been more usefully applied to the problem before us.

The hon. Member for Gloucestershire, South (Mr. Cope) asked me whether revenue of £5 million to £10 million was the net figure. I confirm that I gave the net figure of revenue that will be forgone if the Government's amendment is carried.

The right hon. Member for Worcester (Mr. Walker) complimented—

Mr. Cope

I asked the right hon. Gentleman to supply the gross figure. Is he able to tell us what it is?

Mr. Sheldon

I have not forgotten that. Of course, the figures are extremely speculative. I believe that the hon. Gentleman understands why that must be so. It is hard to estimate in advance the number of traders who will deregister when they are able to do so and what number may feel that they might lose some of their clients, especially the larger ones, who will not wish to lose the benefits of dealing with traders registered for VAT.

The right hon. Member for Worcester complimented Customs and Excise officials on their handling of VAT. I am sure that almost all sections of the Committee will accept that. Customs and Excise started off the tax, and it was a difficult tax to introduce. It has undertaken its task very well.

I recognise the fear of VAT inspectors that the right hon. Gentleman described. It is a subject that I have before me a great deal of the time. That is not because there are many such cases but because I consider that they are important for the reasons I have given. I make a point of going into the cases that are brought to my attention personally. By and large, I believe that they are in fact handled with the degree of delicacy that we would wish to see maintained. At the same time, we must understand the problems that are bound to exist in a system that deals with 1¼ million people.

In the operation of the VAT system there is not the close relationship that was possible under the purchase tax system, in which traders met Customs and Excise officers as a matter of course and were able to build up some sort of relationship with them. Each would know the mind of the other, to the advantage of both sides. That is not possible when there are so many traders and visits are more infrequent. However, a close scrutiny is maintained. I believe that the administration of the tax is being handled with the efficiency and understanding that we would wish.

The hon. Member for Cornwall, North (Mr. Pardoe) talked about compliance costs. The Government are increasingly sensitive to these costs. They cannot always be quoted in this place, but they form a part of the economic cost of the maintenance of any form of taxation. By their very nature the figures cannot be very accurate, but we reckon that the compliance cost of VAT is about 2p in every pound.

I am aware of the University of Bath study. I remind the Committee and the hon. Member for Cornwall, North, who went into the matter in some detail, that it was a pilot study, interesting though it may be. A fuller study is to be undertaken. The Government have authorised Customs and Excise to give assistance to the University of Bath in the further study, and I answered a Question on this subject fairly recently.

Mr. Peter Rees

Is 2p in the pound the compliance cost for Customs and Excise alone? Has any calculation been made of the average compliance cost for the registered trader, which is the figure with which I am more concerned?

Mr. Sheldon

This is the compliance cost of the trader. Perhaps the hon. and learned Gentleman has failed to comprehend. We are talking about the cost of complying with VAT regulations. By its very nature it can be only an approximate figure.

Mr. Pardoe

I think that the right hon. Gentleman has it wrong. Surely 2p in the pound is not the compliance cost. It would help if we made a distinction between the compliance cost to the Treasury and the collection and administrative cost to Customs and Excise. The 2p in the pound is the Customs and Excise cost.

Mr. Sheldon

I have given the latest figure for Customs and Excise VAT costs. I have quoted the official compliance cost of 2p in the pound. That is the way in which I thought I had expressed it to the Committee.

The right hon. Member for Worcester went into the numbers that would be involved if we changed the deregistration limit. The Government's amendment proposes a registration limit of £7,500 coupled with a deregistration limit of £6,000, which would mean that between 50,000 and 55,000 regular taxpayers would come out of the VAT system. If the deregistration limit were £8,000, as proposed in the new clause, the number moving out of the system would be 125,000. If it were £7,000, the figure would be 80,000. I have more figures, but perhaps those I have given are sufficient to meet the purpose of the question.

The hon. Member for Guildford said that if a registration exemption limit of £5,000 was right in 1972 it should be £10,000 in 1977. That begs a number

of questions. The first and most obvious one is whether we can be sure that the figure was right in 1972. It was the figure laid down when the VAT system started. Those who took part in the proceedings in Committee on the Finance Bill 1972 will know the extreme assurance—at times it amounted almost to arrogance—of those who felt that they had the system exactly right and had produced the perfect tax system. Others realised that these matters were subject to error and failure to understand the possible future changes that might be necessary. They adopted a much more pragmatic outlook.

I say in the light of experience that matters have not turned out in quite the way that those who introduced the tax anticipated. I think that we should see how the £7,500 limit works out. We shall learn something from the removal of a large number of traders from the VAT system. There will be a large amount of work for the staff of Customs and Excise in undertaking the change. The experience gained will be useful in considering where the future of the tax should lie, and particularly the question of thresholds.

Question put and agreed to.

New Clause read a Second tune.

Amendment proposed to the proposed new clause: In subsection (2), leave out '£10,000' and insert '£7,500'.—[Mr. Robert Sheldon.]

Question put, That the amendment be made:—

The Committee divided: Ayes 167, Noes 146.

Division No. 134]	AYES	[6.40 p.m.
Allaun, Frank	Colquhoun, Ms Maureen	Evans, Ioan (Aberdare)
Archer, Peter	Cook, Robin F. (Edin C)	Ewing, Harry (Stirling)
Ashton, Joe	Corbett, Robin	Faulds, Andrew
Atkinson, Norman	Cowans, Harry	Flannery, Martin
Barnett, Guy (Greenwich)	Cox, Thomas (Tooting)	Fletcher, Ted (Darlington)
Barnett, Rt Hon Joel (Heywood)	Crowther, Stan (Rotherham)	Foot, Rt Hon Michael
Bates, Alf	Davidson, Arthur	Fraser, John (Lambeth, N'w'd)
Beith, A. J.	Davies, Bryan (Enfield N)	Garrett, John (Norwich S)
Booth, Rt Hon Albert	Davies, Denzil (Llanelli)	George, Bruce
Bradley, Tom	Davies, Ifor (Gower)	Gilbert, Dr John
Brown, Hugh D. (Provan)	Davis, Clinton (Hackney C)	Gould, Bryan
Brown, Robert C. (Newcastle W)	Deakins, Eric	Graham, Ted
Buchan, Norman	Dean, Joseph (Leeds West)	Grant, George (Morpeth)
Callaghan, Rt Hon J. (Cardiff SE)	Doig, Peter	Grant, John (Islington C)
Carmichael, Nell	Douglas-Mann, Bruce	Grimond, Rt Hon J.
Cartwright, John	Dunn, James A.	Grocott, Bruce
Castle, Rt Hon Barbara	Dunnett, Jack	Hamilton, James (Bothwell)
Clemitson, Ivor	Eadle, Alex	Hardy, Peter
Cocks, Rt Hon Michael (Bristol S)	Edge, Geoff	Harper, Joseph
Cohen, Stanley	Ellis, John (Brigg & Scun)	Harrison, Walter (Wakefield)
Coleman, Donald	English, Michael	Hart, Rt Hon Judith
Hooley, Frank	Marks, Kenneth	Silkin, Rt Hon S. C. (Dulwich)
Hooson, Emlyn	Marshall, Dr Edmund (Goole)	Silverman, Julius
Horam, John	Marshall, Jim (Leicester S)	Skinner, Dennis
Hoyle, Doug (Nelson)	Maynard, Miss Joan	Small, William
Huckfield, Les	Mendelson, John	Smith, John (N Lanarkshire)
Hughes, Rt Hon C. (Anglesey)	Mikardo, Ian	Spearing, Nigel
Hunter, Adam	Millan, Rt Hon Bruce	Spriggs, Leslie
Irvine, Rt Hon Sir A. (Edge Hill)	Miller, Dr M. S. (E Kilbride)	Stallard, A. W.
Jackson, Colin (Brighouse)	Miller, Mrs Millie (Ilford N)	Steel, Rt Hon David
Jackson, Miss Margaret (Lincoln)	Mitchell, Austin Vernon (Grimsby)	Stewart, Rt Hon M. (Fulham)
Janner, Greville	Moonman, Eric	Strauss, Rt Hon G. R.
Jay, Rt Hon Douglas	Moyle, Roland	Summerskill, Hon Dr Shirley
Jenkins, Hugh (Putney)	Mulley, Rt Hon Frederick	Taylor, Mrs Ann (Bolton W)
John, Brynmor	Noble, Mike	Thomas, Jeffrey (Abertillery)
Johnston, Russell (Inverness)	Ogden, Eric	Thomas, Mike (Newcastle E)
Jones, Dan (Burnley)	Orbach, Maurice	Thomas, Ron (Bristol NW)
Kaufman, Gerald	Orme, Rt Hon Stanley	Thorpe, Rt Hon Jeremy (N Devon)
Kelley, Richard	Ovenden, John	Tinn, James
Kerf, Russell	Palmer, Arthur	Wainwright, Richard (Colne V)
Kilroy-Silk, Robert	Pardoe, John	Walker, Harold (Doncaster)
Kinnock, Neil	Parry, Robert	Walker, Terry (Kingswood)
Lamborn, Harry	Phipps, Dr Colin	Watkins, David
Lamond, James	Rees, Rt Hon Meriyn (Leeds S)	White, Frank R. (Bury)
Latham, Arthur (Paddington)	Richardson, Miss Jo	Whitehead, Phillip
Leadbitter, Ted	Roberts, Gwilym (Cannock)	Whitlock, William
Lee, John	Rodgers, Rt Hon William (Stockton)	Williams, Rt Hon Shirley (Hertford)
Lyon, Alexander (York)	Rooker, J. W.	Williams, Sir Thomas (Warrington)
Lyons, Edward (Bradford W)	Rose, Paul B.	Wilson, Alexander (Hamilton)
Mabon, Rt Hon Dr J. Dickson	Ross, Stephen (Isle of Wight)	Wilson, Rt Hon Sir Harold (Huyton)
McCartney, Hugh	Ryman, John	Wilson, William (Coventry SE)
McDonald, Dr Oonagh	Sandelson, Neville	Wise, Mrs Audrey
McElhone, Frank	Sedgemore, Brian	Wrigglesworth, Ian
MacFarquhar, Roderick	Shaw, Arnold (Ilford South)
MacKenzie, Gregor	Sheldon, Rt Hon Robert	TELLERS FOR THE AYES:
Madden, Max	Shore, Rt Hon Peter	Mr. David Stoddart and
Magee, Bryan	Silkin, Rt Hon John (Deptford)	Mr. Peter Snape.
NOES
Alison, Michael	Goodhew, Victor	Meyer, Sir Anthony
Arnold, Tom	Goodlad, Alastair	Miller, Hal (Bromsgrove)
Atkins, Rt Hon H. (Spelthorne)	Gorst, John	Mills, Peter
Awdry, Daniel	Gow, Ian (Eastbourne)	Morgan, Geraint
Bain, Mrs Margaret	Gray, Hamish	Morrison, Charles (Devizes)
Baker, Kenneth	Griffiths, Eldon	Morrison, Hon Peter (Chester)
Banks, Robert	Grylls, Michael	Neave, Airey
Bennett, Sir Frederic (Torbay)	Hall, Sir John	Nelson, Anthony
Benyon, W.	Hamilton, Michael (Salisbury)	Neubert, Michael
Berry, Hon Anthony	Havers, Sir Michael	Newton, Tony
Biggs-Davison, Jonn	Henderson, Douglas	Nott, John
Blaker, Peter	Heseltine, Michael	Page, Rt Hon R. Graham (Crosby)
Body, Richard	Hodgson, Robin	Page, Richard (Workington)
Boscawen, Hon Robert	Holland, Philip	Percival, Ian
Bottomley, Peter	Hordern, Peter	Price, David (Eastleigh)
Bowden, A. (Brighton, Kemptown)	Howell, David (Guildford)	Rees, Peter (Dover & Deal)
Brocklebank-Fowler, C.	Hunt, David (Wirral)	Reid, George
Brooke, Peter	Hunt, John (Bromley)	Rhodes James, R.
Bryan, Sir Paul	Hutchison, Michael Clark	Ridley, Hon Nicholas
Buck, Antony	James, David	Ridsdale, Julian
Budgen, Nick	Jessel, Toby	Roberts, Wyn (Conway)
Chalker, Mrs Lynda	Johnson Smith, G. (E Grinstead)	Rossi, Hugh (Hornsey)
Churchill, W. S.	Kershaw, Anthony	Sainsbury, Tim
Clark, Alan (Plymouth, Sutton)	Kilfedder, James	Shaw, Giles (Pudsey)
Clark, William (Croydon S)	Kimball, Marcus	Shelton, William (Streatham)
Clarke, Kenneth (Rushcliffe)	King, Evelyn (South Dorset)	Shepherd, Colin
Clegg, Walter	King, Tom (Bridgwater)	Silvester, Fred
Cope, John	Knight, Mrs Jill	Sims, Roger
Costain, A. P.	Knox, David	Smith, Dudley (Warwick)
Crawford, Douglas	Lamont, Norman	Smith, Timothy John (Ashfield)
Crouch, David	Lawrence, Ivan	Speed, Keith
Dodsworth, Geoffrey	Lawson, Nigel	Stanbrook, Ivor
Drayson, Burnaby	Le Marchant, Spencer	Stanley, John
Edwards, Nicholas (Pembroke)	Lewis, Kenneth (Rutland)	Steen, Anthony (Wavertree)
Emery, Peter	Loveridge, John	Stewart, Rt Hon Donald
Ewing, Mrs Winifred (Moray)	Luce, Richard	Stewart, Ian (Hitchin)
Fyre, Reginald	McAdden, Sir Stephen	Stradling Thomas, J.
Farr, John	MacCormick, lain	Temple-Morris, Peter
Fell, Anthony	Macfarlane, Neil	Thomas, Rt Hon P. (Hendon S)
Finsberg, Geoffrey	MacGregor, John	Thompson, George
Fisher, Sir Nigel	Marshall, Michael (Arundel)	Townsend, Cyril D.
Fookes, Miss Janet	Males, Michael	Trotter, Neville
Forman, Nigel	Maude, Angus	Vaughan, Dr Gerard
Fowler, Norman (Sutton C'f'd)	Maudling, Rt Hon Reginald	Viggers, Peter
Gardiner, George (Reigate)	Maxwell-Hyslop, Robin	Wakeham, John
Goodhart, Philip	Mayhew, Patrick	Walker, Rt Hon P. (Worcester)

Warren, Kenneth	Wiggin, Jerry
Watt, Hamish	Wigley, Dafydd	TELLERS FOR THE NOES:
Weatherill, Bernard	Wilson, Gordon (Dundee E)	Sir George Young and
Welsh, Andrew	Winterton, Nicholas	Mr. Carol Mather.

Question accordingly agreed to

Amendments made to new clause: In subsection (2), leave out "3,500", "6,000", "8,500"and "10,000" and insert 2,625", "4,500", "6,375"and "7,500" in subsection(3), leave out "£,"8000" and insert "£6,000 In subsection (3), leave out "£"2,500"and insert "£1,875". In subsection (4), leave out 'september' and insert 'October'[Mr Robert sheldon]

New clause, as amended added to the Bill.