FINANCE BILL

HC Deb 27 April 1978 vol 948 cc1774-800

Question again proposed, That the Bill be now read a Second time.

Mr. Peter Rees

I turn now to the subject of value added tax.

Dr. Bray

On the question of employment in the tobacco industry, is the hon. and learned Member aware that Wills (Glasgow) is a very large employer in tobacco in an area of high unemployment? The company is part of the Imperial Tobacco group. Will he not agree that it is regrettable that in its diversification programme in the interests of shareholders Imperial Tobacco has completely neglected to create the new jobs in areas that could take former tobacco workers?

Mr. Rees

I am very flattered that the hon. Member should intervene on this basis—on the assumption that I pay the close attention to the internal affairs of one particular company in the tobacco industry that he does. It is an important industry and I am sure that the hon. Member will make an important contribution to the Standing Committee proceedings upstairs, if he is a member of the Committee. If he is, no doubt he will tell us how far Wills is likely to be affected by this provision. No doubt we can extend our debates to considering the diversification of Wills's activities. However, I am not absolutely certain that the point he makes is central to this fiscal theme.

I turn to the subject of VAT and my comments are a prelude to our debates upstairs. We welcome the raising of the threshold to £10,000. There was a Conservative amendment to this effect in May last year which, strangely enough, did not receive Liberal support. No doubt the hon. Member for Cornwall, North will explain to us later why his party is so keen this year to claim this as a great Liberal triumph, when it would not support our amendment last year. The only technical point I would put to the Treasury Bench is whether it is really necessary to keep the deregistration point as high as £8,500.

We welcome the provision on bad debts, as we have been moving amendments on this matter for many years. However, I still believe that the Treasury Bench has been a little stringent, mean and narrow in that the tests imposed for bad debts are considerably stricter than those relating to income tax and corporation tax. I hope that in Committee upstairs we can persuade the Government to relax these provisions a little.

Overseas earnings are a matter of some importance to the self-employed. At the moment, small businesses and the self-employed are basking in the warmth of the Government's affection and, nature- ally, we welcome this relaxation. We moved an amendment last year—and again the hon. Member for Cornwall, North was conspicuously absent from our debates. The hon. Member is well known for his aversion to debating these matters after midnight, but I checked up on this debate and I found out that it took place at 10.30 p.m. I do not want to tempt the hon. Member now—no doubt he will make powerful interventions on other occasions.

The relief that the Treasury Bench has devised has been rather rough and ready. Once again the Government have not been prepared to put the self-employed on the same basis as the employed. Why, for instance, must a self-employed person stay abroad for 60 days while an employed person need only go abroad for 30 days? Again, since the Government are very ready to make their legislation retrospective when they have given a warning or taken a point, and since the Treasury Front Bench said last year that it would look sympathetically at this point, why not make the relief retrospective to 1977–78? At least then we should find a certain symmetry in the Government's approach to these problems.

On capital allowances, we welcome the concession to hotels. The hon. Member for Cornwall, North described this as a Cornish Budget. The only specifically Cornish point, if that is what it be, that I can detect is the provision of capital allowances for hotels. On that basis I should be disposed to claim this as a Dovorian Budget. In fact, any right hon. or hon. Member who has a coastal constituency is likely to be pleased with the provision. Therefore, I welcome it. Credit, if credit should be sought, should go to my hon. Friend the Member for Christchurch and Lymington (Mr. Adley), who has been raising the matter—

Mr. Joel Barnett

What about me?

Mr. Rees

The right hon. Gentleman is so quick to claim credit for the currants in this rather suety Finance Bill. On this occasion I must go back a little in time. I do not recall that the right hon. Gentleman was over-solicitous of the interests of hoteliers and boarding house keepers before he was prompted by my hon. Friend the Member for Christchurch and Lymington. However, there is joy in Heaven over one sinner that repenteth. I have no doubt that the Chief Secretary will be able to join us in Committee in sackcloth and ashes and do penance. We shall receive him warmly. We shall recognise the profundity of his conversion.

There is a matter that I should draw to the right hon. Gentleman's attention before he becomes over-proud of his clause. He will recall that the fire regulations are applied to any hotel or boarding house that has six beds. Why does he not, in a perhaps unexpected burst of generosity, align the basis for capital allowances with those regulations? At least that would have the merit of affording some relief to the smaller business man. We all know that the smaller business man has now entered the Labour pantheon and that he is now to be the recipient of special attention from not only the Chief Secretary but the Chancellor of the Duchy of Lancaster.

The hon. Member for Cornwall, North chooses to claim averaging for farmers as another Liberal victory. I am not disposed to deny him that. I am inclined to think that when the farming community has worked out what it will mean, averaging over two years rather than three years, it may find it to be a rather unattractive gift horse. Had the clause applied over three years or four years, it might possibly have afforded a real measure of relief.

I am a little rusty on my history, but it may have been a coalition Government with Liberal support who abolished the original averaging provisions in the late 1920s. However, that is a matter of history and I have no doubt that the hon. Member for Cornwall, North will be able to correct me if I am wrong.

We should have preferred—it would have been a more practical solution to the problem—some sort of special reserve such as the Australian tax system envisages. I note that the Chief Secretary is smiling. It may be that he considered that system and rejected it. That is the sort of measure for which we are pressing and will be pressing. It would offer a real measure of relief to the farming community.

I move to capital gains tax.

Mr. Joel Barnett

A good idea.

Mr. Rees

The Chief Secretary says "A good idea". We are grateful to him. He spoke, as often, just a little too soon. The most revealing statistic that came from the Government Front Bench was that the proper indexation of capital gains tax would reduce the yield by £350 million. It will be seen in the Financial Statement that the projected yield this year before the reliefs were given—I hope that the Chief Secretary will follow this, because it was his statistic—was only £390 million. In other words, all but £40 million of capital gains tax is charged on inflationary and not real gains. The House will readily appreciate that those figures give the true measure of the tax. Is it worth perpetuating a tax which when 80 per cent. or more of its yield depends on inflationary and not real gains?

We welcome the modest little concessions which have been made. It was inevitable, having seen the lukewarm nature of the discussion paper, that nothing substantial would come out of this year's Finance Bill. But I can tell the Treasury Front Bench that we shall go back to this subject again. In Standing Committee we shall be pressing the Government for a genuine measure of indexation. That is the way in which this tax can be put on a successful basis.

Whether at the end of the day, if the tax is indexed it will be worth collecting will remain for debate. A point which always escapes the Treasury Front Bench is the considerable compliance costs of this tax. I suspect that of all the taxes which are collected by Somerset House, the compliance costs to the taxpayer of capital gains tax are the highest. In order to collect £40 million of real gain, is it worth inflicting that kind of burden on the taxpayer, except to satisfy some deeply rooted instinct in the Labour Party to cause damage to the owners of property and capital?

The hon. Member for Penistone (Mr. Mendelson) laughs. He has a consistent position on this matter. We know his position and we respect it. Of course, he would not stop short at capital gains tax. Why should he? He would like wholesale confiscation, because he does not believe in private capital.

Mr. John Mendelson (Penistone)

Perhaps I may tell the hon. and learned Gentleman why I laughed. I laughed because I was privileged to see him on a television programme the other day when the major tax fiddling companies were telling us how they were doing their job. The hon. and learned Gentleman did not seem too unsympathetic to the work of those companies.

Mr. Rees

I am flattered that the hon. Gentleman should follow my fortunes on television. It was not a particularly significant programme, although it was also referred to by the hon. Member for Perry Barr. I shall be coming to tax avoidance. If the hon. Gentleman wishes to intervene at that point, I hope that he will not hesitate, because it is an important subject. It should not become obsessive to the House.

Mr. Mendelson

It is the principle.

Mr. Rees

The hon. Gentleman is right to remind us that we must concern ourselves not overmuch with the minutiae of Clause 26 but with the principle. I have no doubt that at the end of the day, as so often happens, except in the area of devolution, the hon. Gentleman and I will find ourselves on opposite sides of a very wide divide. I have no doubt that the exercise of debate will be good for us both and for the House as a whole. Perhaps I may be allowed to come to that point, which I had very much in mind, at a later stage.

We welcome the relief for business assets. That point was made effectively by my right hon. Friend the Member for Farnham (Mr. Macmillan), who has a wide, deep and long experience of these matters. It was perhaps a Freudian slip that the Chair called him in the name of his distinguished father, because he incorporates in himself now not one, but several generations of fiscal experience.

The point to which the Treasury still has not addressed itself is the overlap of capital gains tax and capital transfer tax. It cannot be right that two taxes on capital should be charged on the same transaction. This is a point to which we shall have to return upstairs.

The question of loans to traders is important. We are glad to see the relief offered. We wonder why intra-group loans are excluded. That tempts me to come back to the area of tax avoidance.

Many people, because of the stringent way in which capital gains tax has been devised, have sought to turn their loans into debts on securities or equity capital to take advantage of the loss relief. Is that the kind of illegitimate avoidance that the Chancellor feels should be countered by retrospective legislation; or, with the passage of time, has it become respectable?

As I said, we now have a measure which tells us that we can get relief for loans. Therefore, what was illegitimate three years ago is now presumably legitimate. That demonstrates that tax avoidance is not quite the clear-cut area which not the hon. Member for Penistone—I credit him with a great deal of sophistication—but his hon. Friend the Member for Perry Barr would have us believe.

I turn now to profit-sharing schemes. The hon. Member for Cornwall, North claims this as a massive Liberal victory. One does not like to grudge him these points.

Mr. Pardoe

Not massive.

Mr. Rees

All right, not massive. I recall and should like to remind the hon. Gentleman and the House that last year my hon. Friends the Members for Harwich (Mr. Ridsdale) and Norfolk, South (Mr. MacGregor), who are so assiduous in these matters, moved a clause to introduce reliefs in this area. Again, where was the hon. Member for Cornwall, North? I recall that on this occasion it was after midnight and so, of course, under the hon. Member's well-known rule, he was entitled to be absent. We missed the hon. Member's contribution to that debate and we shall welcome his contribution in Committee, providing that the debate comes up before midnight.

We welcome these provisions as a first modest step in the right direction, for all the reasons that the Chief Secretary outlined. When he puts his mind to the problem and remembers his ungenerate past in accountancy in Manchester, he can say some sensible things. However, all too often he is looking over his shoulder at his hon. Friends below the Gangway and then he says some unsensible and remarkably unattractive things. We might have had a more interesting speech from the Chief Secretary had the Government Benches been as bare as they are now.

We are entitled to ask whether it was necessary, in view of the sentiments now coming from the Treasury Bench, to legislate against share option schemes in 1967. We have sometimes had good, robust, commercial common sense from the Prime Minister and perhaps he has learned a little in Cardiff since those darks days. But he was quick to stifle the growth of share options in 1967.

We do not believe that these schemes need positive encouragement. It is enough that the fiscal system leaves them to develop in their own form and own shape. This is because each business will have its own particular problems. They will have to develop schemes to meet their own needs and the aspirations and ambitions of their employees.

The Conservative approach was to stand back and let them develop unfettered by tax burdens. The Chief Secretary laughs, but the burdens were imposed in 1967 and again in 1974. I have taken the trouble to look up the speech of the Chancellor of the Exchequer in 1973 when he was bitterly opposed to the modest measure of relief introduced in the 1973 Finance Bill. He was opposed on the grounds that the share option scheme would benefit neither the public sector nor the lower paid.

For clarification we shall have to ask the Chief Secretary whether the measures that he is proposing can be extended to the public sector. Do we envisage the day when the National Coal Board settles down with the National Union of Mineworkers to work out how much of the equity of the coal industry should be made available to members of the NUM? That might be a desirable development. We might even carry the hon. Member for Penistone with us if we moved our own amendment to that effect. We must consider it.

Mr. John Mendelson

Since I have been in the Chamber the hon. and learned Member has promised himself so much fun in Standing Committee that I doubt whether we shall ever see him again once he gets there.

Mr. Rees

The hon. Member has pinpointed one of my many weaknesses which have been long observed by my own Whips and, no doubt, by the Patronage Secretary—that I enjoy the Standing Committee upstairs but on this occasion I assure the hon. Member that his right hon. and hon. Friends will ensure that something will come back over which we can fight down here to our mutual profit.

I turn to capital transfer tax. Of course we welcome the relief for business property and the reduction in rates. However, when we examine the reduction in rates we find that they are trifling. A mere increase of £10,000 in each band carries us nowhere. I wonder what is the logical basis for this relief. If it is to take account of the impact of inflation, it must be more than £10,000. If it is a sop to small businesses or to the Opposition Benches, I can assure the Chief Secretary that we shall not be satisfied by that. I am sure that many people outside the House will not be satisfied.

I do not believe that these reliefs should be limited to small businesses. There is a whole range of analagous activities which deserve the beneficient glance of the Chief Secretary.

At the end of the day a mixed economy needs capital, unless, as is the case with Labour Members, there is a belief in State capitalism. If we believe in a mixed economy, there must be a considerable contribution of capital from the private sector. That means that something must be left in private hands, and not necessarily first generation capital, either. As my right hon. Friend the Member for Farnham has pointed out, there is considerable virtue, social and economic, in the slow accumulation of business wealth, and wealth from other sources, agriculture for instance, over many generations.

In a way, this process is the basis of the remarkable expansion of our country in the nineteenth century. Although one cannot perhaps pinpoint any one reason for our decline, perhaps one was the highly unattractive series of measures introduced in 1894. Sir William Harcourt has, I am afraid, a great deal to answer for. Perhaps the hon. Member for Cornwall, North will answer in the present day for him. In our debates we are never absolutely certain which chapter of the Liberal Party's past the hon. Gentleman is dealing with, whether it is Sir William Harcourt, Asquith, Lloyd George or some later luminaries. Anyway, the hon. Member will have the time to clear up the Liberal Party's position on this.

Encouraged by the hon. Member for Penistone and his hon. Friends and by my hon. Friends the Members for Maldon (Mr. Wakeham) and Brentwood and Ongar (Mr. McCrindle), who have made notable contributions to our debate, I turn to the question of avoidance, which is posed in a particularly stark form by Clause 26. This is a theme which has been running through many of our debates, regrettably, since 1974 and, let us be realistic, earlier. We must draw a sharp distinction between avoidance and evasion, although both are a phenomenon of a high tax rate system. Both are, to a degree, a consequence of political taxes.

Labour Members must face the fact that if they are to use the tax system as a sharp political weapon, people will respond in kind. If they can get advice which enables them to order their affairs so as to keep the rate of tax on their income or their capital down to what they regard as reasonable—and these matters must be subjective—it is only to be expected that they will do so. The Chief Secretary and his right hon. and hon. Friends would be unrealistic not to recognise that we can only impose taxes on people to a limited degree. We have to carry the general body of taxpayers with us. They will tell us ultimately what is a fair rate and what is not. Some of them will do it by moonlighting, by flitting, by evasion. Others, perhaps the more sophisticated, and—I give this to Labour Members—those who have access to better advice, will do it perhaps by avoidance. Neither phenomenon is attractive. We all recognise that.

The battle is not one-sided. To listen to Labour Members one would imagine that the Revenue was battling short handed and short of advice against a crowd of highly sophisticated, more agile tax avoiders. There has been a notable series of cases in which the judges—and I know that Labour Members, not all of them, have a high regard for the Bench, as I do—have had occasion to observe that there are a great number of provisions on the statute book that were probably directed to anti-avoidance but that have now been extended beyond their original purpose.

I cite from a recent case. I shall not mention the judge's name, although it can be readily ascertained. It is a case called Vesty. The judge said: I am quite unable to understand on what principle of law the Crown, as Lord Upjohn said in another case, realising the monstrous result of giving effect to the true construction of this section, or what it assumed to be the true construction of this section, feels itself entitled to mitigate that monstrosity by such concessions as it chooses to make. One should be taxed by law and not by concession. This has now proceeded such a long time without the Revenue authorities which they have at least once a year to put the matter right that I am afraid they must have failed to realise the deep brooding resentment felt by every taxpayer who is not charged simply on his own income. Those are not the words of a Conservative Member of this House; they are the words of a judge who was called on recently to consider a provision that has been on the statute book for many years. I take that case because that provision was introduced by a Conservative Government in 1937–38. It demonstrates that the battle is not one-sided.

If the Treasury Bench is sincere in its intention to hold the balance between the taxpayer and the Revenue, it would be well advised to look through the statute book to see whether many provisions have not outlived their usefulness. This time, however, it has chosen to adopt a novel constitutional precedent.

Since 1959, regrettably, we have got used to the principle which Labour Governments have adopted of announcing first and legislating later. It was the case of two gentlemen in the motor car industry which prompted Sir Stafford Cripps to legislate on that basis. Now, we have reluctantly to accept—although we need not welcome it—the fact that this is common form for a Labour Government. This is the first time that I have been able to discover that they have chosen to legislate without prior warning at all—subject to one point. This is why I think that their position is even more discreditable than has yet been revealed.

A question on this matter was put to the Chief Secretary by one of his hon. Friends—whether prompted or not I neither know nor care. It related to the particular scheme at which Clause 26 is directed. In his Answer on 25th November, the right hon. Gentleman said that the Revenue did not accept that the scheme was soundly based in law and would be challenging it in the courts, but that the Chancellor would legislate for good measure in the Finance Bill.

Which way do the Government want to face? If the scheme is not soundly based in law, what need to legislate back to 1976? If it is soundly based in law, we can consider in Committee—no doubt taking a robust view—what measures are appropriate in that kind of case. The measure proposed in Clause 26 is utterly repugnant to every constitutional principle which we on this side hold dear. Certainly we shall give it a rough handling in Committee.

In Committee, also we shall press the Chief Secretary to tell us what his hon. Friend has discovered in Jersey. As I understand it, not content with having screwed down the tax system as hard as they can in this country, Government are now trying to extend the Inland Revenue's jurisdiction to the Channel Islands. We covered this ground in our capital transfer tax debates in 1975. If the hon. Member comes back with measures to bring Jersey into the net, we shall have some useful debates in Committee—and perhaps confirm the worst fears of the hon. Member for Penistone that we shall not come out of Committee until late in July.

Mr. Pardoe

We shall not get there at all at this rate.

Mr. Rees

There will be time enough to go into those points in greater detail. What have emerged as the centre of today's debate are the cuts in direct taxation, basic rate, investment income surcharge and the higher rates. There seems to have been a positive orgy of responsibility on every side today. Of course, the Chief Secretary has tried to pin on us the label of irresponsibility. In a corner, he always believes in attack. One admires the verve with which he goes for the Opposition. It is part of his charm and his technique. It is not always reproduced quite so effectively by his right hon. Friends, but they have caught his habit.

Does the right hon. Gentleman believe that tax cuts, which on any view cannot amount to more than £500 million, can be regarded, against the background of this Bill, as irresponsible? The right hon. Member for Down, South, as one would expect, made a penetrating and elegant speech—perhaps the most effective speech on this point and far more so than any speech from the Government Benches.

As I understood it, the right hon. Gentleman argued that it would be impossible, or nearly impossible—perhaps he allowed himself a loophole. There was, as always, a slightly Sybilline quality about his speech, and no doubt the Government will study it closely before he joins us in Standing Committee. It was not entirely clear what position the right hon. Gentleman and his colleagues will take up, but he seemed to be saying that it would be nearly impossible to envisage tax cuts of even £½ billion, first, because it would be wrong to shift the emphasis on to VAT because income tax is the most sensitive fiscal instrument in a Chancellor's hands.

I have no doubt that William Pitt and Addington would warm to these latter-day commendations, but I am no longer persuaded that income tax is such a sensitive instrument and it has certainly not been in very sensitive hands of late. That is what we are debating.

It is all very well the Chief Secretary fluttering his hands. They may have been sensitive when he was working in Manchester and they may become sensitive again when he returns there—and we shall endeavour to speed him on his way to a profitable practice once again; he has been lost too long to his profession—but his hands have become a little harsh and insensitive. It is to undo the work that the Chief Secretary and his colleagues have inflicted on the country over the past four years that we shall be moving our amendments.

The right hon. Member for Down, South said that it was not feasible to cut public expenditure after the start of the financial year. I find this a difficult proposition to swallow, because we were debating the levels of public expenditure just four or six weeks ago. If his proposition is accurate—and I defer to his experience and study of these matters, because he was Financial Secretary in a Conservative Government long before I was even fighting a seat—our debates on public expenditure White Papers are otiose.

I seem to recall that in his contribution to public expenditure debates the right hon. Gentleman is always making the point that it is idle to consider forecasts beyond a year ahead. If one marries those two propositions, we might as well give up having debates about public expenditure.

I agree with what the right hon. Gentleman said about the public sector borrowing requirement. I know that I speak for all my right hon. and hon. Friends when I say that we would not wish to move any amendment that would increase the borrowing requirement, but, as my right hon. and learned Friend the Member for Surrey, East has pointed out in clear, cogent and convincing language, there would be no need for the Government to adopt that course if they are defeated on our amendments to reduce the basic and higher rates of income tax and to reduce the investment income surcharge.

Mr. Wrigglesworth

I hope that the hon. and learned. Gentleman can help the House, because I am a little puzzled about the cost of the further amendments that he has suggested the Opposition will be tabling on capital gains tax and a whole list of tax reductions. They will cost more than £500 million.

Mr. Rees

We are told that we shall not get massive support on those amendments, but we look at the logic of our position and we shall be making practical suggestions that will allow the Government to encompass the reductions very comfortably. The Chief Secretary can await confidently that we shall be doing nothing irresponsible in Committee. We shall suggest exactly how he can absorb those long-deferred amendments, many of which have received a passing benevolent glance from him in previous years.

Our pretext for proposing these amendments to cut the basic rate and investment income surcharge at the higher rates are very simple and clear. We take our theme from the Chancellor of the Exchequer himself, who said that this was to be an incentive Budget and not a Budget of sacrifice—[Interruption.] I am sorry that the hon. Member for Thurrock (Dr. McDonald) is not enthused about the possibility of cutting taxes. I know it has been a long and wearisome debate for her, and I hope, therefore, that she is spared the possibility of joining us in Committee upstairs. Next time, perhaps she can sleep through the speech of the Financial Secretary. I should like to feel that I was holding her attention, whereas she must know already what her right hon. Friend will say.

I come back to the question of human motivation, and it was a theme that emerged from speeches from practically all quarters of the House. It came from the hon. Member for Caernarvon (Mr. Wigley), who has a passing knowledge of accountancy and who again will probably make a notable contribution to our debates upstairs. We had it, of course, from my right hon. Friend the Member for Chipping Barnet, and from my hon. Friend the Member for Croydon, South (Mr. Clark).

I think that the House is right to fasten on this, because, at the end of the day, the questions of growth are not mechanical ones. We do not get a given level of output, nor even a given level of employment, from a given input of Government money. We have to ensure that people have left in their pockets at the end of the day a reasonable net return for the risks that they take or for the work that they undertake. Clearly, this has not yet been fully grasped by the Treasury Bench, even with the sensitive instruction which it has no doubt received from the Chancellor of the Duchy of Lancaster.

We want to ensure not, as the Chancellor of the Duchy engagingly and perhaps slightly misleadingly described it, a country fit only for the £20 million or £10 million man to live in. That Freudian slip from the right hon. Gentleman in his contribution to the Budget debate seemed to recognise that the only person who can afford to live in this country is one who can live entirely on substantial amounts of capital, because, after the crushing burden of direct taxation, he probably cannot live on his income. This was a very engaging slip of the right hon. Gentleman, and I have no doubt that we shall be able to explore it on other occasions.

In many ways, this is a disappointing Budget and a disappointing Finance Bill [Interruption.] Every speech has to come to an end. All good things have to. It is important to try to give a speech some form. I know that the Chief Secretary thinks that a series of staccato barks at the Opposition Front Bench constitutes a speech. He is secure in the knowledge that he has a solid block of trade union votes. The Opposition try to persuade by argument and reason. Perhaps this is a novel concept, but it is one to which I hope the Labour Party will become accustomed. I know that the hon. Member for Penistone wants that, because he always treats the House to a very carefully reasoned discourse. One may disregard or dislike his premises, but always his case is faultlessly and attractively argued, and I wish that there were more contributions like his from the Government Benches.

As I said, this is a disappointing Finance Bill, especially when we recall the nods, winks and hints of real reliefs at the end of last year. We welcome the reliefs such as they are, especially where they reproduce amendments moved by the Opposition since 1974. But I can detect no coherent strategy to relieve the country from the burden of direct taxation which we know, which the country knows and which, in its heart of hearts, the Treasury Bench knows, without any prompting from the hon. Member for Cornwall, North, to be excessive and quite out of line with that of our industrial competitors. I am afraid that it will have to be left to a Conservative Administration to effect real reliefs and proper reforms.

Mr. Pardoe

Like last time?

Mr. Rees

In the meantime, though we shall not be voting tonight against the Bill, we shall try to improve it, possibly even with the assistance of the hon. Member for Cornwall, North in Committee. We are conscious that the Bill is designed to show the alluring and acceptable face of Socialism, but we are also conscious that, in spite of the few deft touches by the Chancellor of the Duchy and the Chief Secretary, the fiscal face of Socialism remains, as ever, hard, raddled and rapacious.

10.40 p.m.

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

My first particular pleasure is to offer a welcome to my hon. Friend the Member for Glasgow, Garscadden (Mr. Dewar). I know full well that he is not entitled to be mentioned as the result of a maiden speech, but that does not prevent my enjoying saying something about one of the speakers who have taken part in the debate. It is on that ground that I say that I heard what he had to say with very great interest. I think that all those Members who come in from a by-election bring something of the air of the particular arguments that they have used. In this case, my hon. Friend used them successfully in the by-election, and his contributions, on this as well as future occasions, will be heard with great interest.

The hon. Member for Weston-super-Mare (Mr. Wiggin) called the introduction of the surcharge on tobacco taxation some sort of breach, at least in the spirit of the three-year voluntary agreement between the Government and the tobacco industry which was announced in March 1977. I should say that the agreement was not a comprehensive answer to the problem, nor was it brought in to prevent any other action already in hand. In fact, the industry was well aware before it entered into the agreement that the Government had already taken an initiative with other member States of the Community, and this was aimed at allowing us to introduce a health-related surcharge. I personally have maintained close contact with the industry, both before and since the proposals were announced.

Perhaps I may comment briefly on the relief for bad debts. In this we have looked for a scheme which will make some provision for bad debt relief but which will be relatively simple to operate for both traders and Customs. We therefore provide in Clause 10 that for insolvencies occurring after 1st October the creditors will be able to claim on a tax-exclusive basis in an insolvency—this is for their own money, as it were—and claim the VAT part of the debt directly from Customs by an adjustment in their next VAT return.

This avoids the complications of traders having to account to the Customs for the tax element of any dividends which they subsequently receive, and they will, of course, obtain the relief on the tax element quickly and with the minimum of accounting problems. By limiting the relief to insolvency we shall be able to forgo the dividends for the tax element which should strictly come to the revenue, since the amounts involved would not justify the costs of making a separate claim. This will simplify administration for the Customs.

It would be quite impossible to achieve this simplicity if we went beyond insolvencies, since in other situations much higher dividends are generally available, which certainly could not be ignored. A wider scheme would, therefore, have to be quite different and much more complex than the proposals we have in mind. Nevertheless, we expect that in a full year the proposed bad debt relief will cost the Exchequer about £35 million, which shows the value of the scheme to business.

A large part of this debate dealt with the alternatives of direct and indirect taxation. There were a number of differences in the views that have been expressed. The hon. Member for Cornwall, North (Mr. Pardoe) argued that there had always been too much obtained from personal taxation. The right hon. and learned Member for Surrey, East (Sir G. Howe) argued for a switch from taxes on incomes to taxes on expenditure. The right hon. Member for Down, South (Mr. Powell) thought that income tax was the best of all taxes, and he went into this and other matters with some theoretical discussion. For my part, I feel that perhaps his absence from the Treasury has enabled him to pursue theoretical discussions to the extent that he loses sight, perhaps, of some of the particular problems which currently in the Treasury we have to face. I look forward to the right hon. Gentleman's appearance in the Committee upstairs to help to restore his understanding of the immediate problems with which we have to deal.

The right hon. Member for Chipping Barnet (Mr. Maudling) dealt with these matters with a certain amount of scepticism, which I found a little attractive. There is a fashion in all these matters. Like all fashions, it stems from our tired approach to things familiar and the search for alternatives.

But I do not see direct taxes and indirect taxes as two extremes. There is a whole range of taxes covering the entire spectrum of discretionary payments that the taxpayer makes. Not being over theoretical, the politician has to devise the best way to get the revenue that he requires. He has to look at the way in which perhaps fashion may alter the incidence of these burdens.

I should like to give one or two examples. We know that rates are taken as an indirect tax, because there is a certain amount of discretion as to where one lives. But we also know that after a person has bought his or her house and has gone to live in it, the amount of discretion is very limited, over a period of time, because the decision to move house is not taken readily. So for a certain time, depending on the person and his or her circumstances, the amount of discretion in this element of taxation is more limited than it is if a person wishes to buy, for example, a fur coat or an item of jewellery.

The purchase tax was probably the best example of as near perfect a discretionary tax as one could find. VAT is a little less so, because it includes such items as household goods. The income taxes and the employee's national insurance contribution are the best examples of the non-discretionary types of taxes. Currently these are seen as great burdens, indeed.

But if we look back over a fair length of time to the figures for 1935–36, we see that income tax and employee's national insurance contribution added together—and I think it right to add them together—amounted to about 33½ per cent. of total taxation. The figure rose to more than 40 per cent. in the war years, and since then a remarkably continuous percentage of taxation has been obtained from income tax and employee's national insurance contribution.

At the end of the war the figure was more than 40 per cent. In the golden years of Macmillan it was still 42 per cent. This year it is 41 per cent. So we have seen not the violent fluctuations that so many hon. Members seem to suggest have occurred in the division between taxes on personal income and other taxes but a remarkably uniform level.

In fact, from 1960, when the level was 42 per cent., it dropped to about 37 per cent. in the Roy Jenkins years. I see that the hon. Member for Blaby (Mr. Lawson) seems to doubt the figures. He is at liberty to put a Question to me and I shall do my best to give greater detail than is possible now. But these are the correct figures that we have produced. They show that, because of the high levels of purchase tax in the Roy Jenkins years, the amount of taxation obtained from personal tax, in the way that I have defined it, actually fell.

The reaction of the public generally to levels of income tax is not necessarily a sign that the division between personal taxes and taxes on expenditure is wrong but that, faced with the problems that we have seen in recent years, people have found the levels of taxation rather higher than they could reasonably expect, and were happy and willing that they should be reduced. If the division between the two taxes is required to be in the direction of taxes on expenditure, as I believe it is, we can undertake to move in that direction, but it is easy to over-emphasise the problems involved for taxpayers.

In his earlier remarks, the right hon. and learned Member for Surrey, East made a rather surprising statement. He said, if I remember his words, that it was perfectly easy to make changes in public expenditure. That comment really surprised me. When I consider the agonies that successive Governments have gone through in making reductions in public expenditure—especially the last Conservative Government—it is truly surprising that the right hon. and learned Member should make a statement of that kind and seek to use it as the basis for a change in the Budget.

Mr. Nick Budgen (Wolverhampton, South-West)

If the Minister is attacking the possibly united Opposition parties on the basis that they might reduce the tax take by £500 million, will he please tell the House what proposals for raising extra expenditure the Government would have in the event of those Opposition proposals being accepted by the House?

Mr. Sheldon

The hon. Gentleman is making an assumption that has yet to be tested, and we shall come to those matters very shortly. We shall see what happens on the Floor of the House and what the House decides.

The right hon. and learned Gentleman made that blanket charge that the Budget judgment could be altered as readily as he believed it could be. It is true that one can undertake a do-it-yourself Budget, and this is done by a number of hon. Members from time to time. I used myself, together with my right hon. Friend the present Chief Secretary, to engage in this exercise year after year in making a general assessment as to what ought to be done, and in producing pointers. We have a certain amount of fun out of it, and also received a considerable amount of instruction.

But we are not playing a game on this occasion. These are real decisions which have to be taken, and the consequences have to be faced. This is not just an exercise, and it is right to examine the consequences as fully as it done in making any Budget judgment.

As for the changes in revenue, it is easy to obtain figures in this respect. The Treasury provides this information as a result of parliamentary Questions. But that is not enough, because we have also to take into account the PSBR effects. How much are we to add to the PSBR as a result of these changes? How will it affect the money supply? I do not blame Oppositions for not finding all the answers, but I must point out the incompleteness of their examination, their analysis and their solution.

There are matters such as the employment effects. Have the Opposition considered these consequences? There are also matters such as prices, which may lead to pay increases, leading in turn to inflation. It is all very well for those who are perfect monetarists to say that this is not a matter for them, but not all Opposition Members believe quite as fully in that policy.

Then there is the question of phasing. How does the money come in at different parts of the year, and in particular in the year of introduction? It is not perfectly easy, as the hon. and learned Member would have us believe, to make these changes. It is hard to make the Budget judgment, and I believe that it is harder still to tinker with the Budget judgment.

At one time Budgets used to have names. There was the "pots and pans" Budget and the "chicory" Budget. They were called by whatever happened to engage the attention of the Press and the public. If one were to name this particular Budget, I suppose that one would call the Conservative's supposed Budget "a front-line Presidents" Budget. It seems to typify the kind of considerations that have been given to it.

If in this pseudo-Budget the Conservatives seek to include a £5 million cut from aid as a result of the measures they would wish to introduce, all I can say is that the right hon. and learned Gentleman and his team may not be awfully good at framing economic policy, but thank God they are not in charge of foreign policy. What we have seen in this proposed Budget tells us more about the nature of the Opposition and their own internal conflicts, than their economic proposals.

Dr. Bray

Few Labour Members would have any sympathy with the sort of tax changes which the Conservatives would wish to make. But does not my right hon. Friend think that he is perhaps over-stating the difficulties for the House of Commons making changes in the Finance Bill? These are well within the margins of uncertainty with regard to the plans which the Chancellor has made.

Mr. Sheldon

My hon. Friend will know—this was made clear earlier in the debate—that what the right hon. and learned Gentleman seeks here is equivalent to one quarter of the Budget changes. We are talking about changing the Chancellor's Budget proposals by a quarter. These are significant amounts and I shall deal with them straight away.

But before doing so I should say that these Tory proposals are really big money proposals. We are talking about changing the basic rate and changes in the higher rates. Incidentally, they would introduce four higher rates, which has the advantage of simplicity. But the simplicity in the number of rates does not suggest that the relationship between the income of the taxpayer concerned and the tax which needs to be paid at these various levels has been carefully examined. I shall be happy to look at these matters in the course of the next few days, although I cannot be sure that these are matters which the Conservative Opposition have studied with the kind of care required of them.

The right hon. and learned Member for Surrey, East totalled his proposals at £485 million. The assessment that I have been able to have made shows that this is about £50 million too little. The total comes to about £535 million in 1978–79 or £800 million in a full year. As my hon. Friend the Member for Thornaby (Mr. Wriggles-worth) pointed out, there are yet other amendments which are yet to be put down, although we have heard from the hon. and learned Member for Dover and Deal (Mr. Rees) that the Opposition do not expect these to succeed. These, then, are not serious proposals. However, those outlined by the right hon. and learned Member for Surrey, East are. There is a division between the serious proposals we heard enunciated by the right hon. and learned Gentleman and those which are not expected to succeed and which we have yet to see.

I should like briefly to mention phasing. The income tax changes, if there are to be any, will have to be back-dated to 6th April, however late in the year they come. The actual effect, therefore, is very nearly the same as a full-year effect.

On the other hand, indirect taxes suffer from the disadvantage of two lags. There is, first, the lag that arises naturally because of the date of implementation. For example, that VAT proposal would take a few weeks to set up.

I should have been delighted if I had gleaned any realisation of these problems in any of the speeches from the Conservative Benches. These are real problems that concern the running of the economy. Not even to take notice of them, let alone not to seek to argue the case, is to fail in the duty of anything like a serious examination of these important matters.

Sir G. Howe

The right hon. Gentleman was implying that the income tax changes starting from the beginning of the financial year would be the same as a full-year effect. But he must know perfectly well that not one of the significant changes listed on the last page of the Red Book in the current year amounts to anything like a full-year effect. There is a wide gap in every case—in some cases it is very wide. Will he confirm that that is so, and will he also explain how he arrives at his assessment that my figures are out of line with his?

Mr. Sheldon

I said that the actual effect was nearly the full-year effect. It is much nearer the full-year effect than the indirect taxes are. There are two lags with indirect taxes. There is the lag that comes between the date of the passing of legislation in this House and the date of implementation. VAT is a very good example of this. For administrative reasons there must be a fair time lag between the decision and the date of implementation, and a further time lag comes from collecting the tax. It takes three months to collect VAT after the date of implementation. There are also similar delays with excise duty as well.

Mr. Lawson

I do not want to go on about indirect tax, although it is quite clear that if that were to be increased, this could be done straight away by the regulator: it does not need a Budget resolution. But so far as income tax is concerned, the Financial Secretary is trying to mislead the House. He said that the first-year effect was nearly the full-year effect, but when he gave us his figures for our proposals he said that they would cost £500 million in the first year and £800 million in a full year. That means that the first year is five-eighths of the full year—not nearly the full effect.

Mr. Sheldon

The hon. Member for Blaby (Mr. Lawson) does not understand these matters of Customs and Excise. There are these basic delays. As far as direct taxes are concerned, the figure for the first year is £340 million, and for the full year £370 million. They are very nearly together. In VAT, however, it is markedly different, as it is in other duties.

Therefore, the loss of income not only has to be made good, if the deficit is not to be increased, but the problems of the time factor must also be taken into account. The right hon. and learned Gentleman has made it abundantly clear that he had not taken these matters into account. I understand his problem, but to exercise the full responsibility to which the Opposition now aspire, he must consider such things.

The right hon. and learned Gentleman also went into the question of how he would pay for this. He wanted to save £92 million on "municipalisation"—local authorities' acquisitions of housing. But he will know that the local authorities have freedom of action. Although one can cut the allocation of funds, there is no way of knowing what will be cut.

Sir G. Howe

I want an answer to my question, although I do not want to press the Minister too far. He said that he had estimated my figure as being £50 million short. How did he arrive at that figure—will he give me a breakdown?

Mr. Sheldon

I shall let the right hon. and learned Member have a breakdown in due course. If he is seeking to challenge my figures, of course he may do so. But our estimates are that he is £50 million out and that the total is £535 million in 1978–79. That is an assessment that I had made in the limited time between his sitting down and my rising. If he wants a detailed breakdown, I shall do my best to oblige, but he is not in a position to challenge my figures.

The right hon. and learned Member also mentioned a saving on the freedom fighters. Aid is given to these countries, not for freedom fighters but for specific supplies and services associated with peaceful development. If he really believes that it would help our position in any of these countries to withdraw that money as a result of trying to cut public expenditure, I am sorry that he is undertaking such proposals.

The most important element of public expenditure that the right hon. and learned Gentleman sought to cut was the £300 million of the National Enterprise Board. I know that the National Enterprise Board has very much rankled the Opposition. I must tell the right hon. and learned Gentleman that this proposal is the most difficult part of his shadow Budget. It is difficult to cut £300 million from the Board in 1978–79, because the total amount is only £275 million. However strong and however firm the right hon. and learned Gentleman might be on these matters, he would not be able to cut £300 million. The £275 million is largely committed to British Leyland following the decision taken by the House. The House is also committed to further significant amounts for Rolls-Royce and other subsidiaries of the NEB. The other £100 million or thereabouts that is as yet uncommitted will assist industry generally. If the right hon. and learned Gentleman thinks that the right way to go about helping industry generally is to forgo these relatively smaller amounts, he is wrong on that score as well.

The right hon. and learned Gentleman finally referred to selective assistance. I presume that he means assistance given under Section 8 of the 1972 Act. I must tell him that a large part of that assistance is already committed to Chrysler and elsewhere. That large part is committed under agreements that have been endorsed by the House.

In The Economist of 15th April there was an article on the Conservative approach to public expenditure. It stated: their priority tax cuts and their determination to keep the borrowing down. But a group under Mr. Nigel Lawson has produced a list of detailed expenditure changes—though it will not be published. I deplore the Conservative Party's secrecy although I admire its prudence. What we have heard from the right hon. and learned Gentleman is not, I think, part of the unpublished document. The cuts that he has mentioned probably come as a result of meetings in the Shadow Cabinet or elsewhere.

What we have seen in the shadow Budget is the substance that is even worse than the Shadow Chancellor himself. We already have a Budget that has given considerable sums to the £20,000a-year man who is married with two children. That man will get £463, and the Shadow Chancellor seeks to give him £1,535. We already have a Budget such that the man on £50,000 who is married with two children will have his tax reduced under the Bill by £616, but the right hon. and learned Gentleman seeks to increase his tax reduction to £5,483. These are enormous handouts. The higher tax rates that we have had to accept in recent years have been the price that the Government felt had to be paid for dealing with the national will to reduce levels of inflation. We feel that we have had advantage from the higher rates. I do not believe that suddenly as a result of Opposition amendments there should be the distributions that the right hon. and learned Gentleman proposes.

That there can be some changes in the higher rates in the period that lies ahead, the Chancellor of the Exchequer has willingly given his approval. That they can and should be put into effect now is clearly wrong.

Mr. Pardoe

I refer the right hon. Gentleman to the noted television intervention of the Chancellor of the Duchy of Lancaster last weekend, when he said that such changes were a very high priority. Indeed, I think that he said that they were of the highest priority for the Chancellor. Therefore, we look forward to their being carried out as the very next step of the Government. Will the right hon. Gentleman say by how much the take-home pay of the person that he has referred to would be increased if the proposals of the Chancellor of the Duchy of Lancaster were carried out?

Mr. Sheldon

The decisions will be for the Chancellor of the Exchequer and the Government as a whole. The next step is not this Budget. We have seen a commendable move to assistance in this area. Further changes of the kind proposed by the right hon. and learned Member for Surrey, East and his right hon. and hon. Friends would clearly be unacceptable to the majority of this country.

The Finance Bill will be debated and examined very fully both here and in Standing Committee. It implements a Budget which seeks a modest relaxation of taxation in line with our present prospects. I ask the House of Commons to support the Bill.

Question put and agreed to.

Bill accordingly read a Second time.

Ordered, That the following provisions, namely—

1. (a) Clause 11, and
2. (b) any new Clause first appearing on the Order Paper not later than Thursday 4th May and relating to stamp duty on house purchase, indexation for capital gains tax, deferred payment of duty on whisky or interest on repayments of overpaid tax,

be committed to a Committee of the whole House: That the remainder of the Bill be committed to a Standing Committee: That, when the provisions of the Bill considered respectively by the Committee of the whole House and by the Standing Committee have been reported to the House, the Bill be proceeded with as if the Bill had been reported as a whole to the House from the Standing Committee.—[Mr. Robert Sheldon.]

Committee tomorrow.