HC Deb 10 July 1979 vol 970 cc415-28 In paragraph 1 of Schedule 1 to the Finance Act 1972 (liability to be registered in the provisions before the Table), for " £10,000 " (in both places) there shall be substituted " £20,000 ".'.—[Mr. Horam.]

Brought up, and read the First time.

Mr. Horam

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

The Temporary Chairman

It will be convenient to discuss at the same time new clause 17, entitled " Liability to be registered for value-added tax ".

Mr. Horam

We come to the last batch of new clauses, for which no doubt the House and the Government will be profoundly grateful. Here we begin to tread over ground that is familiar to all those who have taken part in Finance Bill Committees over the years. Indeed, it is also ground where there is a considerable degree of consensus, since new clause 17, standing in the name of the hon. Member for Upminster (Mr. Love-ridge), is in similar terms to new clause 22.

Despite that, the situation remains unsatisfactory in terms of the level of registration for value added tax, which perhaps says something about the impotence of Parliament over the power of the Executive. It seems always that it is the Government of the day, of whatever party, who are out of step with the consensus that seems to develop between the Back Benches on the Government side and the Opposition.

In 1972, when VAT was introduced, the threshold was £5,000. It was increased twice by the Labour Government, in one case with the assistance of the Liberal Party; I say " assistance " advisedly. There is now a number of reasons why we think it right to have a further increase in the threshold.

First, it is a particular application of the general indexation argument, which should appeal to the Financial Secretary. The present Secretary of State for Energy, when speaking for the then Opposition in 1977, said that it was Conservative Party policy that the threshold should be £10,000 and that it should be reviewed for inflation thereafter. So, even in terms of Conservative Party policy as it was then, and perhaps still is—I do not know —the threshold should be higher than it now is.

11.15 p.m.

The second reason in favour of the new clause is the principal one, that it will reduce the burden of administration and cost for the small business man and the self-employed. We are talking here about very small businesses, the one-person or two-person company rather than anything larger, but they are a part of the economy which is well worth helping. As we know, the compliance costs for such a company are very high. In Committee on previous Finance Bills we have heard or read of the studies done by Bath university which show incredibly high compliance costs at this end of the scale.

Clearly, there is a disincentive here. I disagree with some of the arguments about incentives advanced in other debates during these past five days, but no one can doubt that the paper work and trouble involved in filling in the VAT forms and the rest present a great disincentive to the small business man. Moreover, it is a particular disincentive in his case because it involves time, and time in many cases can be more important than money. As someone who has founded a small business, I know the sheer drudgery of going through all the paper work which accumulates and takes away time which should properly be spent on expanding the business. That is the main reason why we propose the new clause.

The third argument is that, just as it would reduce the costs and burden for the person who has to be subject to VAT, raising the threshold would reduce the cost of administration for the Inland Revenue, which also can be high. I myself am in favour of our moving towards all manner of simplifications of taxation, such as the one that we proposed in the last Government, of eliminating vehicle excise duty. I hope also that in subsequent Finance Bills we can move towards self-assessment for income tax. These are all sensible ways by which we can work towards the general objective of reducing the bureaucracy which we inflict upon ourselves in income tax or any other form of tax.

As to the level at which the registration threshold should be set—we have argued about the reasons for it over the years—I am rather taken with the argument put forward by the hon. Member for Upminster in a debate some time ago, when he said that the reason why he wanted it raised to £20,000 or some such figure was that to raise it to that sort of level would mean that a one-person business could take on an extra person.

As matters stand, the person below the VAT threshold tends to be the one-person business, and I think that the hon. Gentleman's point was that if one doubled the level one would make it possible for the business man or women to take on an extra person and thereby help employment, apart from anything else. I do not know how many people would be removed from VAT by such a step as we are suggesting, and it would be interesting to know from the Minister what the figure would be. But if it were 200,000 one might reasonably expect to employ a further 40.000 if one were able to add a second person to small businesses of that kind.

Therefore, if we decided to fix the level of registration at a point where that expansion could take place, that would be as good an argument as any for coming to a conclusion in this rather arbitrary matter of the level at which the threshold should be set.

Those are briefly the arguments for the new clause. I am glad to see that it has support on both sides of the Committee, and I commend it to the Government for serious consideration.

Mr. Loveridge

The new clause proposes that the threshold of taxable supplies for which it is necessary to register for VAT should be raised to £20,000. The threshold originally started at £5,000 in April 1973. It is now double that. When it was being discussed in 1972, many thought then that it should have been started at £10,000. Indeed, the right hon. Member for Heywood and Royton (Mr. Barnett), when in Opposition and speaking in the Standing Committee at that time, said that he considered that there was an overwhelming case for the figure of £10,000.

Of course, when the right hon. Gentleman became a Minister he became convinced otherwise. I accept that the threshold was increased, but that hap-paned much later. It was raised because there was a great deal of inflation under the Labour Government. Naturally it took time for the Labour Government to raise the threshold. In 1972 Labour spokesmen were suggesting that it should be £10,000, as they are now suggesting that it should be £20,000. One wonders what they would do if they had responsibility.

It is important that turnover should fall before deregistration is possible. That would reduce the level in real terms to £17,000 for the new proposals, or £8,500 as matters stand. It is obviously desirable to allow as many traders as possible to leave this tax net so far as that is consistent with maintaining a reasonable yield of revenue.

In a written answer in January the then Financial Secretary, when asked what the cost would be of raising the threshold to £20,000, gave the following answer: The loss of revenue would depend on the number of registered persons who chose to deregister. If the proportion of those eligable to do so that de-registered was similar to the proportions when the limits were raised in October 1977 and April 1978, it is estimated that doubling the registration limit to £20,000 taxable turnover a year and the de-registration limit to £17,000 a year might result in a revenue loss of somewhere about £15 million in a full year."—[Official Report. 15 January 1979; Vol. 960, c. 669] What are the net costs? We know that there are about 400,000 control visits a year to the 1¼ million VAT-registered traders. There is one visit to every third trader. Mostly, each visit is completed in a day, but some may last more than a day. It is hard to think that they cost less than £10. They take up the inspector's time and the trader's time. It seems likely that the total cost of collection, including the traders' costs, are more than the yield. Figures are available. The overall average administrative costs were £63 per trader in 1978. The yield then from firms with a turnover of less than £20,000 was £350. However, that is an average. Averages conceal wide variations. It is probable that at the lower end of the £10,000-£20,000 bracket the costs of collection are substantial.

If there is evidence that the combined cost of collection—that is the time spent by traders and the costs of inspection—is more than the yield, there will be a strong case for saying that the tax is hardly worth the colection. In any event, will my hon. and learned Friend the Minister of State consider whether the limit should be increased in line with inflation? EEC directives would be met if we went that far. Even if the Government do not feel able to go to the full figure, a great deal of encouragement would be given to small traders if inflation were met. It would help if the present deregistration figure of £8,500 were increased by £1,000.

Many traders are caught in a trap. Although their annual turnover may be within the sum that should allow them to deregister—this was true last year, and I assume that it continues to be true—if their quarterly expenditure reaches £2,500 they are still not able to deregister.

It was said in the House of Commons last year that if the deregistration limit alone were raised by £1,000 it might result in 50,000 traders deregistering. That would surely be helpful for smaller traders and for the Government's inspectorate. It would be helpful to take out of the tax net those who are in a yo-yo position, where one moment they are in the tax net and the next they are out. The work for the inspectorate must be very heavy.

We appreciate that the new rate of VAT, which is welcome because it is simpler and is a single rate, means, none the less, as it is higher, that the tax will be more wealth-collecting at lower thresholds. Equally, the higher rates must be an added burden for some of these small traders. A firm with a turnover of £15,000 or so, and qualifying to pay VAT, might be at the point of deciding whether to take on another member of staff. I am grateful to the hon. Member for Gateshead, West (Mr. Horam) for reminding the House that I raised the matter on a previous occasion. It is an important aspect. The time when a small firm takes on its first new member of staff is a moment of decision whether it will expand. This is a significant moment for the future of full employment.

I therefore hope that the Government will consider at least raising the threshold, even if they are not able to go as far as the new clause requests. Anything that they can do will be much welcomed by the small traders.

Mr. Graham Bright (Luton, East)

The importance of small businesses to the British economy has been clearly recognised by hon. Members on both sides of the House in recent years. In the election campaign both major parties thought it right to propose measures to increase the role of small businesses. They are the single most potent force for expansion in our economy. That is why I support new clause 17.

The present position is that there are more than 1,250,000 companies registered for VAT. Each year more than 400,000 visits to these businesses are made by VAT officers. A total of 12,250 man-years was spent in the administration of the tax in the financial year 1977–78.

The prime responsibility of these firms is to create more productive wealth. However, those with a turnover threshold as low as £10,000 per annum have a difficult task. Almost every small business in the country is liable to VAT. It is my view and that of a number of my hon. Friends that this situation should be changed. The proposal that we put forward is to raise the threshold to £20,000 per annum That would take about 500,000 small businesses out of the system. The cost of the change would be relatively small in revenue terms—only £40 million per annum, according to the latest estimates, in January this year. Against that can be set the saving in manpower that would follow—about £25 million per annum, according to my best estimate. There would be an immediate saving in the number of visits and civil servants' time.

The hidden cost placed on firms by necessary book-keeping and the employment of accountants would be removed at once. The lifting of the tax and the administrative burden would alone provide a greater economic stimulus than the nominal loss of revenue. This modest proposal will involve immediate savings in the administration of the tax and act as a powerful stimulus to small businesses. It will stimulate economic activity and promote employment. This will cover the temporary and minuscule loss of revenue.

In view of the compelling arguments in favour of the new clause, I hope that it will be possible for my right hon. and learned Friend to give it careful consideration.

11.30 p.m.

Mr. Shersby

At this very late hour, when hon. Members are looking forward to getting to their beds, it is nevertheless important that we should probe just a little further the question of the imposition of VAT on small businesses. Equally, it is important to consider the benefits that would accrue to the Customs and Excise, and consequently to the taxpayer, from staff savings resulting from a marked reduction in the number of 1¼ million registered VAT traders.

We know, for example, that, following the increase in the threshold after the 1977–78 Budgets, about one-fifth of the traders eligible applied to deregister. If the threshold were now to be raised to £20,000, as is proposed in the new clauses now being considered—and accompanied, as it would be, by considerable publicity —the number of firms deregistering would be substantial.

The trouble is that in the past the increases in the threshold have been pretty modest by any standards, and the encouragement for traders to deregister and to go through the aggravation of doing this has been pretty small. Only a dramatic change in the VAT threshold will persuade a number of them to take the necessary action. A really big lift would do the trick. It would save money in collecting VAT and at the same time give a boost to the small firms and to employment.

It is my view that, because the threshold is far too low, many small firms are working only half-time and that whereas prior to the introduction of VAT they employed a number of people, now they do not do so. I know—as, I daresay, do other hon. Members—of small firms that today are working only half-time, and where the sole proprietor is keeping just below the tax threshold simply to avoid having to cope with all the paper work and aggravation that VAT involves. I know of one firm that used to employ seven men and now employs only one. The reason is that the VAT threshold is too low.

That is the kind of position that I wish to draw to the attention of my hon. and learned Friend tonight. It is no good having small firms working half-time simply because they are not prepared to cope with the very low threshold.

My hon. Friend the Member for Upminster (Mr. Loveridge) and my hon. Friend the Member for Luton, East (Mr. Bright) mentioned the 400,000 control visits which take place every year. These visits are made by VAT officers. Last year these visits resulted in the detection of about £50 million under-declared tax and the discovery of declarations of too much tax of about £4 million. But what did those 400,000 control visits really cost in terms of staff time, travelling and other overheads? I would hazard a guess that if the costs of those visits were properly computed they would constitute a very substantial amount.

As every hon. Member knows, it is not only the cost of those visits that presents a disincentive to small firms; it is the headaches that go with them. It is the feeling among many small traders that they are being hounded by officers of the Customs and Excise and that the VAT man is one of the factors which detracts from the pleasure of engaging in small business and the fun and enjoyment which come from expanding it and offering other employment.

It is important for us to recognise these factors, nebulous though they may be, and to realise that we have not only to raise the threshold but to get rid of some of the pressure which small traders feel is exerted on them unnecessarily by officers of the Customs and Excise, however admirably they may carry out their duties. I have no doubt from my personal experience that in the vast majority of cases they are carried out admirably and fairly. I am glad to see that my hon. and learned Friend is listening attentively to the powerful points that I am making in support of the new clauses.

I turn for a moment to the EEC directive. In asking my hon. and learned Friend to consider raising the threshold I am conscious of the existence of the sixth directive, which, as we all know, provides that member States may raise their registration limits in line with inflation but no more. I ask my hon. and learned Friend to consider whether the original thresholds have not, in practice, proved to be far too low. If he is of a mind to agree, I hope that he will discuss the problem with our friends in the EEC to see whether it is possible to obtain a fundamental revision of the whole business of EEC directives and the question of the threshold as it is applied to small businesses. Only if the threshold is reduced dramatically shall we be able to achieve the lift-off of which the Government Front Bench has spoken and which it has persuaded us is right in terms of increasing employment.

There needs to be some incentive, such as less tax to pay, fewer headaches and less aggravation for the small trader. The cost would be small—only about £15 million in a full year. That figure was given in answer to a parliamentary question on 15 January, at column 669. If the cost of controlled visits is deducted, the revenue loss will be smaller. I ask my hon. and learned Friend sympathetically to consider that which has been put to him on behalf of the small businesses which so desperately need to rid themselves of unnecessary paper work and get on with the job of manufacturing, and thus creating employment.

Several Hon. Members rose—

The Temporary Chairman

As time marches inexorably on, I express the hope that those hon. Members whom I am about to call will remember that tedious repetition consists not merely of one hon. Member saying the same thing over and over again but of a number of hon. Members saying the same thing over and over again. I hope that hon. Members will endeavour to make their remarks brief and interesting.

Mr. David Atkinson (Bournemouth, East)

I support my hon. Friend the Member for Uxbridge (Mr. Shersby) with regard to new clause 17. I wonder whether the Committee appreciates that the current VAT threshold of £10,000 a year does not reflect, in real terms, the value of the original level set in 1972. That figure was £5,000. Inflation pushed the real value to £10,000 two years ago. We had to wait until the last Budget for the threshold to be raised to that figure.

For the threshold accurately to reflect the original value of the level set in 1972 it should be about £12,500. Because it is not, more small businesses than ever before are obliged to undertake the burdensome commitment of administering VAT. It may be said that that is acceptable if a sizeable Exchequer revenue is produced. We have just heard that that is not the case. With 500,000 small businesses liable to VAT registration the tax figure per business is about £80. That is peanuts, bearing in mind the work given to thousands of Customs and Excise officers—for which they are paid—and the extra work given to small businesses—for which they are not paid.

The Chancellor's Budget was described as " bold ". That is an apt description. But my right hon. and learned Friend has not been bold in respect of small businesses. I hope that he will accept new clause 17. It is to the small businesses that we must look if unemployment is to be reduced. We know that many thousands will be made redundant as a result of the overmanned nationalised industries being brought back to viability. I am not convinced that there are not thousands of skilled people who would prefer to do their own thing and set up a small business if they were encouraged to do so. At the moment they are frightened of all the administration that they are obliged to undertake, not least in relation to VAT.

I am concerned about the effects of the technological revolution. It will mean large-scale redundancies. We do not yet know where they will take place, but many people will be looking to supply services for others and we should not put obstacles in their way. The Government have not succeeded in encouraging small businesses to be the dynamic element in the economy. I hope that the Minister of State will accept the new clause.

Mr. John Page (Harrow, West)

It is only once every seven years that I attempt to intervene in the esoteric nuances of the Finance Bill. I usually speak only on the taxation of the Easter offerings of incumbents, but in order to follow your ruling exactly, Sir Stephen, I am happy to say that the speech that I was intending to make has been brilliantly and incisively made by my hon. Friend the Member for Luton, East (Mr. Bright).

In order that there should be no vain repetition, I say only that if it costs the Revenue £25 million to make a net gain of £15 million, that seems to be an unnecessary expenditure. If those figures are correct, I hope that the Minister of State, who is so mature, worldly and sensible, will feel that, even if he cannot go all the way up to £20,000, he would like to make a gesture—say £15,000—in the right direction.

Mr. Peter Rees

How can I resist the blandishments of my hon. Friend the Member for Harrow, West (Mr. Page)? There is always a certain charm in hearing old arguments put elegantly and persuasively, as they were by the hon. Member for Gateshead, West (Mr. Horam) and my hon. Friends the Members for Bournemouth, East (Mr. Atkinson), Upminster (Mr. Loveridge), Uxbridge (Mr. Shersby) and Luton, East (Mr. Bright).

The Committee has addressed itself to the problem before. I was delighted by the intervention of my hon. Friend the Member for Harrow, West, not just because of his kind personal remarks but because it is about seven years since we first addressed ourselves to the matter.

The arguments that commended themselves to the Labour Opposition in those days did not commend themselves to the subsequent Labour Government. I recall in 1972 the hon. Member for Sheffield, Attercliffe (Mr. Duffy) ably supported by his right hon. Friend the Member for Heywood and Royton (Mr. Barnett), per- suasively advancing arguments for a limit of £10,000. In 1973, the right hon. Member for Dudley, East (Dr. Gilbert) advanced the more modest argument for a limit of £7,500.

When those Members moved into Government, slower progress was made, but, encouraged and coaxed by the Conservative Opposition, they eventually raised the figure to £10,000. The Committee will see that we do not come entirely fresh to these problems, but that does not mean that they are not problems which are well worthy of our consideration.

I diffidently put to the Committee one or two grounds for pausing and reflecting on the new clauses. Our objection is not primarily on grounds of the cost, which we have been reminded is between £10 million and £15 million. There is, first, the distortion of competition. Perhaps we underestimate the fact that de-registration puts small businesses at a slight advantage, although in some respects it is counterbalanced by disadvantages, compared with almost equally small businesses that are slightly above the limit.

11.45 p.m.

Secondly, there is a limit imposed by the EEC sixth directive. That limit is now about £11,700. I know that EEC directives tend to be rather lightly brushed aside in the House, but I must pay certain respect to them, and I hope that the Committee will understand the Government's difficulties in that regard.

The argument that has perhaps most impressed me is that no great ardour was demonstrated when the limit was last raised—by the previous Government, firmly and courageously pressed by the then Conservative Opposition—to £10,000. It was subsequently found that only a fifth of those traders who were entitled to deregister—admittedly, as many as 40,000—chose to take that course. That leads me to suspect that perhaps the advantages of deregistration are not quite as compelling as they have been outlined, today or on previous occasions. As I have said, I am well conscious that I have in the past pressed the case for deregistration.

If hon. Members said " Let us make deregistration compulsory ", it might add an extra dimension to the debate. It would certainly save a great deal of Customs and Excise time. But I am not completely confident that hon. Members would press the Government to make it compulsory.

Therefore, I hope that the Committee will pause and reflect. If one of the clauses were reintroduced, making de-registration compulsory, perhaps we could look at it on grounds of convenience to Customs and Excise and to small businesses generally.

The last ground that I stated certainly has persuaded me. I do not have a closed mind, and I could never resist the blandishments of my hon. Friend the Member for Harrow, West. But I hope that hon. Members will not press the new clauses to a Division. The Government would be prepared to look sympathetically at a proposal to make deregistration compulsory and at the new arguments then advanced.

Mr. Horam

I am slightly encouraged by what the hon. and learned Gentleman said about deregistration, and possibly Government Back Benchers are also encouraged. But I am discouraged by what he said about all the other arguments on raising the main level for registration.

We all know and admire the hon. and learned Gentleman's considerable skill as an advocate, but I sometimes think that he chooses to use all the arguments rather than select the best. The arguments about distortion of competition and EEC directives are distinctly the worst to use in this context. The hon. and learned Gentleman would have been better advised to stick to his last argument.

However, it is the tradition that after this set of debates, which we have almost every year on the Finance Bill, the Government of the day ultimately, with some delay, accede to the view expressed by the Opposition. I hope that on this occasion the delay will he short.

Question put and negatived

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