HC Deb 25 May 1979 vol 967 cc1432-41

3.0 p.m.

Mr. David Atkinson (Bournemouth, East)

I am grateful for the opportunity to refer to an extremely serious episode involving the practical administration of value added tax. Mr. Bedward is a constituent of mine who runs the Crooked Beams restaurant in nearby Christchurch. He was subject originally to a claim of underpayment of £7,646 from April 1973 to January 1977. After prolonged negotiations, that sum was reduced to £3,821. It was reduced again, finally, to £1,597. As my constituent was convinced that he owed nothing, he refused to accept even that final figure and the whole matter went to appeal in November 1978.

After a two-day hearing, the tribunal accepted Mr. Bedward's evidence. The VAT assessment was withdrawn and costs were allowed against Her Majesty's Customs and Excise.

Within these broad facts there lies a disturbing story concerning the methods and processes used by VAT officers in establishing their case. Doubtless they thought that they had a case against Mr. Bedward, as the lengths to which they went demonstrate. The tribunal's report revealed the flimsiness of the foundations and evidence of their case. The cost of their judgment, or misjudgment as it proved to be, to the taxpayer amounted to £1,300. That represents an approximate total of 250 man hours expended by departmental staff. The award of costs claimed against them was an additional £2,000 for the year's work by a solicitor and accountant for Mr. Bedward's defence, apart from the cost and time of the tribunal itself, involving three members of a panel, one clerk and six VAT repretatives.

The Customs and Excise investigations included a number of interviews with Mr. Bedward. The House should know of my constituent's version of the meetings. He says: Instead of asking questions in a civil, orderly manner, I was interrogated by two officials. Before I could answer the first officer, the second would fire away with another question. Then, before I could answer that one, the original man would come in with yet another question. On one occasion Mr. Bedward said to the officer: Are you calling me a thief? He replied: Yes, I am. Furthermore, Mr. Bedward was informed by some of his regular customers that they had recognised two VAT officers known to them from Southampton, which is another area, posing as customers and dining in his restaurant without revealing their identity. In a letter that I sent to the chairman of the Board of Customs and Excise, I asked whether the visit was part of the investigation. The chairman replied that on three occasions officers kept observation from outside the restaurant. Presumably they became hungry and went in for lunch.

I turn to the case against Mr. Bedward that was submitted to the tribunal. It was presented in the form of an extremely elaborate 12-page schedule with columns of figures and calculations on percentages of mark-up on some 59 items of food and drink served in the restaurant. In the course of preparing that evidence, Mr. Bedward was asked specifically how many prawns he put in his prawn vol-au-vents and the number of peas that went into a portion of peas. The VAT inspector conceded to the tribunal that Mr. Bedward was completely honest in the preparation of all the calculations, save in respect of the amount of gristle and fat trimmed in the preparation of fillet steak and the number of portions served from a 19 oz. tin of carrots.

In its report, the tribunal accepted Mr. Bedward's evidence that his tax return was accurate, allowed his appeal and, despite opposition from a Customs and Excise lawyer, awarded him costs. That conclusion was reached after it was noted that the chief VAT officer had not taken up Mr. Bedward's invitation to inspect a delivery of meat and to watch it being trimmed of fat and gristle to determine wastage, and that VAT officers had failed to appreciate that of a 19 oz. tin of carrots the carrots themselves weighed only 11 oz. and the liquid in which they were preserved weighed 8 oz. Indeed, the hearing had to be suspended to allow a VAT officer to go off in search of a tin opener in order to weigh both the carrots and the liquid.

Although Mr. Bedward won, the amount of stress and strain the prolonged case had on him, as one can imagine, produced a breakdown in his health, necessitating a period in hospital suffering from complete exhaustion. He also incurred additional expense employing extra staff while he was opposing the case, for which, of course, he received no compensation.

My hon. and learned Friend the Minister of State may refer in his reply to other details that I have not mentioned, such as the fact that Mr. Bedward may have merited investigation initially because, when he applied to be registered for VAT, he did not understand that, as he was in partnership with his wife, her name should have been included on the form. That led to some administrative complications. My hon. and learned Friend may also refer to the fact that there were delays in the submission of Mr. Bedward's tax returns, which was due to his period of illness. However, I hope he will accept that those are details that are irrelevant to the very disturbing questions arising from the case which I wish to put to him.

Before I ask those questions, I should tell the House that the case of Mr. Bedward is not an isolated one. There was a remarkably similar case, involving the proprietor of the Double Luck Chinese restaurant in Wilmslow last year. Acting anonymously, VAT officers visited the premises and purchased meals. Using opera glasses and binoculars from a car park 100 yards away, they attempted to count the number of people taking meals in the restaurant, a check which the tribunal rejected as unreliable.

Undeterred, the VAT men attempted to find a formula which could be used to determine the turnover, based on the sizes of the portions of chips and rice that were served. Here again they fell into their own trap, because they miscalculated the weight ratio of uncooked rice to cooked rice. The method that they used when taking samples was an English method where the damp rice was strained and not the Chinese method where the rice was cooked dry, leaving no moisture to be strained. In that case, an underpayment of £11,000 was reduced to £3,500 and further reduced to £2,700. The tribunal found in favour of the restaurateur and criticised the commissioners on their judgment.

The experience of my constituent, Mr. Bedward, the Double Luck restaurant and other small self-employed business men at the hands of VAT officers poses a number of questions that I hope my hon. and learned Friend will answer when he replies.

My first question refers to the methods of investigation that were used. Here I might refer to what the chairman of the tribunal, the noble lord Lord Grantchester, said of Mr. Bedward, who is a Dunkirk veteran and served as an officer in the Coldstream Guards. The noble lord said: We hold that Mr. Bedward is a witness of truth. If there is any truth whatever in Mr. Bedward's description, I hope that the new Government will review the Soviet-style methods of interrogation and subterfuge which, together with the power of breaking and entering which Her Majesty's tax inspectors acquired during the period of office of the last Government, constitute the hallmarks of a dictatorship.

Secondly, can we really permit a system which, in Mr. Bedward's case, allows an incredibly high assessment of £8,000—in other words, accusing Mr. Bedward of not declaring approximately £20,000 worth of turnover for his, if I may so describe it, modest restaurant—to end up by being reduced to a claim for less than £1,500? Is this not an attitude which is morally wrong, right from the start, based as it is on a threat? More- over, it was a claim based on such trivia as the amount of wastage on steak and the weight of carrots in a tin. What kind of basis is that for judgment? What kind of practical training and experience do VAT officers have in the day-to-day running of small businesses?

Is it a case of "If you cannot succeed, become a VAT man"? Even more seriously, how many small business men, when faced with a claim for assessment with which they do not agree, nevertheless pay up just to avoid the aggravation and considerable time, effort and expense involved in challenging Customs and Excise, which Mr. Bedward courageously did? Undoubtedly, he would have faced bankruptcy had his appeal gone against him. Therefore, what safeguards does my hon. and learned Friend propose?

Thirdly, there does not appear to be one hint of admission by Customs and Excise, in the light of the tribunal's findings, that it just might have been wrong in pursuing Mr. Bedward in the way that it did. There was absolutely no apology to Mr. Bedward, who, as I have said, had to employ additional staff during the case and who suffered a breakdown in health as a result of it. There must be an end to the attitude, which the last Socialist Government created and encouraged, that every business man is on the fiddle and that he must be guilty before he proves himself innocent.

Finally, I put the fundamental question. Is there any need for smaller businesses to be subjected to VAT registration which necessitates an army of inspectors to administer such bureaucratic controls? Is my hon. and learned Friend aware that if the tax threshold were raised to an annual turnover of £20,000, no fewer than 500,000 small businesses would be freed of the burdensome commitment of charging and administering VAT? According to a reply to a written question of mine on 31 January last year, the loss of revenue to the Exchequer would be a mere £40 million a year, which at £80 per business would be made up in no time at all through the additional taxation on the increased profits which small business men would produce as a result of the extra time and effort they would have available to get on with the job. Surely one of the clearest messages that came through in the recent general election campaign was the need to set the small business man free and to get the Government off his back.

3.13 p.m.

The Minister of State, Treasury (Mr. Peter Rees)

I am grateful to my hon. Friend the Member for Bournemouth, East (Mr. Atkinson) for raising this matter, since it affords an early opportunity in the life of this Government of going into a subject which, as he emphasised, touches on the more general problems of small businesses, in which, like my hon. Friend, I have a strong interest.

Before I deal with my hon. Friend's comments, it may be helpful, if a little trite, if I attempt to put the matter in some perspective. VAT is, of course, a self-assessed tax. That is to say, registered traders are required to declare once a quarter or once a month the tax they have paid to their suppliers and the tax they have charged to their customers, and to pay or reclaim the difference.

Customs and Excise has various means of checking the accuracy of these declarations, the most important being the visits to traders by prior appointment—I emphasise "prior appointment"—by local VAT officers to verify the accuracy of the traders' declarations. Where an officer has good reason to believe that a trader has under-declared his tax, he is empowered to make an assessment. I regret to say that the levels of under-declaration are often found to be considerable. In fact, an assessment is raised on one visit in every three, and the total amount of tax involved is of the order of £60 million a year.

But the visits by officers are not always painful, and I should like to reassure my hon. Friend on that. On over 10,000 visits a year they are able to tell the trader that he has over-declared his tax liability, and about £4 million is thus identified and repaid. This may come as a slight surprise to the public outside and possibly even to my hon. Friend, although I note that he takes an expert interest in these matters.

Where a trader does not accept an assessment, he can apply to the local VAT office to have it reviewed and where, as in the case of Mr. Bedward, regrettably an agreement cannot be reached, the trader has the opportunity of appealing to the independent VAT tribunal. In the last financial year just under 500 traders notified appeals to the tribunal, when the accuracy of the trader's declaration was in question, though the majority were withdrawn before the hearing. To give my hon. Friend a standard of comparison, the total number of assessments made was about 150,000. A total of 109 cases were heard and decided by the tribunal; 10 of these were allowed in full, admittedly; 27 were allowed in part, and in the remaining 72 cases the commissioners' assessment was upheld.

Turning now to the case mentioned by my hon. Friend, I do not think that it would be right or even productive at this stage to delve too deeply into the details of Mr. Bedward's business. The technical partnership point was, of course, commented on by the tribunal, and I certainly do not want to take up the time of the House and divert my hon. Friend's attention from the matters of substance which he has raised.

The tribunal found in Mr. Bedward's favour and awarded costs. I hope that Mr. Bedward will accept this as a full vindication of his integrity. But the tribunal found—it is right that I should emphasise this—no cause to criticise the officers' actions in making the assessment in the first place or in the subsequent negotiations which led to a considerable reduction in the amount originally assessed, which was a point on which my hon. Friend rightly touched. Indeed, what emerges from the judgment is that the tribunal specifically identified some of the difficulties with which the officers were faced in trying to establish what were the correct amounts of tax involved. It explains, I hope, the original large estimated assessment which was raised in the first place.

I hope, though, as I have emphasised, that Mr. Bedward will accept the decision as vindicating his integrity, and, indeed, there was the specific finding that he was found to be a witness of truth. I am glad about that, of course.

There is always, of course, an element of high farce when the number of carrots in a tin, the weight of uncooked rice or the number of prawns in a vol-au-vent case have to be canvassed in an inquiry or a court. But it should be appreciated that this House has placed on VAT officers the often difficult and delicate duty of trying to establish the true liability when faced with an apparent under-declaration of tax. Obviously, in the case of a business buying and selling goods, it may be possible to check the level of declared takings by reference to the value of purchases, with adjustments for profit margins and for such variables as stock changes, special offers and wastage. However, restaurants present special difficulties in that there is no simple relationship between the value of food purchased and the value of meals sold.

It is sometimes necessary for the officers to undertake observations or what is charmingly described as test eating—no doubt a pleasurable activity in the case of Mr. Bedward's restaurant. I emphasise that we have not been able to identify any claim for expenses by officers of the Poole area, so I hope that my hon. Friend will accept that no visits were made, at any rate, in the course of duty. They may well have been drawn by the reputation of Mr. Bedward's restaurant so that they went there in out-of-duty hours, but that is hardly a matter of which, I am sure, Mr. Bedward or my hon. Friend would want to complain.

I emphasise that I shall wish to be satisfied that such activities are kept to a minimum and are used only where strictly necessary. I am happy to tell my hon. Friend that I find that as a result of the commissioners' review of this case and the Double Luck case to which my hon. Friend referred, the Customs and Excise has already tightened its instructions to its staff on these matters. Therefore, I hope that my hon. Friend will detect a perceptible improvement in the months to come.

I am particularly sorry that this special inquiry coincided with a period of ill health for Mr. Bedward. I recognise the great service which he gave to his country in the last war, in a very distinguished regiment, and I hope that he is now completely recovered.

The verification of restaurant declarations is clearly a difficult area; but the Department has had a number of successful investigations in this field. It would clearly be wrong for the commissioners, with their responsibility for the care and management of the tax and for protecting the interests of honest traders and taxpayers generally, simply to ignore the possibility of evasion because of the complications involved.

Allegations are made, and regrettably will probably continue to be made, that VAT officers have misused their powers and intimidated traders or acted without due consideration. It is perhaps too much to expect that every single officer always behaves correctly. Indeed I have in the past complained about officers' activities. In all fairness, however, the overall position is good and each complaint made is thoroughly investigated. There is a complaints mechanism which traders are encouraged to use, and their attention was drawn to that in VAT News number 9. In the last resort, it is always open to a trader to have his complaint investigated by the Ombudsman.

The commissioners are most concerned to ensure that nothing is done to damage relationships with the trading community and paid particular attention to that in their review of the administration of the tax last year, the report of which was presented to this House last December. I was surprised to learn from the report that since the introduction of VAT in April 1973 only 30 cases concerning the tax had been investigated by the Parliamentary Commissioner for Administration, and that in less than one-third of the cases so far reported on has any degree of maladministration been found. That is surely not an unsatisfactory record given that in the same period some 2 million visits have been paid by VAT officers to registered traders.

I am sorry that Mr. Bedward continues to feel that he was harshly treated by the officers concerned. I can assure him through my hon. Friend the Member for Bournemouth, East that their activities were afterwards thoroughly investigated by senior officials. All the papers in the case were carefully examined personally by the chairman of the board of Customs and Excise.

I would be deceiving myself and attempting to deceive the House if I pretended that the collection of a tax such as VAT can be popular. A balance has to be struck between economy and efficiency of collection on the one hand and the convenience of the taxpayer on the other, between the too enthusiastic pursuit of the tax evader and the need to safeguard the country's revenues.

It would be wrong for me in the early days of this Administration to suggest that I am satisfied or, indeed, dissatisfied that the correct balance has been found. I can, however, assure my hon. Friend that I will make it my concern to see that VAT procedures interfere with legitimate business practices no more than is consistent with the need to assess and collect the tax in an effective and economical manner. We have promised to assist small businesses and in that context to undertake a thorough review of the enforcement procedures of Customs and Excise and the Inland Revenue.

Regarding the tax threshold, I am deeply aware of the considerations that my hon. Friend has drawn to the attention of the House, and we debated them on the Finance Bill as recently as last year. I am sure that my hon. Friend will understand the conventions and not expect me to anticipate my right hon. and learned Friend's Budget Statement. One person in six on the VAT register is entitled to deregister if so desired. Presumably because of the balance of convenience and advantage, we may infer that they have chosen not to do so.

My hon. Friend has done a service by raising these problems in the context of the case of Mr. Bedward, and to a degree the Double Luck restaurant, so early in this Parliament, and I can assure him that his comments and criticisms will not pass unnoticed or unconsidered.