§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Douglas Hogg.]9.20 pm
§ Mr. David Myles (Banff)
I am pleased to have secured this Adjournment debate on the evening of the Budget. I congratulate my right hon. and learned Friend the Chancellor of the Exchequer on what I would call a steady-as-you-go Budget. It keeps absolutely to the financial strategy that has marked the period of office of this Government. I am also honoured and pleased that one so senior as my right hon. Friend the Financial Secretary has seen fit to remain until this time of night, although it is not so late as some Adjournment debates, to reply. Those are the nice things that I have to say.
While everyone rightly deplores the fact that we have such a high rate of unemployment, most also accept that there is no simple solution to the problem. However, it would appear not be widely recognised in Government quarters that a vast area of potential employment is ignored or frustrated. My right hon. and learned Friend has shown recognition in his Budget of small businesses, although not so much of the self-employed. He has achieved, in a number of measures, gradual and constructive progress along the road to encouragement of small businesses.
I wish to concentrate mainly on small traders or business men who would be willing to employ one person. An example is a tradesman, perhaps a plumber, a joiner, a painter or a radio and television engineer who wants to set up in business on his own account. It is possible that he has been declared redundant. However, he still possesses the skills of his trade. He is told by Government and everyone else that it would be a good idea to establish his own business. I recognise that a tremendous number of people are following this course. Without the burden of overheads he finds that he is trading competitively. In no time at all, he is overwhelmed with work and decides to take on an employee. It may be a friend or someone else who possesses the same skills. Because he wants the operation of taking on an employee to be above board, he notifies the Inland Revenue and all the public offices that should be notified.
After a time, which can be considerable, he receives through the post a voluminous official paid envelope of the type I hold in my hand. It contains tax table A, tax table B, national insurance contribution tables, forms P7, P8, P45, P46, P11, P15 and 30BZ. Sixteen moves are needed to fill in P11, if the employees are paid once a week, and seven moves to fill in 30BZ. The man will receive numerous letters to explain the forms, but not a single letter of courtesy or explanation.
When I took up the matter with the Inland Revenue, I was told, "We send out so many of those envelopes that we do not have time to send individual letters." What do people in the Inland Revenue think that the poor employer has time for? He has to sift through all these leaflets and try to decipher what he is liable for—and he is liable, because he sees there warnings about what will befall him if he does not comply fully with the instructions which either he does not understand or he does not have time to comprehend. He is liable to be punished if he fails to complete the VAT forms correctly, or if he fails to remit the employee's PAYE tax, or if he fails to return the required census information.
212 I could go on, but in this short debate there is not time. However, I should point out that I have been inundated with letters from the National Federation of Self Employed and Small Businesses, the forum of private business, and a number of other organisations representing small businesses, as well as from many small business men, saying, "Thank goodness, at last, someone is drawing our plight to the attention of the Government."
The same tradesman then receives details of the national insurance scheme. He has to send contributions, regardless of whether he is making a profit. He is bombarded with regulations from bodies such as the Health and Safety Executive. Lurking in the background, because they do not communicate with him, are a wages council or a wages board, and a trade union or trade association, which require him to pay a certain amount to the employee. They do not tell him, but he is expected to know. Indeed, they can penalise him for not having obeyed instructions. There are 34 wages councils, and I am pleased to know that my right hon. Friend the Secretary of State for Employment has said that he is not happy about them.
The man will then receive a 59-page booklet which explains how he is to pay the first eight weeks' sickness benefit. This is complicated. I do not want to decry the scheme, but the onus is on the employer to complete and return the statutory sickness pay forms, and failure to do so could result in a £500 fine.
If the small trader has not already dismissed any notion that he may have had of employing someone, he may face even greater problems later. Regulations about working conditions may demand structural changes in work premises, and thus understandably inhibit the employment of full-time staff. Here I quote Mr. Anderson, the chairman of the National Federation of Self Employed and Small Businesses in my area. He says:We employ only part-time staff in our Coffee/Gift shop. However if I took on one full-time employee I would have to provide two extra toilets (one male and one female) for staff. I believe I also have to have a rest room. Unfortunately, it would leave no space for customers".That speaks for itself.There is also the problem of obligatory redundancy payments whereby on the termination of a business, the employee may receive more than the man who has invested his money, risked his family and perhaps borne financial loss in order to build up the business.We must also remember that if that man goes out of business he is not entitled to any unemployment benefit and he cannot even opt to pay a higher rate of insurance in order to do so. Could anybody blame that poor fellow if he were to throw all the bumf in the waste paper basket and tell his new employee that he is sorry but there is no way that he can be an unpaid civil servant and run a business.
I do not exaggerate the strain that such intolerable administrative burdens place on the small employer. I have an extract from a Scottish newspaper of 11 September 1980. That quotes 16 small business men as saying that their businesses are up for sale because of Government red tape. The small employer has enough to battle with in this time of recession without having to take on the machinery of bureaucracy, especially when it appears that the machinery is geared against him. Therefore, I ask the Minister to take steps to simplify the procedure, not only by removing some of the major disincentives but by offering some positive incentives. The EC's suggestion 213 that an allowance might be given towards the cost incurred by small and medium sized firms in complying with tax and other regulations is one possibility.
The subject of the private employer is a hobby horse of mine. I take as an example a highly qualified young lady who has benefited from a university training for one of the professions. She may work a year or two and then meet the man of her choice and get married. Before long she will start a family. Now she may not have any bent towards or interest in housework and looking after children. She wants to follow her profession and would like to have someone to look after the house and the children—there are plenty of people with such skills and inclination—but she is not allowed to do that because she cannot set the wages of such a person off against taxation.
Perhaps she is married to a thrusting young executive and lives in a surburban house with a large garden. Perhaps they will have benefited from the mortgage advantages announced in the Budget today. Perhaps neither her husband nor she has the time or inclination to look after the garden but wants to see it looking well and thus keep up the tone of the neighbourhood. Therefore, they would like to employ a gardener. There may be an unemployed man down the road who would love to be a gardener but they are unable to employ him for the simple reason that they cannot set off his wages against taxation.
Therefore, that young couple will pay the housekeeper and the gardener in cash. There will be no record and thereby thrives the black economy. I am led to believe that the black economy is estimated to be 5 per cent. of the GNP. Not only can they not employ a gardener and set off his wages against taxation, but a factory down the road with large grounds which employs five gardeners to cut the grass about three times every week can do so with the blessing of the Inland Revenue.
Surely at this time of high unemployment we should allow all wages paid to be tax deductible. I am certain that thousands of jobs could be created overnight if we took that relatively simple step. Surely we have departed from the "Upstairs, Downstairs" mentality when it was thought to be demeaning to work for a private employer. The Government have done much to return this country to sanity. I hope that what I suggest will be the next step.
§ The Financial Secretary to the Treasury (Mr. Nicholas Ridley)
I congratulate my hon. Friend the Member for Banff (Mr. Myles) on his good fortune in getting the Adjournment debate. It was even more fortuitous that he got it on Budget night. He raised most important issues, to which I shall refer. I thank him for what he said about the Budget. We shall return to those matters in the rest of the week. I am grateful for his welcome for the proposals of my right hon. and learned Friend the Chancellor of the Exchequer.
There is no difference between my hon. Friend and the Government on the importance of small employers and people starting up on their own, beginning to take on employees and, from there, going ahead to expand. That is absolutely essential to the Government's strategy. I think that my hon. Friend will agree that over the years we have done an enormous amount to make that easier for people who have the enterprise and skill to set up on their own.
My hon. Friend may know that I was the Minister responsible for small businesses in 1971 when the Bolton 214 report was first published. We stripped away the impediments and difficulties that Mr. Bolton saw at the time, yet now, 12 years later, it is incredible how many more difficulties have been found and stripped away and how it is a continuing operation to improve the position of small business men. One never seems to reach a position where all is satisfactory.
So true is that that in some ways we have in the Budget anticipated my hon. Friend's speech. My right hon. and learned Friend announced the extension of the loan guarantee scheme, the increase of the registration ceiling for VAT to £18,000 and, perhaps even more important, the business expansion scheme, which my hon. Friend will find to be the greatest help to small businesses, particularly those that want to expand, and which assistance is unique in the Western world to those who want to get equity to expand their businesses.
In some ways my hon. Friend has anticipated my speech tomorrow because if I have the good fortune to catch Mr. Speaker's eye, Mr. Deputy Speaker, I shall conclude the debate on the Budget measures. I wanted to say a little about annual accounting for VAT, which my hon. Friend and many others have said is suitable for simplifying the life of small business men. We have also looked carefully at annual accounting for pay as you earn, which I should dearly like, but the cost in terms of revenue delay and the complications of doing so are such that it is not immediately possible for us to contemplate doing it.
What I have been able to distil out of that study is the possibility of encouraging employers to pay their employees net of tax. If my hon. Friend will bear with me I shall expand on that subject tomorrow. That is a useful way forward for small employers who find life too complicated.
My hon. Friend also raised a number of matters which impinge on the complications of taking on employees. I am sure that my hon. Friend will accept that some of those matters are not for me—for example, the statutory sick pay scheme, census information and the activities of wages councils—but he will also accept that my right hon. and hon. Friends who deal with those matters are active in trying to find ways of simplifying and improving the situation.
We have made continued progress in reducing the number of forms and returns with which small businesses have to deal. It is only fair to pay tribute to the Inland Revenue in that context. The Inland Revenue has greatly reduced the amount of paperwork and the complication of the paperwork with which the small business man is asked to deal. PAYE and national insurance contributions have given cause for a great deal of thought in the Treasury. I have spent a great deal of my time trying to find ways of simplifying the system. At the heart of the system—this is what we must try to preserve—is the fact that PAYE raises about £45 billion revenue and covers 1 million employers throughout the country. It is an extremely efficient method of raising tax. Indeed, it is the envy of the world because it is so simple to administer and costs so little to raise the money. But my hon. Friend was absolutely right to say that it depends on employers to administer it. On so many aspects of PAYE, the onus is on the employer to get the sums right and to pay up the money. I absolutely accept that an argument can be made for the Government to reimburse or assist with compliance costs. This matter will come before the House when we consider the report on the powers of the Revenue 215 departments, which is soon to be published. If concessions are made to cover employers' costs in administering the tax system, tax must be increased elsewhere in order to recoup that money. It is a vicious circle.
The burden is greatest for the smallest employers. They cannot always afford computers and modern office machinery, although those are becoming cheaper. In most parts of the country accountants can now be found to do payrolling at a modest cost to employers. The accountants will set up the system, will check it at the end of the year and, if necessary, will administer the monthly figures that have to be returned. As I will explain if I catch Mr. Speaker's eye tomorrow, the employment of net-of-pay techniques can be helpful in this respect.
We have been simplifying the income tax system. The first simplification was to take child allowances out of codings and to substitute child benefit. More recently, life assurance premiums have been taken out of codings and on 4 April mortgage interest relief will be taken out of codings. Those two will then both be reimbursed at source. Gradually and step by step, the coding of income tax is becoming ever more simple. Indeed, for those in work it is a question only of whether they are married or single or are earning wives. In due course, if we succeed in solving the riddles involved in the Green Paper on the taxation of husbands and wives, which is before the House, it may be possible to simplify even further. That basic simplification of the coding system and of income tax allowances has been part of the Government's strategy to make the system simpler. We hope to proceed further with that to make it easier for people to administer. That is one side. The other side is the extent to which they comprehend what is required of them. My hon. Friend is quite right in saying that many small businesses find it almost impossible to understand what is required.
I have asked the Inland Revenue to produce a new leaflet. My hon. Friend may say that there are too many leaflets already, but I think that a new leaflet, designed specifically for the first-time employer and setting out the details very clearly, will be an asset. I have a first draft of this and perhaps my hon. Friend would like to see it. When we have a completed draft we shall let him have a copy of it because I should welcome his comments and those of the small businesses with which he has discussed this issue to make sure that we get it as intelligible and simple as possible.
In addition, there is a general review of stationery and forms—we would welcome his comments on that too—to ensure that anybody who wants to devote the majority of his time to running his business properly can in a few minutes understand what is required of him in terms of calculating PAYE and national insurance contributions.
My hon. Friend mentioned that some of his small business constituents had not had the courtesy of a letter from the Inland Revenue. I am sorry about that. He also said that there had been some delay in replying to correspondence. If he would let me have particulars of any discourtesy or delay on the part of tax inspectors I should be only too pleased to follow the matters up. I want to make it clear that in the vast majority of cases the Inland Revenue serves taxpayers extremely well. The Inland Revenue is as sensitive as I am to the need to make that service universally acceptable, and the only way that we 216 can do that is by seeing that specific instances of slipshod or discourteous behaviour or delay are brought to my attention so that I can have them investigated.
The problem of the simplification of the PAYE and national insurance contribution systems can be solved only in the context of further and more deep-seated reforms of those systems. We are constantly pushing to simplify, to explain and to make things easier. I think that my hon. Friend would be reassured to know that the Government are not content with that. We are constantly looking at ways of making the burden on the small firms easier to stand and the regulations easier to comply with.
The level of that burden, of course, is a different matter. It depends on how much revenue my right hon. and learned Friend the Chancellor of the Exchequer has to raise, but I should not like my hon. Friend to think that what he has said falls on deaf ears. The Government are acutely sensitive to the need to solve the problems that he has put before the House this evening.
My hon. Friend asked whether certain expenses could be deducted from corporation tax for small businesses just setting up. He instanced the worthy technological woman who marries and has a family and then wants to get back to her calling and to have somebody to look after the children. This is perhaps the most deserving case in the spectrum that this problem throws out. We must start with the law. The law says that the expenses of a business are allowable against practical profits only if they are incurred for the purpose of earning the profits of the business. Those words have been tested over many decades, and they do not include expenses of the sort that my hon. Friend has in mind.
Expenses such as domestic help so that one can go out to work, or assistance with child care so that the wife can leave the children and go out to work, come into the category of putting one in a position of being able to carry on a business. That is quite different from expenses incurred for the purposes of earning a profit. For instance, the cost of travelling from home to work is necessary to put one into the position of being able to carry on a business. One might say that having to wear clothes is an expense incurred in going to work, but it is an expense necessary to carry on a business rather than for the purpose of earning profits. The same is true of minding the garden.
My hon. Friend must appreciate how difficult it would be to draw a line. If the basic distinction between the two definitions that I have given were altered, the line would have to be drawn in a new place. I could claim that to go to work I have to travel, that I must have a house from which to travel and somebody to mind my garden and my children. I might even claim that it is necessary for me to have food and clothing to be in a position to go to work. That comes close to including all expenses of the good life. Clearly, one cannot exempt all those expenses from tax.
Where would the limit be? My hon. Friend argues from the case of the deserving young wife in a small business and he makes a compelling argument. One might argue, however, that for those who are self-employed or who employ fewer than 10 people all those expenses should be tax deductible. Or should it be based on the type of work that they perform? Either system creates great difficulties. It may be argued that if one is at work all day it is necessary to employ a butler to uncork one's claret. Is that to be allowable against tax? Such a system comes close to being a butler's charter and my hon. Friend touched on the historical difficulties involved in that type of rule.
217 We are not doctrinaire or dogmatic about this. We breached the rule about business expenses in the Finance Act 1982, which allowed companies to second members of staff on full pay to enterprise agencies and for this still to count against corporation tax. My right hon. and learned Friend the Chancellor announced today that the same concession would apply to staff seconded by tax-paying companies to work for charities. I think that my hon. Friend would agree, however, that the House as a whole would find both those cases acceptable. I am not sure that it would find the employment of child minders, gardeners or, at the extreme, more fanciful characters so acceptable.
My argument is therefore not based on a doctrinaire objection. It is simply very hard to see where the line could be drawn and held. I suspect that wherever my hon. Friend suggests it should be drawn the cost might become very heavy.
For those reasons, we have not felt able to take the step that my hon. Friend advocates. The concept of the personal allowance is designed to take into account, broadly speaking, the domestic and family responsibilities of taxpayers. There are three categories of personal allowance—the married man's allowance, the wife's earned income allowance and the working single parent's allowance. They are supposed, each in its rather rough 218 justice fashion, to compensate people for the expense of not staying at home and minding the children or looking after the spouse or the garden but going to work instead. That is the origin of the personal allowance. I do not claim that personal allowances fit every circumstance—far from it—but that is how the tax system, as we have it, seeks to take care of the sort of problem that my hon. Friend has raised.
Before my hon. Friend can force the logic of his argument upon the Government, he must deal with the problems of definition and of helping the people that he and I might want to help without helping many people that both he and I would agree were not deserving of the help of the taxpayer because of what they seek to do.
I repeat that I am grateful to my hon. Friend for bringing these matters to the attention of the House. I hope that I have shown the deep thought and consideration that we have given to them already. I hope that he will continue to give us the benefit of this views, despite the fact that, although I can go with him almost the whole way on the first half of what he said, I find difficulties about accepting the second half of his argument.
Question put and agreed to.
Adjourned accordingly at four minutes to Ten o'clock.