HC Deb 25 January 1985 vol 71 cc1307-14

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Archie Hamilton.]

2.30 pm
Mr. Christopher Chope (Southampton, Itchen)

The House has spent much of the day discussing the grave public nuisance caused by one part of the black economy —the one with scarlet edges. I am pleased to have the opportunity to draw attention to another part of it which is far more extensive and has a much wider impact on the public—the black economy in the building trade.

The Keith committee report on enforcement powers of the revenue departments, which was published in 1983, defines the black economy as all activities which are concealed from the revenue collecting authorities with the specific intention of avoiding tax. The size of the black economy in the United Kingdom is impossible to estimate precisely. Sir Lawrence Airey has estimated that it is between 6 and 8 per cent. of gross domestic product. If it was 7 per cent. of last year's gross domestic product of £305.7 billion, it would have been worth more than £21 billion. The tax loss on that sum could have been as high as £6 billion. Those large figures show that the public think that the taxes they are expected to pay are far too high. The size of the black economy is strong evidence of the need to reduce the overall level of taxation.

What proportion of the black economy is in the building industry? The Federation of Master Builders estimates that it is 20 per cent., or £1 billion a year in lost taxes. That estimate is regarded as low by the Building Employers Confederation, and as very low by the National Home Improvement Council. The debate is therefore about what is being done, or can be done, to bring that lost revenue into the Treasury, so enabling tax cuts to be made all round.

The black economy in the building trade is a problem because of lost revenue, which means that everyone else must pay more, and because consumers, normally private householders, suffer greatly from delayed or shoddy workmanship for which they can often gain no redress. It is inevitable that only a small proportion of dissatisfied customers complain to the Office of Fair Trading. However, more than 24,000 complained in 1981, more than 28,000 complained in 1982, more than 36,000 complained in 1983 and 23,015 complained in the first six months of 1984. Those are the figures for consumer complaints about construction, double glazing and house insulation work and are published in the Official Report of 21 November 1984, at column 186.

Such a high level of consumer dissatisfaction brings the building industry into disrepute. The public are largely ignorant of the risks involved in the lack of redress when cowboy builders are involved. They do not think about the implications of the builder having no insurance and do not understand the complexities of value added tax. They regard "No VAT" in a builder's advertisement as an attractive inducement, rather than as a warning of pitfalls.

Examples of the gullibility of the public abound. Yesterday's Daily Telegraph reported a case at Oxford Crown court, in which a 64-year-old woman paid £11,350 —almost her life's savings—to a contractor who spent two days relaying a drive, tidying paths, lopping trees and demolishing two sheds. She then had to pay a further £739 to have the shoddy work put right. It was estimated that if the work had been done by a respectable builder in the first place the bill would not have been even as high as the £739 that she had to pay to have the work put right.

The black economy in the building trade is bad for the general body of taxpayers, for consumers and for those who work in the industry. The unfair competition from those who are not registered for VAT puts pressure on legitimate building employers to reduce their overheads by employing more self-employed labour and by cutting training.

I understand that the Department of Employment has evidence that that self-employment in the building industry has increased by 13 per cent. during the past two years. I recognise and applaud the fact that many people want to assume the risks and responsibilities of being their own boss and being self-employed. However, there are many skilled and unskilled building workers who would prefer the security of being employees, so that they can be eligible for sick pay and unemployment benefit in the event of losing their employment.

It is always easier for politicians to state a problem than it is to provide a remedy, but a remedy must be found. I look forward to hearing from my hon. Friend the Minister of State, Treasury of the Government's efforts to combat the escalation of black economy activity in the building trade. I would particularly welcome his observations on two suggestions.

My first suggestion is that the Government should eliminate the areas in which the Treasury not only loses income in the black economy, but actually helps to fund it. Home improvements are big business. The report of the Building Material Producers forecasting panel of November 1984 estimated that repair, maintenance and improvement work represented about 40 per cent. of total output in the construction industry, compared with only 25 per cent. in 1970.

Much of that business expansion is funded by taxpayers and ratepayers through grants or subsidised by tax relief on loans. The Government should insist that taxpayers' subsidy should go only to those who have their repair, maintenance and improvement work carried out by VAT-registered builders, and preferably by builders who participate in the welcome new initiative of the Building Employers Confederation, that is, its guarantee scheme. For a small additional premium—about 1 per cent. of building costs—a person who is having building work carried out has a guarantee against the builder going bust or the work proving to be defective within a specified period.

At present, some local authorities are paying grant money on estimates rather than on receipts. That seems incredible when we say that the public sector must get good value for money. Even more local authorities are paying grant money which will end up in the pockets of evaders.

My second suggestion is that the Government should recognise the reality that registration for VAT is a major disadvantage to a jobbing builder in quoting for small private work. As a result, small builders do not register, although the law requires registration where annual turnover reaches £18,700. The Government must recognise that it is virtually impossible to conduct a legitimate business in the building industry with a turnover of less than £18,700 a year. Yet, by having a threshold, evasion is encouraged and proof of evasion is hampered.

It would be much simpler to have the VAT threshold reduced to zero. Then any jobbing builder who is not registered can be prosecuted solely on proof of working as the sole proprietor for reward.

The extent of VAT evasion is breathtaking. A recent survey of classified newspaper advertisements for building services from newspapers throughout the country showed that between 70 per cent. and 75 per cent. of those advertising building services were unregistered for VAT. Many newspapers carried blatant display advertisements boasting, "No VAT." The position is farcical.

The Customs and Excise must mount a major investigation to prove turnover in excess of £18,700 to obtain a conviction. Its job would be much easier if the threshold were nil. Belgium and Italy have nil limits on registration for VAT, and in most other European countries the registration threshold is much lower than that in Britain.

Some people have lobbied for a higher VAT threshold and argue that lowering the threshold would simply increase administrative costs, but a nil VAT threshold for all those undertaking building work for reward is the only way to ensure that we deal with this aspect of the black economy.

In his foreword to the White Paper on the calculation of VAT, my right hon. Friend the Chancellor of the Exchequer said: Traders who conscientiously comply with their legal obligations must not be put at a disadvantage compared with their competitors who do not. At present, traders who conscientiously comply with their legal obligations are put at a disadvantage. On the basis of what my right hon. Friend said, I hope that when he decides his Budget he will think seriously about the strong case for reducing the VAT threshold to nil. The threshold need not be reduced for areas other than the building industry, if there are strong arguments against that. I limit my submissions to the building industry.

The Government must take the matter more seriously. If the estimate of Kent Matthews of Liverpool university, writing in Economic Affairs in July 1983, is anywhere near correct, about one third of those included in unemployment statistics are actively involved in the black economy. If benefit fraud is added to the loss of tax and VAT, the financial implications are even more serious. I hope that my hon. Friend will be able to assure the House that the Chancellor will seek to eliminate the inducements to tax evasion that undoubtedly exist in the building trade.

2.42 pm
The Minister of State, Treasury (Mr. Barney Hayhoe)

I congratulate my hon. Friend the Member for Southampton, Itchen (Mr. Chope) on raising this important matter. He property concentrated upon the tax aspects of it, although he said something about the consumer aspects. He will understand that his comments about standards should be addressed to my right hon. and hon. Friends at the Department of the Environment, and I shall ensure that their attention is drawn to his remarks. If appropriate, I am sure that they will be in direct contact with him.

I shall concentrate on tax, and I endorse warmly my hon. Friend's proper criticism of cowboy operators in the black economy who evade their lawful tax obligations. There can be no justification for such actions, and the Revenue Departments deserve our full support in taking action against those involved. My hon. Friend referred to VAT. It is important to keep in sight the dual nature of the problem, which involves income tax as well as VAT. By definition, it is impossible to quantify precisely the extent of the black economy, although my hon. Friend mentioned some estimates.

Because of the different tax thresholds, it is worth stressing the fact that the problem bites first on the income tax side. An odd-jobber must have a turnover of more than £18,700 a year—about £350 a week — before VAT becomes chargeable. On the income tax side, on the other hand, personal thresholds start at just under £40 a week for single and at just over £60 a week for married people.

With VAT there is also an inbuilt incentive to register in that only then can input tax—all the VAT that the builder pays for his equipment and supplies — be refunded. It is, therefore, in his interest to register.

As my hon. Friend concentrated on the VAT aspect, I shall deal with that. There are two main ways in which VAT is evaded. The black economy, cowboys, moonlighters and similar phrases are used rather loosely when speaking of these matters, but basically there are two categories of evasion of VAT liability.

The first is when work is done for cash and suppressed by VAT-registered businesses. VAT is lost on the total price of the job unless the purchase of the VAT-paid materials used is also suppressed. That is where businesses are properly registered but do cash transactions.

Secondly, VAT is lost when work is done by people unregistered for VAT but whose turnover is such that they should be registered, and my hon. Friend referred to that category. VAT is lost on the labour element of the job but not normally on the materials, which are bought VAT-paid unless the builder's merchant is also in on the racket and is selling materials for cash without keeping records.

There is a third category of people who do not pay VAT and who take advantage of the registration limit of £18,700, but they do that legitimately. From the VAT point of view, that group includes not only many part-timers or moonlighters who trade in their spare time or when temporarily unemployed, but small-time traders and craftsmen who can make a reasonable living without going over the limit, possibly aided by the device of getting the customer to buy the materials for the job, thus keeping low the turnover of a one-man business.

Some in that category may be evading income tax and national insurance, and I have mentioned that problem. I assure my hon. Friend that the Inland Revenue is doing all it can to pursue that type of tax evasion in the black economy by the cowboys and moonlighters. However, they are not evading VAT if their turnover is genuinely below the £18,700 limit.

It is sometimes argued that unregistered traders with a small turnover are competing with VAT-registered traders. That is not peculiar to the construction industry. The logic of the argument is that the registration limit is too high, or at least too high for the services trades, and I shall return to that shortly.

The existence of that category of people trading below the VAT threshold makes it more difficult for the Customs and Excise to get evidence against unregistered people who should be registered. When challenged by the Customs and Excise, they can say, "My turnover is nothing like £18,700", and if the bulk of their trading is for cash and there are no records available for the Customs and Excise to prove the suspected illegality, that leads to difficulties, and extended investigation might be required to establish that fraud is taking place.

My hon. Friend suggested ways in which Government action could help reduce the amount of fraud and evasion. He suggested, for example, that the whole of the improvement repair grants operation should be confined to VAT-registered building contractors. However, this is primarily a question for Department of the Environment Ministers.

It would be difficult to insist that all home improvement and repair grants had to go to VAT registered dealers, as I am sure it would lead to the charge that we were discriminating against the small man, perhaps just setting up in business on his own, and quite properly not yet liable to VAT registration. I know from what my hon. Friend said about the importance of small businesses that he would be loth to incur such a charge.

One has also to bear in mind the needs of the do-it-yourself householder, who might be able to do the bulk of the work himself with the assistance of one or two skilled craftsmen who might or might not be registered. I understand that the Department of the Environment will be issuing a consultation document on home improvements policy soon. If I have been reading my papers correctly, there was some reference to this in the White Paper on public expenditure that came out this week.

Mr. Chope

Will my hon. Friend accept that it is open to anybody who is trading as a sole proprietor to register for VAT? If it is thought that that might be unfair on some traders who do not yet have the £18,700 turnover, they could still register for VAT, as they do in my profession. Every barrister registers for VAT, even when he is obviously earning a lot less than that.

Mr. Hayhoe

Such registration causes a lot of extra work for the Customs and Excise, because registration for VAT is being seen as a badge of importance. If one is not registered for VAT, people assume that one's turnover cannot be £18,700. In the legal profession people are presumably concerned with that appearance, as they are in other professions. There are problems in insisting, as my hon. Friend has suggested, that the improvement and repairs grants system should work only through VAT registered traders, but this is a matter for the Department of the Environment Ministers, and I shall draw my hon. Friend's comments to their attention.

The main effort of the Customs and Excise is directed at controlling and investigating suppression by VAT registered traders—that is the cash payments that are not in the records and lead to evasion of tax liability. In the building and construction industries, the abolition of the pre-1984 liability borderline between standard-rated repairs and zero-rated alterations allows the Customs and Excise to concentrate on the main task of seeking out suppression. The old borderline provided rather an easy method of evasion, in that if repair work was misdescribed as being alterations the work changed over from being standard rated to zero rated and a fraud took place. Undoubtedly, some people exploited those opportunities for evasion, which have been removed by the changes that my right hon. Friend the Chancellor of the Exchequer made in the last Budget.

Enforcement of the £18,700 registration requirement is rather more difficult. It is time-consuming to get adequate evidence of failure to register, and the amount of tax, even if arrears can be recovered, is relatively small. Controlled visits to registered premises are much more cost effective in bringing in under-declarations and arrears of tax—that is the experience of the Customs and Excise. Nevertheless, it is co-operating in a study in selected locations with the Building Employers Confederation designed to establish the size of the problem and the number of people who are unregistered but are offering their building services to the public.

The Customs and Excise will then do an in-depth study into one of those areas to try to establish the proportion that is unlawfully trading above the registration limit. When this research has been completed, we shall have a clearer picture of whether more resources should be devoted to policing the registration limit or whether other solutions might be considered. As my hon. Friend knows, as part of its 1985 Budget submission, the BEC is asking for a reduced rate of VAT to about 5 per cent. on all work —alterations, improvements and repairs to existing buildings. It also wants a nil registration limit for the building trade. The object is to ensure that all people supplying building services are liable to register and account for VAT.

My hon. Friend knows that I cannot be drawn on the question of a reduced rate in this period before the Budget. I am in pre-Budget purdah and anything that I say, or anything that I do not say, cannot be taken to mean that the Chancellor will do anything, or not do anything, in his Budget later in the year. I intend to give no indications and no inference should be drawn from what I say.

The introduction of a second positive rate of VAT for construction alone would probably involve a revenue cost and certainly an administrative cost. Both would have to be taken into account when coming to a decision.

A nil registration limit for the construction industry would be a draconian measure with a vengeance. It would catch every odd job man who supplemented his earnings by occasional evening or weekend work. It would have to be enforced. If such people were successfully registered they would have to be controlled and their VAT returns and remittances would have to be investigated. The flurry of correspondence to hon. Members complaining about the bureaucracy, rules and form-filling would be alarming.

As my hon. Friend acknowledged, most of the representations received by the Treasury are in the reverse direction. We are asked for a substantial increase in the registration limit. At Question Time yesterday I was pressed to increase the limit and I had to make it clear that to do that would lead us into conflict with European Community law and was not possible. I accept that there is a balance. Some people would be disadvantaged by such an increase, and others would be advantaged.

We shall keep an open mind about changing the registration requirements for the building industry along the lines that my hon. Friend suggests. I do not want to arouse either fears or expectations that changes will be made. We should await the studies to which I referred earlier.

The extra resources which the Inland Revenue is devoting to detecting moonlighters and cowboys might not only provide Customs officers with evidence of people trading above the present threshold, but might provide valuable information on the scale of trading at various levels below the threshold. That should help us to decide whether a special VAT registration limit for the construction industry is justified. I stress that departure from a uniform limit would result in a more complicated system for the Customs and Excise to administer and for traders to understand.

The Federation of Master Builders made a suggestion which would have allowed householders paying VAT on the upkeep of their property to claim relief from VAT on their bills against their income tax liability. This would have been a kind of schedule A relief, without a corresponding schedule A charge. The Federation of Master Builders saw this as a scheme to remove the incentive for householders to use unregistered cowboys who were not charging VAT, but, alas, I see little or no merit in practice in a scheme like this. It would cost a great deal of revenue. It would also introduce another special and administratively costly relief into the income tax structure, whereas our policy is to simplify the system.

Like any law enforcement agency, the Customs and Excise needs reliable information about the people who are evading their VAT responsibilities. There is plenty of anecdotal evidence about the scale of the black economy, but the Customs and Excise needs more hard facts about transactions where VAT is evaded. I hope that those who hear of this debate will do what they can, if they are involved in any way, to ensure that the information is provided so that the Customs and Excise can take action and the community as a whole can deal with those people — the cowboys in the black economy — who are unlawfully evading their tax liabilities.

Question put and agreed to.

Adjourned accordingly at Three o'clock.