HC Deb 09 July 1985 vol 82 cc999-1008

Services supplied or transactions carried out by a trader shall be treated as taking place at whichever is the earliest of the following times:

  1. (a) when the payment in respect of those services or transactions is received in the trader,
  2. (b) when the trader issues a tax invoice in respect of them, or
  3. (c) the day when the trader ceases to trade.'. — [Mr. Campbell-Savours.]

Brought up, and read the First time.

Mr. Campbell-Savours

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

I propose this measure on behalf of hundreds of thousands of business men who, if they knew what I am about to reveal, would be most concerned about the legislation penalising their position.

I must express my indebtedness to my hon. Friend the Member of Sedgefield (Mr. Blair) whose revelations during the Committee debate in the Finance Bill interested my colleagues to such an extent that we were able to identify a special tax concession which has been provided to barristers and which was passed in 1981 without parliamentary debate. None of us knew anything about the concession until my hon. Friend brought it to our attention. His sense of objectivity outweighed his commitment to the Bar, and that must be the mark of a truly great parliamentarian.

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I must tell the House that the new clause is defective. It follows exactly the wording of the concession that was given to barristers under the VAT (General Regulations) 1980, of which section 20 states: Services supplied by a barrister, or, in Scotland, by an advocate, acting in that capacity, shall be treated as taking place at whichever is the earliest of the following times:—

  1. (a) when the fee in respect of those services is received by the barrister or advocate;
  2. (b) when the barrister or advocate issues a tax invoice in respect of them; or
  3. (c) the day when the barrister or advocate ceases to practise as such."
That provision enables barristers to enjoy the concession.

We are examining a privilege. We have privileges in education, housing and employment and here we have a privilege in taxation. That privilege provides that a barrister does not have to pay VAT to Customs and Excise until he has claimed in turn from his own client. That is a special concession. All other traders are required to pay VAT to Customs and Excise within a maximum of three months after they invoice their clients. Barristers are in a special position. In justifying the concession, Customs and Excise states: Unlike other 'tradesmen', barristers do not have the option of taking clients to court in order to recover unpaid fees. Although it might be said that the practical disadvantage of not being allowed to sue compared with the privilege of being allowed to sue someone who has not paid a debt—presumably because there is no money with which the debt can be paid—my be slight". That is how Customs and Excise justifies the concession.

The hon. Member for Corby (Mr. Powell) was far more interesting in his intervention in the debate that took place in Committee on this issue. He gave us the real reason. He did so when it was necessary for someone to come to the aid of the Chief Secretary to the Treasury to explain to the Committee what the concession was all about. The right hon. and learned Gentleman did not know the reason at that moment for its introduction. The hon. Gentleman said: The special concession negotiated by the Bar when VAT was introduced in 1972 or 1973 arose because a portion—about 40 per cent. — of practising barristers relied almost entirely on legal aid fees for their income. Unlike other fees which other members of the Bar may receive, legal aid fees are not negotiated in advance. They are all determined by taxing officers of the courts in arrears. Therefore, when the work is done, the fee is unknown and may be unknown for a long time. However, a difficulty arose in that in order to secure taxation of a legal aid fee, barristers' clerks had to submit an invoice to taxing officers of the courts which would essentially be a negotiating ploy. In my experience, not once has a fee which my clerk has asked for been accepted by the taxing officers of the courts …

That means the invoices did not necessarily relate to the fee that was subsequently paid. Of course, if the invoice issued became the basis for VAT, it would be paid not on the basis of the fee subsequently taxed and paid, but on the fee on the invoice that was essentially a negotiating point. I believe that it was to get round this difficulty that the commissioners of Customs and Excise made a special concession to the Bar." I think he said — this will interest the hon. Member for Croydon, South (Sir W. Clark), who takes a great interest in these matters— that this is a unique concession." [Official Report, Standing Committee B; 23 May 1985, c. 238.] The hon. Member for Corby said that to send the invoice is a negotiating ploy. He then implied that there is no connection between the submitted invoice and the settlement. If so, let the order be modified to provide for an adjustment, thereby securing early payment in line with the practice for other traders. The Minister, whose letter on that very point I received this morning, said: It would in theory be possible for a barrister to account for tax on a provisional estimated basis and make any adjustment in subsequent tax periods but this would be an undesirable adminstrative complication both for him and Customs and Excise. How convenient an answer that is.

This is a very Socialist new clause. It extends this privilege to everybody.

In another new clause which unfortunately was not selected, although I can refer to its contents because it relates directly to the new clause that was selected, I identified over 100 groups of people who would benefit if this new clause were to be accepted. They are glassblowers, travel agents, accountants, jugglers, musicians, conjurers, impresarios, income tax advisers, composers, knife and scissor sharpeners, thatchers, tea blenders, peat cutters, bagpipe makers, turf cutters, holiday flatlet operators, hoteliers, estate agents, architects, sculptors, experimenters on embryos, paper-makers, marble converters, printers, metal bashers, wood carvers, goldsmiths, silversmiths, potters, masseurs, stonemasons, painters and decorators, enamellers, dressmakers, clothes designers, lithograph artists, fly tiers, acrobats, illustrators, farmers, smelters, picture restorers, fencers, metal polishers, soldiers, buskers, cobblers, remunerated after dinner speakers, shepherds and goatherds, odd-job men, weavers, spinners, steel stock holders, hand glove makers, shirt makers, carders and cads, clockmakers, value added tax advisers, marine pilots, plumbers, electricians, undertakers, furniture restorers, joiners, bricklayers, plasterers, butchers, bakers, candlestick makers, professional mechanics, welders, wheelwrights, scrap metal merchants, ships' chandlers, turners, millers, glaziers, hauliers, gardeners, agriculturalists, tattooists, refuse disposal traders, deep sea fishermen—that will appeal to my hon. Friend the Member for Great Grimsby (Mr. Mitchell) — inshore fishermen, French polishers, upholsterers, totters, freelance journalists, scaffolders, boat builders, professional athletes, carpet layers, roofers, tailors, sausage makers, strippers, horse traders, horse trainers, surveyors, quantity surveyors, photographers, bailiffs, fish smokers, cheesemakers and organ grinders. All of these groups would benefit, as would many other groups. This is a very charitable and Socialist new clause because it extends a substantial privilege enjoyed by barristers to many groups of people, many of whom live in my constituency.

Other organisations have an interest in this new clause. They do not accept that it would meet their objectives, but they recognise that although it is defective the Minister of State, Treasury could table his own substitute new clause tomorrow morning, as the Finance Bill is to be debated again later that day.

The Institute of Chartered Accountants is concerned about the cash flow problems of small businesses, which must pay VAT to the authorities prior to its collection. That body said in a submission to Lord Young in response to a Government document entitled, "Burdens on Business": VAT is a major cash flow item in small business. The current system of VAT outputs, being based on the date of supply, can adversely affect a business which gives credit. In certain cases, the supply of a service or goods will have taken place, but no money received, before the VAT on that service must he forwarded to Customs and Excise. Such payments are often funded by a bank overdraft at considerable cost to the business. We would urge that consideration be given to a method where small businesses might elect to put VAT on a cash received/cash paid basis. Small businesses could account on a cash book system and would thus be saved the burden of keeping additional records for VAT purposes. We acknowledge that this may be one area where to realise the benefits, an element of positive discrimination towards the small business would be involved. That, I am told, is what Government policy is all about. In a debate a week or so ago the Government talked about the need to discriminate positively in favour of small business wherever possible. This is their opportunity to do that. The institute added: A monthly payment plan for VAT would need to avoid the additional complexity of monthly returns and would be unattractive if it had an adverse effect on cash flow. While there may be ways of deferring payment, we see some difficulty in including the suggestion as part of a package designed to improve the lot of small businesses. Again, the institute expressed reservations about the way in which VAT operates under present arrangements.

I accept that my new clause has a defect. That is because it has been transposed from the original 1980 regulations. That has been done to show the many small business organisations that one group of people have a concession. I do not object to that, because I regard it as a reasonable concession for them to have. Indeed, on a free vote, many hon. Members would probably vote for that concession to be extended in the way I have suggested. I do not know how much that would cost. But if the Government reject the new clause on the basis of cost, they must consider the effect that implementing it would have on the cash flow of many small businesses. They, too, need the money.

Mr. Austin Mitchell

My hon. Friend the Member for Workington (Mr. Campbell-Savours) described the origin of the new clause. It arose in Committee upstairs, where it emerged that barristers were not subject to the same requirement as small business in the case of bad debts. Where a business man is not paid, he must still pay the VAT on what he would have been paid. That does not apply to barristers.

Understandably, that caused a certain embarrassment in Committee because, after all, we have in office a Government of barristers, for barristers, by barristers. I am not sure how many barristers there are in the Cabinet turning their knowledge of the law to applied economics, but some embarrassment was caused for the Government because it is clearly wrong to have one law for barristers and one for small business men, the latter having the much more stringent requirement to pay VAT on other people's bad debts. If it is good for small businessmen to pay it, barristers should pay it too. They should be subject to exactly the same requirements, rules and regulations.

There should not be what amounts to a secret distinction. I hope that the Minister, in winding up this dynamic and hard-fought debate, will tell us about the origins of this concession and what happened before the 1980 regulations. Is it a long-standing concession to barristers? Our impression is that it is of much longer standing than the 1980 regulations. Can the Minister say why it was brought in? It emerged entirely by accident. It has not been publicised. It looks like a secret concession which has been kept from small businessmen who have been complaining for years about the iniquity of having to pay VAT on bad debts. The argument is that this concession should either be abolished or extended to everybody. There cannot be a fairer principle than that. There is no reason why one section of society should be singled out in this fashion.

The concession in the 1980 regulations applies only to barristers. Our amendment seeks to apply it to everyone. That is the simplest and most straightforward principle. We asked in Committee for an explanation of what was being done, why it was being done, who it extended to and what was the basis of it. We quickly received art explanation from the House of Commons Library which provided the basis of our amendment. It is fair to say that the explanation promised from Treasury was very slow to reach us. It is dated 9 July 1985 and it reached my hon. Friend only today. It is obviously a last-minute attempt to catch up, which puts Opposition Members at a certain disadvantage in dealing with it. Being extremely well organised, with an enormous research staff, I have not yet received the letter. Doubtless they are falling over each other to bring it to me or clambering outside the Chamber with it. It is not right that we should receive it immediately before the debate when we have to put down amendments in advance. Had it not been for the diligent efforts of the House of Commons Library we would not have been able to do so. It is curious that the explanation should be so late, because it comes from the Chief Secretary who, as a barrister, one understands, is returning to practise that profession in the forthcoming reshuffle, must have a peculiar interest in these matters. It is a concession from which he might well benefit in his occupation to which, one discovers from reading the papers, he is about to return.

The explanation in the letter is simple. It states: The law covering the matter is Regulation 20 of the Value Added Tax (General) Regulations 1980 … In practice this allows barristers (and advocates in Scotland) to account for tax on their services when they receive payment of their fees since their is no requirement on them to render VAT invoices within a specified period of the completion of their services. This is a requirement that affects most other traders and which means that they do not get paid. Having put in the invoice they still have to pay VAT within the requisite period. The letter continues: This special VAT regime for barristers was justified on two main grounds. First, in a substantial proportion of their work, fees are not fixed in advance of or at completion of the service. It is an extraordinary situation. It is common to some other occupations like oriental bazaar keepers. As the letter states: … fees are not fixed in advance of or at completion of the service but are open to negotiation after the event. I imagine that is not correct, but this is the assertion. The letter continues: In particular in legal aid cases barristers' fees are neither determined nor paid before the matter has been considered by the Legal Aid Committee and a precise figure has been certified. The question arises, what proportion of barristers' fees are legal aid cases? The overall figure may be 40 per cent. but that can vary widely among barristers, particularly as they work in different fields. In some sectors—company law, for instance—it is almost certainly a minute proportion of the income of barristers. On the basis of a justification based on the income of a minority of barristers, the concession has been extended to all barristers, against the general run of the law for small business men.

The letter continues: Secondly, unlike the generality of other unregistered persons, barristers are not permitted to sue their clients for nonpayment of fees. That is a decision made by the barristers themselves. They can change that easily by a simple decision of the Bar Council, and could start suing those who do not pay their fees. It is ludicrous to make a voluntary castration and then complain. The decision is in the hands of the barristers. It is therefore wrong to make it the basis for a concession such as this.

The letter goes on: I think that on reflection you will agree that these two factors taken together"— they are different excuses for the same thing. They are not cumulative reasons but separate and distinct reasons— do put barristers in a special position. For them it is not so much insufficiency of funds being a reasonable excuse for inability to pay the tax when due—which was the matter under debate in Clause 32"— That is a side issue. We are talking about the iniquity of the requirement that VAT shall be paid on debts— but an inability to know precisely how much VAT is due because of the uncertainty about the actual level of the fee. It would in theory be possible for a barrister to account for tax on a provisions estimated basis and make any adjustment in subsequent tax periods". That is what we would like to see happen. However, the letter says: this would be an undesirable administrative complication both for him and Customs and Excise. In any event the receipt of payment tax point is not unique to barristers. We were told that this was unique to barristers but it now emerges that retailers effectively enjoy this privilege.

Mr. Campbell-Savours

The communication does not quite say that. It does not say that they enjoy the same facility under the same concession. It is that the effect may be the same, for other reasons.

Mr. Mitchell

I agree, but the letter says that retailers effectively enjoy the facility because they are paid cash on the point of purchase as do people supplying continuous services or services where stage payments are the norm … Some people also have the facility to account for tax on a cash received basis with no compulsion to issue a VAT invoice in advance of payment. That dodges the issue, which is the distinction between barristers and other small business men, who have to pay tax on debts that they will not be repaid. Even though the money has not been paid to them, and the companies to which they have supplied the goods have gone bust, and they cannot be paid, they have to pay the VAT on the money that they are not getting. It is an unfair system, and if there is any justification for it, it should be universal. There is no justification for excusing barristers.

Therefore, we need information from the Minister. If the inability of barristers to sue for debts is to be used as justification for this concession, can we know what in what proportion of cases barristers do not get paid for their services? What is the proportion of debts owing to barristers? What does their inability to sue for debts mean as a justification for this concession?

We need to know why the concession has been extended to barristers, and not to the other small business men. We are talking, in the case of barristers, about a sizeable business. The estimates of barristers' incomes vary widely—anything between £100,000 and £250,000 a year. I discount the claims of incomes of £1 million a year. A quarter of a million pounds a year is not uncommon. This puts them in a fairly sizeable lead in the business table. We are talking about much smaller businesses with much smaller income which are having to cripple themselves to pay VAT on debts they are not receiving. The real criterion should be, as we were debating in the Committee, inability to pay. A businessman should not have to pay VAT on a bill which is not paid.

Why should there be this distinction between barristers and others? Why not accept the principle of our amendment, which is simply to extend this concession to a unique and very privileged section of society to the whole of small business?

Mr. William Powell (Corby)

Unlike the hon. Member for Great Grimsby (Mr. Mitchell) I shall be brief. Little did I expect to hear the hon. Member for Workington (Mr. Campbell-Savours), who so admirably opened the debate, advocate an extension of VAT to, of all people, experimenters on embryos. Conservative Members had come to look upon the hon. Gentleman as a robust supporter of the right to life, and now to find him advocating this extension comes as a considerable shock to us.

The hon. Member was generous enough to read out the point of order which I made during our discussion in Committee and I was amazed by how lucid it sounds or how lucid he made it sound. There are few changes I want to make, except that, having said there was "no relationship" between the invoice and the negotiating ploy made by barristers' clerks to the taxing authorities, I wish to amend that to "little relationship."

The hon. Member for Great Grimsby has few admirers in the professions and the House knows that I and a number of other hon. Members are members of the Bar. However, one of his current campaigns has drawn a favourable response in the Temple. That is the idea that barristers should be able to sue for their fees. I hope in due course, if he is able to put his case with a great deal more charm than he has managed so far, he will be able to secure that valuable change in the law. The hon. Member for Great Grimsby was wrong in law in at least one of his contentions. It is not possible for the Bar Council simply by fiat or motion to change the common law of this country. It is the common law of this country that prevents barristers from suing for their fees. It would therefore not be possible for the Bar to change the rule on its own, and because of the venerability of this part of the common law, it would be necessary for Parliament by legislation to change it.

I quite understand the argument of the hon. Member for Workington. It has a certain logic within it, but there is perhaps a better way of dealing with this. I would urge my right hon. Friend the Minister of State to consider pursuing the matter with our noble Friend the Lord Chancellor. This is a unique concession to barristers. I say to the hon. Member for Great Grimsby and the hon. Member for Workington that, though it may have been incorporated in statute in 1980, it goes back to the introduction of VAT in 1972, and this practice has always applied to barristers' fees. There was nothing innovatory about what happened in 1980: that merely continued existing practice.

I am certain that barristers who receive legal aid fees, as a substantial number of the members of the Bar do, would welcome it if the legal aid taxing authorities provided that the fees should be fixed in advance, rather than negotiated in arrears, as happens currently. The concession would not then be necessary.

I note that the hon. Member for Sedgefield (Mr. Blair) is on the Opposition Front Bench. He shares these problems with me, my hon. and learned Friend the Member for Leicestershire, North-West (Mr. Ashby) and one or two other hon. Members. Those hon. Members know that the change that I have suggested would receive a loud and warm welcome in the Temple. I urge my right hon. Friend the Minister of State to take it up with the Lord Chancellor.

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Mr. Blair

My hon. Friend the Member for Workington (Mr. Campbell-Savours) was kind enough to say when moving the new clause, which was obviously drafted by a supporter at the Bar, that I was the origin of the proposal.

I should say to my hon. Friend the Member for Great Grimsby (Mr. Mitchell), who criticised barristers, that I made an open avowal of the privilege without its being sought. My hon. Friend the Member for Workington said that that showed an admirable commitment to objectivity. That is probably excellent for one's reputation as a parliamentarian but fatal to one's prospects in a political career.

There are two problems. The first is whether there should be discrimination in dealings between some traders —the Bar is one such trade — and others. The less discrimination there is the better. It should he pointed out that, because people make purchases from retailers and pay at the time, the retailer's liability to pay VAT arises when the payment is made. The privilege exists for a variety of transactions, but that arises of necessity and because of the type of business involved.

Mr. Austin Mitchell

The privilege is pleaded on the basis of two justifications that apply only to the law. The situation may be the same for retailers, but that is only because they exchange cash at the point of sale and there is no procedure for invoicing.

Mr. Blair

That is exactly what I said. There are circumstances other than those applying to the Bar where VAT liability arises at the same time as payment is made to a trader.

The more important problem, which is particularly acute for small traders, is that businesses are liable for VAT when they have issued an invoice, even though they have not received payment from the customer. The small builders' federation has pointed out that solvency problems can arise for small companies that have to meet VAT liabilities when they have not received payment from customers. That is the most important issue in the debate. If the Pavlovian reaction to barristers has sparked off the debate, it has been worth while.

The Government should look carefully at the difficulties facing small traders who run into difficulty over VAT payments. A small builder may do work costing £15,000 or £20,000 and the VAT liability could be quite large. Cash flow problems are fairly common when traders are involved in such transactions.

Perhaps a better solution would be to give more discretion to the commissioners to allow an easing of the burden of VAT payments when difficulties arise from a default by a customer. Subject to the amendment being selected, we shall debate the bad debt provisions, which will allow an insufficiency of funds arising directly from default by a customer to be considered when the penalty is being decided.

The Government should study the matter. Many traders find it hard to see why they should have to pay money, which they are supposed to pass on from their customers, when they have not received that money. The Government would do small businesses a service and justice, if they found better ways of ensuring that both the tax was properly collected and the interests of small businesses were protected.

Mr. Hayhoe

I should begin by declaring a non-interest in that I am not a lawyer, but an engineer. My speech may well be better for that.

The new clause would allow all traders to account for VAT on a cash-received basis so that everyone would receive the treatment that barristers already enjoy under regulation 20 of the Value Added Tax (General) Regulations 1980, which is statutory instrument 1536/80. Although barristers are enjoying VAT under that statutory provision, I confirm that they have always enjoyed those arrangements under earlier statutory instruments, as my hon. Friend the Member for Corby (Mr. Powell) pointed out. We should also note that during the Labour Government the same writ ran.

The hon. Member for Workington (Mr. Campbell-Savours) also seeks to eliminate any injustice for traders in having to account for tax which they have not received and may never receive from their customers, as the hon. Member for Sedgefield (Mr. Blair) pointed out. At least some amelioration is contained in clause 32, where important changes have been made regarding bad debts and where links are made with insolvency legislation. Moreover, if amendment No. 175 is selected, it will allow a more precise debate on that aspect.

As the hon. Member for Workington acknowledged, his new clause is technically deficient. It would, radically alter the present arrangements, in which the tax invoice is the essential standard under which VAT is charged and accounted for. However, the tax invoice is also important for the registered customer because until he holds the supplier's tax invoice, he cannot deduct or reclaim the tax that he is being charged. The House should note that our debate has been about paying the tax, while no consideration has been given to the important matter of reclaiming or setting against the tax to be paid, the input tax that has already been paid by the individual concerned.

The scheme proposed in the clause would devalue the tax invoice because businesses would want to defer their liability to account for output tax, until they collected the tax from their customers. Therefore, they would not issue tax invoices until they received payment. There would be a corresponding disadvantage for the customer, especially one receiving regular repayments of tax in monthly tax periods, because at present he can deduct or reclaim VAT charged as input tax before he has paid for the supply, provided he holds a valid tax invoice. Under the new clause the customer would not be likely to receive his tax invoice until after he had paid his supplier. There is an up side and a down side, as so often applies to changes in tax regimes.

The suggested scheme would have a profound effect upon the cash flow of most businesses. There would be some gainers and some losers. Retailers and repayment traders — that is, exporters or businessmen such as farmers trading mainly in zero-rated goods — would be substantial losers. Retailers would lose because their input tax deduction would be deferred until after they had paid their suppliers, but they would gain nothing on their output tax because they already account for tax on the basis of daily cash receipts. Repayment traders would similarly lose on the input tax deferment, but have no corresponding output tax deferment because no tax is chargeable on most of their sales.

I hope that I have said enough to explain that considerable complexities are involved in making changes along the lines suggested. This is not the time for me to try to deal with matters other than those before us. We have to consider many new clauses. It is fascinating to listen to the contributions to the debate, but it has gone wide of the subject.

Dr. Marek

Can the Minister say anything about the merits of at least bringing in line the special concessions to barristers? What can be said about equality of treatment in terms of fiscal neutrality?

Mr. Hayhoe

I have tried to explain the difficulties for the trading community if we adopted the sentiments behind the new clause. I have not argued the case on the basis of the defective technicalities.

The question of barristers is an aside in relation to the new clause. I have only added to the observations made by the Chief Secretary in the letter to which referrence has been made. If necessary I shall arrange for a copy of that letter to be put in the Library.

I hope that the hon. Member for Workington will not press his new clause to a Division. He has ventilated the subject and my hon. Friend the Member for Corby has been given the opportunity to make an important suggestion to the Lord Chancellor which I shall pass on.

Mr. Campbell-Savours

The Minister's answer was complex and I confess that after about five minutes I could not grasp what he was saying and lost the thrust of his argument. I am sure that other hon. Members feel the same.

The Minister might well have made an important statement. I should like to consider it tomorrow and perhaps raise the matter later after taking advice. We have raised an important issue. Many people are interested in the concession which barristers enjoy. We should like it to be extended to others. Our new clause is defective and so I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

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