HC Deb 08 July 1986 vol 101 cc191-205

'In section 15 of the Finance Act 1985 (value-added tax: failure to notify liability for registration) after subsection (4) here shall be added the following subsection: (4A) Any penalty imposed by this section may be reduced to such lesser amount as appears to the Commissioners or, on appeal, to a value-added tax tribunal to be just and reasonable in all the circumstances of the case.'.—[Mr. Blair.]

Brought up, and read the First time.

Mr. Tony Blair (Sedgefield)

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

New clause 2 is of major importance to small traders. It is widely supported by groups representing the self-employed and small business men and it will be a crucial test of whether the Government's proclamations about the worth of small businesses are rooted in propaganda or practice.

The Keith committee, which reported in 1983, effectively recommended that value added tax offences should be decriminalised but that a system of automatic penalties should he brought into being. The sanction of the criminal law was to be taken away, but there were to be automatic penalties, in order to speed up the process of bringing to justice those in default of VAT.

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It was pointed out in volume 2, chapter 20 of the report that the Inland Revenue had the power of mitigation in respect of income tax offences and that that power was useful as a bargaining counter and in order to avoid hardship. In chapter 18, the Keith committee recommended extending that power of mitigation to VAT offences and penalties. The Keith committee—the body that gave rise to the provisions in last year's Finance Act in relation to VAT — recommended that there be a power of mitigation for all VAT penalties, including the new offence of civil fraud, in which case the committee recommended the power to mitigate down to 50 per cent. of the penalty.

The Government rejected the view of the Keith committee and rejected a new clause tabled by Labour last year. At present, therefore, there is no mitigation in the case of VAT offences and someone who is in breach of the VAT regulations can escape penalty only if he can show a defence of reasonable excuse. Only in those circumstances can he escape the full rigour of the law. The effect is, for example, that someone who deliberately fails to register for VAT is treated in exactly the same way as someone who innocently fails to register.

The new clause is a very modest proposal. It would allow the power of mitigation, but only on late registrations for VAT, where someone's turnover exceeds the requisite level for VAT but he fails to register in time. That power of mitigation would be given both to the commissioners for Customs and Excise and to the VAT tribunal.

The need for action is both urgent and easily demonstrable.

Mr. Douglas Hogg

Am I right in thinking that the penalty imposed for a default is a fixed penalty, fixed either by statute or by statutory instrument, and the commissioners or the tribunal have no power to impose a different penalty?

Mr. Blair

There is a fixed penalty referable to 30 per cent. of the amount of VAT in, say, the quarter in which the person should have registered. The penalty is fixed in that sense by reference to a percentage of the amount of tax due. At present there is no power to abate that in circumstances in which the commissioners or the tribunal might think it reasonable to do so. In a number of cases that have appeared before it, the VAT tribunal has drawn attention to the substantial injustice to small traders that arises from an absence of a power of mitigation.

The Rhodes case came before the VAT tribunal on 31 March 1986. In that case Lord Grantchester, the president of the tribunal, said in express terms that he regretted the absence of any power of mitigation. That case precisely illustrates the problems faced by small traders because of the absence of the power of mitigation. A small trader started a debt collection agency. In the year to 31 March 1985 the amount of turnover was well below the registration limit for VAT. In the following quarter the turnover exceeded £6,500, the level above which one should register for VAT. The trader did not know that she had to register her agency when that limit was exceeded. She found out only during a conversation with her accountant, a quarter later. As soon as she told the accountant what the turnover was, he told her to apply for registration. She did so immediately, received a form from Customs and Excise and replied by return. She then issued back invoices to all the customers with reference to the quarter during which she should have registered for VAT, so ensuring that no tax was lost to Customs and Excise.

The VAT tribunal accepted that she had behaved entirely innocently. There had been no loss to Customs and Excise and, indeed, the trader herself had volunteered the information to Customs and Excise that enabled the penalty to be levied. In his judgment, Lord Grantchester said that he had to dismiss the appeal because the trader's innocence did not amount to a reasonable excuse in law and so she had no defence for her failure to register in time. However, he continued: I dismiss this appeal. I do so with regret. Had there been criminal proceedings requiring the imposition of a fine, I would have taken full account of the mitigating circumstances. Little or no tax has been lost and all books and documents have been adjusted retrospectively so that for practical purposes, they now record what they would have recorded if the Appellant had duly complied with the relevant requirements. But neither the Commissioners nor this Tribunal has been entrusted with such a power to mitigate a fixed penalty. In successive cases, other chairmen of VAT tribunals have made the same point. No fewer than three VAT tribunal chairmen, other than the president of the VAT tribunal, have drawn attention to the injustice that has occurred.

These traders are all people who run very small businesses. They are usually self-employed. A French polisher may be involved, or a small furniture business. In the last couple of weeks, the case of Mr. Pearson has been decided. Mr. Pearson is a decorator who failed to register for VAT in time. The chairman of the VAT tribunal, having said that again he could not say that there was a defence, because ignorance of the law is no defence, then said: Since I have no power to mitigate the penalty, I did not explore matters which went solely to mitigation. It was apparent that there were many such matters, in particular the transparent honesty of the Appellant, his (and his accountant's) prompt and full disclosure of the facts to the Commissioners and, subject to clearance of the Appellant's cheque, the fact that no tax has been lost to the Commissioners. I understand that many more cases are pending before the VAT tribunal. It is clear that the absence of any power of mitigation is causing substantial injustice. All the cases before the VAT tribunal have features in common. First, it is accepted that all the people acted in good faith and honesty. Secondly, their only fault was ignorance of the law. Thirdly, there has been no loss to Customs and Excise, and fourthly, and perhaps most importantly, the people involved are all small traders in a very small way of business.

It is generally accepted in the House that there is, and will continue to be, a growth in the number of small businesses and self-employed people. In my own constituency, many people have used redundancy money from their factories to start up their own businesses. Such people are often not aware of all the intricacies of form-filling, VAT and so on and they can get into difficulties. The absence of any power for the VAT commissioners or the tribunal to mitigate penalties is a substantial block on the establishment of new businesses.

The Government have put forward only two arguments why such a power of mitigation should not be accepted. First, the Government say that there has been a considerable increase in the speed of registration since the system of automatic penalties was introduced. In other words, there has been a diminution in the amount of late registrations.

I accept that that is the case and I welcome it. But, with great respect, there has been a speeding up of registrations for VAT because of the introduction of automatic penalties. It has nothing to do with the absence of the power of mitigation. I can see no logical or practical reason why the absence of a power of mitigation should speed up VAT registrations. Indeed, many of the cases before the VAT tribunal involve people who have been ignorant of the fact that they have to register for VAT. So automatic penalties were not a factor governing whether they registered.

The second and perhaps more surprising argument that was put forward in Committee in answer to the clause moved by the hon. Member for Slough (Mr. Watts) was that a power of mitigation would increase the number of civil servants that were needed to deal with mitigation. That is a classic example of how, as so often, the Government misunderstand the nature of the problems of bureaucracy. It is not civil servants who cause problems of bureaucracy but unnecessary rules of civil servants doing work with no useful purpose. Civil servants properly used, for example, assisting small businesses in setting up and overcoming their problems, are a positive bonus to small businesses and should not be regarded as some obstruction.

The Financial Secretary should consider the new clause, from the point of view of cutting not the costs of the Civil Service, but the burdens on small businesses. I use the words "cutting the burdens" because we have heard a lot from the Government about how they want to lift the burdens on small businesses. They have published two White Papers in the past two years, one called "Lifting the Burdens" and one called "Building Businesses — Not Barriers".

The Government introduced legislation on small businesses because a Department of Trade and Industry survey said that red tape was a problem, and the single most important item of red tape to which small businesses referred was value added tax. There was huge concern among small traders about the injustice of automatic penalties with no power of mitigation.

I have been through the White Paper "Building Businesses—Not Barriers" and as a piece of second-rate propaganda it takes some beating. When one looks at the Government's proposals on value added tax, most are elementary, such as allowing traders to make monthly rather than three-monthly accounts. I do not know how that is of great assistance to the small trader, but it is put forward as a great proposal by the Government.

Hon Members will find it amusing that the Government also include as one of the great steps that they have taken for small businesses the fact that they have revised guidance on the treatment of motoring costs after full consultation with business. A naive person reading those lines would think that the Government have helped to simplify the problems of VAT on fuel for motorists, but, as we learnt in Committee, what has actually happened is that the Government have introduced a system of standard computations of VAT on fuel which has saved the Government about £50 million. The notion that sucking £50 million out of the ordinary trader and motorist is some great bonus to small businesses is laughable. The truth is that when the Government are presented with a small but practical instance of how they can help small traders such as is suggested in new clause 2, they do not seem to be interested.

New clause 2 is a test for the Government. It has widespread support and it is difficult to see what coherent arguments there are against it. It is supported by those who specialise in value added tax work. It has been tacitly recommended by the tribunal chairmen who have to administer the system and it is widely supported by small businesses and the self-employed.

The test for the Government is whether they are more interested in headlines for themselves than in help for the small businesses, in publishing White Papers that are long on promises and short on practice, or in doing something that is really worthwhile for Britain's self-employed and small businesses. New clause 2 is such a clause and I recommend it to the House.

Mr. Douglas Hogg

I shall not speak for long because I am looking forward to hearing my right hon. Friend the Financial Secretary's reasons for not accepting the new clause. Looking at it in general terms, I think that the new clause is good and that it requires support.

As a general principle I have always been against fixed penalties. I have also been against minimum penalties. Indeed, that is the view that the Government have adopted in the criminal law ever since I have been in the House. On various occasions some of my hon. Friends have called for minimum penalties for this or that offence under the criminal law and the Government have always resisted, in my view rightly. The same general principle applies to fixed penalties.

5.15 pm

All penalties — whether minimum penalties, fixed penalties or penalties of any kind — must have some regard to the degree of culpability involved. Failure of registration in VAT cases may be a deliberate act of fraud. That is an extreme degree of culpability. On the other hand, failure to register might come about from a much smaller degree of culpability— for example, illness, the destruction of documents or ignorance. That is another and quite different degree of culpability.

It is wrong in principle that a penalty should be imposed that does not reflect the degree of culpability involved on the part of the person who has offended. Therefore, as a matter of general principle, I am highly sympathetic to new clause 2.

I am aware that the Government say that fixed penalties have necessarily resulted in an increase in the number of registrations. I have two comments to make on that. First, I suspect that the hon. Member for Sedgefield (Mr. Blair) is right in his explanation for the increase in the number of registrations, but there is another point, too. There is always a natural tension between the desire on the part of the Executive to do those things that are convenient to it, on the one hand, and the desire of the legislature to ensure natural justice, on the other. If I hear that argument advanced by my right hon. Friend the Financial Secretary today — I fancy that I shall, although he will cloak it in his usual eloquent and charming manner—I must tell him that I am in favour of natural justice, not the Executive.

Having made those few remarks, I look forward to hearing my right hon. Friend tell us why we should not support new clause 2.

Mr. David Penhaligon (Truro)

I echo what the hon. Member for Grantham (Mr. Hogg) has said. There is no logic in having a mitigation procedure for income tax but not for value added tax. One is aware of income tax procedures from one's constituency work. I have occasionally helped a constituent and been surprised at the outcome. At the end of the day a constituent often seems to have been rather well treated. In such circumstances one tends to claim some credit for such things.

A system of mitigation does exist and is operated in such circumstances. Therefore, I do not see why the powers of discretion and intelligent analysis of the background cannot be given to somebody within the area dealt with by the new clause. It is a power that cannot be unduly abused. If the Minister believes that it can be used as an excuse for putting off the payment of the tax even further, no doubt his Department, with its ingenuity, will find some way to deal with that.

The law, as it currently stands, says that there is never a harsh word within the worlds of justice, right and reason. The Government should give serious consideration to the new clause or, if an opportunity exists, at least to introduce something that approximates closely to it.

Sir Kenneth Lewis (Stamford and Spalding)

When I first came to the House, I was told—I suppose correctly — by the Conservative Whips that it was always dangerous to listen to arguments in debate. One was supposed just to vote. To my great surprise, I discovered myself listening to the debate and, therefore, listening to the arguments of the hon. Member for Sedgefield (Mr. Blair) and of my hon. Friend the Member for Grantham (Mr. Hogg). I have been convinced by the arguments that the Government must be wrong if they do not accept new clause 2.

For some years, we have been saying, first, that there will be a big expansion of new businesses, which will be the Government's salvation and will do us much good at the geneal election because it will provide jobs; secondly, that we should do everything we can to support new businesses in every way. We have produced various documents, as my hon. Friend the Member for Grantham and the hon. Member for Sedgefield have mentioned. We wanted to get off the backs of small businesses. We know that our constituents have problems with VAT from time to time. VAT must be collected and no one wants to make it easy for people to get out of paying it. I am not on the side of those who want to try to get round paying the tax.

We have a tribunal procedure. Presumably the merit of the tribunal is that it is flexible. If it is to make decisions on the basis of hard lines—where it does not get the chance to mitigate —it will not have the opportunity to deal with cases that may be different. If it must simply take a hard line, because that is what the Act says—the idea of the tribunal is to help businesses and to help the Government to get their proper tax income—it will be put into a difficult position and will not be able to do its job properly.

My right hon. Friend the Financial Secretary to the Treasury should consider that and concede the new clause, or at least propose one in its place, for two reasons. First, it will help the tribunal to provide justice. Secondly, it will help small businesses, which may have made errors and which may have sought to put those errors right, when they come to the tribunal. The tribunal will be able to recognise that fact and deal with those businesses and business men differently from those who have skived and got round the VAT regulations.

If we wish to help small businesses, we must be seen to help them. The Treasury has an opportunity to do that today. I hope that it will take that opportunity, because it is within the guidelines of the Government's policy. If it does not take that opportunity, it will lead people to say, "What is all this talk about? When a Minister gets the chance to turn talk into action, he does not do it."

Mr. Harry Cohen (Leyton)

I do not wish to repeat the excellent points that have already been made. On the point of small businesses being affected and the Government's claims, I would point out that there have been record bankruptcies of small businesses under this Government. The imposition and high increase of VAT has been a factor in that.

A letter from the Minister of State, Treasury went out to hon. Members only this week. In effect, it said "You will have complaints about VAT. Here is the answer.- It is a complicated letter which deals with many complicated issues. Yet here we are penalising people because they honestly fall foul of the law. It might often be a matter of ignorance. Tribunal officials acknowledge that the mistakes are often innocent mistakes, yet people are penalised for them. The letter from the Minister of State is a case for the clause being accepted. As has been stated, there should be the opportunity for mitigating circumstances to be taken into account by the tribunal or the commissioners where the circumstances are just and reasonable. That is what is contained in the amendment.

The tribunal must also take into account the hardship that small businesses face. I began by mentioning the record number of bankruptcies. Some small businesses are close to bankruptcy, and the penalties might tilt them over the edge, as several hundreds of pounds can be involved in each case.

I endorse and repeat the comments made by my hon. Friend the Member for Sedgefield and by Conservative Members. In the interests of natural justice, the Government should accept the new clause.

Mr. Norman Lamont

This subject was debated several times in Standing Committee and at the Report stage of the Finance Bill 1985, and again in Committee this year. The hon. Member for Sedgefield (Mr. Blair) reminded the House that the Keith committee on the enforcement powers of the Revenue Departments, which was set up by my right hon. and learned Friend, the Secretary of State for Foreign and Commonwealth Affairs when he was Chancellor, reported on VAT in early 1983. The present position is based on the recommendations of the Keith committee, and its conclusions, which were generally in favour, after examining the subject, of fixing penalties for specific defaults. That is the position now and that is how we arrived at the decision to decriminalise offences.

As the hon. Member for Sedgefield recalled, the Government held a consultation exercise on the Keith committee's recommendations. In November 1984, we issued a consultation document which explained our intention to legislate in 1985. We put forward detailed clauses for comment.

The Keith committee wanted to balance the proposed strengthening of some of the powers of the Customs and Excise with the decriminalisation of most VAT offences and other forms of increased protection for the taxpayer. In preparing the 1984 consultation document, and between the consultation exercise and the publication of the 1985 Finance Bill, we made some important changes to the Keith proposals in favour of the taxpayer, including perhaps the most important change, the introduction of the statutory defence of reasonable excuse, which had not been generally recommended by Keith. The Finance Act 1985 was, therefore, a carefully balanced package which was introduced after full consultation with taxpayers and their representatives.

In its balanced approach, the Keith committee recognised that two particular problems concerning VAT for the Government were late payment and inaccurate accounting for the tax. The two best-known examples of these are that the average amount of VAT outstanding at any one time is about £1,200 million and the net underdeclarations of VAT found by Customs and Excise officials on control visits to business premises amounted to almost £500 million in 1985–86. Customs and Excise needed to have effective powers to encourage more timely and accurate compliance on these and other important aspects of the tax. The Keith committee therefore proposed a regime of surcharge, interest and civil penalties specifically for that purpose. Today we are discussing the civil penalties charged under section 15 of the Finance Act 1985 and especially the penalty on belated notification of liability to register for VAT.

Consistently with the Keith committee's other compliance proposals, the belated registration penalty is dependent, not on subjective factors, but on an objective test as to whether the registration is late. There is a right to appeal to the VAT tribunals on grounds of reasonable excuse or against the liability to register, or if Customs and Excise appears to have made an error in its calculation of the penalty assessment. Beyond that the penalty is fixed at the rate of 30 per cent. of the tax liability for the period by which the registration is late. There is no provision for mitigation.

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The hon. Member for Sedgefield referred to Keith's views on mitigation. It is true that Keith recommended that Customs and Excise should have the general power to mitigate penalties, but he also said that the use of that power should be restricted to exceptional cases. Keith had proposed that mitigation should be limited to exceptional cases of financial hardship, injustice or difficult points of tax liability. The last item on that list is fully covered by "reasonable excuse". For the other two, as my right hon. Friend explained last year, Customs and Excise already have the power, subject to the supervision of the Public Accounts Committee and the Comptroller and Auditor General, to remit tax extra-statutorily in wholly exceptional cases on grounds of equity or compassion. It is the Government's view that those powers should be adequate similarly to cover penalties, interest and surcharge in such exceptional circumstances.

The hon. Member for Sedgefield has argued that there should be a power to reduce the penalty in particular circumstances to recognise the different weights of offence, including the question of the taxpayers' co-operation with the Customs and Excise investigation. I can assure him that any liability to late registration penalty — and, indeed, most of the other civil penalties—will be decided by simple objective tests concerned with the lateness of the registration. It follows that the quicker the taxpayer cooperates with Customs and Excise and discloses his late registration, the less will be the turnover that he will have accumulated while unregistered. The hon. Member for Sedgefield may not have said this today, but he will forgive me if I have been reading in Hansard some of the speeches that he made on other occasions. I observe that the hon. Gentleman nods. I am sure that he thinks that it is not a very good argument—indeed, I agree with him in that—but he will forgive me for having knocked down the argument that he put forward.

Mr. Douglas Hogg

In almost every penalty that I can think of within the criminal or civil law, the authority that has the power to impose the penalty has the power to vary a penalty in accordance with the degree of culpability involved. For the life of me, I cannot see why that general principle should not apply to late registration.

Mr. Lamont

My hon. Friend has made his position very clear on this. That is the view that he has taken, and he says that there should be no exception to that principle. This departure from that principle was fully debated and paraded with the Keith recommendations. Although my hon. Friend does not like the situation, it should not be a novelty to him. It has been in position since the recommendations of Keith, and it was because of the need to achieve greater compliance that the regime was adopted.

As my hon. Friend may know, I pick up this point simply because the hon. Member for Truro (Mr. Penhaligon) referred to the difference between the treatment of VAT and the treatment of income tax. Keith is being implemented in stages. There are other parts of Keith that the Government are still considering and that will be implemented this year. The question of the Keith recommendations on income tax is being examined by the Government. The implementation of Keith is happening by stages.

Sir Kenneth Lewis

Time has moved on since then. We do not stick to a line if a position is reached where we think that modification might be an advantage. It is some time now since Keith. We have decided as a Government that we are going to be as helpful as we can to small businesses. Surely the Government can decide that, although they took a line at the time which they say was effective, they do not now need to stick to that line because time has moved on, and they can give the tribunal the flexibility that it says it would like.

Mr. Lamont

I note what my hon. Friend says, but not very much time has moved on. I shall be coming to the question of a review of these procedures later in my remarks, if my hon. Friend will bear with me.

I certainly agree that the effects would be limited if the power of mitigation was limited to section 15 penalties alone, as proposed in the new clause. I am not sure whether the hon. Member for Sedgefield would go further and would want to see mitigation much more widely. I ask the House to remember that there are two sides to the question of non-compliance with VAT-registration requirements. We have heard about certain cases in which penalties for late registration have been imposed. The hon. Gentleman may care to reflect that, while these businesses remained unregistered, many of their commercial competitors were already registered and having to account for VAT. We receive many complaints, particularly from the building and catering industries, about the problems that VAT-registered traders can face in competing for business with unregistered competitors. There is a great deal of pressure from the business community for compliance and fair competition. Non-compliance is not fair competition. That has to be borne in mind.

Mr. Blair

Nobody is suggesting that there should not be compliance with VAT regulations— of course there should be. The situations with which we are dealing are those in which there has been an innocent non-compliance. It should always be borne in mind that the power of mitigation depends precisely on the VAT tribunal commissioners thinking it right to exercise it.

Mr. Lamont

I agree with what the hon. Gentleman was saying, and I was not in any way suggesting that he felt otherwise. The question is whether effective compliance can be achieved if we abandon the method that Keith concluded was necessary. Keith recommended mitigation in a very prescribed circumstance. The Government came to the conclusion that was not necessary after giving effect to the other alteration involving "reasonable excuse" that the Minister of State announced in Committee last year.

We have had now almost a full year's experience in the operation of belated registration penalties. In the period from Royal Assent last year to 30 June this year there were about 172,000 new registrations for VAT. Belated registration penalties under section 15 have been imposed in about 3,700 cases, a rate of just over 2 per cent. of all new registrations in the period. Customs and Excise has accepted pleas of reasonable excuse for late registration in a further 187 cases.

That brings me to the purpose of the new system, which sometimes seems to be overlooked. The purpose is not, of course, to see how many penalties can be imposed but to improve compliance with the law. Although my hon. Friend the Member for Grantham (Mr. Hogg) was sceptical about it, Customs and Excise says that it has detected a marked improvement in compliance during the last year. There is no doubt that many potential taxpayers and, perhaps more importantly, their professional advisers are increasingly realising that timely compliance with the registration requirements is important. It is by the yardstick of improvement in compliance that the penalty system must be ultimately judged.

My hon. Friends the Members for Grantham and for Stamford and Spalding (Sir K. Lewis) said that sufficient time had elapsed and that the time had come for modification. When my right hon. Friend the Member for Brentford and Isleworth (Mr. Hayhoe) was Minister of State last year he gave an undertaking that the new penalty system would be carefully monitored. That reassurance was reiterated in the White Paper. Indeed, in paragraph 6.5 there is a specific commitment that the system as a whole, including the operation of penalties and of reasonable excuse, will be reviewed by Ministers, before the 1988 budget, after a full year's practical experience. I repeat that the review will be after a full year's practical experience, because we wish also to examine the effects of the surcharge that is to be applied in the case of persistent underpayment as from 1 October 1986. A single review covering both phases is justifiable, since a commitment has been given that both of these matters, taken together, will he reviewed.

Mr. Douglas Hogg

Will my right hon. Friend confirm that the review will extend not only to the mechanics but to the justice of what is being done?

Mr. Lamont

I am sure that that will be very carefully considered. We shall pay careful attention to all the representations.

We stand by that commitment, which offers safeguards for the long-term interests of the taxpayer. In the meantime, the taxpayer is benefiting substantially from the reasonable excuse provisions that were introduced, even though they had not been generally recommended by Keith.

Sir Kenneth Lewis

I believe that 136 out of 3,000 appeals were allowed under the reasonable excuse provisions. That is not a very high figure. Will my right hon. Friend try to persuade the commissioners to be more realistic in placing reasonable excuse at the forefront of their considerations?

Mr. Lamont

About 5 per cent. of potential cases were allowed, but what has been said in this debate will certainly be noted.

The pursuit of the alternative of mitigation is not right. Mitigation would serve only to erode the valuable tax compliance benefits of the package and would open the gates to appeals. We should then lose many of the benefits that we arc now beginning to gain.

I understand the unease and the points that have been made on both sides of the House. I assure my hon. Friends the Members for Grantham and for Stamford and Spalding that the commitment to a review before the 1988 Budget stands. Therefore, I cannot advise my hon. Friends to accept the Opposition's new clause.

Mr. Blair

The Financial Secretary to the Treasury says that there has been much greater compliance with VAT registration since the introduction of the Keith committee's recommendations. With respect, I do not understand how the absence of the power of mitigation can be said to have affected compliance under the VAT regulations. The point made by the hon. Member for Grantham (Mr. Hogg) is fundamental, but I hope he will forgive me if I do not pursue it.

I realise that the existence of automatic penalties means that there has been an increase in compliance, but the new clause does not touch the automatic penalties system. That remains in being. Therefore, the Keith committee's fundamental proposal will be untouched by the new clause. It is ludicrous to suggest that the existence of a power of mitigation will encourage people not to comply with the original law, yet that is the effect of what the Financial Secretary has said.

It is not the case that we have no experience upon which to form a judgment. During the last few months there have been cases before the value added tax tribunal in which not just the president but the president and three different chairmen have specifically pointed to the injustice of the absence of a power to mitigate.

As the hon. Member for Stamford and Spalding (Sir. K. Lewis) said, we have the benefit of experience. We know that there is an injustice here. That injustice is recognised not merely by traders but by those who practise in the value added tax area. It is not good enough to ask us to await the outcome of a review that is to take place in a few months' time which will cover a whole range of different matters. An injustice exists now and we have been provided with an opportunity to remedy it.

If we really care about small businesses and if what we are saying is not mere rhetoric but has a touch of reality about it, those who go through the Lobby and vote for the new clause will be pinning their colours to the mast of small businesses, while those who do not will forfeit their right to be called the friends of small businesses.

Question put, That the clause be read a Second time:—

The House divided: Ayes 166, Noes 225.

Division No. 247] [5.45 pm
AYES
Adams, Allen (Paisley N) Davis, Terry (B ham, H'ge H'I)
Alton, David Deakins, Eric
Archer, Rt Hon Peter Dewar, Donald
Ashdown, Paddy Dixon, Donald
Ashley, Rt Hon Jack Douglas, Dick
Ashton, Joe Duffy, A. E. P.
Atkinson, N. (Tottenham) Dunwoody, Hon Mrs G.
Banks, Tony (Newham NW) Eadie, Alex
Barnett, Guy Eastham, Ken
Beckett, Mrs Margaret Edwards, Bob (W'h'mpt'n SE)
Beith, A. J. Evans, John (St. Helens N)
Bell, Stuart Ewing, Harry
Bennett, A. (Dent'n & Red'sh) Fatchett, Derek
Bidwell, Sydney Faulds, Andrew
Blair, Anthony Field, Frank (Birkenhead)
Bray, Dr Jeremy Fields, T. (L'pool Broad Gn)
Brown, Gordon (D'f'mline E) Fisher, Mark
Brown, Hugh D. (Provan) Flannery, Martin
Brown, N. (N'c'tle-u-Tyne E) Foot. Rt Hon Michael
Brown, R. (N'c'tle-u-Tyne N) Forrester, John
Bruce, Malcolm Foster, Derek
Buchan, Norman Foulkes, George
Callaghan, Jim (Heyw'd & M) Fraser, J. (Norwood)
Campbell-Savours, Dale Freud, Clement
Canavan, Dennis George, Bruce
Carlile, Alexander (Montg'y) Gilbert, Rt Hon Dr John
Carter-Jones, Lewis Gould, Bryan
Cartwright, John Gourlay, Harry
Clark, Dr David (S Shields) Hamilton, W. W. (Fife Central)
Clarke, Thomas Hancock, Michael
Clay, Robert Hardy, Peter
Clelland, David Gordon Harrison, Rt Hon Walter
Clwyd, Mrs Ann Haynes, Frank
Cocks, Rt Hon M. (Bristol S) Heffer, Eric S.
Cohen, Harry Hogg, Hon Douglas (Gr'th'm)
Coleman, Donald Hogg, N, (C'nauld & Kilsyth)
Cook, Frank (Stockton North) Home Robertson, John
Cook, Robin F. (Livingston) Hoyle, Douglas
Corbett, Robin Hughes, Dr Mark (Durham)
Corbyn, Jeremy Hughes, Roy (Newport East)
Craigen, J. M. Hughes, Sean (Knowsley S)
Cunningham, Dr John Janner, Hon Greville
Dalyell, Tam John, Brynmor
Davies, Ronald (Caerphilly) Johnston, Sir Russell
Jones, Barry (Alyn & Deeside) Richardson, Ms Jo
Kaufman, Rt Hon Gerald Roberts, Ernest (Hackney N)
Kennedy, Charles Robertson, George
Kilroy-Silk, Robert Robinson, G. (Coventry NW)
Kirkwood, Archy Rogers, Allan
Lambie, David Rooker, J. W.
Leighton, Ronald Ross, Ernest (Dundee W)
Lewis, Sir Kenneth (Stamf'd) Rowlands, Ted
Lewis, Ron (Carlisle) Ryman, John
Lewis, Terence (Worsley) Sheerman, Barry
Livsey, Richard Sheldon, Rt Hon R.
Lloyd, Tony (Stretford) Shore, Rt Hon Peter
McCartney, Hugh Short, Ms Clare (Ladywood)
McDonald, Dr Oonagh Short, Mrs R.(W'hampt'n NE)
McGuire, Michael Silkin, Rt Hon J.
McKay, Allen (Penistone) Skinner, Dennis
McKelvey, William Smith, Rt Hon J. (M'ds E)
MacKenzie, Rt Hon Gregor Spearing, Nigel
McTaggart, Robert Steel, Rt Hon David
McWilliam, John Stewart, Rt Hon D. (W Isles)
Madden, Max Strang, Gavin
Marek, Dr John Straw, Jack
Maxton, John Thomas, Dafydd (Merioneth)
Meadowcroft, Michael Thomas, Dr R. (Carmarthen)
Michie, William Thompson, J. (Wansbeck)
Millan, Rt Hon Bruce Tinn, James
Miller, Dr M. S. (E Kilbride) Torney, Tom
Mitchell, Austin (G't Grimsby) Wainwright, R.
Morris, Rt Hon A. (W'shawe) Wardell, Gareth (Gower)
O'Neill, Martin Wareing, Robert
Orme, Rt Hon Stanley Welsh, Michael
Park, George Wigley, Dafydd
Parry, Robert Williams, Rt Hon A.
Pavitt, Laurie Wilson, Gordon
Pendry, Tom Winnick, David
Penhaligon, David Woodall, Alec
Pike, Peter Wrigglesworth, Ian
Powell, Raymond (Ogmore)
Radice, Giles Tellers for the Ayes
Randall, Stuart Mr. James Hamilton and
Rees, Rt Hon M. (Leeds S) Mr. Lawrence Cunliffe.
NOES
Adley, Robert Dunn, Robert
Atkins, Rt Hon Sir H. Durant, Tony
Banks, Robert (Harrogate) Dykes, Hugh
Batiste, Spencer Emery, Sir Peter
Beaumont-Dark, Anthony Farr, Sir John
Bennett, Rt Hon Sir Frederic Favell, Anthony
Best, Keith Fenner, Mrs Peggy
Biggs-Davison, Sir John Finsberg, Sir Geoffrey
Blackburn, John Fookes, Miss Janet
Boscawen, Hon Robert Forsyth, Michael (Stirling)
Bottomley, Mrs Virginia Forth, Eric
Bowden, Gerald (Dulwich) Fowler, Rt Hon Norman
Brandon-Bravo, Martin Fox, Sir Marcus
Brown, M. (Brigg & Cl'thpes) Fraser, Peter (Angus East)
Bruinvels, Peter Freeman, Roger
Bryan, Sir Paul Galley, Roy
Buchanan-Smith, Rt Hon A. Gardiner, George (Reigate)
Budgen, Nick Gardner, Sir Edward (Fylde)
Burt, Alistair Garel-Jones, Tristan
Butterfill, John Gilmour, Rt Hon Sir Ian
Carlisle, John (Luton N) Glyn, Dr Alan
Carlisle, Kenneth (Lincoln) Gow, Ian
Carlisle, Rt Hon M. (W'ton S) Gower, Sir Raymond
Carttiss, Michael Greenway, Harry
Chope, Christopher Gregory, Conal
Churchill, W. S. Griffiths, Sir Eldon
Clark, Dr Michael (Rochford) Griffiths, Peter (Portsm'th N)
Clegg, Sir Walter Grylls, Michael
Cockeram, Eric Hamilton, Hon A. (Epsom)
Colvin, Michael Hampson, Dr Keith
Conway, Derek Hanley, Jeremy
Coombs, Simon Hannam, John
Cope, John Hargreaves, Kenneth
Corrie, John Harris, David
Critchley, Julian Harvey, Robert
Currie, Mrs Edwina Hawkins, C. (High Peak)
Douglas-Hamilton, Lord J. Hawkins, Sir Paul (N'folk SW)
Hawksley, Warren Pollock, Alexander
Hayes, J. Portillo, Michael
Hayhoe, Rt Hon Barney Powley, John
Hayward, Robert Prentice, Rt Hon Reg
Heathcoat-Amory, David Proctor, K. Harvey
Heddle, John Raffan, Keith
Henderson, Barry Renton, Tim
Hickmet, Richard Rhodes James, Robert
Hicks, Robert Rhys Williams, Sir Brandon
Higgins, Rt Hon Terence L. Ridsdale, Sir Julian
Hind, Kenneth Robinson, Mark (N'port W)
Hirst, Michael Roe, Mrs Marion
Holland, Sir Philip (Gedling) Rowe, Andrew
Hordern, Sir Peter Ryder, Richard
Howard, Michael Sackville, Hon Thomas
Howarth, Alan (Stratf'd-on-A) Sainsbury, Hon Timothy
Howarth, Gerald (Cannock) Sayeed, Jonathan
Howell, Ralph (Norfolk, N) Shaw, Giles (Pudsey)
Hunt, David (Wirral W) Shaw, Sir Michael (Scarb')
Hunter, Andrew Shepherd, Colin (Hereford)
Irving, Charles Silvester, Fred
Jackson, Robert Sims, Roger
Jessel, Toby Skeet, Sir Trevor
Johnson Smith, Sir Geoffrey Smith, Tim (Beaconsfield)
Jones, Gwilym (Cardiff N) Soames, Hon Nicholas
Jones, Robert (Herts W) Speed, Keith
Kellett-Bowman, Mrs Elaine Spencer, Derek
Kershaw, Sir Anthony Spicer, Jim (Dorset W)
Key, Robert Spicer, Michael (S Worcs)
Knight, Greg (Derby N) Stanbrook, Ivor
Knight, Dame Jill (Edgbaston) Stanley, Rt Hon John
Knowles, Michael Steen, Anthony
Lamont, Rt Hon Norman Stern, Michael
Latham, Michael Stevens, Lewis (Nuneaton)
Lawler, Geoffrey Stewart, Allan (Eastwood)
Lawrence, Ivan Stewart, Andrew (Sherwood)
Leigh, Edward (Gainsbor'gh) Sumberg, David
Lennox-Boyd, Hon Mark Tapsell, Sir Peter
Lester, Jim Tebbit, Rt Hon Norman
Lilley, Peter Temple-Morris, Peter
Lloyd, Peter (Fareham) Terlezki, Stefan
Lord, Michael Thomas, Rt Hon Peter
MacGregor, Rt Hon John Thompson, Donald (Calder V)
MacKay, Andrew (Berkshire) Thompson, Patrick (N'ich N)
McLoughlin, Patrick Thorne, Neil (Ilford S)
McNair-Wilson, M. (N'bury) Thornton, Malcolm
Madel, David Thurnham, Peter
Major, John Townend, John (Bridlington)
Malins, Humfrey Townsend, Cyril D. (B'heath)
Marland, Paul Twinn, Dr Ian
Marlow, Antony Vaughan, Sir Gerard
Marshall, Michael (Arundel) Viggers, Peter
Mather, Carol Wakeham, Rt Hon John
Mayhew, Sir Patrick Walker, Bill (T'side N)
Merchant, Piers Wall, Sir Patrick
Meyer, Sir Anthony Waller, Gary
Mills, Iain (Meriden) Ward, John
Mills, Sir Peter (West Devon) Wardle, C. (Bexhill)
Moate, Roger Watson, John
Morris, M. (N'hampton S) Watts, John
Morrison, Hon C. (Devizes) Wells, Bowen (Hertford)
Moynihan, Hon C. Wells, Sir John (Maidstone)
Murphy, Christopher Wheeler, John
Neale, Gerrard Whitfield, John
Nelson, Anthony Whitney, Raymond
Neubert, Michael Wilkinson, John
Newton, Tony Winterton, Mrs Ann
Nicholls, Patrick Winterton, Nicholas
Norris, Steven Wolfson, Mark
Onslow, Cranley Wood, Timothy
Osborn, Sir John Yeo, Tim
Ottaway, Richard Young, Sir George (Acton)
Page, Sir John (Harrow W) Younger, Rt Hon George
Page, Richard (Herts SW)
Patten, Christopher (Bath) Tellers for the Noes:
Pattie, Geoffrey Mr. Francis Maude and
Pawsey, James Mr. Gerald Malone.
Percival, Rt Hon Sir Ian

Question accordingly negatived.

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