BAD DEBTS (Hansard, 16 July 1990)

§ Mr. Chris Smith
I beg to move amendment No. 38, in page 7, line 9, leave out 'two years' and insert 'fifteen months'.
You will probably recall, Madam Deputy Speaker, that on 15 May we debated in Committee on the Floor of the House what was then clause 10 and is now clause 11. It relates to VAT relief for bad debts on VAT. Prior to the Budget, for the majority of traders, VAT had to be accounted for to Customs and Excise on the basis of VAT invoices issued, regardless of whether the money had been received. The VAT was paid to Customs and Excise even though the trader may not have received the VAT from the purchaser of the goods or services. That system caused particular problems if the debt was defaulted upon. Until the Budget, the trader could get the VAT back only if the debtor became formally insolvent. That meant going into bankruptcy or liquidation. If a debtor simply disappeared without going into formal liquidation, the debt could not be recovered from the debtor or from Customs and Excise.
The Government have introduced a welcome change in clause 11. We welcomed it when we debated the issue on 15 May. The Government are now proposing that if a trader has made provision for bad debt on VAT and the debt is not repaid after two years, the funds can be reclaimed from Customs and Excise. That is a step in the right direction.
On 15 May, we set out in detail why we felt that the two-year period was too long. If a formal bankruptcy occurred within nine to 12 months of the VAT being paid, the new rules would be less attractive to a trader than the old rules. We proposed two alternative and complementary mechanisms to sort out that problem. We proposed 796 that the new and the previous systems should run in parallel, enabling a trader to receive relief on bad VAT debts by either of the two systems. The Government were not prepared to accept that.
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We also proposed a measure that would have reduced the waiting period for relief on bad debts from two years, which is the proposal in the Bill, to one year. That proposal was strongly supported by many small traders. On 15 May, the Economic Secretary, speaking from the Front Bench with all the authority of the Government, appeared to give our proposal a significant welcome. He said: Our judgment was that two years is an appropriate period of time to elapse before a company decides that a debt cannot be recovered. The hon. Gentleman went on: I am aware of the strength of feeling expressed in the debate and by the many organisations that have made representations to the Treasury. For those reasons, I have concluded that there may be scope for further improvement i n the scheme. We shall be examining that possibility between now and Report stage."—[Official Report, 15 May 1990; Vol. 172, c. 814.] That statement clearly showed that the Government were sympathetic to our proposal for a reduction, yet there is no Government amendment before us to give flesh to that commitment.
As a result, we have tabled this amendment, which would change the period from two years to 15 months. We are being more generous to Customs and Excise than we were in our original proposal. We believe that a 15–month period would be sensible and practical and would give better relief to businesses, especially small businesses, than the Government propose. It would be entirely within the spirit of the statements by the Economic Secretary on 15 May.
I hate to chide the Economic Secretary for a failure to live up to an indication that he gave in Committee, but we wish that the Government had been true to their word and had tabled an amendment such as amendment No. 38. I commend the amendment to the House.

§ Mr. Beith
I support the case advanced by the hon. Member for Islington, South and Finsbury (Mr. Smith) for a more generous recognition of the problems of business in dealing with bad debts. I, too, formed the impression that the Government had taken seriously the many representations about their proposed time scale. They seemed to recognise that this matter required another look, and I am disappointed that the look has not turned into an appropriate change in the Bill.
The hon. Member made clear at an earlier stage in the Bill what a serious problem this presented to the firm that he described as "Ryder associates"—or some such expression—if it had paid over a substantial sum in VAT to Customs and Excise at a time when an even more substantial sum remained outstanding from a company which had not paid it. He described how serious that would be, especially with present high interest rates, if the debt were spread over two years. I had hoped that the Government would recognise that this is a serious problem, and I look forward to the Minister having something to say on the subject tonight.

§ Mr. Ryder
In debate on what was then clause 10, in Committee of the whole House, I said that we would consider whether anything could be done to improve the 797 Government's proposals on bad debt relief. The hon. Member for Islington, South and Finsbury (Mr. Smith) and the hon. Member for Berwick-upon-Tweed (Mr. Beith) were right to make their observations. I did so because of the view that some hon. Members expressed that our proposals did not go far enough.
Our proposals were a huge improvement for businesses, as is evidenced by the cost of £150 million a year that will result from the change. The decision was one of the most generous and well-received in my right hon. Friend's Budget. Any further change would be equally expensive.
Amendment No. 38, tabled by the hon. Member for Islington, South and Finsbury, seeks to reduce the waiting period from two years to 15 months. In the past two months, we have given careful consideration to whether we could justify a further change, but we have come to the conclusion that we could not. Amendment No. 38 would cost about £120 million in this financial year. That is a large price to pay for the marginal improvement that it would make to the scheme. The only way that we could afford to make such a change would be to defer the start date of the scheme to 1 January 1990 instead of 1 April 1989, as announced by my right hon. Friend in his Budget.

§ Mr. Chris Smith
The Economic Secretary has estimated the cost of the change that we are proposing at £120 million. How can debts that are bad after 15 months, but are recovered within the subsequent nine months—that is, debts that are not bad at the end of two years—possibly amount to £120 million?

§ Mr. Ryder
Those figures were calculated by Customs and Excise. We gave a figure of £150 million as the estimated cost of the proposal that we announced at the time of the Budget. The figure of £120 million estimated for this financial year is a significant sum, especially when it is judged alongside the other measures that have been introduced in the Budget, and beside some measures suggested to us in amendments during the course of the Bill. It is a large price to pay for what I would describe as a marginal improvement.
If we were to accept the amendment, as I have described, it would ensure that the first claim was not made until 1 April 1991, as we had orginally planned. That would mean disappointing those who expected to be able to obtain relief in due course on debts that they incurred in the period between 1 April and 31 December 1989. That would also be too big a price for the majority of traders to have to bear to ease the position for a small minority. For that reason, and for the other reason that I gave earlier, we decided not to reduce the 24-month period on this occasion.
In view of the information that I have given the hon. Gentleman, I should be grateful if he saw fit to withdraw the amendment.

§ Mr. Chris Smith
The Economic Secretary has said that he believes that the cost of such a change would be £120 million. I confess to considerable scepticism about how that figure was arrived at, but it is not for me to quarrel at this stage with the Treasury's figures. Perhaps it would be best to wait and see how the new system beds down—to retain a watching brief and possibly to return to this subject in a year's time.
798 I contest the view that our proposal represents purely a marginal improvement. That is not the view of business, which believes that it would be a great improvement.
We reserve the right to return to this issue. In the meantime, I beg to ask leave to withdraw the amendment.