BAD DEBTS

HC Deb 15 May 1990 vol 172 cc791-816

Mr. Chris Smith

I beg to move amendment No. 2, in page 6, line 43, leave out 'his accounts' and insert 'the accounting records from which the accounts of the business for the period in which the write off occurs have been or will be prepared'.

The Temporary Chairman

With this we may take the following amendments: No. 37, in page 6, line 43, leave out 'accounts' and insert 'books and records'.

No. 3, in page 6, line 44, leave out 'two years' and insert 'one year'.

No. 1, page 6, line 45, after 'elapsed', insert ', or the company or individual liable to pay any outstanding amount of the consideration has become insolvent and (except where Paragraph 10 (1A)(b) below applies) the person has submitted a claim in the insolvency for the outstanding amount of the consideration.

1. (1A) a company becomes insolvent for the purposes of this section if:
1. (a) it goes into liquidation in the United Kingdom or the Isle of Man at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up;
2. (b) a person who has been appointed in Great Britain to act as the Administrator or Administrative Receiver issues a certificate of his opinion that, if it went into liquidation, the assets of the company would be insufficient to cover the payment of any dividend in respect of debts which are neither secured nor preferential; or
3. (c) a composition or scheme proposed by the Directors is approved under Part I of the Insolvency Act 1986.
2. (1B) An individual becomes insolvent for the purposes of this section if:
1. (a) in England and Wales he is adjudged bankrupt, a deed of arrangement is made for the benefit of his creditors, a composition or scheme proposed by him is approved under Part VIII of the Insolvency Act 1986 or, after his death, his estate falls to be administered in accordance with an order under Part XV of that Act;
2. (b) in Scotland, sequestration of his estate is awarded, he signs a trust deed for his creditors or, after his death, a judicial factor is appointed under Section 11A of the Judicial Factors (Scotland) Act 1889 to administer his estate;
3. (c) in Northern Ireland he is adjudged bankrupt, a deed of arrangement is made for the benefit of his creditors, a resolution of his creditors is approved by the court under Section 5 of the Bankruptcy Amendment Act (Northern Ireland) 1929 or, after his death, the court makes an order for the administration in bankruptcy of his estate; or
4. (d) in the Isle of Man, he is adjudged bankrupt, a deed of arrangement is made for the benefit of his creditors or, after his death, the court makes an order for the administration in bankruptcy of his estate.'.

No. 24, in page 7, line 4, at end insert 'but no claim may be made before 1st December 1990.'.

No. 38, in page 7, line 18, leave out from '(b)' to the end of line 20.

Mr. Smith

Clause 10 relates to bad debt relief for VAT. It will cost the Exchequer £150 million in a full year, so we are talking about a substantial measure and it is important to ensure that the Government have got it right. We broadly welcome the Government's aim in the clause but do not think they have it right, and we have tabled amendments to improve it. I hope that when he returns to his place, the Economic Secretary will address the issues involved in the clause in the open-minded manner that he promised he would adopt in our discussions on the Bill.

The Government have made much of the claim that the clause will ease the position of VAT recovery for small businesses. Our fear is that there are some limited circumstances in which the clause will make matters worse, and we have tabled amendments to correct that problem. I shall return to that issue later as I deal in detail with our amendments. It is important at the outset to recognise the context in which the debate is taking place, and to that end it is necessary to examine the overall context in which small businesses find themselves.

Small, if useful, measures on VAT registration and bad debt relief are as nothing beside the two overwhelming and dominating facts of life for small businesses in Britain today. Those are high interest rates and the introduction of the uniform business rate.

7 pm

High interest rates have been adopted by the Government as the only policy that is supposed to operate as a deterrent to demand and credit in the British economy. As we know, high interest rates are not particularly good instruments as a deterrent to demand. As we pointed out on Second Reading, since the former Chancellor began to tighten credit by raising the cost of money, £150 billion-worth of additional credit has gone into the domestic economy. The profit figures announced this morning by Sainsbury show that the impact on the demand side of the economy has been imperfect at best.

But the problem with high interest rates is that they harm the supply side of the equation, too. It becomes crucial for small businesses because of the results of the harm on the supply side. Large-scale business tends to invest out of its own profits. Small business must borrow to invest, to grow and to take the decisions about future expansion that must be taken.

The reality is clear. For example, the chairman of the Midland bank, Sir Kit McMahon, was reported on 24 April last to have said: High interest rates were hitting businesses as well as individuals and leading to a worsening of the bank's bad debts. That was a clear indication from the Midland bank, echoed a couple of days later by the deputy chairman of Barclays bank, that small businesses throughout the country were facing enormous difficulty as a result of the Government's high interest rate policy.

The accountants Peat, Marwick, McLintock reported a 27 per cent. rise in the number of companies going into voluntary liquidation in the first quarter of this year. That is the background for small businesses against which we come to this debate about VAT changes for small businesses.

At the same time as high interest rates are operating on small businesses, the uniform business rate is having a great impact, especially in the south of the country, on the small-scale retailing sector. Even the transitional protection that the Government have supposedly introduced will not make life much better for small businesses faced with the certainty of major increases in the rates that they will pay in each of the next five years.

We must consider clause 10 against that background. Likewise, we must consider the changes that our amendments would make to the clause. There are two forms of trader who are not affected by clause 10. A limited number of traders use either the cash accounting scheme or the retailers' standard method scheme. Under either of those, output VAT is accounted for only when cash is received. So bad debt relief is automatic for firms in those categories.

All other traders will find the clause important. For them, VAT must at present be accounted for to Customs on the basis of VAT invoices issued, regardless of whether the money has been received. As a result, if a trader charges a customer £100 of VAT, he must at the time of his next VAT return account for that £100 to Customs and Excise, whether or not he has received the money.

If the £100 is not received, because the customer defaults, how can the trader get his £100 back or have it recredited? Until the date of the Budget, he could get it back only if the debtor became formally insolvent, and the formal definition of insolvency—generally either bankruptcy or liquidation—was set out in section 22 of the Value Added Tax Act 1983.

If a debtor simply did not pay or became untraceable —if he disappeared or, in the case of large companies, the debt was small—it was not worthwhile tracking the debtor down, making him bankrupt and petitioning for a company's liquidation. As a result, even where a debt had been written off and was clearly not recoverable, VAT bad debt relief was often not available. As larger debtors were chased and as larger creditors tended to pursue debts as a matter of principle, the problem tended to affect mainly relatively small debts owed to small and medium-sized traders.

Overall, taken in total, a substantial amount of money is involved and it has been a source of great irritation to many businesses. For example, in the credit card operation of one major high street retailer, in 1988–89 £12 million of small debts, of under £500 each, was written off. By doing that, the company would have lost some £1.8 million in VAT bad debt relief. So in some instances we are talking about substantial sums of money and a substantial impact upon the cash flow of companies.

The new relief which clause 10 introduces allows the £100 of VAT to be reclaimed or recredited after three things have happened. First, the VAT has to have been paid over by the trader to Her Majesty's Customs and Excise before it can subsequently be reclaimed under the provisions of the clause. Secondly, the debt has to be written off in the company's accounts, and thirdly—the point to which our principal amendment relates—at least two years must elapse from the date of the supply.

Representative bodies of small businesses have been pressing for such bad debt relief for many years, so it is a welcome change. However, the pressure was for such a change to be made as an alternative to the existing system, not as a complete and total replacement for it. Our other main amendment seeks to enshrine that principle so that after Royal Assent the new clause 10 provisions are not a total replacement for the existing provisions, and to allow them to run side by side.

Mr. Tim Smith

I do not fully understand one aspect of the hon. Gentleman's argument. I do not understand why it is thought that clause 10 is so important for small businesses. Any small business with a turnover of less than £250,000, which is not that much, can opt for cash accounting. If a company opts for cash accounting it has to account for output only when it receives the cash. Small businesses do not have to worry about all that, so why is the clause so important for small businesses if they can opt for cash accounting?

Mr. Chris Smith

I am surprised by the hon. Gentleman, who is normally somewhat more perceptive. Of course the clause is important to small businesses, as it is to larger businesses, but larger businesses can frequently tolerate greater ups and downs in their cash flow than can small businesses which have not opted for cash accounting. I made it clear at the beginning of my remarks that the cash accounting principle was excluded from the provisions for bad debt relief because VAT is not claimed at the point of supply. The hon. Gentleman must realise that large numbers of small businesses are affected by the provisions of clause 10 for whom the deficiencies of clause 10 are likely to be important.

The new relief will be introduced in place of the old relief and schedule 16 of the Bill, which no doubt we shall be discussing in some weeks' time, repeals section 22 of the Value Added Tax Act 1983.

7.15 pm

The problem is that, where prompt relief might have been possible under the old system, it is likely to be delayed under the new system. Let me illustrate that. If a major trader, which we shall call Ryder and Co., is rendering quarterly VAT returns and in July 1990 Ryder and Co. sells goods to another company—let us call it Lilley and Co.—for £1 million plus VAT of £150,000. Payment is due in 60 days. At the end of September 1990, Ryder and Co. pays the £150,000 to Her Majesty's Customs and Excise. Lilley and Co. has not yet paid Ryder and Co.

In October, Ryder presses Lilley for payment and hears that Lilley may be insolvent. In November Ryder petitions for Lilley's liquidation and in December Ryder submits proof to the liquidator who responds that the company is likely to receive £230,000 in due course. Ryder therefore writes off £920,000 in its year-end accounts and with December 1990 VAT return claims repayment of £120,000. Effectively, under the existing system of claim back the repayment would have taken only one VAT quarter. In practice that would be unusually quick, but not totally uncommon.

Under the new system, Ryder and Co. would have to wait until at least July 1992—two years after the supply and seven VAT quarters after paying over the VAT—before being able to recover the £120,000 from Customs and Excise. Potentially that could be a crippling blow, because a further £800,000 would already have been lost as a result of the non-payment. At an estimated 15 per cent. cash flow cost, the cash flow cost to the company would be at least £18,000. It is therefore perfectly conceivable that under the changes that the Government have introduced, in some circumstances bad debt relief will be worse than under the existing system. In those circumstances the reforms in clause 10 could cost traders money. They would get additional relief for smaller bad debts, but would suffer delays in receiving relief for larger debts.

The amendments seek to relieve or eliminate the problem. Amendment No. 3 is our principal amendment and unless the Government can satisfy us on it, we might divide the Committee. The amendment seeks to reduce the two-year time limit in clause 10(1)(c) to one year. If it takes an average of nine months from the date of supply to obtain bad debt relief under the old system—the period that would normally apply if the debtor went into liquidation—and if a one-year rather than a two-year period were to operate, the new system would simply add three months' delay rather than the 15 months' delay that would apply under current proposals. The period of one year would be more appropriate and sensible. It would allow for 80 days of credit, five months of arguing—if discussions were appropriate—and six months to write off the debt.

Amendment No. 3 would provide that instead of having to wait two years before it can get bad debt relief, a company should have to wait only one year. That seems to provide a better framework for business without causing insuperable administrative problems for Customs and Excise.

Amendment No. 1 would reinstate the old section 22 test as an alternative to the time lapse test. As I said earlier, the amendment would set the old system for relief where liquidation took place alongside the new system, rather than allowing the new system totally to eradicate the old. If liquidation took place within a short period after the supply of goods or services, the old system operated fairly effectively. Under the Government's proposals the two-year time limit has to expire before relief can be obtained. Amendment No. 1 seeks to reinstate the old system to run in parallel with the new, and offers the two as alternatives to the business community.

Amendment No. 2 is slightly more technical; the Liberal Democrats have tabled a similar amendment, No. 37. Amendment No. 2 has two aims. First, under new Inland Revenue regulations, small traders can present simplified accounts to support a tax return and there is no statutory requirement to produce full accounts. Some small traders may not have accounts which would satisfy clause 10(1)(b). Their three-line accounts will not identify bad debts as part of the specific acccounts prepared by the company. The amendment requires only that the account be written off in the accounting records from which the accounts, however simple, have been or will be prepared. Even smaller traders will have such records, which are a VAT requirement.

The second reason for amendment No. 2 is that the wording of clause 10(1)(b) could in some circumstances cause problems. Let us assume that the Government were to decide that although our proposal for a 12-month period is not acceptable, none the less two years is too long, and in due course proposed shortening the period to 15 months. If a company had a debt of £1 million, with VAT of £150,000 already paid to Her Majesty's Customs, dating from March 1991, the debt would not be written off in the December 1991 accounts but would be written off in the May 1992 ledger. To satisfy the provisions of clause 10(1)(b), the company could not reclaim the VAT until the audited 1992 accounts were available, say, in April 1993.

In the amendment, we suggest that the proof that the debt was written off should not have to wait until the published accounts but should be demonstrable by entries in the company's ledgers, which would be used in the compilation of the accounts. That would mean that the company would not have to wait, possibly for several years, for the bad debt relief.

I wish to make three other brief points in respect of the clause. First, the power in clause 10(5)(g) to let the commissioners make regulations which make different provision for different circumstances appear to be drawn rather widely. Obviously, we wish to ensure that the commissioners have the powers they need, but the provisions of that part of the clause seem wide. Although regulations will be promulgated under the provision, we ask the Government to ensure that any such regulations are issued in draft for comment before promulgation takes place.

Secondly, clause 10(4)(a) is clearly aimed at the position where someone deliberately overcharges another person for a supply, crediting the VAT on the VAT return of the person receiving the supply, with the supplier then recovering it under the new rules. We wish to catch precisely such abuse as well. The wording of clause 10(4)(a)— equal to or less than its open market value"— seems to be drawn extremely tightly. It is reminiscent of Shylock's pound of flesh when even £1 worth above the stated value would immediately disqualify the entire bad debt relief. That seems tough. We hope that the Government will consider a phrase such as, "the value of the supply not being substantially greater than the open market value".

Thirdly, I note that the Liberal Democrats have tabled amendment No. 38 in respect of clause 10(4)(b). There might be a problem with the provision where goods are sold under hire purchase or under a Romalpa clause, whereby in strict law title remains with the vendor until the goods are fully paid for, but where the goods are not recovered by the vendor when the purchaser defaults. Unless clause 10(4)(b) is withdrawn or amended, a strict interpretation would mean that bad debt relief would not be due in such cases. It would be useful to have an assurance that the regulations will allow relief to be claimed.

I have tried to outline on these complicated and technical matters the purpose of our amendments. We agree entirely with the aim upon which the Government have embarked in clause 10 to make life better and easier for businesses claiming bad debt relief. We do not think that the Government have got it entirely right. We have tabled the amendments in a spirit of helpfulness to the Government and in the hope that improvements will be made.

Sir Barney Hayhoe (Brentford and Isleworth)

The hon. Member for Islington, South and Finsbury (Mr. Smith) was less than generous in his welcome to a worthwhile and overdue reform. It is no secret that sometimes Ministers, as a result of collective responsibility, have to support and take action on matters with which they are not in 100 per cent. agreement. That was certainly true for me in the mid-1980s when I was a Treasury Minister with responsibility for indirect taxation.

Having had a hand in the reform of bad debt provision in regard to insolvency, I always recognised that very hard cases still remained in which groups of traders were suffering, because at that time we were unable, with the expertise available to the Customs and Excise, to come up with a scheme as wide in operation as that now proposed.

I warmly congratulate my right hon. Friend the Chancellor and my hon. Friend the Economic Secretary —who has, I imagine, dealt with the detail of the provisions—on bringing forward this reform. I can remember a number of times on which I had to write letters to traders who could not believe that the system was fair. I had to say to them that VAT operated on the supply of goods and services and not on the payment for them. It was bad enough when people defaulted on paying the fees or the charges for the goods or services supplied, but when the traders who were suffering from that bad debt had only limited redress through the insolvency provisions and often had no redress in reclaiming the VAT, one realised that the problem required Government action.

The Government have now moved substantially in that direction at a significant cost of between £150 million and £200 million in a full year. That is a substantial contribution by the Government towards putting right something that has been wrong for too long. This is an excellent provision in what I regard as a good, fair and responsible Budget. It is with great pleasure that I commend clause 10, although I have a little trace of regret that when I had Treasury responsibility, I was unable to take the helpful action that my right hon. Friend the Chancellor and my hon. Friend the Economic Secretary have now taken.

7.30 pm

Mr. Beith

Clause 10 is a welcome feature of the Bill and addresses part of a major problem for smaller businesses. Bad debt is the tip of the iceberg of the problem of debt and late payment, which besets small business to such an extent that it has given rise to pleas for legislation and to private Members' Bills which have addressed the wider issue of late payment. Government Departments themselves are sometimes open to substantial criticism because many small businesses find it most difficult of all to deal with Government agencies.

There is also a case for the Government, perhaps through training programmes, through the training and enterprise councils and through help for small businesses to direct attention towards ways of stopping bad debt problems mounting up and to encourage new businesses to put invoice and collection systems properly in place from the beginning. In my experience, many good craftsmen and tradesmen are often slow to send in their bills, so they are slow to realise that bad debts will arise.

I am sometimes amazed by how long people who have done decent jobs wait to get paid and how often they fail to issue an initial invoice, let alone chase up the debt involved. That is often because such tradesmen are good at doing the job rather than good at the technicalities of chasing payment. However, there are so many relatively simple computer systems now that small business can be given every help and encouragement to stop the problem building up.

Clause 10 addresses the extreme end of the problem —genuine bad debt. In a wide-ranging speech, the hon. Member for Islington, South and Finsbury (Mr. Smith) talked about the banks and their involvement. It struck me at the time that it is all very well for the banks to talk about bad debt when they have found that the worst bad debts are caused not by the expansion of demand in the retail trade, but in Third-world countries and in agriculture.

Mr. Neil Hamilton

Does the hon. Gentleman agree that there would not have been so many bad debts if the banks had not been such bad lenders?

Mr. Beith

The banks' readiness to lend in circumstances in which individuals should be much more cautious about the pressure put on people to borrow money has been part of the recent economic problems, although the record of recovery at the personal debt level is very much better than it is in some other areas. I singled out agriculture and debts in Third-world countries as areas where the banks have seriously overcommitted themselves far more, to their own detriment. In personal debt, they have caused considerable damage to individuals by encouraging them to take out debts that they cannot repay.

Sir Alan Glyn (Windsor and Maidenhead)

Does the hon. Gentleman agree that by giving enormous advances to Third-world countries, which will never be repaid, the banks have made it almost impossible or far more difficult to lend to smaller businesses?

Mr. Beith

No, because the banks still have the capacity to provide loans to small businesses. I am critical of the way in which they carried out lending operations to Third-world countries, but we shall have plenty of opportunity to talk about that when we debate other provisions in the Bill.

I and my right hon. and hon. Friends have tabled amendments designed to improve clause 10. Amendment No. 37, which overlaps with amendment No. 2, seeks to delete the word "accounts" and to insert "books and records". It is worrying that, if full statutory accounts are required, it will be a long time before a business can make a claim for relief from VAT. It could be a process of two years to have audited accounts available and unless the word "accounts" is used in a looser and more general way, the clause could present a real obstacle and could leave small businesses wondering whether it will be worth the effort and time involved in following the matter through over so long a period. I hope that the Economic Secretary will tell us that the word "accounts" in this case does not mean final audited or statutory accounts.

Amendment No. 38 seeks to remove clause 10(4)(b) which denies relief where the goods have been supplied under a reservation of title, or what is known as a Romalpa title in the trade, in which the title remains with the vendor until payment is received. The logic is that the vendor can simply repossess the goods to meet his VAT payments and the debt to him, but that is not always easy. A hire purchase item may mysteriously disappear from the premises of the person who has incurred the debt. A piece of equipment may be supplied to another company which, strangely, has disappeared. Access to the premises may not be easily obtained. There are many reasons why repossession may not be feasible in the circumstances.

If the debt is treated as a bad debt, but the item is subsequently reclaimed or returns to the possession of the business, the value would come back via clause 10(5)(e) and would be repaid. There are provisions there to ensure that a bad debt that ceases to be a bad debt is not the subject of a double benefit. I hope that the Minister will either accept amendment No. 38 or find some other way to ensure that people trading in that manner can obtain VAT relief. We are dealing with a sector that is important not only in the retail hire purchase trade, but in small business generally.

Small businesses that face difficulties in obtaining capital are frequently involved in arrangements under which they have equipment whose title remains with the vendor until payment is received or completed. It is a common method and is an alternative to full-scale leasing which many small businesses use for the equipment they need. I look to the Minister to find a way of meeting those difficulties. If he does so, he will improve what is already a useful clause.

Mr. David Nicholson (Taunton)

This is the first debate on a Finance Bill in which I have taken part which has been initiated by the hon. Member for Islington, South and Finsbury (Mr. Smith), for whom I have some admiration. However, I am sorry that he spoke at some length and somewhat controversially in the early part of his speech. He spent so long in setting the scene that I hope, Mr. Lofthouse, that you will permit me to respond to his remarks on interest rates, for example. All hon. Members recognise that interest rates are a major problem for all kinds of businesses at present. However, let the House not forget that, under the previous Labour Government, the rate of interest was normally below the rate of inflation, so savers were losing all the time. It is appropriate to make that point in the debate on a Budget that aims to help saving.

The hon. Member for Islington, South and Finsbury also referred to the uniform business rate as a source of burdens on small businesses. He will recall that we have previously debated the Labour party's attitude to the revaluation of business rating, which is by far the greatest cause of the burdens facing many businesses at the moment. The Labour party supports that revaluation.

We welcome the measure in clause 10 which, as has been stated, will cost between £150 million and £200 million. That is a substantial amount at a time when budgetary pressure is significant. I listened with interest to the hon. Member for Islington, South and Finsbury. Certain business organisations share some of the reservations that have been expressed. I understand that the Confederation of British Industry has expressed reservations, although I have not been in direct contact with it. I believe that it has made representations to one or two of my hon. Friends.

I must declare an interest because I am an adviser to the Building Employers Confederation which, in collusion with the CBI, has expressed concern about the way in which the bad debt relief might work. The BEC does not want traders to have to wait two years for the relief to take effect. It also sees certain advantages in running the new system in parallel with the old so that there will be an alternative. I hope that my hon. Friend the Economic Secretary to the Treasury will address those concerns expressed by business organisations and consider further possible representations that they might make in writing after this debate.

Mr. Allen

It is worth noting that it was a Conservative Administration who raised VAT from 8 per cent. to 15 per cent. in their first year of office. We must view some of the problems that are related to clause 10 against that background and against a wider background of small businesses suffering the highest interest rates of any G7 country and the highest rate of inflation in industrialised Europe. I must make those points as we discuss what some people outside this place might consider a rather technical clause.

You were right, Mr. Lofthouse, to call me to order earlier when I referred to the uniform business rate. That also forms part of the background to this debate, in which we are considering small businesses that might be forced out of business. The registration requirement might be the final straw for them. Because of the wider factors to which I have referred, many small businesses will find that any additional impositions might be enough to force them over the brink. Dun and Bradstreet estimate that in 1989 bankruptcies were running at 26.3 per cent. in London and the south-east, while the figure was 9.3 per cent. for England as a whole. Those figures appeared in March 1990.

Mr. Hanley

Of what was that 9.3 per cent.?

Mr. Allen

Of 100 per cent.

We must also put the problem of late payments into perspective. My hon. Friend the Member for Ashfield (Mr. Haynes) paid tribute to his predecessor and I wanted to pay tribute to my predecessor, who was also a Conservative, Mr. Richard Ottaway. He often raised the issue of small claims and late payments. I am glad to see Conservative Back Benchers picking up on that campaign once again. I hope that they will find a ready response from the Government Front Bench.

Mr. Hanley

Will the hon. Gentleman consider the number of liquidations against the number of new companies being formed? If he did that, he would see that in all parts of the country the net number of new companies is higher than ever in our history.

Mr. Allen

We must be very careful about the number of companies and businesses that are being created. We must consider how long they last. The companies that become bankrupt or go out of business may be different companies from those that are being created. My hon. Friend the Member for Wrexham (Dr. Marek) has just arrived in the Chamber hot foot from his constituency. I understand that he has lost 1,000 jobs in his constituency over the past couple of days. Frankly, even a dozen new hamburger stalls would not compensate to that loss of jobs.

Dr. John Marek (Wrexham)

I hope that we have not yet lost those jobs. Brymbo was one of the most profitable steelworks in the country. It takes genius on the part of the Government to lose those jobs.

Mr. Allen

All new business is welcome. However, we must ensure that the balance in our economy, which has been distorted over the past 10 years, reaches some equilibrium. We need full-time jobs that pay a reasonable rate for the job. People should not be forced into low-income employment to supplement otherwise inadequate earnings. Wives should not have to go out to work when they would rather look after young families at home when their husbands are at work.

I understand that the measure in clause 10 will cost about £150 million. I do not want the measure to be withdrawn and I do not say that £150 million should not be spent. However, I hope that we will refer to the measure constantly in our proceedings on this Bill as an illustration of where the Government's spending priorities lie. In an earlier debate, the Department of Employment's training programmes were cut by £212 million. Today the Prime Minister refuted the need for more resources to be devoted to tracking down sex offenders—something that is close to the hearts of some Opposition Members.

The Temporary Chairman

Order. The hon. Gentleman is straying. He should return to the amendment.

7.45 pm

Mr. Allen

I accept that reprimand, but I was trying to draw a perspective on the spending involved in clause 10. That spending amounts to £150 million. While I do not believe that that money will not be spent properly, there are other spending priorities, which should be examined thoroughly in our debates on this Bill.

Mr. Tim Smith

The hon. Gentleman is complaining about the cost of the measure. However, his hon. Friend the Member for Islington, South and Finsbury (Mr. Smith) has already welcomed it. He is proposing an amendment to reduce the period to one year, and no doubt that would increase the costs a great deal. What does the hon. Gentleman say about that?

Mr. Allen

I am sorry that my arguments went over the hon. Gentleman's head. I will try to explain them more simply, so that he can understand them. We are used to his interventions in the Public Accounts Committee, where he is usually a little more perceptive.

We are entitled to examine the Government's spending priorities as a whole in the Finance Bill. I welcome the spending on this measure of VAT relief. I also welcome the speech of my hon. Friend the hon. Member for Islington, South and Finsbury. My point is that there are many other spending priorities, but you, Mr. Lofthouse, would draw me to order if I were to refer to them in detail. However, those other priorities should also be taken into account. They illustrate the philosophy of a Government who, in many aspects in the Budget, have decided to do very little. They are holding the ship as steady as possible while it is surrounded by icebergs. Nevertheless, other areas are involved and need to be examined.

The first of the three amendments explained by my hon. Friend the Member for Islington, South and Finsbury seeks to ensure that the baby is not thrown out with the bath water. Although we welcome clause 10, we should ensure that companies that are insolvent retain their current abilities and are not ruled out of the provisions.

The second of our group of amendments seeks to help with small traders' claims for relief. That point has been well covered. The final amendment in this group, on which I have no doubt that my hon. Friend the Member for Workington (Mr. Campbell-Savours) wishes to comment, relates to the delay in claiming VAT relief on all written-off debts. Again, I hope that the Government will feel that it is possible to reduce the two years to one and that they will accept the amendment as proposed. If that is not possible, I hope that the Economic Secretary will at least agree to consider the matter in some detail and that he will make some verbal commitment when he replies.

Mr. Tim Smith

When VAT was first introduced, the position on bad debt relief was clear—there was no bad debt relief. It is important that the Committee understands how unfair that was. Value added tax was organised in such a way that a business had to pay over the VAT whether or not the registered trader had received the cash. If the trader never received the customer's cash, he never received the cash back from Customs and Excise. My right hon. Friend the Member for Brentford and Isleworth (Sir B. Hayhoe) was the Minister responsible for Customs and Excise at the time. He introduced what he has just conceded was a step in the right direction on the issue of bad debt relief, but it provided only for businesses that were already insolvent. There was therefore still a problem, because many businesses still had to pay VAT to Customs and Excise, but were unable to recover it.

It is important to understand that registered traders are effectively unpaid collectors of taxes. They are not dealing with their own liability; they are collecting a tax and paying it to Customs and Excise. It was a most unfair system, because they were required to pay a tax when somebody else was unable to pay it. The clause is welcome, as it introduces a comprehensive system of bad debt relief for the first time.

The hon. Member for Nottingham, North (Mr. Allen) does not seem to understand a great deal about VAT and would do well to listen at the moment—[Interruption.] I am glad that the Opposition Front Bench spokesmen are listening. The hon. Gentleman complained about the cost of the relief and suggested that it was an indication of the Government's public spending priorities. However, we are not talking about public spending priorities; we are talking about taxation yields.

If the cost of the relief is £150 million, we must remember that that £150 million is the bottom line for businesses that are not responsible for the fact that the tax has not been paid in the first place. It was not those businesses' fault that their customers had become insolvent or did not pay, but they had to pay the tax over to the Customs and Excise. It is because that system was so unfair that this change is so welcome.

The only point that I did not understand in the speech of the hon. Member for Islington, South and Finsbury (Mr. Smith) was his explanation of the importance of the clause for small businesses. I remind him that, in the past few years, another important change has been made—since the introduction of VAT—

Mr. Allen

Is the hon. Gentleman saying that providing the relief does not involve real money or real spending or certain priorities in relation to Government spending?

Mr. Smith

Of course it involves real money, but it has nothing to do with the Government spending. The provision involves a reduction in the yield of VAT, and for the reasons that I have explained, I believe that that reduction in the yield is wholly justified.

I was about to say that another important change that has been made to the VAT regime in recent years is the change to cash accounting. Any business with a turnover of £250,000 or less, which must accommodate a large number if not the majority of registered traders, can switch to a system of cash accounting if it so chooses, and at any time that it so chooses. It can then not only accommodate bad debts—there will be no problems about customers who have not paid—but it has a solution to the problem of customers who pay late. Cash accounting means that the trader pays the VAT to Customs and Excise only when it has been collected from the customers.

Can my hon. Friend the Economic Secretary tell us what proportion of VAT traders have opted for cash accounting? Surely more small businesses should be encouraged to make the change, because they would not have to worry about complying with all the requirements of the provisions on bad debt relief, and they would not have to worry if some of their debtors took a long time to pay their debts, because all those factors are taken into account in cash accounting.

I believe that only a relatively small proportion of VAT traders have changed to cash accounting, and I wonder why. Is it because the system has not been publicised sufficiently? If more traders switched to that system, they would find substantial cash flow benefits and would no longer have to worry about the problems of bad debt relief. Clause 10 would then be relevant to large businesses with a turnover of more than £250,000. Although I hope that my hon. Friend the Economic Secretary will comment on that, I conclude by welcoming the new provisions.

Mr. Hanley

I welcome the speech of my hon. Friend the Member for Beaconsfield (Mr. Smith), which was in stark contrast to that of the hon. Member for Nottingham, North (Mr. Allen) in that it contained great good sense and was both accurate and to the point.

I, too, welcome clause 10. As my hon. Friend the Member for Beaconsfield said when he traced the history of bad debt relief—or the absence of bad debt relief—businesses of all kinds have been hard done by in the past, which is why the relief is so welcome.

However, although the previous relief needed amending to some extent, it should not be thrown out altogether. The Institute of Chartered Accountants in England and Wales believes that the clause is a welcome extension to the existing bad debt reliefs, at least where there is no formal insolvency. However, either the present relief should be allowed to continue in addition to the new relief that has been proposed—perhaps the former should be amended to provide for the repayment of VAT for amounts that are subsequently recovered, with proof of the insolvency for the VAT-inclusive amount of the debt—or the requirement for a two-year period should be substantially reduced. It has been suggested that the two-year period should be reduced to one year. That would be possible, but I accept that if the period were reduced there would be many more cases of doubt in which a bad debt was initially claimed but where the amount was subsequently paid.

We are all aware of the need for Customs and Excise to ensure that companies do not claim double relief. However, if the two systems of bad debt relief—the old system and the new system—were allowed to run in tandem, and if a VAT payer could opt for the system that he found preferable, he might be able to avoid claiming double relief simply by the inclusion of an additional box on VAT form 100, in which only the amount of the relief that has actually been claimed would need to be given. In that way, no one could enjoy double relief.

The Institute of Chartered Accountants in England and Wales also believes that the new relief is unduly restrictive because there is an unwarranted delay where the debt has become irrecoverable within a short period after the date of supply because of the insolvency of the debtor. That point has been raised by several hon. Members, including the hon. Member for Islington, South and Finsbury (Mr. Smith).

There is support for the fact that this is welcome relief, unless the debtor goes bankrupt, and then the delay seems far too long.

In his brief sketch of the legislation, the hon. Member for Islington, South and Finsbury—

Mr. Tim Smith

It was an outline.

8 pm

Mr. Hanley

As my hon. Friend says, it was an outline or perhaps even briefer than that. I am sure that we shall hear longer speeches from the hon. Gentleman in Committee. He also mentioned Romalpa-type goods, where goods are sold subject to reservation of title. The hon. Member for Brent, South (Mr. Boateng) would understand the legal title. Where the property and goods have not passed, the owner of those goods is placed in a difficult position. If the goods have disappeared, there is a bad debt, but, because the title has not passed, he is still deemed to own those goods, so there is a serious problem with clause 10(4)(b). It would operate unfairly if the title proved to be unenforceable. I am sure that the effect of that clause was not intended and was a straightforward slip which needs to be addressed. Hire purchase contracts or goods sold under reservation of title should not cause unfair disadvantage to those who have lost both the goods and, subsequently, the VAT.

Clause 10(5) mentions "regulations". It would be most helpful for all hon. Members on both sides of the Committee if those regulations were issued in draft form for comment before being laid before the House. There have been many cases during the past few years where the Revenue and the Department of Trade and Industry have been helpful over company legislation, and draft regulations issued for comment have helped to reduce final inaccuracies and argument.

That is particularly important in this clause, because accountants would like to feel that the definition of writing off a debt is at least consistent with their way of doing it. Will a debt being written off mean that the debt has to be written out of the books, or will it suffice if the full provision is made against it? The law is not clear and it would be much better if published accounts were consistent with what my hon. Friend the Economic Secretary is trying to bring into the legislation.

Presumably, the regulations will also specify the additional records that the taxpayer will have to keep to make a claim, and in what form. It is only right that practising accountants should be able to comment on that before the regulations are presented to the Committee. The Institute of Chartered Accountants in England and Wales has written to the Treasury saying it would be happy to discuss the draft with Her Majesty's Customs and Excise if it so wishes.

The bad debt relief should be available where a provision is made in respect of a debt, rather than its being written off. Should the amount prove recoverable, the debt would be repayable. It would be disappointing if best accounting practice was distorted as a result of the need to comply with the write-off requirements under the regulations. Therefore, I welcome the clause, but believe that the two or three issues raised by hon. Members from both sides of the Committee are worthy of comment. In that spirit, I support the clause.

Mr. Campbell-Savours

When one misses a Finance Bill or two, one becomes quite rusty on such matters, and I must confess that I feel a little rusty on this issue.

I should like to raise a couple of points because, if I recall correctly, early in the 1980s I spoke on an amendment to the Finance Bill in some detail having done a considerable amount of homework. I am trying to empty my mind of what I said then. Now that a scheme is in place —at that time I was arguing for the introduction of a scheme—I am concerned about what would happen if someone claimed relief, having written off a debt, and subsequently reclaimed the goods.

The hon. Member for Richmond and Barnes (Mr. Hanley) alluded to what would happen if relief was claimed and the goods were subsequently re-acquired—

Mr. Hanley

If the goods were reclaimed, the relief would have to be repayable.

Mr. Campbell-Savours

I can understand that if settlement of the account finally took place, the VAT would have to be adjusted to take that into account. However, I am not sure that it is the function of the Customs and Excise authorities to police where goods have been re-acquired by manufacturers or distributors from customers who have not paid, but have been willing to relinquish control of the goods.

Mr. Hanley

I do not believe that the hon. Gentleman was in the House when the hon. Member for Islington, South and Finsbury made exactly the same points as I did. If the hon. Member for Workington (Mr. Campbell-Savours) disagrees with what I said, he is disagreeing with his own Front-Bench spokesman.

Mr. Campbell-Savours

It is not unknown for me to depart from the views of my Front-Bench spokesmen. This is the House of Commons, a debating Chamber, and we are free to speak. This is hardly a matter of huge political dimension, requiring us to take an entrenched ideological position. We are discussing to and fro the merits of a scheme. I was not here earlier because I was in the Select Committee on Members' Interests, dealing with matters that I find important and interesting.

I support the amendment to reduce the period to one year. It seems that it will be hard for Customs and Excise to police where goods have been reclaimed from customers who have had their VAT liability to the seller, distributor or supplier of the goods written off. It would be hard to monitor that.

It might be that firm A supplies to firm B £5,000-worth of merchandise. Firm B dillies and dallies and at the end of two years, firm A claims relief. Six months later, firm A may send round a couple of wagons to firm B and say, "We know that you have the goods in there and we want them back. You never paid us. We have received the money back from Customs and Excise, but you never actually paid us and we want our goods back." Firm A may go in and secure those goods. That is a reasonable case. What would happen in that instance? Will the VAT monitoring apply equally in that case, or will it partially apply? How will it be policed? I do not know.

I believe that the provision is a major concession. I remember the old days when purchase tax was 25 per cent. There was a time when it was even more. There was a purchase tax surcharge in the late 1960s when I was in business when it was as much as 35 or 37.5 per cent.—extremely high. At that time one could not reclaim it and when someone did not pay, it was a big wallop out of one's cash flow. We have seen purchase tax reduced to 8 per cent. as VAT and rise to 15 per cent. and I am sure that today, while it will not be on such a high scale, it will certainly have a major effect on cash flow when companies do not pay their bills or VAT liabilities.

I remember a particular incident in which I was involved. In 1976, in my former incarnation as a business man, I was supplying clocks to a large retailing organisation. It advertised my clock in full-page advertisements in one of the Sunday colour supplements. The company performed some clever manoeuvres when placing its orders. I was not too intelligent at the time; I was just banging out the gear, getting it into the shops to our clients, and perhaps forgetting that certain customers were building up a lot of credit. One particular customer built up credit of about £10,000—worth about £30,000 today—and then took our company for a ride. Of course, we were left to pay the bill for VAT. The rogue company never went into liquidation and we never found out what happened to it. By that time I had retired from the business to come into this blessed place. No claim was ever made, and what had previously been partly my company ended up subsidising Customs and Excise. That was wrong, and it has perhaps gone on to this day when liquidations have not taken place.

Based on my experience, I welcome a reform of this nature. But we should also consider the implications for many businesses suffering from high interest rates. Many companies in times of comparatively declining consumption and difficult market conditions—we are now entering such a period—find it hard to use all their capacity, and often find their profits falling as a result. At a time when such companies are borrowing more and more from the banks to invest in technology, as the Government told them they should, and when they are having to pay high interest rates, concessions of this sort are important because they save companies money and have a significant and positive effect on their cash flow.

Mr. Neil Hamilton

I mean no disrespect to my hon. Friends or even, unusually, to Opposition Members when I say that the most fascinating speech in the debate so far has been that of my right hon. Friend the Member for Brentford and Isleworth (Sir B. Hayhoe), who I well remember defending with passionate intensity in previous such debates positions that he now declares he believed all along to be indefensible. I know that the Economic Secretary will not be unfamiliar with that aspect of a Minister's life; but I have often spoken on previous Finance Bills to advocate broadly the sort of relief that the Government propose this evening. I greatly welcome it.

I was most interested by the speech of the hon. Member for Islington, South and Finsbury (Mr. Smith). I am delighted that he accepts the recommendations of the Institute of Directors on this matter. This is a most welcome new alliance with the Labour party, and I hope that it is contagious and will extend in due course to many of the other policies of the institute. Then we will know that perestroika has come to the Labour party in a big way.

Only one of my two amendments has been selected. They propose a slight modification of the Government's legislative proposals. In particular, they would reduce the two-year period before relief can be claimed to 13 months. It may be wondered why I selected 13 months, as opposed to 12. My first reason was that I discovered that the Labour party had selected 12—my original suggestion. However, I have been able to think up a rational justification for my change of mind. It is that 13 months can be justified as one year from the usual due date for payment after presentation of an invoice—usually 30 days or one month.

My second amendment seeks to bring forward the earliest date at which a claim under these rules can be made to 1 April 1991. That has been necessitated because my amendment to reduce to 13 months the period before relief can be claimed has the consequential effect, given the way the clause is drafted, of bringing forward the earliest claim date to 1 April 1990. Clearly it would be impossible to have a claim date earlier than that on which the regulations under the clause come into force, so I chose 1 April 1991 as a date which accommodates the reasonable suggestions of the Customs and Excise as to what is practically possible, but which seeks to bring forward the date on which the relief will become available in the interests of those who will be able to claim.

8.15 pm

I greatly welcome the Government's proposals, because proper relief of VAT on bad debts has been a notable omission from United Kingdom tax legislation, as my hon. Friend the Member for Beaconsfield (Mr. Smith) pointed out, since the inception of VAT. This inequity has been staring Governments in the face for a great many years and hon. Members on both sides of the House have campaigned strongly for many years against it, in the interests, particularly but not exclusively, of small businesses.

It is perhaps interesting to look back over the various reforms of the past 15 years or so and to see the slow steps by which we have reached this point. Section 22 of the VAT Act 1983 re-enacted provisions in the Finance Act 1978 and gave relief in cases in which there had been a formal insolvency. Then, in 1985, as my right hon. Friend the Member for Brentford and Isleworth recalled, relief was extended to include administrative receiverships. And then, in the Finance (No. 2) Act 1987, we introduced that most valuable provision, the cash accounting scheme, for traders with a turnover of up to £250,000.

If I may supply my hon. Friend the Member for Beaconsfield with the answer with which the hon. Member for Nottingham, North (Mr. Allen) was unable to supply him as to why we need this new relief, inasmuch as most small businesses can avail themselves of the cash accounting system which would remove the necessity for it, it is that, for whatever reason, there will be traders who do not appreciate where their true commercial tax advantage lies, and it would therefore be right to provide a catch-all relief. This provision certainly does that.

I share the view of my hon. Friend the Member for Beaconsfield that it would be in the interests of many more firms to take up the opportunities that the Government have provided for them. They perhaps do not sufficiently realise the advantages to their cash flow that the cash accounting scheme would provide. I should be very surprised to hear from my hon. Friend the Economic Secretary figures to show that more than a very small proportion of those who qualify for the cash accounting scheme have actually taken up the opportunity with which the Government have provided them, and I hope that they will he encouraged to do so.

In July 1988, Customs and Excise announced a review, following a commitment in the enterprise and deregulation unit's progress report earlier in the year, to look into the matter. We have been waiting a long time for this most welcome change, which the Government have introduced after a period of consideration.

My amendments seek to bring forward the point at which the benefits of this relief become available. One of the reasons why that is necessary is the very length of the period of gestation that I have described. Business deserves prompt and full relief without further ado, and I do not believe that the arguments for a two-year period are very compelling.

Attention has rightly been concentrated on the cost to the Treasury of the reduced yield of VAT that these proposals would cause. If their proper relief is expensive, that is merely a measure of the unfair burden that those businesses have had to endure for many years.

We should not be apologetic in any way about the cost to the Treasury of these proposals. That burden falls especially on small businesses which do not have the muscle that larger businesses use to make their customers pay promptly. For many small businesses, a bad debt can prove fatal. It can be the straw that breaks the camel's back, and being able to recover VAT promptly on a large bad debt can be the difference that enables a firm to survive and can stop the domino effect of default, bankruptcies and insolvencies.

This is a valuable means of preserving businesses that might otherwise be threatened. It has job-saving potential, and also the revenue-raising potential that comes from profitable businesses paying taxes rather than becoming a charge on the taxpayer as a result of failure.

The reason that I have sought to reduce the two-year period to 13 months, and why the Opposition have sought to reduce it to 12 months, is that, for most businesses, once a debt is over a year old, the likelihood of recovery is small. We should recognise that one year is a sensible period to choose, because at the end of that time, the debt is in practice unlikely to be recoverable. I hope that my hon. Friend the Economic Secretary to the Treasury can offer some comforting words when he replies to the points that I have made.

My hon. Friend the Member for Richmond and Barnes (Mr. Hanley) and the hon. Member for Islington, South and Finsbury spoke of running in tandem the old section 22 relief and the proposals in the Bill. I support that contention, because I see nothing wrong with running the two in tandem. It may be more advantageous to businesses to seek the section 22 relief, and businesses that are used to doing that should be allowed to continue in that way.

I do not wish to sound churlish because I greatly welcome the birth of this advantageous tax relief. It coincides with the appointment to his distinguished office of my hon. Friend the Economic Secretary to the Treasury. I congratulate him on building on the work of our right hon. Friend the Member for Brentford and Isleworth (Sir B. Hayhoe) who covertly and strongly fought the mandarins of the Treasury all those years ago. I congratulate the Government on their proposals.

Mr. Ryder

I reiterate my gratitude to my right hon. Friend the Member for Brentford and Isleworth (Sir B. Hayhoe). I am sure that my right hon. Friend the Chancellor, being a generous man, would be happy to share the credit for the implementation of this clause with my right hon. Friend the Member for Brentford and Isleworth, for whose kind remarks I am grateful.

I start by responding to some specific and technical points that were made by some of my hon. Friends and by Opposition Members, including the hon. Members for Islington, South and Finsbury (Mr. Smith) and for Workington (Mr. Campbell-Savours). My hon. Friend for Richmond and Barnes (Mr. Hanley) spoke about extra boxes. I understand that the return has just been revised to make it shorter, simpler and easier for traders, and that that has been done very much along the lines that my hon. Friend suggested. That is part of the Government's deregulation drive.

My hon. Friend the Member for Beaconsfield (Mr. Smith) asked about numbers. I think that about 83,000 have taken up cash accounting out of a total of 600,000. That represents about 15 per cent. so far. The hon. Member for Workington conceded that he was a little rusty after all these years. This is the first time that I have had to speak about VAT from the Front Bench and I can tell him that he is not the only one who feels a little rusty.

In the debate on last year's Finance Bill, which I have read, the hon. Member for Workington spoke about corporation tax. This time he has raised the matter of policing. VAT officers will be instructed to pay special attention to bad debt relief claims during normal control visits, and they will carry out cross checking of supplies, verification and transaction testing, especially in relation to associated companies and connected persons. We have approved 20 extra staff for that very purpose and with the full implementation of the Keith committee proposals, Customs and Excise now has a fuller armoury of criminal and civil evasion powers to deal with any dishonesty that is discovered.

Mr. Campbell-Savours

Is not there a danger that the defaulting company could claim that it has paid its account and the value added tax that was due, when in fact it has been written off by the supplying company?

Mr. Ryder

I do not think that that is a danger. During discussions that I have had about the clause it has never been drawn to my attention that it could be a danger. If the hon. Gentleman feels that the matter is worthy of further investigation, I shall certainly carry out an examination on his behalf.

The hon. Member for Islington, South and Finsbury raised three specific points about clause 10(5)(g) and the powers of VAT commissioners. We are looking at the feasibility of a consultation exercise on the draft regulations. If the hon. Gentleman has any specific matter that he would like to draw to our attention in connection with that exercise, we would be grateful to receive it. Clause 10(4)(a) is a straight copy of section 32(4)(a) of the Finance Act 1985. There is no case for giving more relief than the supply is worth. I think that traders might be tempted fraudulently to inflate the value. The other technical point raised by the hon. Gentleman was in the context of section 22 of the 1983 legislation, which has been superseded by section 32 of the Finance Act 1985.

The hon. Member for Islington, South and Finsbury made a great deal of the problem that some small businesses are suffering because of high interest rates. At the moment, lower interest rates are not a viable option if inflation is to come down. I draw his attention to an article last week in the Bank of England Quarterly Bulletin which stated that interest rates are an extremely effective policy instrument and that, if anything, their effectiveness has increased rather than decreased in recent years. I cannot share what I would describe as the hon. Gentleman's gloom merchant's analysis of small businesses. As one of my hon. Friends said in an intervention, there are now about 1,500 net new businesses starting every week.

Ms. Abbott

How many bankruptcies are there?

Mr. Ryder

The figure that I have given is net. The net figure during the last full year of a Labour Government was a loss of 100 rather than a gain of 1,500. It was minus 100 and not plus 1,500.

Mr. Battle

Is not the crucial point how long those businesses last? Businesses may start up, but if they do not survive the year, the figures are meaningless.

Mr. Ryder

If they do not survive the year, they go into the next year's figures. This is a net figure, a rolling figure. It is the figure of the new VAT regulations, which is in the public domain and constantly used by the Government.

Mr. Campbell-Savours

I do not think the Minister understands the importance of the intervention made by my hon. Friend the Member for Leeds, West (Mr. Battle). We are discussing bad debt. If, while pressing his case, the Minister is forced to accept that a large number of companies are dropping out of business or becoming insolvent, he is accepting that there is a disproportionately higher level of debt today than previously. If people are dropping out of business, the chances are that it is because of insolvency and they will leave debts behind. Surely it cannot be the Government's policy to promote a climate of business expansion which is reliant on the odd few getting through and a majority dropping out, creating immeasurable damage in terms of bad debt liability with the consequences of that on those who survive. We cannot run a modern economy on that basis. Who is protecting whom in those circumstances?

8.30 pm

Mr. Ryder

I do not deny that many small businesses are experiencing serious problems. With interest rates at their present level, it would be unusual if they were not. But I gave the net figure of new businesses starting up. There is no denying that many small businesses are closing and that many that are not closing are suffering from some of the problems to which the hon. Gentleman referred.

Clause 10 is another step towards improved conditions for small businesses, and most hon. Members who have spoken have expressed their support for it. It follows a catalogue of tax cuts undertaken by the Government since 1979. I am grateful for that support for the general thrust of the measures that have been incorporated in the clause.

Clause 10(6) provides for the making of regulations to cover the accounting requirements of the new scheme. They will provide that any trader wishing to claim bad debt relief will be required to maintain a separate bad debt relief account. When a debt is deemed to be bad, the trader will enter the debt in the bad debt relief account. That will be regarded as write-off for the purpose of the clause, as the debt will have been tranferred from whatever form of current account the trader maintains.

Concern has been expressed by hon. Members and by interested organisations outside the House that the requirement for write-off might not be met until a trader's accounts are audited or approved at a general meeting. I hope that the hon. Member for Berwick-upon-Tweed (Mr. Beith) will accept that amendment No. 37 addresses an unfounded fear. However, should the accounts subsequently be rejected by the auditors or the general meeting in matters affecting bad debts, the clawback procedures would be appropriate.

Amendment No. 38 has been tabled by the hon. Member for Berwick-upon-Tweed because he believes that traders supplying goods under certain contracts—for example, Romalpa—will be at a disadvantage. I do not think that that will be the case, because under such contracts the seller reserves title until the customer has paid for the goods. If the customer does not pay, the seller can either reclaim the goods, in which case there is no debt, or he can relinquish title to the goods and become eligible for bad debt relief. The amendment would allow the seller to do both. In other words, there would be double relief, and that would not be wholly justified.

Mr. Beith

Does that mean that a trader can self-certify that the debt cannot be recovered and so transfer title and, in some cases, if a person cannot be traced so that transfer cannot be formally effected, he can simply report to Customs and Excise that he has surrendered title and claim VAT relief?

Mr. Ryder

That is a possibility.

Amendment No. 1 was echoed by an amendment in the name of my hon. Friend the Member for Basingstoke (Mr. Hunter) which was not called. It proposes that our new scheme should co-exist with the previous bad debt relief provisions which relied on formal insolvency. The argument here is that when a company goes into formal insolvency, within a period of two years the creditor is worse off under the new arrangements than he was under the old arrangements. Much has been made of that by some commentators outside the House, but I wonder how often that would arise in practice.

I am told that it takes on average 18 months for a creditor to pursue a debt from the initial supply of goods or services to unsuccessful enforcement through county court procedures. Only then might a creditor contemplate insolvency as a means of recovering at least part of the debt owed to him. I would certainly expect companies to think twice about supplying goods or services on credit to a company which has already experienced problems in paying others.

If we were to go down that route of dual running, there would be considerable administrative complexities for business men and for Customs and Excise, who would have to guard against the possibility of claims being made under both systems. One of the virtues of the system that we are proposing is that relief is automatic. Therefore, in principle, it should be simple to operate.

Amendment No. 3 is the core of the debate, as was acknowledged by the hon. Member for Islington, South and Finsbury. It seeks to reduce the waiting period before bad debt relief can be claimed from two years to 12 months. A cut in the time limit also found favour with, among others, my hon. Friends the Members for Taunton (Mr. Nicholson) and for Tatton (Mr. Hamilton). My hon. Friend the Member for Tatton tabled an amendment for 13 months rather than 12 months. Amendment No. 24 in his name is a consequential amendment which would follow if amendment No. 3 were to be accepted.

I would expect a company, before it wrote off a debt, to make every attempt to recover not only the VAT, which would be a fairly small proportion of the sum, but the debt itself. In our judgment, two years is the appropriate period which should elapse before a company decides that a debt is irrecoverable.

Mr. Campbell-Savours

Why?

Mr. Ryder

If the hon. Gentleman waits a second, I shall explain.

Mr. Boateng

That is what we are waiting for.

Mr. Ryder

I always leave the good news to the end, as the hon. Gentleman, our favourite Jacobin, knows.

Our judgment was that two years is an appropriate period of time to elapse before a company decides that a debt cannot be recovered. We are also conscious that too short a period might be open to deliberate abuse by fraudsters.

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 to the scheme. We shall be examining that possibility between now and Report stage.

I began today's proceedings by saying, in response to the hon. Member for Nottingham, North (Mr. Allen), that I was cordial, friendly, co-operative and helpful. It is in that spirit that I have put forward the views that I have. On that basis, I hope that the hon. Member for Islington, South and Finsbury will withdraw his amendment.

Mr. Chris Smith

I begin by thanking the Economic Secretary for his remarks about possibly issuing the draft regulations relating to clause 10 for comment before they are submitted to the House. We hope that that will be done. Certainly my right hon. and hon. Friends and I will want to take a vigorous part in such a consultation exercise.

I thank the Minister for his comments about the provisions of the clause as they effect hire purchase or Romalpa arrangements. As far as I could tell, the Economic Secretary was saying that, if title to the goods is relinquished by a decision of their supplier, bad debt relief can be claimed. I hope that I have correctly understood the Minister's remarks.

I was not entirely convinced by the hon. Gentleman's answers to questions asked by ourselves and the Liberal Democrats concerning the precise definition of accounts and the effect that an entry in the books of a company before accounts have been audited or published might have on the provisions of the clause. Perhaps we can continue to examine that over the next month or two.

As to the two major issues before the Committee, we have made substantial progress on amendment No. 3, and it would be churlish of me not to acknowledge that the Economic Secretary's response was extremely positive. We hope that, as our discussions progress, the Government will bring forward a new clause or amendment on Report to cover the points encompassed by amendment No. 3, and that their response is a harbinger of other changes of mind. It is good to see that happening so early in our discussions. We have struck gold. We find that the Government are accepting the wisdom and sense of amendments that we have tabled.

Accordingly, I shall happily seek permission to withdraw amendment No. 3, and await our return to the issue to which it relates.

The Economic Secretary was somewhat less forthcoming in respect of amendment No. 1. We believe that a reduction in the time period from two years to one year would be useful; and that it would be sensible and right to run the existing system of relief in the case of insolvency together with the new one of automatic relief after a certain period has elapsed. Even with the shortened time period, in some cases—such as where insolvency occurs after three months—a supplier will have to wait another 12 months before being eligible for bad debt relief under the new system. We still want to press amendment No. 1, which seeks to allow the two systems to run alongside one another—but we give a warm welcome to the Economic Secretary's comments on amendment No. 3.

The First Deputy Chairman of Ways and Means (Sir Paul Dean)

The debate that has just taken place related to amendment No. 2. Am I to understand that the hon. Member for Islington, South and Finsbury (Mr. Smith) wishes to withdraw amendment No. 2?

Mr. Chris Smith

Yes, Sir Paul. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 1, in clause 10, page 6, line 45, after 'elapsed', insert ', or the company or individual liable to pay any outstanding amount of the consideration has become insolvent and (except where Paragraph 10 (1A)(b) below applies) the person has submitted a claim in the insolvency for the outstanding amount of the consideration.

1. (1A) a company becomes insolvent for the purposes of this section if:
1. (a) it goes into liquidation in the United Kingdom or the Isle of Man at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up;
2. (b) a person who has been appointed in Great Britain to act as the Administrator or Administrative Receiver issues a certificate of his opinion that, if it went into liquidation, the assets of the company would be insufficient to cover the payment of any dividend in respect of debts which are neither secured nor preferential; or
3. (c) a composition or scheme proposed by the Directors is approved under Part I of the Insolvency Act 1986.
2. (1B) An individual becomes insolvent for the purposes of this section if:
1. (a) in England and Wales he is adjudged bankrupt, a deed of arrangement is made for the benefit of his creditors, a composition or scheme proposed by him is approved under Part VIII of the Insolvency Act 1986 or, after his death, his estate falls to be administered in accordance with an order under Part XV of that Act;
2. (b) in Scotland, sequestration of his estate is awarded, he signs a trust deed for his creditors or, after his death, a judicial factor is appointed under Section 11A of the Judicial Factors (Scotland) Act 1889 to administer his estate;
3. (c) in Northern Ireland he is adjudged bankrupt, a deed of arrangement is made for the benefit of his creditors, a resolution of his creditors is approved by the court under Section 5 of the Bankruptcy Amendment Act (Northern Ireland) 1929 or, after his death, the court makes an order for the administration in bankruptcy of his estate; or
4. (d) in the Isle of Man, he is adjudged bankrupt, a deed of arrangement is made for the benefit of his 814 creditors or, after his death, the court makes an order for the administration in bankruptcy of his estate.'.—[Mr. Chris Smith.]

Question put, That the amendment be made:—

The Committee divided: Ayes 165, Noes 224.

Division No. 208]	[8.45 pm
AYES
Abbott, Ms Diane	Hughes, John (Coventry NE)
Allen, Graham	Hughes, Robert (Aberdeen N)
Anderson, Donald	Hughes, Roy (Newport E)
Archer, Rt Hon Peter	Ingram, Adam
Armstrong, Hilary	Janner, Greville
Ashdown, Rt Hon Paddy	Jones, Barry (Alyn & Deeside)
Banks, Tony (Newham NW)	Jones, Ieuan (Ynys Môn)
Barnes, Harry (Derbyshire NE)	Jones, Martyn (Clwyd S W)
Barnes, Mrs Rosie (Greenwich)	Kaufman, Rt Hon Gerald
Barron, Kevin	Kilfedder, James
Battle, John	Leighton, Ron
Beckett, Margaret	Lestor, Joan (Eccles)
Beith, A. J.	Lewis, Terry
Benn, Rt Hon Tony	Litherland, Robert
Bermingham, Gerald	Livsey, Richard
Bidwell, Sydney	Lloyd, Tony (Stretford)
Boateng, Paul	Loyden, Eddie
Boyes, Roland	McAllion, John
Bradley, Keith	McAvoy, Thomas
Brown, Gordon (D'mline E)	McKay, Allen (Barnsley West)
Brown, Nicholas (Newcastle E)	McKelvey, William
Brown, Ron (Edinburgh Leith)	McLeish, Henry
Buchan, Norman	Maclennan, Robert
Buckley, George J.	McWilliam, John
Callaghan, Jim	Madden, Max
Campbell, Menzies (Fife NE)	Mahon, Mrs Alice
Campbell, Ron (Blyth Valley)	Marek, Dr John
Campbell-Savours, D. N.	Marshall, David (Shettleston)
Carlile, Alex (Mont'g)	Marshall, Jim (Leicester S)
Clark, Dr David (S Shields)	Martin, Michael J. (Springburn)
Clarke, Tom (Monklands W)	Martlew, Eric
Clay, Bob	Maxton, John
Clelland, David	Meacher, Michael
Cohen, Harry	Meale, Alan
Cryer, Bob	Michael, Alun
Cummings, John	Michie, Bill (Sheffield Heeley)
Darling, Alistair	Mitchell, Austin (G't Grimsby)
Davies, Ron (Caerphilly)	Molyneaux, Rt Hon James
Davis, Terry (B'ham Hodge H'l)	Morgan, Rhodri
Dewar, Donald	Morley, Elliot
Dixon, Don	Morris, Rt Hon A. (W'shawe)
Doran, Frank	Mowlam, Marjorie
Dunnachie, Jimmy	Mullin, Chris
Dunwoody, Hon Mrs Gwyneth	Oakes, Rt Hon Gordon
Eadie, Alexander	O'Brien, William
Eastham, Ken	O'Neill, Martin
Evans, John (St Helens N)	Orme, Rt Hon Stanley
Ewing, Harry (Falkirk E)	Parry, Robert
Fearn, Ronald	Patchett, Terry
Field, Frank (Birkenhead)	Pike, Peter L.
Fisher, Mark	Powell, Ray (Ogmore)
Flannery, Martin	Primarolo, Dawn
Foot, Rt Hon Michael	Quin, Ms Joyce
Forsythe, Clifford (Antrim S)	Radice, Giles
Foster, Derek	Redmond, Martin
Fraser, John	Rees, Rt Hon Merlyn
Fyfe, Maria	Reid, Dr John
Garrett, John (Norwich South)	Richardson, Jo
George, Bruce	Robertson, George
Graham, Thomas	Rogers, Allan
Griffiths, Nigel (Edinburgh S)	Rooker, Jeff
Griffiths, Win (Bridgend)	Ross, Ernie (Dundee W)
Harman, Ms Harriet	Ruddock, Joan
Haynes, Frank	Salmond, Alex
Heal, Mrs Sylvia	Sedgemore, Brian
Henderson, Doug	Sheerman, Barry
Hogg, N. (C'nauld & Kilsyth)	Sheldon, Rt Hon Robert
Home Robertson, John	Short, Clare
Hood, Jimmy	Skinner, Dennis
Howells, Geraint	Smith, Andrew (Oxford E)
Howells, Dr. Kim (Pontypridd)	Smith, C. (Isl'ton & F'bury)

Smith, Rt Hon J. (Monk'ds E)	Wareing, Robert N.
Smith, J. P. (Vale of Glam)	Welsh, Andrew (Angus E)
Soley, Clive	Wigley, Dafydd
Spearing, Nigel	Williams, Rt Hon Alan
Steinberg, Gerry	Wilson, Brian
Strang, Gavin	Winnick, David
Straw, Jack	Worthington, Tony
Taylor, Mrs Ann (Dewsbury)	Wray, Jimmy
Taylor, Matthew (Truro)	Young, David (Bolton SE)
Thompson, Jack (Wansbeck)
Turner, Dennis	Tellers for the Ayes
Wallace, James	Mrs. Min Golding and Mr. Frank Cook.
Walley, Joan
Wardell, Gareth (Gower)

NOES
Alexander, Richard	Fairbairn, Sir Nicholas
Alison, Rt Hon Michael	Fallon, Michael
Amess, David	Favell, Tony
Amos, Alan	Field, Barry (Isle of Wight)
Arbuthnot, James	Fishburn, John Dudley
Arnold, Jacques (Gravesham)	Forman, Nigel
Arnold, Tom (Hazel Grove)	Forsyth, Michael (Stirling)
Aspinwall, Jack	Forth, Eric
Atkins, Robert	Fowler, Rt Hon Sir Norman
Atkinson, David	Fox, Sir Marcus
Baker, Nicholas (Dorset N)	Franks, Cecil
Baldry, Tony	Freeman, Roger
Banks, Robert (Harrogate)	Galloway, George
Batiste, Spencer	Garel-Jones, Tristan
Bellingham, Henry	Gill, Christopher
Bennett, Nicholas (Pembroke)	Glyn, Dr Sir Alan
Benyon, W.	Goodlad, Alastair
Bevan, David Gilroy	Goodson-Wickes, Dr Charles
Blaker, Rt Hon Sir Peter	Gorman, Mrs Teresa
Body, Sir Richard	Gow, Ian
Bonsor, Sir Nicholas	Grant, Sir Anthony (CambsSW)
Boscawen, Hon Robert	Greenway, Harry (Ealing N)
Boswell, Tim	Gregory, Conal
Bottomley, Mrs Virginia	Griffiths, Peter (Portsmouth N)
Bowden, Gerald (Dulwich)	Ground, Patrick
Bowis, John	Grylls, Michael
Boyson, Rt Hon Dr Sir Rhodes	Gummer, Rt Hon John Selwyn
Braine, Rt Hon Sir Bernard	Hague, William
Brandon-Bravo, Martin	Hamilton, Neil (Tatton)
Brazier, Julian	Hanley, Jeremy
Bright, Graham	Hargreaves, Ken (Hyndburn)
Brown, Michael (Brigg & Cl't's)	Harris, David
Bruce, Ian (Dorset South)	Haselhurst, Alan
Buchanan-Smith, Rt Hon Alick	Hawkins, Christopher
Buck, Sir Antony	Hayhoe, Rt Hon Sir Barney
Budgen, Nicholas	Hayward, Robert
Burns, Simon	Heathcoat-Amory, David
Burt, Alistair	Heseltine, Rt Hon Michael
Butler, Chris	Hicks, Mrs Maureen (Wolv' NE)
Carlisle, John, (Luton N)	Hicks, Robert (Cornwall SE)
Carttiss Michael	Hill, James
Chalker, Rt Hon Mrs Lynda	Howe, Rt Hon Sir Geoffrey
Chapman, Sydney	Howell, Ralph (North Norfolk)
Chope, Christopher	Hughes, Robert G. (Harrow W)
Clark, Dr Michael (Rochford)	Hunt, Sir John (Ravensbourne)
Clark, Sir W. (Croydon S)	Hunter, Andrew
Clarke, Rt Hon K. (Rushcliffe)	Irvine, Michael
Colvin, Michael	Irving, Sir Charles
Coombs, Anthony (Wyre F'rest)	Jack, Michael
Coombs, Simon (Swindon)	Janman, Tim
Couchman, James	Jessel, Toby
Currie, Mrs Edwina	Jones, Gwilym (Cardiff N)
Davies, Q. (Stamfd & Spald'g)	Jones, Robert B (Herts W)
Davis, David (Boothferry)	Kellett-Bowman, Dame Elaine
Day, Stephen	Key, Robert
Dicks, Terry	King, Roger (B'ham N'thfield)
Douglas-Hamilton, Lord James	Kirkhope, Timothy
Dover, Den	Knapman, Roger
Dunn, Bob	Knight, Greg (Derby North)
Durant, Tony	Knight, Dame Jill (Edgbaston)
Dykes, Hugh	Knowles, Michael
Eggar, Tim	Knox, David
Evans, David (Welwyn Hatf'd)	Lamont, Rt Hon Norman
Evennett, David	Lang, Ian

Latham, Michael	Soames, Hon Nicholas
Lee, John (Pendle)	Speed, Keith
Lennox-Boyd, Hon Mark	Speller, Tony
Lightbown, David	Spicer, Sir Jim (Dorset W)
Lilley, Peter	Spicer, Michael (S Worcs)
Lloyd, Sir Ian (Havant)	Squire, Robin
Lloyd, Peter (Fareham)	Stanbrook, Ivor
Lord, Michael	Stanley, Rt Hon Sir John
Luce, Rt Hon Richard	Stern, Michael
Lyell, Rt Hon Sir Nicholas	Stevens, Lewis
Macfarlane, Sir Neil	Stewart, Allan (Eastwood)
MacGregor, Rt Hon John	Stewart, Andy (Sherwood)
Maclean, David	Stewart, Rt Hon Ian (Herts N)
McLoughlin, Patrick	Stokes, Sir John
McNair-Wilson, Sir Patrick	Stradling Thomas, Sir John
Malins, Humfrey	Sumberg, David
Mans, Keith	Taylor, Ian (Esher)
Maples, John	Taylor, John M (Solihull)
Marland, Paul	Taylor, Teddy (S'end E)
Marlow, Tony	Tebbit, Rt Hon Norman
Marshall, Michael (Arundel)	Temple-Morris, Peter
Martin, David (Portsmouth S)	Thompson, D. (Calder Valley)
Mates, Michael	Thompson, Patrick (Norwich N)
Maude, Hon Francis	Thornton, Malcolm
Mayhew, Rt Hon Sir Patrick	Thurnham, Peter
Meyer, Sir Anthony	Tracey, Richard
Miscampbell, Norman	Trotter, Neville
Morris, M (N'hampton S)	Twinn, Dr Ian
Nicholson, David (Taunton)	Vaughan, Sir Gerard
Norris, Steve	Waddington, Rt Hon David
Onslow, Rt Hon Cranley	Walker, Bill (T'side North)
Patnick, Irvine	Waller, Gary
Pawsey, James	Wardle, Charles (Bexhill)
Peacock, Mrs Elizabeth	Watts, John
Riddick, Graham	Wells, Bowen
Ridsdale, Sir Julian	Whitney, Ray
Roberts, Wyn (Conwy)	Widdecombe, Ann
Rost, Peter	Wilkinson, John
Rowe, Andrew	Wilshire, David
Ryder, Richard	Wolfson, Mark
Sainsbury, Hon Tim	Wood, Timothy
Scott, Rt Hon Nicholas	Woodcock, Dr. Mike
Shaw, David (Dover)	Yeo, Tim
Shaw, Sir Giles (Pudsey)	Young, Sir George (Acton)
Shaw, Sir Michael (Scarb')	Younger, Rt Hon George
Shelton, Sir William
Shepherd, Richard (Aldridge)	Tellers for the Noes:
Skeet, Sir Trevor	Mr. Tom Sackville and Mr. Kenneth Carlisle.
Smith, Tim (Beaconsfield)

Question accordingly negatived.

Clause 10 ordered to stand part of the Bill.