REGISTRATION (Hansard, 15 May 1990)

§ Mr. Chris Smith (Islington, South and Finsbury)
Clause 9 simplifies the procedures by which businesses determine whether they must register for VAT.
I must begin by taking slight issue with the notes on clauses issued by the Treasury, which are intended to simplify and to explain clauses. It was with some surprise and concern that I came across the following note on clause 9: Sub-paragraph 1(1) provides reference to the new sub-paragraphs (3) to (5) and continues to cite the revised sub-paragraph 1(a). The revised sub-paragraph 1(1)(a) replaces the current sub-paragraphs 1(1)(a) (i) and (ii)". That is impenetrable and does not enlighten our consideration of the clause. I hope that in future the notes on clauses will be clearer than the clause, not less clear.
Clause 9 has already been welcomed by many small traders, and we intend to support it. There has long been discontent that the tests to determine whether a small trader should register for VAT were too complex. Even before the new regime for VAT penalties and interest which has just been introduced, the cost of not registering when one should have done so could have been punitive, and that has become more so with the recent new system of penalties.
Before the changes proposed in clause 9, a trader had to apply four different tests in order to see whether he should register. The first was a test of the past year's turnover exceeding a specified threshold; the second was a test of the past quarter's turnover exceeding another specified threshold; the third a test of the next month's anticipated turnover being likely to exceed a third threshold; and the fourth a test of the next year's turnover being likely to exceed a fourth threshold. Those four tests all had to be undertaken regularly by a small business in order to ascertain whether it should register. It was a complex bureaucratic procedure, which was resented by many small businesses.
Clause 9 effectively removes two of those tests—the test of the past quarter's turnover and the test of the next year's 782 turnover. The removal of those two tests is welcome, but I have two questions for the Economic Secretary. First, it appears from the clause that a trader must register at the end of a month if the previous year's turnover exceeded £25,400. In other words, the trader has to make an assessment on a rolling 12-month basis with a new assessment having to be made each month about whether the two remaining tests will be exceeded. That is somewhat onerous and I hope that, in a spirit of bipartisanship, the Government will consider some change, perhaps to a calendar quarter rather than the existing calendar month with the rolling provision.
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Secondly, the increase in the threshold that the Government are introducing in the clause is an increase from £23,600 to £25,400—an increase of 7.6 per cent. Under the European Community sixth directive, the increase must be limited to a rise in real terms—that is, allowing for inflation. However, I am sure that the Government will be aware that inflation is currently running at considerably more than 7.6 per cent. It would be useful to know from the Government whether it might be possible to allow a slightly greater increase in the VAT threshold in the light of the rising level of inflation that we faced at the time of the Budget and that we certainly face now.
I raise those two small points, but in broad terms we support the general thrust of clause 9 and wish to see it included in the Bill.

§ Mr. Tim Smith (Beaconsfield)
I welcome clause 9 because it considerably simplifies the arrangements for the registration of VAT traders. We have had VAT now for about 20 years, and ever since it was introduced the registration requirements have caused difficulties for small businesses. Small businesses are inevitably affected, because the threshold is so low.
There was no great problem until 1985, when the new Keith-type default provisions were introduced. Since then, a number of cases have been decided which many felt were penal in their outcome. Therefore, clause 9 is good news and I congratulate Treasury Ministers on it. It is obviously always difficult to anticipate turnover, and it makes so much more sense to have a registration requirement based on turnover recorded in the books of a business.
I have seen the representations made by the Institute of Taxation, to which I think the hon. Member for Islington, South and Finsbury (Mr. Smith) referred, which suggested that, despite a simplification, there was an increase in the compliance burden, because a business would have to look at its turnover at the end of each month rather than at the end of each quarter under the previous arrangement.
I always think that small businesses are ambivalent about VAT. They complain about the compliance burden that VAT imposes, but I was interested to note that, when annual VAT accounting was introduced a couple of years ago to lessen the burden on small businesses, take-up was low. I believe that one reason is that small businesses find the obligation to complete a VAT return once every quarter a useful discipline. They are usually busy trying to make a success of themselves and do not keep their books much up-to-date. However, every quarter they are compelled to bring their books up to date by the end of the 783 following month, for the purpose of completing their VAT return. That is probably why take-up of monthly VAT accounting has been less than anticipated.
I have read the views of the Institute of Taxation, but I imagine that a small and growing business would want to know fairly soon after the end of any particular month what its turnover was in the preceding four weeks. That is not a difficult figure to calculate. Although I have some sympathy with the suggestion that, in subsection (2)(1)(a), the word "month" should be replaced by the word "quarter", the new obligation is not terribly onerous. Clause 9 offers a valuable simplification for small businesses that has already been widely welcomed.

§ Mr. Beith
I welcome the improvement that clause 9 represents. We should not get too excited when we remember that these days the VAT registration limit is such that any small business employing two people and paying some rent is likely to be over the threshold anyway. Therefore, we are taking only about the smallest businesses, to which monthly VAT accounting would be of advantage in many cases. It will allow some to remain free even of the threat of the requirement to register and offer them more peace of mind. Nevertheless, the complex problems of VAT, as they relate to other aspects such as bad debts, to which we shall return later, remain for a large number of other businesses. For a few, the clause will be most helpful.

§ Mr. Jeremy Hanley (Richmond and Barnes)
I first declare an interest as parliamentary adviser to the Institute of Chartered Accountants in England and Wales. I hope that the submissions that the institute lodged with the Treasury will prove helpful, not only to the Committee of the whole House but when right hon. and hon. Members repair to the Standing Committee later this week.
There are three technical questions that I want to put to my hon. Friend the Economic Secretary, but first I echo the remarks of my hon. Friend the Member for Beaconsfield (Mr. Smith), who congratulated Treasury Ministers on simplifying the registration procedure, which will be warmly welcomed by small businesses. My only gripe was that raised also by my hon. Friend the Member for Beaconsfield and by the hon. Member for Islington, South and Finsbury (Mr. Smith): that monthly accounting could prove onerous for some businesses and that a quarterly calculation might be fairer.
My hon. Friend the Member for Beaconsfield put his finger on the button when he argued that, as a result of hardware that was not available even four or five years ago, small businesses can calculate their monthly turnover. If they do not do so, their bank would probably be extremely interested.
The institute suggests that, as a counterweight to the requirement placed on small businesses to monitor turnover monthly, the time limit for notifying a liability to register might be extended to two or three months. That would seem a fair bargain.
I turn now to my three technical points. I suggest that if the words in the period then ending not exceeding one year was substituted for the words in the period of one year then ending in subsection (1)(1)(a), that would make it clear that the period does not have to be a full year. The existing words suggest that a full year must be taken into account, and I am not sure that that is what is intended.
784 Secondly, I know some chartered accountants who would like confirmation that the word "business" in subsection (1)(2) includes part of a business, to align with the wording that appears in article 12(1)(b) in the Value Added Tax (Special Provisions) Order 1981.
Finally, it is not clear, having regard to section 33 (1)(a) of the Valued Added Tax Act 1983 whether the words "his taxable supplies" in subsection (2)(a) refer to the transferee or include the supplies of the transferor now transferred to the transferee.
I acknowledge that these purely technical points may be extremely boring to the Committee, but they are important. I shall be happy if my hon. Friend the Economic Secretary will write to me about them.

§ Mr. Graham Allen (Nottingham, North)
In common with right hon. and hon. Members in all parts of the House, I believe that clause 9 is to be welcomed. I hope that it sets a precedent in establishing cross-party agreement on such matters, and that when my right hon. and hon. Friends present new clauses that are equally reasonable, they will similarly receive a fair hearing from Government Members. I understand from right hon. and hon. Members who served on previous Committees that that has not always been the case, but I am sure that open-minded Members of the Government Front Bench will want to prove their good will at an early point in the Committee proceedings, by accepting reasoned and reasonable amendments.
In the past, businesses had to check their turnover on a quarterly and full-year basis, and guess at their possible future turnover, to establish whether they needed to register for VAT. The new system will provide for registration only if the turnover threshold was achieved in the previous 12 months, which is a helpful and useful improvement.
The old system was extremely complicated, so any change that simplifies it must be welcomed. I hope that the Government will consider extending the principle to other areas—such as to people trying to complete housing benefit forms, which are also very complicated. Disposing of red tape in respect of small businesses will always have the support of my right hon. and hon. Friends. Equally, I hope that there will be support for simplifying the forms that must be completed for the purpose of poll tax rebates. I am sure that right hon. and hon. Members in all parts of the House have received letters from their constituents complaining about the complicated procedure that must be observed to obtain a rebate. I hope that clause 9 sets a precedent in simplifying procedures in that respect.
Small businesses constitute a vociferous local lobby, and rightly so. However, if one asks them for a list of the provisions in the Finance Bill that should be reconsidered, the imposition and complexities of VAT would probably come fairly low down on it. Other matters need to be examined in some detail, particularly interest rates. Certainly the chamber of commerce and small business organisations in my constituency have made endless representations to me—and I have no doubt to the Government and the Treasury—regarding the effect on their businesses of high interest rates and the uncertainty about whether the rates will go higher.
The one-club policy that the Government are adopting over interest rates is not merely a club but a sledge-hammer, and an ineffective one at that. The Government should show more diversity and flexibility in 785 their policies for dealing with the present state of the economy. High interest rates alone are not the answer—they need to be part of a more comprehensive attack on inflation and the other problems that beset us, and which particularly beset small business people. They would benefit from an attack on high interest rates and the continued development of some of the things that hon. Members mentioned earlier, such as training to ensure that the skill levels in our communities guarantee higher levels of employment and income so that small businesses can continue to grow and flourish.
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If asked to list their priorities, while small business people would welcome clarification and simplification of VAT registration, they would probably put it fairly low on the list compared with other issues that we need to consider. In Committee those other issues will be important. Small business people will make representations in Committee and, among other things, they will concentrate on the economic indicators, which show the stagnant output that undoubtedly afflicts our economy, and the need to drive the economy back towards growth with sensible rather than obsessive and dogmatic policies on interest rates.
Small businesses have also been particularly affected by the uniform business rate. It would be remiss of us to discuss the clause without putting on record what UBR has meant to many small businesses. The Inland Revenue estimates that 252,000 businesses will face increases in bills. They are small businesses. While clarifying VAT for small businesses, surely we should consider all the other things that afflict them and VAT may not—

§ The Temporary Chairman (Mr. Geoffrey Lofthouse)
Order. The hon. Gentleman is going rather wide of the subject. We may discuss some of these issues at a later date, but at present we should be discussing whether clause 9 should stand part of the Bill.

§ Mr. Allen
The last thing that I wish to do is to get on the wrong side of you at this early juncture, Mr. Lofthouse. Unfortunately that may happen later—who knows? In view of your comments, I shall conclude my remarks.

§ Mr. Neil Hamilton (Tatton)
I am sure that all hon. Members present will be disappointed to learn that I shall not be serving on the Standing Committee this year as I have already sat for 270 hours in Committee on the King's Cross Bill—in which the hon. Member for Islington, South and Finsbury (Mr. Smith) has some interest. I have enjoyed Committees enough this year and should allow others, such as the hon. Member for Nottingham, North (Mr. Allen), the privilege of enjoying the Finance Bill Committee.

§ Mr. Beith
Who is to assist me in scourging the Government over retrospective legislation, on which the hon. Gentleman had such a distinguished record on previous Committees?

§ Mr. Hamilton
I recall the fight that the hon. Member for Berwick-upon-Tweed (Mr. Beith) and I had last year on the Standing Committee to support what I believed to be the true Conservative principles in respect of 786 retrospective legislation. I regret to say that even all the eloquence at his command, in addition to the few small words that fell from my lips, was not sufficient to persuade the Government of the merits of our cause. Virtually every week we had cause to join forces on the Select Committee on the Treasury and Civil Service and I hope that that will suffice in the hon. Gentleman's mind to sustain the alliance which we have held together across the Floor, which was perhaps in rather better shape than the alliance he had with his own colleagues.
I welcome clause 9, because it increases the certainty of rules for the trader in an ingenious way and increases the effective level of registration threshold within the constraints of European Community legislation.
One of the complaints of small businesses, as the hon. Member for Nottingham, North said, has been the onerous burden of VAT compliance over the years. Until 1984 or 1985, I recall that the annual report of Customs and Excise used to contain a useful table which revealed the yield of VAT from traders within different bands of turnover threshold. I cannot recall the figures exactly, but the overwhelming bulk of VAT receipts come not from small businesses but from relatively large businesses, although the majority of registered traders are small businesses. Therefore, it is an expensive way to collect revenue, and the expense falls not on the public departments, but on small businesses who are responsible by and large, for administration of the tax. It is a great shame that that table is no longer published. I do not know whether it caused too much embarrassment and therefore had to be removed, but I should like to see it published once again.
Although I know that the arguments against raising the threshold too much are that it introduces inequities in competition between businesses, in particular when the VAT rate is 15 per cent., as it is in this country, we should have regard to the compliance costs of such a tax on small businesses. I am pleased that the Government have borne that in mind over the years and have made a number of useful reforms—perhaps this is one of them.
The clause demonstrates once again that the maximum registration threshold permitted by the European Community under the sixth directive is unrealistically low. It is a great shame that we are constrained in such a way. I am certain that if we had complete freedom of action on the matter we would not choose to have such a low VAT threshold. It amazes me that we have been unable to persuade our partners in the European Community of the rightness of our arguments in favour of raising the threshold significantly. One mystifying aspect of the European Community is that so many sensible ideas put forward by the Government are not accepted by our colleagues across the water.
The large increase in the compliance burden alluded to by my hon. Friend the Member for Beaconsfield (Mr. Smith), following the Keith report recommendations—now enshrined in legislation—and the risk that small businesses will incur penalties, make it all the more urgent for the Government to reopen in Brussels the question of a substantially increased threshold. It is not fair to expect the smallest businesses to have the same sort of resources available to understand and administer complex legislation as larger firms, which can afford to maintain their own in-house accounts and tax administrators. Consequently, it would be a great misfortune if the issue of the VAT threshold were to decline in importance over the years.
787 I hope that the Economic Secretary will redouble his efforts to raise the VAT threshold or to persuade our EC partners to support our campaign to raise it. That will lift a significant burden in administration and costs from businesses that are ill-equipped to carry the costs, particularly when other costs have been rising recently, as the hon. Member for Nottingham, North pointed out in his somewhat wide-ranging and discursive remarks on the community charge. I welcome the clause, and I shall support it if there is a Division.

§ Mr. Haynes
I remember the last exchanges with the Economic Secretary to the Treasury. We were talking about the good old British banger. They tried to take that away from us at the other end of the building. However, we got in first.
The hon. Member for Beaconsfield (Mr. Smith) referred to the need for small businesses to show discipline. You and I, Mr. Lofthouse, knows what discipline means. We worked in the bowels of the earth. Discipline was all about saving life and limb. The hon. Member for Beaconsfield knows that there are many small businesses in my constituency. My constituents come to see me about their financial problems, some of which are the direct result of measures introduced by this Government.
One of my constituents with a fairly small business employed an accountant. I employ an accountant; I am no financial wizard. My constituent was in serious difficulty over VAT. He was told by the Inland Revenue that he was in deep trouble, so he came to my surgery and asked for help. I told him that I was no financial wizard and that I could not work it out for him but that I would write to Sir Lawrence Airey, who was the chairman of the Board of Inland Revenue at that time. We found out that the accountant had not done his job and that therefore his business owed the Inland Revenue £6,000 in VAT.
Shortly afterwards, Sir Lawrence Airey was summoned before the Select Committee on the Parliamentary Commissioner for Administration to give evidence. I am a member of the Select Committee, so I had a word with him after the meeting. It turned out that although the accountant had not done his job properly, my constituent had been overcharged for VAT, so he got some of his money back. My constituent told me that he had always voted Conservative but that because he had got some of his money back he had decided to vote for me at the next election.
Local people who have left the pits have set themselves up in small businesses with their redundancy money. They are screaming like hell back home about the way this Government are taxing small businesses. They are hitting small firms hard and VAT involves them in more and more work. I agree with the hon. Member for Beaconsfield that self-discipline is needed—that small business men ought to do their books regularly and not wait until the end of the year to sort it all out. The Government must not, however, clobber the small business man. The Prime Minister told us a long time ago that small businesses create jobs and that small businesses ought to be encouraged. However, the Government must be fairer when it comes to taxing them. I appeal to the Government to help them. Small businesses make a valuable contribution to the economy.

§ Mr. Tim Smith
The hon. Gentleman says that the VAT burden is far greater now than it was 10 years ago. Will he, however, remind the Committee of the number of boxes that the registered trader had to fill in on his VAT return 10 years ago and how many he has to fill in today?

§ Mr. Haynes
The hon. Gentleman referred earlier to discipline; now he talks about burdens. I remember the time when the Chancellor of the Exchequer came to the House and said that he intended to double VAT. The hon. Gentleman has forgotten that; he was not here at the time. The hon. Gentleman talks about burdens, but it is the Government who have imposed burdens on small businesses. That is why my constituents come squealing to my surgery. When the Chancellor of the Exchequer doubled VAT it caused more and more work for small business people. They are sick of it.
In the case of some small businesses, the men still work in the pits. There are only three pits left in my constituency. The wife looks after the small business. They have to get their heads together to work out the VAT and to fill in all the flipping forms that this Government have imposed on them so that they can get in all their money. These poor souls have been down the pit all day. You know what it is like, Mr. Lofthouse, to be down the pit for eight hours a day.

§ The Temporary Chairman
Order. I am fully aware of the conditions in the pits. I am also fully aware of the contents of clause 9. I hope that the hon. Gentleman will stick to it.

§ Mr. Haynes
I am talking about small businesses. I hope that you are listening, Mr. Lofthouse.

§ The Temporary Chairman
The hon. Gentleman is going pretty wide of the clause.

§ Mr. Haynes
I do not think so, but I do not intend to have an argument with you.

§ The Temporary Chairman
Order. I happen to think so.

§ Mr. James Arbuthnot (Wanstead and Woodford)
I am enjoying the hon. Gentleman's speech so much that I almost hate to do this, but does he have any views on the commendable relaxation and simplification of the VAT rules that the clause introduces?

§ Mr. Haynes
I welcome that change. However, the Government have imposed a great burden on small businesses. The hon. Member for Beaconsfield then dragged me into debating the burden on small businesses. The VAT burden on small businesses is being increased by the Government.

§ Mr. Hanley
Does the hon. Gentleman know how many miners in his constituency who work eight hours a day down the pit then come out of the pit and do a part-time job with a turnover in excess of £25,000?

§ Mr. Haynes
Would I be in order if I answered that question, Mr. Lofthouse?

§ The Temporary Chairman
The hon. Gentleman can answer the question.

§ Mr. Haynes
I had to ask because I did not know whether you would step in and rule me out of order if I tried to answer it.
I am in the House five days a week so how can I keep track of everyone? What a stupid question. The matter is not funny. However, I think that I have said enough.

§ The Economic Secretary to the Treasury (Mr. Richard Ryder)
The hon. Member for Ashfield (Mr. Haynes) and I have been a powerful force in defence of the British banger. I am happy to say that, although there may be a mad cow disease, as yet there is no mad pig disease—not even among the Gadarene swine. If one did develop, perhaps the hon. Member for Ashfield and I should get together again to save the British banger. Millions of people are grateful to the hon. Gentleman and me for ensuring that it is still on our plates.

§ Mr. Haynes
Is the Minister aware that the hon. Member for Crawley (Mr. Soames) has just walked into the Chamber and that he, like us, thinks that the British banger is the best in the world?

§ The Temporary Chairman
The British banger is certainly enjoyable, but it has nothing to do with clause 9.

§ Mr. Ryder
I thank the hon. Member for Ashfield for reminding me that my hon. Friend the Member for Crawley (Mr. Soames) enjoys the British banger. However, as my hon. Friend has just walked into the Chamber, I did not need the reminder.
Let me reassure the hon. Member for Nottingham, North (Mr. Allen)—who is a member of the Standing Committee on the Finance Bill—that he will find me an open-minded, cordial, friendly, helpful and co-operative Minister who is prepared to examine every conceivable point of view that is put to me. If the hon. Gentleman would like to draw to my attention any VAT forms that he thinks require further simplification, I shall be happy to examine them.

§ Mr. Allen
I thank the Minister for showing his usual generosity. I guarantee him that I will correspond with him within a fortnight with my suggestions, should I find that any amendments to VAT forms are necessary.

§ Mr. Ryder
I thank the hon. Gentleman.
All the speakers in this short debate have welcomed the general point made in clause 9. The measures for small and medium-sized businesses were central to my right hon. Friend the Chancellor's Budget, and lie at the heart of the Bill. The revenue cost of the clause, which has been welcomed by the small business community, is about £75 million.
Clauses 9 and 10 may not grab the headlines, but together they provide for nearly a quarter of a billion in legislative assistance for the small business community. They are deliberately targeted at smaller, growing businesses, which—although perhaps less glamorous—are none the less important. Such companies produce a large proportion of our industrial output, and have grown apace during the past few years.
The hon. Member for Islington, South and Finsbury (Mr. Smith) made some observations about the notes on clauses. I will do my best to ensure that they are made clearer than the notes for clause 9. I am only too grateful to the hon. Gentleman for not asking me to explain the notes on clauses, as I would not have been able to do so. 790 Clause 9 was welcomed by the hon. Member for Berwick-upon-Tweed (Mr. Beith), my hon. Friend the Member for Beaconsfield (Mr. Smith) and my hon. Friend the Member for Tatton (Mr. Hamilton)—I am sorry that he is not a member of the Standing Committee this year.
The hon. Member for Islington, South and Finsbury asked about the liability arising at the end of a calendar quarter, for example, rather than at the end of a month. The month-end determination of liability reduces unfair competition from traders who remain unregistered. It also minimises the revenue loss, and maintains an even flow of registration work for Customs. Most businesses keep monthly records of sales and expenses in any event.
The hon. Gentleman was also concerned about the possibility of raising the threshold still further—an argument also pursued by my hon. Friend the Member for Tatton. The original threshold of £5,000 has been increased over the years—in line with inflation—to the present level of £25,400, which is already among the highest in the EEC. A further increase would constitute a breach of our legal obligation under article 24 of the sixth VAT directive, to which my hon. Friend referred.
However, I agree with my hon. Friend's general observations about the threshold, and it is inconceivable that his views will not be put strongly by Ministers whenever suitable opportunities arise in Brussels. As he knows, we want to ensure that the threshold is raised still further, although some industries—such as the building industry—would like it to be lowered. It is not a uniform pattern across small businesses.

§ Mr. Chris Smith
The Economic Secretary rightly says that the European Commission insists that the rise in the threshold should be no greater than inflation. However, which inflation figure does he mean? Does he mean the inflation figure at the date of the Chancellor's Budget, or an average inflation figure taken over a period of 12 months? If so, which 12 months? The figure used in the calculation relating to clause 9 is 7.6 per cent., but inflation is currently at 9.4 per cent. and rising. Which figure will be used?

§ Mr. Ryder
When the threshold has been raised over the years, it has not always been raised directly in relation to inflation. The hon. Member for Islington, South and Finsbury would be pursuing the wrong hare if he believed that it had been. If the threshold were raised, that would require another significant loss of revenue, and would further increase the distortion of the balance between registered and unregistered traders.
As an accountant, my hon. Friend the Member for Richmond and Barnes raised three technical points. As he requests, I shall write to him about them as soon as possible, as I, too, would like to clarify the matter.
This has been a valuable debate. It has shown that the House fully supports clause 9 and the important measures that my right hon. Friend the Chancellor has taken to help small businesses. I hope that the House will continue to support the Bill.