§ Mr. Chris Smith
I beg to move amendment No. 19, in page 11, line 18, after 'one year' insert'and after "elapsed" there shall be added ", 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 oustanding amount of the consideration.(1A) a company becomes insolvent for the purposes of this section if:
- (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;
- (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
- (c) a composition or scheme proposed by the Directors is approved under Part I of the Insolvency Act 1986. (1B) An individual becomes insolvent for the purposes of this section if:
Clause 14 relates to the recovery of bad debts on which value added tax has been paid to Customs and Excise. It reduces the waiting period for recovering such VAT from two years to one year. The issue is important because it affects substantially many businesses, especially smaller businesses. However, many traders in the smallest category of businesses, with a turnover of under £300,000, use the cash accounting mechanism for paying VAT, which becomes payable to Customs and Excise only when it is received by the trader rather than when the invoices are issued. The cash accounting system gets round the problem of bad debts altogether. The companies that use that system are unaffected by the clause.
- (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 the Act;
- (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 1989 to administer his estate;
- (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
793 Amendment Act (Northern Ireland) 1929 or, after his death, the court makes an order for the administration in bankruptcy of his estate; or
- (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,".'.
However, other traders must pay the VAT to Customs and Excise as they issue invoices to their customers. lf they never receive the VAT from the customer, they can eventually reclaim it from Customs. Until 1990, they could reclaim it only if the customer could be proved to be insolvent. As a result of the change introduced in the Finance Act 1990, they were allowed to reclaim it if they had written off the debt in their own books and if the debt was over two years old and had not been paid. That helped some traders but disadvantaged others, for example, if the customer who owed the VAT went rapidly into liquidation but the trader then had to wait for two years before he could recover the uncollected VAT.
In our debates on last year's Finance Bill, we argued that the Government's proposal was unfair. We tabled amendments that sought to allow the old and new reliefs to run in parallel, so it would then be a case either of a period having elapsed without the debt being paid or of the company that owed the debt becoming insolvent and, as a result, the relief being triggered. We suggested that those measures could run side by side and that that would solve the problem. As an alternative, we proposed that the two-year period should be reduced to one year, thus relieving hard-pressed traders and reducing the number of cases where the old system would have given relief before the new system came into operation.
It is worth examining exactly what happened during the passage of last year's Finance Bill, because the Government's behaviour on the specific issue of bad debts was instructive. When we debated the measure in Committee on the Floor of the House, the Government clearly said that they believed that there was some merit in our argument for a shorter time period than the two-year one. The then Economic Secretary to the Treasury, who has subsequently risen in the ranks to become the Government Chief Whip, said:Our judgment was that two years is an appropriate period of time to elapse before a company decides that a debt cannot be recovered.8.30 pm
The then Economic Secretary said that he was aware of the arguments that we and others, including some of his hon. Friends, had been mounting. He continued: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."—[Official Report, 15 May 1990; Vol. 172, c. 812.]794 That welcome sign of movement on the Government's part came about last May. But in July last year, when we debated the Bill on Report, there was no sign in the amendments of any extra relief on the bad debt issue. Our proposal for a reduction in the time period from two years to one year was nowhere to be seen. Having given a sign that they were likely to see fit to bring forward some further improvement to the Bill in May, the Government reneged on that commitment when we discussed the Bill on Report in July.
The then Economic Secretary also spoke in the debate on Report. He said that he did not believe that it was right to go for a shorter period and stated:In the past two months, we have given careful consideration to whether we could justify a further change, but we have come to the conclusion that we could not."—[Official Report, 16 July 1990; Vol. 176, c. 797.]Having reached that conclusion on 16 July last year, the Government came forward in this year's Budget and Finance Bill debate to say that they were wrong all along. They have, in effect, accepted the arguments that we mounted in Committee and on Report during the passage of last year's Finance Bill and have introduced precisely the proposal that we made in Committee to reduce the qualifying period for relief from two years to one—that is welcome.
Our amendment seeks to draw the Government just a little bit further along the road to provide relief to hard-pressed traders. The U-turn that they have made on the issue of the time period—agreeing to reduce it from two years to one year—should be accompanied by the additional provision that, if a company becomes insolvent within that one-year period, the VAT bad debt relief should be immediately claimable, rather than the claimant having to wait the full year.
We believe that that proposal is important for two reasons. First, the rate of company insolvencies and liquidations is currently running at a record level. Some 24,442 firms failed in 1990 in Britain and, in the first quarter of this year, the numbers were up by almost 70 per cent. on the equivalent period for last year. Peat, Marwick, McLintock has estimated that there will be five times as many receiverships in 1991 as there were in 1988. Therefore, the problem of firms going bust and, as a result, being unable to meet their VAT debts to other traders is bound to increase. While the provision of a reduction to one year in the time period is welcome, the introduction of an alternative, parallel system of being able to claim the relief when an insolvency occurs would bring extra relief.
The second principal reason for the amendment is that cash flow problems often catch out companies, especially small ones, and force them to close earlier than was, perhaps, economically necessary. We propose the amendment in order to assist the cash flow position of traders who have already paid VAT to Customs and Excise but have not received it from the person to whom they sold the goods or services. If the company owing VAT goes into liquidation three, four or five months after the VAT was paid to Customs and Excise, there will be a further seven, eight or nine months to wait before the VAT can be reclaimed—that makes a seven to nine months delay in the cash flow represented by that VAT payment.
Our proposal would directly assist the cash flow problems of such companies by enabling them to claim the VAT relief immediately upon the liquidation of the person or company owing the money. Therefore, we believe that 795 our measure will enable the Government to go further than they have. We welcome the fact that they have now seen the light and accepted this year what we were urging on them last year. However, we wish that they could go a little further and ensure that the "payable on liquidation" system that was in place could run in parallel with their new provision to improve the system further and assist businesses, especially smaller ones, even more than the new clause does.
§ Mr. Beith
This useful amendment addresses the particular problem of insolvency. We all welcomed the introduction of the VAT bad debts provision and sought to extend it last year. We have all welcomed the shortening of the period to one year, as announced in the Budget statement. All that is the tip of the iceberg of the bad debt problems affecting small businesses. We believe that many more steps should be taken, including the sort of measures for interest provisions for bad debts supported by some of the Government's own Back Benchers. Bad debts cause severe problems for small business men and women and, with the VAT man on their back as well, they should be afforded any possible relief from bad debt problems that they ought not to be bearing. Therefore, the Government's decision to shorten the time period is most welcome.
I am glad that the amendment addresses the insolvency problem and I hope that the Minister will be reasonably sympathetic towards it. I hope that she will also realise that, within the purview of her Department, there are other issues affecting small businesses to address. The Government should recognise responsibility for those problems relating to debt, as they presided over the recessionary climate in which those debts arose. I hope that the Minister will be sympathetic to that problem.
§ Mrs. Gillian Shephard
The hon. Member for Islington, South and Finsbury (Mr. Smith) has given us some background to clause 14 and the amendment. He said, as did the hon. Member for Berwick-upon-Tweed (Mr. Beith), that in 1988 there was a comprehensive review of the arrangements for the relief of VAT on bad debts. During that review, the views of professional and business organisations were sought. The review recommended a change from the old, restrictive system, dependent only on the formal insolvency of the debtor, to a new, comprehensive scheme, providing relief on all bad debts, subject to elapsed time and write-off in the trader's accounts.
When last year's Finance Bill was debated in the Committee of the whole House and the House, one of the main concerns expressed centred on the effect of the two-year waiting period. During the year there have been representations from professional and business organisations, as well as individuals, to the effect that the waiting period is too long and that, at a time of recession, the cash flow problems thus caused are onerous. I began to wonder whether the hon. Member for Islington, South and Finsbury too would be begrudging, but he welcomed the reduction of the waiting period to one year. It was precisely because of the concerns that had been expressed during the year that my right hon. Friend the Chancellor of the Exchequer introduced the provision to reduce the period. That reduction should help to meet the concern and the criticisms that have been expressed.
§ Mr. Chris Smith
I hope that, in the point that I am about to make, I shall not appear grudging. During the 796 passage of last year's Finance Act, people involved in business and industry up and down the country, as well as Members of Parliament, made innumerable representations about the two-year period that the Government then proposed. The Government considered the matter carefully for two months. Why, after their careful consideration, did they fail to accept that one year would be better, whereas this year they have felt able to accept the case that we made then? Why have they changed their minds?
§ Mrs. Shephard
I thought I had made it clear that the representations continued during the year. The Government and the customs authorities have listened, and have responded by introducing these changes.
The old, very restricted scheme allowed relief only on the formal insolvency of the debtor. At the centre of all argument for the extension of relief is the feeling of injustice on the part of a supplier who has to pay tax on a supply for which there is no prospect of payment. That is very well understood. Indeed, that theme was consistent throughout the consultative exercise before the 1988 bad debt review. Many trade associations criticised the inadequacy, the ponderous nature and the unfairness of the old arrangements. It is clear that, on grounds of equity, there are no strong arguments for defending the restrictiveness of the insolvency-based arrangements. The new, comprehensive scheme greatly widens the scope by providing relief on many more debts. It extends relief to the very many cases in which debtors, over a long period, refuse to pay or pay only token amounts, or simply vanish. The new scheme removes a legitimate and long-standing grievance, and, together with the halving of the waiting period now proposed, will provide an immediate boost—estimated at £340 million in 1991–92—to the cash flow of business.
At the time of the 1988 review, detailed consideration was given to a dual scheme of bad debt relief, and the concept was rejected. Let me outline the main reasons. First, there was the problem of accounting arrangements. There would be a need for voluminous regulations and instructions to cover all contingencies, and an attempt to minimise the dangers of double claiming would be both burdensome and intrusive to business. Let me give an example. The two schemes do not match in every respect. They do not match in clawback. There is no clawback under the formal insolvency scheme, but there is under the new scheme. If that were left unaltered, it would advantage one type of debtor over another. If clawback were extended to the existing insolvency scheme, it would lead to quite a nightmare changeover, in which claims to liquidators under the new scheme would be tax-inclusive, whereas those under the old scheme would be tax-exclusive.
I know that the hon. Member for Islington, South and Finsbury is aware that the introduction of regulations—after the contribution of the hon. Member for Bradford, South (Mr. Cryer) I hardly dare utter that word—to cope with this kind of problem would be difficult. The existence of a dual scheme, governed by complex regulations, would be wide open for double claiming—either accidental, by traders not unnaturally confused, or, more worryingly, deliberate, by unscrupulous traders. It would be all too easy to claim once, when the debtor became insolvent, and again when the elapsed time criterion had been met. There is also the question of controlling the system. Any VAT 797 system has to he both fair and convenient to operate, not only to business but to the Customs authorities. When one looks at the problems of controlling a dual scheme—complex to operate, and open to abuse—it becomes clear that the control problems would be formidable. We estimate that we should need 150 to 200 extra VAT control staff just to police a dual scheme. I am sure that most hon. Members agree that that would not be a very productive use of resources.
Perhaps our overwhelming reason for not supporting the amendment is that our consultations with business and industry have revealed that the main support for a dual scheme resulted from the waiting time of two years. Indeed, at a recent meeting with the Customs authorities, the CBI said that it would not be interested in a dual scheme if the waiting period were one year. There were other representations to the same effect. The reduction to one year has gone a long way towards meeting the problems expressed by representatives of trade and industry.
The hon. Members for Islington, South and Finsbury and for Berwick-upon-Tweed mentioned current problems of companies and other businesses, including insolvency and cash flow. In that regard, I should remind the Committee that this year's Budget injected £750 million into business. Many of the Budget measures were designed to help cash flow—the reduction in corporation tax; the extension of the carry-back period for losses from one year to three years; the deregulatory measures; the 40 per cent. increase in VAT threshold; the possibility of quarterly PAYE and national insurance returns for small businesses to help 700,000 firms; and the extension of simplified accounts. The Budget, of which this clause is a part, went a very long way to help companies and other businesses with the problems that they currently face.
§ Mr. Chris Smith
I immediately acknowledge that the reduction from two years to one year goes a long way towards meeting the problems that people in business identified when the two-year period was introduced last year. That is precisely why we urged this course on the Government last year. Their repentance is a year late, but, none the less, welcome. The Minister dwelt on the benefits of the new system, but failed to recognise that it has disadvantages where liquidation occurs within a few months of the payment of VAT to Customs and Excise. 798 That raises a very genuine problem. I agree that there may not now be as much pressure for a parallel scheme of this kind as there was last year, when the period was two years, but insolvencies that occur within a very short period of the payment of VAT present serious problems. I hope that the Government will consider whether such a parallel scheme could be implemented. We may even find another case of the repentance that we have seen this year. Of course, it will be a different Government of another party who will introduce next year's Bill.
The Minister referred to practical problems. She talked about the complexity of the clawback system and about the dangers of double claiming. We accept that there might be practical difficulties, but they would not be insurmountable. When something is worth doing, it is worth overcoming practical difficulties to do it. None the less, I hope that, in respect of this issue, we shall be able to proceed by means of consensus rather than confrontation.
It is a matter to which I hope the Government will pay continuing attention. If it becomes identified during our further deliberations on the Bill that business is unhappy without the parallel provision of an insolvency trigger for VAT bad debt relief, I hope that the Government will consider an amendment even at the 11th hour.
With that hope and with the wish to proceed by consensus if possible, I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 14 ordered to stand part of the Bill.
§ Bill (Clauses 14, 21, 22, 23, 24, 31 and 77 and Schedule 14), reported, without amendment; to lie upon the Table.