Bloodstock Industry (Hansard, 19 October 1992)

§ Mr. James Paice (Cambridgeshire, South-East)
; I welcome the opportunity to use the first Adjournment debate after the summer recess to raise a subject about which I have spoken before in the House. Its significance has come into stark reality during the recess.
I am privileged to represent the principal bloodstock breeding constituency within the United Kingdom. My hon. Friend the Member for Bury St. Edmunds (Mr. Spring) and I represent the centre of the United Kingdom racing industry in and around Newmarket. I am also the chairman of the relevant all-party committee. From these two positions I have witnessed the problems of the racing and bloodstock industry develop over the past few months and years.
I welcome the many hon. Members on both sides of the House who have remained in their places to be part of this evening's debate. I hope that their presence is not lost on my hon. Friend the Financial Secretary to the Treasury, who is standing in for my right hon. Friend the Paymaster General. My colleagues, like myself, have witnessed over the past few months a number of events, not least the fact that the BBC has presented two separate programmes in which it examined the severe financial constraints facing the industry, the decline in the number of horses in training—half the yards in Newmarket are supposed to be for sale—the decline in the number of owners and the efforts that are being made by the industry to help itself by the establishment or the creation of the British Racing Board.
I shall quote from a letter written by a Member of the other place to his trainer. The passage reads: I have really reached the end of the line with British racing and breeding, and facing up to the economics are just ridiculous. Perhaps one day the Government will see the error of their ways, and then I will be back. That is typical, unfortunately, of the attitude that is being taken by many owners.
I do not need to rehearse all the facts about the industry. Suffice to say that "Panorama" stated that it is the sixth largest industry in the country. It is even larger, dare I say, than the coal industry. It is estimated that the breeding side alone employs about 17,000 people. The entire racing industry involves about 100,000 jobs. It has a positive balance of payments, with exports direct from the sale ring of about £20 million. They amount to considerably more when private sales are taken into account
As the House will be aware, the changes in value added tax brought about by the single market and the end of certain special arrangements mean that as from 1 January 1993 our industry will have to compete with those of Ireland and France at 2.3 per cent. and 5.5 per cent. respectively. The inevitable result is that bloodstock breeders in the United Kingdom will send their horses abroad to be sold. It is certain that the studs will follow, especially the larger ones, which are often owned by overseas residents. We shall be left only with the breeders of second-class animals. There will be many fewer jobs, and less tax revenue for the Government.
Also, overseas owners of mares will not send them to stallions in the United Kingdom because, unless there is 294 some extension of the current temporary import arrangement, they would have to pay VAT on the charges. Stallion investment as well is now in serious jeopardy.
The good news during the recess was the decision by Tattersalls, this country's leading auctioneers, to remain in Britain as a result of the measures already taken by the Government to mitigate the problem. They deserve credit for that, but the issue goes beyond the location of Tattersalls, which, as with many other service sector companies, reflects the industry's financial health at any one time.
The House could be forgiven for believing that the difficulties I have described are new and have been brought about by the single European market. Sadly, that is not the case. The problem has existed for many years. I have a letter from a former Treasury Minister relating to the belief that the French would not apply VAT law correctly. Nothing has changed in that regard. He wrote: I gave an assurance that the Government would follow up the earlier official protests made to the Commission in May. It should become clear in the course of the next month whether we can realistically progress within an acceptable time scale. However, should it become apparent that we cannot, then the Government will give further and urgent consideration to the bloodstock problems as a whole. That Minister was Peter Rees, and the date of his letter was 30 August 1979. As my hon. Friend the Minister acknowledges by his smile, that month has become somewhat extended—to 13 years and two months. Still that unfair discrepancy exists, worsened by the rise in VAT rates and single market changes.
The lesson to be learnt is that any protest to the Commission is a waste of time. France, or any other nation, will do what is in its special interest. Although my right hon. Friend the Paymaster General and his predecessors have consistently referred to the need to press the Commission to take action, my right hon. Friend must understand that the industry and many right hon. and hon. Members view such pronouncements with a degree of scepticism.
A year ago, the Select Committee on Home Affairs, under the chairmanship of my hon. Friend the Member for Westminster, North (Sir J. Wheeler), undertook a highly regarded investigation into the financing of the racing industry. The Select Committee concluded that the Government must act quickly to alleviate the serious discrepancy that I mentioned. Consequently, the Minister then having responsibility for such matters—my right hon. Friend the Member for Norfolk, South-West (Mrs. Shephard)—undertook a considerable amount of work to devise the flat-rate scheme for farmers that is now embodied in the Finance Act 1992. The industry made it plain, however, that it would not help most of the major United Kingdom breeders—and that is proving to be the case.
More recently, my right hon. Friend the Paymaster General devised an extension of the rules governing distant selling to provide for temporary export as a means of avoiding the full VAT implications. That is of benefit only in respect of horses valued at more than 15,000 guineas, because it still costs the owner about £700 to export an animal to Ireland to complete the necessary paperwork—only for the new owner to bring the horse back. My right hon. Friend deserves credit for that concept, but it is not in itself sufficient. Most breeders of such horses would rather pay that £700 and sell them in a foreign sale ring.
295 The results of the first two sales at Tattersalls this autumn fulfilled the worst prophecies. The combined total income fell from £24 million last year to £16 million—a decline of 32 per cent. That itself cost the Government £1.4 million in lost VAT revenue. I emphasise that that money has gone already. The Treasury loses out regardless, and the country loses out because our blookstock industry is severely damaged.
My hon. Friend the Minister—and, indeed, others—may be tempted to dismiss the reduction in prices as simply part of the recession. Before they do so, they should study the catalogues for the Deauville sales in France: they will find that in the past two years there has been a substantial increase in the number of consignments of horses from British breeders who had previously sent their horses to Tattersalls. Furthermore, in the past few weeks the Maktoum family—whose racehorse interests in this country are extensive—has decided to reduce its activities here. That family has given as one of the two main reasons for its move the VAT rate. Already the family had been approached by a senior official of the French Government, who were anxious to encourage it to remove all its racing interests to France and prepared to offer help to that end. The Maktoums may be the most well known, but many smaller breeders and owners are tempted to follow.
My right hon. Friend the Paymaster General has taken a considerable interest in the matter, and that is of course very welcome. His attendance at various meetings has been widely recognised. None the less, the industry, in which Britain has always been pre-eminent, is going into permanent decline, not because of any inefficiency on its part or because of poor quality of production or lack of competitiveness, but simply because of Government-created inequalities in taxation. I have always supported my Government's policy of harmonisation through the market place rather than through regulation. Now the market has clearly spoken, and the Government should respond.
Let me make it clear to the House, and to my hon. Friend the Minister, that I am not looking for a subsidy. I would not do that, because I do not believe that the industry needs or should have such a subsidy. I must add that the Paymaster General's comments on the subject in The Racing Post were not very well received by the industry. Nor am I looking for special treatment for the industry—and for that reason I am not speaking in favour of a special low rate of VAT, which, although perfectly legal, I accept is not a realistic proposition at this time.
I am not looking for something that no one else has. What I am looking for is business registration for VAT purposes for racehorse owners. That would place United Kingdom owners back on a level footing. It would enable them to reclaim VAT on their inputs, and, indeed, to pay it on their outputs. It might well be possible to combine it with VAT on prize money—that is what happens in many other countries—and it would give the Government some payback. The horse race advisory council's taxation committee has worked on the whole question of output and its definition.
As the House will know, the question of businesses and their definition comes under VAT law—specifically, under the sixth VAT directive, article 4, which defines a taxable person as any person who carries out any economic activity, whatever the purpose or results of that activity.
My right hon. Friend the Paymaster General has said that, because racehorse ownership is, in his view, a hobby 296 and not a profit-making activity, it is in some way excluded. I must tell him that at no place in the directive does the motivation for carrying out an economic activity come into the matter. In no place does the directive refer to the profit motive as being necessary. Indeed, in article 6—which defines the supply of services—it is specifically stated that the following should be treated as supplies of services for consideration: supplies of services carried out free of charge by the taxable person for his own private use or that of his staff or more generally for purposes other than those of his business". That clearly encompasses racehorse ownership, and my right hon. Friend really could use that as a basis for assisting the industry.
Of the other 11 countries—all tied by the same sixth VAT directive—eight allow, in one way or another, racehorse ownership to be registered as a business. I hope that the Minister will tell my right hon. Friend the Paymaster General that I know that Customs and Excise states that in many countries it is not allowed and that he should look not at the official position but at what in reality is happening in those countries. If he does so, he will find that the vast majority of racehorse owners are able to register and that in most of those countries prize money is taxed at VAT rates. The industry in this country would accept that as part of the quid pro quo for this movement. Touche Ross carried out an investigation into the question of VAT on bloodstock in all Community countries. I am sure that its information could be made available to the Government, if they do not already have it.
The simple conclusion, therefore, is that if all countries in the Community are tied by the same VAT directives as we are, how can it be that this country can resist—I accept that Ireland does the same—the registration of racehorse ownership as a business for VAT purposes? Before my right hon. Friend the Paymaster General says that he believes that the other countries are wrong and that he will protest to the Commission, I have to remind him of the letter from Peter Rees in 1979 which demonstrates that these protests are absolutely fruitless. The Customs and Excise lawyers should look at the directive to see how it can be used to help us rather than at how it can be used not to help us, or just to hinder others.
I do not pretend that this proposal is the panacea for all the problems of the bloodstock industry. O that it were so simple. However, it would be a very considerable step forward, particularly for the breeders in my constituency and for those in the constituencies of both my hon. Friends and hon. Members in all parts of the House. I know that the issue of prize money is also of great significance. There is to be an attempt next month to stage an owners strike on that subject. It is to be led by one of my constituents. I intend to concentrate simply on the VAT issue, but I hope that sooner or later the House will have an opportunity to spend much longer on debating the problems that face this important industry.
I hope that the Minister who is to reply to the debate will take back to my right hon. Friend the Paymaster General what I have said and what I believe may be said by the vice-chairman of the all-party racing committee, if he is fortunate enough to catch your eye, Madam Deputy Speaker. I hope that he does not intend to dismiss my proposals. If he does, I urge him to tear up the speech that he has in front of him. I simply remind him of the words of the Prime Minister and of the Chancellor of the Exchequer two weeks ago—that British interests must 297 come first. Clearly we are talking about a British interest. It goes far beyond the owners and stud farmers who are directly involved. It affects the employees of the industry—the many thousands of them. It affects the interests of the nearly 5 million people who attend race meetings and who, with countless millions of other people, last year paid £482 million in horse race betting duty to the Government.
If my right hon. Friend the Paymaster General intends to play the cost card, perhaps he will ponder on this: the flat-rate scheme and distance selling are ways to avoid paying VAT. My right hon. Friend has already conceded that he will not get that money. If the sales go abroad, not only will my right hon. Friend not get the VAT but all the other revenue that the Government get from the industry will likewise disappear. If stud owners do not make a profit, there is no corporation tax. If the studs go abroad, there will be no business rates either. The real cost to the Government will be the tax revenues. The real cost will also detrimentally affect the heritage of this country where horse racing has always played a major role. I believe that it must continue to do so.
I hope that my right hon. Friend will put meaning into the words of the Prime Minister. We are not crying wolf. The events of the last few months have shown clearly that the expectations that I spoke about in the House two years ago have started to happen. My constituents, and those of all my hon. Friends and of hon. Members in all parts of the House, now look to the Government to come up with solutions.

§ Mr. Lawrence Cunliffe (Leigh)
I reinforce the points expressed by the hon. Member for Cambridgeshire, South-East (Mr. Paice) and his factual assessment of the state and plight of our bloodstock industry.
There is some consternation that after 1 January 1993, when the differentials in VAT between the French, Irish and ourselves come into force, purchasers in the bloodstock market will make a vast percentage of their purchases in Ireland.
There is no division on the subject between the parties. The hon. Gentleman, who is chairman of the all-party racing committee, pleaded a logical case. If the bloodstock and breeding industry is to make a reasonable commercial return, it is imperative that the playing field is level, that the differentials are equitable and, with respect to my Conservative friends, that free market competition is based on honest criteria. I say that in the nicest sense, especially being a miners' sponsored Member of Parliament.
When we met the right hon. Member for Mid-Norfolk (Mr. Ryder), who is now the Government Chief Whip, he expressed sympathy with us. However, as my old boss, Joe Gormley—I was his adviser—used to say, it was a bit like giving us mustard without the beef. Our concern is that people who buy bloodstock and breeding stock in the same market will inevitably buy where the lowest taxes apply.
Every member of the all-party racing committee is saying one thing—that unless the Government take notice and prompt action to enable the bloodstock industry to 298 compete on an equitable basis with our European competitors, a valuable source of trade and revenue may be lost.

§ The Financial Secretary to the Treasury (Mr. Stephen Dorrell)
I begin by congratulating my hon. Friend the Member for Cambridgeshire, South-East (Mr. Paice) on drawing the House's attention to this important matter in the first Adjournment debate of the autumn Session. He and I met regularly in Adjournment debates when I was a Health Minister, but he never succeeded in securing the same interest among our colleagues as he has this evening. I note that this interest is pursued not only by my hon. Friend as chairman of the all-party racing committee and by its other officers but is a subject that elicits substantial interest and sympathy in all parts of the House.
I apologise for the absence of my right hon. Friend the Paymaster General, who has been chairing a meeting of ECOFIN today. The House will know that, in the normal course of events, this subject would have come within his sphere of influence in the Treasury. It is a subject to which he has devoted a substantial amount of time because he understands the importance of the industry to the Cambridgeshire economy, but, much more widely than that, as a major contributor and a major successful British industry—a British success story which any Treasury Minister should be interested to secure and to underwrite and want to continue to be a success story in the years ahead. As my hon. Friend emphasised, it creates a significant number of jobs, it creates real wealth for the British economy, and it is one that we all should want to continue to succeed. That at least is common ground in all parts of the House, and it is an ambition and an objective that is shared by Treasury Ministers.
I stress that my right hon. Friend the Paymaster General is the master of all the detail in this subject. Whereas he looks after the Customs and Excise within the Treasury, I look after the Inland Revenue. Until this evening, I had thought that that meant that my cup overfloweth. However, I will undertake to the House to report to my right hon. Friend the Paymaster General and, of course, my right hon. Friend the Chancellor the arguments that have been put by both hon. Members who have contributed to the debate and also to transmit the attendance in the House at this relatively inconvenient time on a relatively lightly whipped evening to ensure that the issue is taken seriously by the House of Commons.
My hon. Friend asked me to depart from whatever text had been provided for me by officials. I propose to keep the text in front of me but to elaborate a little in a way that I hope that my hon. Friend will find acceptable. He drew particular attention to the importance of VAT as one of the factors which either contributes or fails to contribute to the continued success of the livestock industry. I want to address the application of VAT to the racing livestock industry, but in particular——

§ Mr. Colin Shepherd (Hereford)
Will my hon. Friend give way?

§ Mr. Dorrell
Is my hon. Friend going to be very brief?

§ Mr. Shepherd
I shall be very brief. Will my hon. Friend confirm that it is open to the Government to apply a lower rate of VAT if they so wish?

§ Mr. Dorrell
I will touch on the point about lower rate VAT, but my hon. Friend the Member for Cambridgeshire, South-East particularly wanted me to dwell on the proposition of the——

§ Mr. Geoffrey Clifton-Brown (Cirencester and Tewkesbury)
Will my hon. Friend give way?

§ Mr. Dorrell
Will my hon. Friend forgive me? I have three minutes left.
My hon. Friend the Member for Cambridgeshire, South-East wanted me to dwell particularly on the subject of the registration of racehorse owners, and I want to touch on both of those points. Taking first the point about low-rate VAT for horses, my right hon. Friend the Paymaster General is very well aware that many in the industry want us to introduce a low-rate VAT uniquely for horses or limited to defined categories of valuable horses. My hon. Friend will be well aware that it is the Government's basic proposition in dealing with the tax system that we seek to maintain a system that is as simple as possible with the minimum of discontinuities that are the inevitable consequence of a multiplicity of different rates. There would inevitably be pressure for reduced rates of VAT from a wide range of lobby groups who would feel that their case was at least as strong as that for racing bloodstock. The Government must of course be seen to be fair to all taxpayers. I understand my hon. Friend's point, but he will understand that it flies in the face of the established tax policies that the Government have pursued in this and many other matters.
I now refer to the point about VAT registration of racehorse owners because that is the point on which my hon. Friend the Member for Cambridgeshire, South-East dwelt. My hon. Friend quoted the sixth VAT directive 300 which provides, as he said, that a trader is eligible for registration if he carries on an economic activity whatever the purpose. But the question is whether the ownership of racehorses and the racing of racehorses in race meetings constitutes an economic activity.

§ Sir Nicholas Bonsor (Upminster)
Of course it does.

§ Mr. Dorrell
My hon. Friend the Member for Upminster (Sir N. Bonsor) says, "Of course it does," but that is the question around which the argument revolves. As my hon. Friend the Member for Cambridgeshire, South-East rightly says, it is simply a matter of the enforcement of the law. This much I am clear about—whether we are talking about the Inland Revenue or the Customs and Excise, the interpretation of the law is not properly a matter for Ministers. If there is a dispute about whether the law is being properly enforced in allowing a certain racehorse owner to register for VAT, there is a well-established procedure by which a racehorse owner who feels that he is being unjustly denied the opportunity to register for VAT may prosecute that argument through the courts. As my hon. Friend quite rightly said, it is a matter of law whether an owner is entitled to register or not. The decision whether a racehorse owner falls within the categories defined within the law is a matter for decision ultimately by the courts and certainly not by Ministers.
I stress to the House and to my hon. Friend that the Government share my hon. Friend's ambition to ensure that we have in this country a system of tax law which makes possible the continuation of a successful racehorse-breeding industry. That we shall continue to do.