FLAT-RATE SCHEME (Hansard, 8 May 2002)

§ Mr. Boateng
The clause represents the latest and, I believe, the most significant step that we have taken to simplify the administration of VAT for hundreds of thousands of small businesses.
Since VAT was introduced, the vast majority of registered firms have been obliged to keep a record of the VAT charged on each individual purchase and sale, and go through the often laborious process of totting up their inputs and outputs when filling out their VAT return. The flat rate that is being introduced on 25 April does away with that requirement for more than 500,000 small businesses with turnovers of up to £100,000. Instead, those businesses will have the option to work out their VAT liabilities as a simple percentage of their total turnover. Instead of making hundreds of calculations each quarter, they will simply have to make one. Instead of spending hours sorting through old receipts, they will be able to concentrate on running their business.

§ Mr. Chope
Will the right hon. Gentleman give way?

§ Mr. Boateng
May I just develop the argument a little? We estimate that, by reducing the time that those businesses spend filling in forms and reducing their reliance on accountancy services, the scheme will cut compliance costs for the average business by up to £1,000 per year.

§ Mr. Chope
Does this scheme already apply beyond the 32,000 small manufacturers, 15,000 small agricultural firms, 11,000 small pubs and 22,000 transport companies that, I have been informed, are the only beneficiaries of the scheme at the moment?

§ Mr. Boateng
I do not quite follow the point. The scheme, which I should have thought anyone would welcome, reduces for 500,000 small businesses with turnovers up to £ 100.000 the burden of making those calculations and digging out old receipts. If the hon. Gentleman suggests that we should be doing more, he is of course entitled to say that, but to him must go the question, "What did you do when you had the opportunity to make a difference by relieving this burden on small businesses?" and answer comes there back, "Not very much." I do not think, therefore, that at this stage it would be right for the hon. Gentleman to cavil at what the Chancellor announced in the Budget, because what—

§ Mr. Chope
rose—

§ Mr. Boateng
The hon. Gentleman will have his opportunity.
188 What the Chancellor made clear in his Budget—in response, in some sense, I suppose, to the point that the hon. Gentleman makes—is that we intend to go further next year, extending the scheme to a further 200,000 businesses with turnovers of up to £150,000. Therefore, from next April the scheme will be available to some 700,000 small firms in total: more than 40 per cent. of all VAT- registered businesses.
This is one issue on which it should be possible for the whole House to say, "Good; there is something here that is of benefit to small and medium-sized businesses and not something to cavil about." Anyway, we shall find out when we hear Opposition Members' speeches.
Let me give the Committee a sample of the reactions that the Budget announcement has received from individual businesses. Jamie Rowland, who set up a bike repair shop in Gwynedd in Wales—he did so last year, so he is still wrestling with the issues—said: The extension of the flat-rate VAT for small business will definitely help me and others, because sorting out VAT takes up a lot of time. The more time I can put into the shop in the early days the better. Joanna Marshall, who runs a business designing and making ties in Nottingham, said: I think this is an excellent idea for small businesses. I set up my company two years ago and there is a lot to learn. Taking away a burden like this will make a big difference. This valuable and radical measure has been much welcomed by small businesses and their representative groups. It will remove a compliance burden that has been in place for the past three decades. In that spirit, I commend it to the Committee.

§ Mr. Chope
I am sorry that the Financial Secretary mistook my request for information as cavilling. I asked him for information because I have an article written by someone called Richard Murphy and I was unsure whether what he states in his article represents a misunderstanding. However, he asserts that the scheme is only available to 32,000 small manufacturers, 15,000 small agricultural firms, 11,000 small pubs and 22,000 transport companies", making a total of about 80,000 firms. Yet the Financial Secretary referred to about 500,000 small firms, so has Mr. Murphy got it wrong?

§ Mr. Boateng
Mr. Murphy is absolutely right to identify four categories in that 500,000, in giving an approximation of the numbers concerned.

§ Mr. Chope
I am grateful to the Financial Secretary for that information. Is Mr. Murphy also right to imply that no other group of firms yet qualifies?

§ Mr. Boateng
Mr. Murphy is not quite right. Slightly more than 500,000 small businesses in all sections of the economy will benefit from this measure.

§ Mr. Chope
I am grateful to the Financial Secretary for that clarification. I hope that he will now be equally 189 helpful in answering a question that has been asked by someone whose daughter owns a hairdressing salon in a small town. He says: Under current VAT rules she pays to Customs & Excise around £7,500 per annum on a turnover approaching £70,000 after deducting the VAT on her supplies etc., and in her own spare time keeps all the required books and receipts. He says that under the new scheme she would not keep any records, but would have to pay about £9,000 to Customs & Excise. What sort of help is this? He questions how a scheme has been designed that is meant to help someone where they end up paying more and how has it been worked out that 13 per cent. of turnover would be less than anyone's current VAT payment in the hairdressing business. He also says: To be of any help to my daughter the flat rate for hairdressing should be about 10 per cent., which would leave her about £500 better off. She could then give herself a pay rise of £10 a week, something which she has not had for the last 4 years. I make no political point, but I hope that the Financial Secretary can deal with that specific example.
If the scheme turns out to provide a significant reduction in the burden on business, it will be very welcome. I notice that the estimates as to exactly how much time will be saved have changed significantly from the earlier estimate, but any time that small businesses save is valuable and worth while. However, I should be grateful to the Financial Secretary if he could explain what happens in relation to the records that have to be kept for income tax and corporation tax purposes. If a firm does not have to keep VAT supply invoices for the purposes of VAT accounting, is it exempt from having to keep them for other accounting purposes? If not, what is the purpose of the exemption? Again, that issue has been greeted with some scepticism by several people involved in the very important small business sector.

§ Mr. Edward Davey
We welcome the clause.

§ Mr. Boateng
Let me deal with the hypothetical question asked by the hon. Member for Christchurch (Mr. Chope) in relation to the need still to collect receipts for other taxes. There will still be a need to do that because VAT is a real-time tax; people will not need to collect receipts for that purpose, but they may well have to collect them for another purpose.
The specific issue is that small businesses are understandably concerned that they are collecting the tax on our behalf—that we are using them as tax collectors. We are recognising that fact and saying that, because VAT is a real-time tax, they do not have to collect receipts for that purpose, but they may well have to do so for the other purposes.
The hon. Gentleman's specific example of a hairdresser strays into individual tax concerns. I do not feel that it would be appropriate for me to give advice on such matters at the Dispatch Box, but I will happily ensure that Customs and Excise writes to him, or indeed to the individual taxpayer, to outline the proposal's impact on that individual. However, Customs and Excise has given me an illustrative example of the categories of people who 190 would benefit front this measure, and it estimates that hairdressers will save about £1,000 in compliance costs. As that information does not relate to the hon. Gentleman's specific example, it is right to share it with the Committee, but I shall write to the hon. Gentleman about it in the way that I have outlined.
On the general point about small businesses paying more tax, the proposed flat-rate scheme will operate on an optional basis, so only those businesses that believe they will benefit from joining the scheme will opt to take part. Therefore, some businesses may well say that they do not want to take part in the scheme because they and their accountants have calculated that it would not benefit them to do so. Businesses that do not believe they will benefit can continue to account for VAT in the way that they always have done.
The rates have been calculated to produce a broadly revenue-neutral outcome in each sector, but that clearly means that there will be a net reduction in the amount of tax many businesses pay, as well as significant compliance cost savings. For all those reasons and bearing in mind the general, broad welcome that the measure has received in all quarters, I commend it to the Committee.

§ Roger Casale
I wish to make two or three brief comments on the clause. I welcome the new measures, and I am pleased that the Opposition welcome them too, but I rise to speak because the welcome has been distinctly tepid and lukewarm from the Opposition Benches. If the truth were known, there is probably quite a lot of repressed enthusiasm for the measure. After all, it will save small businesses much time and cost. Small businesses make up a growing part of our economy, especially in the service sector, and are great creators of employment.
That is certainly the case in my constituency, as I know from my dealings with the Merton chamber of commerce, the Wimbledon business group and other small businesses, not least Ad Hoc Business Support, which helps me in my work when I have a particularly heavy case load. I have seen that business grow in the past three to four years. One of the things that held it back initially was the onerous task of having to work out its VAT liability. Indeed, being eligible for VAT at all held it back in the early stages. Increasing the threshold and introducing the flat-rate scheme will save that and similar businesses a great deal of time and could save it up to £1,000 a year, which will make a difference to its competitiveness. I hope that that will underpin such companies' future success.
My second reason for wanting to speak in favour of the new measure is that it is part of a series of measures that the Government are taking to boost competitiveness and to support small businesses. For example, there was a recent statement by my right hon. Friend the Chancellor of the Exchequer on the reduction of bank charges for small businesses. There are many thousands of small businesses in my constituency, and they will disagree with us about some things, but on the other side of the equation they will also recognise that we are taking a raft of measures, of which this is one, that demonstrate that we are on the side of small businesses, that we want to support them and that we will make the necessary changes to the tax system, as we are doing now in relation to VAT, to cut red tape and to cut business costs. All of that has come from the dialogue between this Government and the 191 small business community, which was completely unknown under the previous Administration. In that regard, I mention the work of the Small Business Council in particular.
I was in touch with the Federation of Small Businesses just today, and it welcomed the measure. It has always made the point that many small businesses feel that they have the onerous task of acting as tax collectors in relation to VAT. This measure demonstrates that we have taken their concerns on board. The small business community wants to work with the Government to improve things, not just in its own interests but because it recognises, as we do, that small businesses will continue to drive our economy in the future and create jobs, and that, by working together, we can reach a solution that works for everybody.
I very much welcome these measures, which come out of that dialogue between the Government and business. As I said, they are one more demonstration of this Government's support for and commitment to the small business community, and our determination, when possible, to introduce the changes necessary to make small businesses more successful and more competitive in the future.

§ Mr. Mark Hoban (Fareham)
I welcome the introduction of a flat-rate scheme for small businesses, although I want to raise one concern in that regard.
One of the issues that small businesses in my constituency have raised with me in recent months is the administrative burden of VAT. Any action taken to lift that burden will be welcomed by those businesses. My only caveat is the process by which the flat rate is set for particular businesses, and what consultation there has been with trade bodies on whether that rate is appropriate. One of the issues that small businesses will consider—my hon. Friend the Member for Christchurch (Mr. Chope) referred to the circumstances of a hairdresser who would lose out as a consequence of adopting the flat-rate scheme—is whether they would feel obliged, on a regular basis, to calculate their VAT liability if they did not elect to use a flat-rate scheme. Would compliance costs continue because businesses would feel the need, every so often, to re-check whether they would be better off using the flat-rate scheme or the more conventional scheme?
I hope that the Financial Secretary will speak to trade representatives to ensure that the flat rate that is set is relevant to those businesses and encourages them to take advantage of it, so that they benefit from the lower compliance costs on offer through this scheme.

§ Mr. Mark Field
I, too, would like to speak briefly on this point. I am sorry that the hon. Member for Wimbledon (Roger Casale) feels that the Opposition's support for this measure is somewhat tepid. In principle, we are comfortable with the measure, which is a positive step forward. The small business sector, in which I operated prior to joining the House, has not been terribly well served by this Government. It is not fair to say that there is a monopoly of good will towards the small business sector on either side of the political divide. It is fair to say, however, that, in essence, these changes, although welcome, represent only a small part of the burden faced by many small business people.
192 VAT is one matter on which I have spoken previously in the House—I always felt that I was one of the worst paid pro bono for my tax-collecting skills when I dealt with VAT in my business—and it is an important fund raiser for the Government. There are great concerns, however, about the amount of time that must be spent by any small business man on the various other payroll taxes, which are not affected by the measure.
Much as I understand the Government wishing to make much of this measure, it is very small. As has been pointed out in various interventions, there will no doubt still be a great burden on many small business men in terms of having to deal with receipts for Inland Revenue purposes, if not necessarily for Customs and Excise. I would be interested, however, to receive guidance from the Financial Secretary on his comments to the effect that the whole process would be revenue neutral. Will he tell us which businesses are likely to suffer under the new provision?

§ Mr. Boateng
I am very grateful to my hon. Friend the Member for Wimbledon (Roger Casale) for stressing the importance that the Government attach to consultation with industry, business and the relevant affected sectors. I first recall meeting him many years ago, when I was an Opposition Front-Bench spokesperson on Treasury affairs. If he was not then a parliamentary candidate, he was at least very active in Wimbledon, and he was noted, at a time when it was not as commonplace as it is now, as someone who always bothered to reach out to small businesses in his constituency and to learn and listen to their concerns. I have no doubt that that contributed to his subsequent success in 1997 and to his re-election last year. That is a lesson that the Labour party has learned, and that we sometimes had to learn the hard way in the years of opposition.
We have been engaged in a process of consultation in order to arrive at these rates. In response to the points made by the hon. Members for Fareham (Mr. Hoban) and for Cities of London and Westminster (Mr. Field), the rates are based on information from previous VAT returns submitted by all traders who would be eligible to join the scheme. The rates have been calculated on the basis of producing a broadly revenue-neutral outcome across each sector. We consulted on all these rates, talked to the sectors concerned, and, in some cases, responded to the consultation by reducing the rates proposed for an individual sector. For example, we now have two rates for construction services, instead of one. That was a result of listening to the industry and its concerns to ensure that we got it right and that we met its needs.
For reasons that hon. Members on both sides of the House have outlined, it would have been a nonsense to set a single flat rate for all small businesses. Either it would have been set so low that there would be a substantial loss of revenue, or so high that the sector would simply not opt to participate. We want businesses to have a real choice. The rate for a particular business will therefore depend on what trade sector it is in, but, clearly, there will be only one rate for each business. If a business is engaged in two or more sectors with different rates, the flat rate to be applied will be that for the main business sector based on turnover generated. The businesses and trade associations that we consulted felt 193 that that was the best solution to this problem. I think that we have got it right, and we are determined to make sure that it is helpful to small businesses.
As my hon. Friend the Member for Wimbledon said, the measure should be seen as part of a wider Government commitment to support small businesses and to promote an entrepreneurial culture. No doubt there is still more to be done, and we are determined to do all that is necessary to ensure that we have a culture that promotes the creation of jobs, that helps bridge the productivity gap, and that recognises the vital role that the entrepreneurial spirit plays in creating a sound and dynamic economy.
I hope that, as a result of this debate, the enthusiasm that-as my hon. Friend pointed out-Conservative Members have so ably repressed will re-emerge. One does not often associate the hon. Member for Buckingham (Mr. Bercow) with repression in any sense of the word; his enthusiasms are normally plain for all to see. It is unusual for his enthusiasm to be as successfully repressed as it has been on this occasion. However, in the many hours that lie before us in Committee, we will no doubt draw out that enthusiasm. My hon. Friends the Paymaster General and the Economic Secretary cannot wait to have a go at drawing out—-repressions" may be going too far—the enthusiasms of the hon. Member for Buckingham. With that, I commend the clause to the Committee.