NATIONAL INSURANCE SURCHARGE BILL

HL Deb 20 December 1976 vol 378 cc1079-127

2.56 p.m.

The SOLICITOR-GENERAL for SCOTLAND (Lord McCluskey)

My Lords, I beg to move that this Bill be now read a second time. The Bill now before the House gives effect to a measure announced by my right honourable friend the Chancellor of the Exchequer in another place on July 22nd. This is the introduction of a new tax to be known as the National Insurance Surcharge and it will be collected through the machinery of the National Insurance contributions. I must emphasise however to noble Lords that this is a tax and, as such, in no way affects the rate of contribution or of benefits under the National Insurance system. Indeed, the most important word in the Title of the Bill is the word "Surcharge".

The new tax will come into operation on April 6th, 1977. The new tax is to be levied at a rate of 2 per cent. on those earnings which are liable to secondary Class 1 National Insurance contributions. In effect, the surcharge will apply to earnings under £105 per week. It will not apply in respect of those earning less than f15 a week for whom no National Insurance contribution is payable. These figures of £15 and £105 are the new limits for National Insurance contributions for 1977/78. They were announced by the Secretary of State for Social Services on December 7th 1976.

This new tax will be collected together with the employers' National Insurance contribution so that there will be no additional administrative work for the employers. In effect, the employers will calculate the employers' contribution as though the rate had been increased by two percentage points. The additional revenue will be paid over to the Inland Revenue.

Baroness ELLES

My Lords, did the noble Lord say that the 2 per cent. would be on the contribution or on the earnings?

Lord McCLUSKEY

My Lords, I intended to say (and I hope I said) that it will be on the earnings. If that satisfies the noble Baroness, perhaps I can return to repeat that the employers will calculate their contribution as though the rate had been increased by two percentage points in relation to earnings. The additional revenue will be paid over to the Inland Revenue along with the National Insurance contribution and PAYE. The revenue from the surcharge will be paid into the Consolidated Fund along with the proceeds of other taxes. Because the surcharge makes use of the machinery of the National Insurance contribution for purposes of collection, it will be exceptionally cheap to collect. It will throw no extra administrative burden on employers, and no additional civil servants will be needed to operate this tax.

If I may turn to the reasons for the introduction of this tax, when my right honourable friend announced the introduction of this tax in July, he explained that the size of the Budget deficit in the current financial year, although raising problems of financing, was advantageous at a time of recession, as it enabled unemployment to be kept lower than it would otherwise have been. However, given the prospects for 1977/78, both in world trade and at home, he wished to reduce the public sector borrowing requirement during that year. This was part of a long-term strategy to reduce the borrowing requirement steadily over the next three years. If this did not happen, it was his view that the financing of the public sector could preempt private savings, which productive industry was likely to require on a substantial scale to finance stock building and investment. Alternatively, it would lead to an excessive growth of the money supply, which would refuel inflation.

The National Insurance surcharge, which he then announced (that is, on 22nd July), was seen as one step in beginning this reduction of the public sector borrowing requirement. Although the rate of the surcharge is comparatively low, the comprehensive nature of its base makes it revenue-rich and therefore well suited to its objective of reducing the public sector borrowing requirement. The revenue yield in 1977/78 is estimated to be £950 million. The reduction in the PSBR which will result is some £700 million. The difference between these two figures is explained very largely by the increased level of public expenditure in money terms which will be occasioned by the higher price level caused by the imposition of the surcharge.

Although circumstances and forecasts have changed since July of this year, there is still a need for this substantial increase in revenue. The measures which my right honourable friend announced in another place last Wednesday are a reflection of the continuing need to reduce the PSBR in 1977/78 and in subsequent years. It is linked with a large external deficit and with a severe problem of internal financing. An excessive PSBR presents the choice, on the one hand, of high interest rates and, on the other hand, printing money.

A gradual reduction in the PSBR will enable us, without inflation and without intolerable interest rates, to provide for the borrowing needs, both of the public sector and of industry. This is essential to the industrial strategy, because it is necessary for industry to be able to borrow for investment and for working capital at tolerable interest rates. The National Insurance surcharge is of course only part of the strategy. Other measures were announced by my right honourable friend the Chancellor of the Exchequer last week which will carry this matter further forward. It is clear that our long-term objectives will be achieved by a combination of public expenditure and taxation changes. The National Insurance surcharge was the first of the tax changes to be announced and it forms part of the economic line-base on which last Wednesday's measures were calculated.

If I may turn now to the economic effects of the surcharge, noble Lords will appreciate that to raise almost £1,000 million in taxation is bound to have, and does have, a considerable effect on the economy, and this would be true whichever tax instrument was chosen. The choice of the National Insurance surcharge in particular was made because of the nature of its economic effects. The surcharge is a tax on consumption. That is, although it is to be collected from employers, it is expected that they will pass it forward into their prices, which will eventually reach the consumer. However, because it is a tax with a very broad base (although at a low rate) the time taken for the effects to pass through the economy to the final consumer is much greater than in the case of other taxes on consumption; in particular, for example, value added tax.

The estimate is that the adverse effect on unemployment by the fourth quarter following the introduction of the surcharge might be of the order of 10,000 jobs lost. Similarly, the effect on the retail price index at that point in time is estimated to be of the order of just under 1 per cent. Comparable figures for an increase in the standard rate of value added tax which would achieve the same effect on the PSBR would be an addition of some 50,000 to the unemployment figures and about 1.8 per cent. on the retail price index. This reflects the fact not only that VAT comes through more quickly, but also, as I told this House two weeks ago in a debate on VAT, that it bears almost entirely on about 50 per cent. of consumer expenditure, whereas the surcharge will spread very widely over the whole domestic economy.

Perhaps it would be useful if at this stage I were to say a few words about the comprehensive nature of the tax, which I know is of concern to many here. I have already explained the economic reasoning which led the Government to make this a non-selective tax. There are also sound practical reasons. The National Insurance contribution system is itself non-selective, and one of the merits of the surcharge is that it follows the contribution system in all respects. This will enable employers, as I have already said, to behave in practice as though there had been an increase of 2 percentage points in the rate of the employers' contribution, thus eliminating extra work for them. It would have been impossible to introduce a system of selective payments for 1977/78 given the administrative timetable already laid down by the National Insurance contribution system. Selectivity in that year could therefore be introduced only by means of a system of repayment. This would involve the employer in making a claim for repayment, which would have had to be processed and checked. If that system were introduced, there would then necessarily be additional work for employers, and additional civil servants would be required to operate the scheme. Inevitably, there would be difficulties of definition, and borderlines would have to be drawn which would no doubt give rise to complaint and criticism.

Having said that, it may of course be argued that many of these points which go in favour of this form of tax do not apply to Churches and charities; or if they do, that their validity is much reduced. This is a point of view of which the Government are well aware. Indeed in another place Treasury Ministers have already announced that they will consider very carefully representations from Churches and charities. I understand that the most reverend Primate the Lord Archbishop of Canterbury is shortly to lead a deputation to meet the Prime Minister to discuss this matter. Accordingly, at this time I would not wish to say any more, although I will listen to the debate and, in the light of the points made, it may be desirable for me to add something to that.

Baroness ELLES

My Lords, if the noble and learned Lord will allow me to intervene once more, would he ensure this time that the Prime Minister will receive the most reverend Primate the Archbishop of Canterbury and his delegation if they go to 10 Downing Street?

Lord McCLUSKEY

My Lords, that question is misconceived, with respect. The noble Baroness imagines that the Prime Minister refused to see the Archbishop. That is not so. The Archbishop sought a meeting with the Prime Minister on two days which were two of the busiest days for many years in the life of a Prime Minister of this country. The Prime Minister did not decline to see the Archbishop but sought to make a different arrangement. The Archbishop has no free time to meet the Prime Minister before Christmas. But of course as soon as it suits the Archbishop, the Prime Minister will meet him.

My Lords, in conclusion, this is a new tax for this country, although the machinery, in the form of the employers' National Insurance contribution, has existed for a long time. It is the Government's view that this non-selective way of raising a large sum of revenue with its effects being spread thinly across the whole economy is preferable to other, more selective, measures which could have been taken. It does of course present problems for particular interests, but it is necessary to point out that many of the difficulties would be created by any increase in taxation of similar magnitude. My Lords, I beg to move that this Bill be now read a second time.

Moved, That the Bill be read 2^a.—(Lord McCluskey.)

3.10 p.m.

Baroness ELLES

My Lords, we are grateful to the noble and learned Lord, Lord McCluskey, who has outlined for the benefit of the House draft legislation to implement the proposals made by the Chancellor way back in July—a long time ago in the economic history of this country. It must be said at the outset that we on these Benches consider the measure contained in the Bill to be thoroughly objectionable both as to the way in which it is to be implemented and as to its probable effects upon the economy.

The Title of the Bill is itself deceptive, as indeed the noble and learned Lord very honestly indicated. The surcharge to be paid by employers is not, as one might be forgiven for imagining, on the National Insurance contributions but on the earnings of the employees. Therefore, although it is 2 per cent. on earnings, it is 23 per cent. on the National Insurance contribution. I should like to emphasise that point, because I do not think it was made quite as clear as perhaps it might have been by the noble and learned Lord in his brief. If 2 per cent. is calculated on the employee's share of the contribution, that would be 2 per cent. on 8½ per cent. of somebody's earnings; but in fact he is paying 2 per cent. on earnings and 23 per cent. on what is 8½ per cent. on National Insurance contribution; so the total contribution by the employer is an increase of 23 per cent. on the National Insurance contribution.

The noble and learned Lord has said that there would be no additional cost to the Civil Service involved here because it would be raised through the National Insurance scheme. I wonder whether he could explain how the money will be transferred from the collectors of National Insurance money to the Treasury. I imagine that some members of the Civil Service must be employed to effect such a transfer—or is it done entirely on Giro? Further, it might be reasonably assumed, if it is reasonable to assume anything any more, that the extra payments would be a contribution to the National Insurance Fund. It might be thought possible, say, to allow the payment of £10 to old age pensioners as a Christmas bonus or to increase the child allowances, which are so badly needed for poor families. But not a bit of it, as the noble and learned Lord has indicated. The estimated yield of over £900 million per year will be paid into the Consolidated Fund, at the same time reducing the PSBR—thus enabling the Chancellor to cut back less on public expenditure than he would otherwise have had to do. From a growing number of published examples and following the statement of Mr. du Cann, chairman of the PAC, it appears that about £1 billion—rather more than the tax yield—could be saved just by being more efficient, responsible and competent in administration and in Government. In effect, what is happening is that the new tax is a boost to the squanderers in the public sector.

Lord McCLUSKEY

My Lords, in the light of what she said and in view of the fact that she interrupted me twice, may I ask the noble Baroness to explain how one can pay the benefits to children or old age pensioners without increasing the public sector borrowing requirement?

Baroness ELLES

My Lords, I think I have given one indication; that is, if administration was more efficient £1 billion could be saved, to say nothing of what could be saved by stopping the nationalisation programme, which is to cost the Government several thousand million pounds. There are several ways of saving money in connection with the Public Expenditure Account, as the noble and learned Lord well knows. The Government considered in July the necessity for bringing in this tax against a totally different set of economic circumstances and still see fit to introduce a measure which in effect amounts to a net 2 per cent. increase in direct taxation on earnings; the only difference from the present methods being that it is the payer who foots the Bill and not the recipient. During the last few weeks in the worsening conditions of the economy, the Government have made several policy statements, with some of which we on this side of the House would certainly not disagree. But if the Government meant what they said, or if the half of them who speak were aptly able to implement what they propose, there would be no shred of justification for this new tax—a tax which is both unfair and dangerous because of the way in which it is being levied. It is also dangerous because of its possible and, indeed, probable effects upon the economy.

We are told by the Prime Minister and the Chancellor that it is vital to encourage industrial investment: indeed it is a basic thesis of the Government's industrial strategy, so we are given to understand. Both the TUC and the CBI recognise the need to shift resources to the manufacturing industries, but does an extra tax on all employers—and I repeat, all employers—encourage investment?—especially when one takes into account the exorbitant minimum lending rate, which is now over 14¼ per cent. The tax will cost an estimated £400 million to manufacturing industry. At the same time, the mini-Budget includes proposals to phase out the regional employment premium, so that regions which are trying to revitalise their industries and create jobs in areas of high unemployment will find it harder than ever to follow their programmes. Is this what could be called encouragement? Is this a shift towards manufacturing industry, on which the future of the British economy depends?

We are told that inflation must be curbed, and we absolutely agree with that. In July, when the tax was proposed, inflation was running at the rate of just over 14 per cent. Incidentally, were we not to have been into single figures as regards inflation by the end of this year? Who remembers that promise now? The figure is now rising again and running at about 15 per cent. Yet it is admitted that this tax will be passed on in prices not only of food but also or other goods and services, such as gas, electricity, travel and so on. In any circumstances, can this be considered a contribution to curbing inflation?

We are also told that unemployment must be checked. We totally agree with that. It was unimaginable in the early 1970s that the unemployment figure for this country could reach 1 million, let alone 1½ million. Yet we read again yesterday of estimates of 2 million unemployed. Those figures cannot express the consequences on even more people, including families and dependants; and it is no use quoting statistics only. These are human beings we are considering, passing their days in ever-declining hope.

Over £900 million is being removed from the very sector which is able and which must, if we are to survive as a nation with a viable economy, create new wealth and new jobs and be able to offer opportunities to young people who are completing their education. I have said over and over again in this House that one of the most immoral situations in this country, whichever Government are in power, is to have thousands of school children leaving school and being neglected by the society in which they are meant to earn their living. Yet, according to Government calculations, this new tax will result in at least another 10,000 unemployed by the last quarter of next year. Other estimates show convincingly, and regrettably, that that figure will be largely exceeded.

We are also told that the private sector must he encouraged, particularly to increase our exports. Who, my Lords, would not agree with that, with a trading deficit of over £500 million in November alone? But who are our exporters? A pay policy was surely agreed between all parties—the workers, the CBI and the Government. Why is it that only the employers are now to be affected by an alteration in the pay policy? Many small firms are among our exporters, making components for engineering, precision industries and so on. What does the tax do for those small businesses? It directly puts up the cost of labour. According to an Answer published in Hansard on 13th December in reply to a Question put down in another place, it will cost an extra £1,607 per year for a firm with 25 employees, £6,407 for 100 employees and for a large firm with 10,000 employees the enormous sum of £642,700. Of course, one can go on calculating in that proportion according to the number of employees involved. No wonder the figures for bankruptcies are higher than they have ever been, having declined during the period 1971–73. There are now over 7,000 for 1975 alone, not to mention the incalculable number of firms which just folded up in despair in the present state of the economy.

Is this extra cost going to help the private sector and small businesses, especially with the minimum lending rate at its present level? We are told, and once again we agree, that direct taxation is too high. Everybody would agree with that. But, as I have said, this Bill, in effect, imposes a direct tax on earnings: regardless of whether it be the payer of earnings or the recipient of earnings, the effect of this surcharge is a direct tax.

We are told that the yield will be over £900 million, but the net benefit to the Consolidated Fund will be around £700 million, and we must ask: Why? The noble and learned Lord quite rightly gave one or two reasons as to why there should be a difference. But according to the statement made by the Financial Secretary in another place, it was also estimated that part of this £200 million from the tax receipts will be needed to pay for the unemployment benefits of those who will become unemployed, because of the imposition of the tax. Crushed between the Treasury computer, which fails, like almost every other projection, to give an accurate image of the future, and the Marxists within the Labour Party, who know only too well what they are projecting for the future of Britain, the Chancellor has totally failed to encourage those citizens—and I believe that they represent the vast majority of the people of this country—who are waiting and wanting to co-operate to restore, through increased productivity and successful export programmes, the failing economy of Britain.

Finally, there are two areas on which others will be speaking in this debate. The Churches were specifically told that they would suffer no more taxes, and they were actively encouraged by the Government to switch from self-employed to employed status. Yet some days later—but I will say no more as, undoubtedly, the right reverend Prelate the Bishop of London will be informing the House of these matters on the basis of his personal, expert knowledge. The other area is that of the voluntary organisations, on which the noble and learned Lord has rightly touched, and has said that the Prime Minister is willing to receive representations. We on this side of the House are wholly in sympathy with the charities and the Churches, and are very pleased with the statement which the noble and learned Lord has made that the Prime Minister will receive representations and consider very seriously their position. But what conclusions are we to draw from this collection of statements which we have had on the economy? Do the Government imagine that the citizens of this country can really believe any more what the Government are saying? It is no longer a question of a credibility gap. and it is clear that everything that is said by the Government in relation to the economy is merely listened to with increasing incredulity. What a way to run a country which was once great!

The fact is that since this tax was proposed the economic position of the country has changed. Certain assumptions were made which have already been proved baseless: economic growth of 4½ per cent. which was estimated in July, now may be 2 per cent.; inflation was declining in July but now it is not. It is now assumed that investment in industry will increase by 19½ per cent., but on what basis is this assumption made? It seems to be a totally groundless assumption. This Bill does not answer any of the real problems with which the country is faced hut, on the admission of the Government, will serve to exacerbate them. It does not answer any of the economic, social, financial or political needs of the country. Above all, it does not give any incentive, which is so badly needed for the wealth creating sectors of the economy. Consequently, it will not provide confidence in the Government, either at home or abroad, if they proceed with this measure. We on this side of the House maintain that this is a bad Bill, and will be of no benefit at all to those who most need help.

Lord JACQUES

My Lords, before the noble Baroness sits down, may I ask this question? She has a very great interest in the EEC. Will she admit that this Bill brings employers' contributions and taxes a little nearer to the rates which are paid by our partners in the EEC?

Baroness ELLES

With pleasure, my Lords. In fact, the noble Lord has very kindly drawn attention to the fact that our direct taxes are considerably higher than those in any other country in the EEC. The United Kingdom pays 43 per cent., Germany pays 33 per cent. and France pays 20 per cent. Further, the social security contributions in the other EEC countries include medical services and health services, whereas in this country they are paid out of direct taxation. Further, if anybody wants to make any comparison between social security benefits obtained in any other European country and those in this country, I know where I would live.

3.23 p.m.

Lord BANKS

My Lords, I should like to join with the noble Baroness, Lady Elles, in thanking the noble and learned Lord, Lord McCluskey, for the concise way in which he has introduced this simple, though controversial, measure. However, I must confess at once that I dislike this tax intensely. The 2 per cent. surcharge on employers' contributions to National Insurance is clearly a tax on employment at a time of high unemployment, and it will, for some employers, be the last straw. It must encourage employers to employ fewer people. We are told that the surcharge will be passed on in prices, but of course not all businesses will be able to do this. The Government's estimate of the increase in unemployment directly attributable to this tax is 10,000, but I shall be greatly surprised if it is not much higher than that. Figures of 75,000 to 80,000 have been mentioned in the debates in another place. The surcharge must be taken into account together with the increased contributions which employers are to pay, anyway, from next April in respect of those earning over £95 per week, and these National Insurance burdens are being added at a time when it is estimated that there will be a surplus of £888 million in the National Insurance Fund in 1977–78. So, first, it is a tax on employment.

Secondly, the tax takes no account of ability to pay and it will be bound to bear heavily on small firms, on labour-intensive industries and on firms in a marginal position between profit and loss. The Government tell us that the self-employed are not affected by this tax, and of course their own National Insurance contributions are not affected. But they are affected in their capacity as employers, and many partners and sole proprietors will feel the weight of this extra burden very severely.

Thirdly, the tax also takes no account of ability to pass on the surcharge in prices and some organisations, by their very nature, are quite unable to do that. This is, of course, the position of the Churches and the charities, to which the noble and learned Lord referred, and figures have been given in debates in another place of the frightening extra cost which will have to be borne by the Churches and the charities. I have no doubt that the right reverend Prelate the Bishop of London will be able to give us more detail of this situation. But perhaps I may say just a word about the position of my own denomination, the United Reformed Church. The Churches generally are now contemplating moving to employed status for their ministers of religion, and the cost to the United Reformed Church, which is one of the smaller of the major denominations, would be £150,000 a year. That is just to move to employed status, because the Church will now have to find the employer's contribution for all its ministers. If the 2 per cent. surcharge is added, it will have to find another £40,000 on top of the £150,000. This is money which has to be raised; it is not money which will come in from any automatic source.

The fourth reason why I object to this tax is that I believe it is an abuse of the National Insurance system. The National Insurance Fund will have a surplus this year of £932 million, so the estimate runs, and, as I have already mentioned, in 1977–78 of £888 million. I think it follows from that that the National Insurance system is being used as part of a deflationary policy, at the moment. The whole basis of National Insurance is that there should be contributions from employers and employees, and also a contribution from the Treasury at a fixed rate. What would happen in the ordinary course of events in 1977–78 is that the Treasury would make a contribution of about £1,500 million to the National Insurance Fund, according to the agreed basis as approved by Parliament.

What is happening, in effect, is that that is being reduced by very nearly £1,000 million as a result of this surcharge. So a major change is taking place in National Insurance policy, but it is disguised; it is being introduced by a backstairs method. With the increased contributions projected for next year for those earning over £95, of which employers will have to pay their share, this makes the burden of National Insurance contributions, with the surcharge, much heavier on the employer than it need be, and this must subject the whole system to strain.

It has been said—the noble Baroness has answered this effectively—that in countries on the Continent employers pay more in social security contributions; but, as she pointed out, to get a proper comparison it is necessary to know what is spent by employers in this country on other benefits, such as pension benefits, which are provided through the national social security systems in some of the Continental countries to which reference has been made.

Lord BROWN

My Lords, is the noble Lord one of those who believes in earmarking specific tranches of taxation for quite specific purposes—for instance, the road vehicle tax for the Road Fund, the National Insurance contributions for the National Insurance Fund, and so on?

Lord BANKS

My Lords, I thank the noble Lord for his question. If it is understood that these moneys are being raised for a particular purpose—and the contributions are given a particular title, which suggests that they are—then the answer certainly is, Yes. What we need to know is the incidence of taxation on employers in those other countries as well, as compared with this country.

We on these Benches have long questioned the contributory principle, since the National Insurance scheme is "pay as you go" and is not really insurance at all. We have advocated that National Insurance contributions should be regarded as a social security tax; that is what they really are. Indeed, we suggested that they could be regionally varied to help the implementation of regional policy. But we have never advocated that money raised by this tax should go to the general revenue.

It seems that there is a likelihood that the surcharge which is being imposed to deal with the current difficult situation may become a permanent feature, because it is much easier to impose a tax than it is to repeal it. When the noble Lord replies I should be grateful if he would give us an assurance that at least it is not the Government's intention that this surcharge should become a permanent feature of the taxation scene.

The Government say that this tax is an essential part of the package designed to reduce the public sector borrowing requirement in 1977/78. On 22nd July the Chancellor announced public expenditure cuts which were calculated to reduce the public sector borrowing requirement by £800 million in 1977/78, and also the surcharge, which we are discussing today, which was designed to reduce the public sector borrowing requirement by £700 million, making a total of £1,500 million to be reduced by that set of measures. Last week the Chancellor said that notwithstanding those measures the forecast of the public sector borrowing requirement was now £10,500 million for 1977/78 and he proposed a package of measures which would reduce that requirement by a further £1,800 million. Therefore, taking together the July and the December measures, the total reduction in the public sector borrowing requirement is £3,300 million, of which this Bill contributes £700 million.

I think that helps to put the Bill into perspective. I am quite convinced that it will be possible to re-arrange the package to eliminate altogether the surcharge. For example, we might well have had a larger contribution from drink and tobacco —perhaps even double. If we were to achieve that, it would leave a smaller revenue to be raised from other taxation. For this purpose I should have preferred to use value added tax, but less would have to be raised by this means than is being raised by the surcharge. In those circumstances, I think that a 2 per cent. increase would have been sufficient.

Unlike the surcharge, value added tax does not affect food, nor does it affect many necessities. Also it does not affect exports, and I believe it to be generally fairer. The fact that it bears more heavily on selected areas than the surcharge, because it is not so broadly based, and that it finds its way immediately into the retail price index, would be offset by the fact that, under the arrangement I am suggesting, less revenue would have to be raised by value added tax than by the surcharge. I have no doubt that the package could be rearranged in some such manner and I therefore reject the argument that there is no alternative to the National Insurance surcharge.

For the reasons which I have given I regret that the Government have felt it necessary to introduce the Bill, and I hope that it will not be long before they feel able to bring before us another Bill that is designed to repeal it.

3.37 p.m.

The Lord Bishop of LONDON

My Lords, I, too, would like to thank the noble and learned Lord for the clarity and brevity with which he has presented the Bill, although I regret that I do not think that I shall be able to emulate the second admirable quality of his speech. I am grateful that the noble Lord has confirmed the assurance given in another place, that the position of the Churches and the charities will be given very careful consideration by Her Majesty's Government. I shall bear in mind that assurance in what I have to say to your Lordships.

Your Lordships will be aware, from the publicity which has been given to their representations, of the widespread and deep concern felt by the Churches and charities over the likely impact of this surcharge. In this debate the noble Lord, Lord Allen of Abbeydale, will present the views of the charities and of the National Council of Social Service. I, as Chairman of the Churches Main Committee, a body which represents all the major Christian Communions and the Jewish Church, shall seek to place before your Lordships the grounds on which the Churches base their conviction that this Bill would impose on them a gross and damaging injustice. Before I do so, I want to remove some of the misunderstandings which have arisen as a result of the publicity given to the negotiations between the Government and the Churches and charities, to which reference has already been made in this debate.

First, the information that the Churches were seeking an urgent interview with the Prime Minister was not supplied to the Press by the Churches themselves. Where it came from I do not know. Secondly, it was unfortunate that the situation was presented as one between the Archbishop of Canterbury, speaking for the Church of England, and the Prime Minister. This was never the case. The negotiations throughout have been made by the Churches Main Committee, or with its knowledge and consent. Sir Ronald Harris, the First Estates Commissioner, communicated first with the Chancellor of the Exchequer and it was only when the Committee was satisfied that it could not get a sympathetic response from the Chancellor that it felt it necessary to ask the Archbishop to lead a delegation to see the Prime Minister himself.

A similar state of affairs had arisen over the Community Land Bill and the then Prime Minister, Sir Harold Wilson, received a deputation led by the Archbishop. The issues of this surcharge were so grave that it was felt necessary to ask for another interview with the Prime Minister. The deputation would have been led by the Archbishop of Canterbury and would have included Archbishop Dwyer, the Archbishop of Birmingham and the Elected Chairman of the Roman Catholic Bishops Conference; the Moderator of the General Assembly of the Church of Scotland; The Moderator of the Free Church Council; the Archbishop of Wales; and the Chief Rabbi and others of us, together with the noble Lord, Lord Allen of Abbeydale, and other representatives of the National Council of Social Service. There was never any question of Dr. Coggan going alone to fight the battle for the Church of England. It was the leaders of the Churches and representatives of the charities going together to express jointly their deep appreciation.

It has been represented that it was discourteous to approach the Prime Minister at short notice and at a time when he was deeply immersed in negotiations with the International Monetary Fund; and that it was unfair to put him in a position when his inability to receive the deputation looked like a snub to the Archbishop. Certainly the Prime Minister's decision was in no way interpreted by the Archbishop or anyone else involved as a slight or a rebuke. Nor was the approach made at the last moment. It was on 22nd July that the Chancellor announced his intention to impose the surcharge on employers' National Insurance contributions, and that he would introduce legislation "early in the new Session". On August 10th the noble Lord, Lord Allen of Abbeydale, wrote on behalf of the National Council of Social Service seeking exclusion for charities. On 19th August Sir Ronald Harris wrote setting out the position of the Church of England, and reflecting the situation facing all Churches.

Since neither representation received any encouragement from the Chancellor of the Exchequer, the Churches Main Committee on 8th October decided to ask the Prime Minister to receive a deputation at the highest level. On 5th November the Archbishop of York, acting on behalf of the Archbishop of Canterbury who was out of the country at the time, and Lord Allen of Abbeydale representing the National Council of Social Service, wrote to the Prime Minister asking him to receive the deputation. The Prime Minister's reply was dated 23rd November, but for some unexplained reason it did not reach the Archbishop till 3rd December, ten days later than the date of the Prime Minister's letter, and nearly a month after the dating of his letter to the Prime Minister. A copy of the Prime Minister's letter of 23rd November was sent to the other signatory, Lord Allen, under cover of a letter from a private secretary, dated 30th November, a week later: and it was by his courtesy that a copy reached the secretary of the Churches Main Committee on 2nd December.

The Prime Minister's letter gave no indication of any readiness to make relaxations in favour of the Churches and the charities, but suggested that the delegation might like to meet Mr. Joel Barnett, the Chief Secretary to the Treasury, to discuss the problems, "especially in the context of the clergy becoming employees". Your Lordships will appreciate that it was not discussion I at this level or of this nature that was being sought, and the Archbishop repeated as soon as possible, in a letter of 3rd December, the request that the Churches and charities should be exempted from the surcharge, or that the deputation should be received on 6th December or 7th December.

Meanwhile events had caught up with the negotiators. On 30th November the Ways and Means Resolution was introduced into the House of Commons and passed, and the National Insurance Surcharge Bill given a First Reading. On 2nd December the Bill was published and the Churches and charities had a first opportunity to see what it contained. On 6th December the Bill was given a Second Reading: on 8th December it was taken through all its remaining stages and the Ways and Means Resolution precluded any useful amendment. So the Prime Minister's reply on 6th December to the Archbishop's letter of 3rd December had to point out that since the Ways and Means Resolution had been passed, it would not be possible to introduce relief into the Bill.

A letter over the signatures of Lord Allen and myself, setting out the concern of the Churches and charities, appeared in The Times on 6th December; and on 8th December the Archbishop again wrote to the Prime Minister asking that a deputation should be received at the earliest possible date. We are thankful to know that this will take place early in the New Year. I apologise to your Lordships for recounting this catalogue of dates, but it is necessary to do so to belie the suggestion that the Churches and charities dragged their feet until the last moment. The facts are that representations were made as early as August and that the request for a deputation was made on 5th November.

The mysterious delay in the delivery of the Prime Minister's reply of 23rd November, coupled with the speed at which the Bill was taken through another place, combined to rob the parties concerned of an opportunity to meet and to discuss the issues before decisions were reached. I again repeat that the Churches have never interpreted the Prime Minister's inability to see the delegation as an affront. Although, as I have said, publicity was not given nor sought by the Churches, it has nevertheless served a useful purpose in alerting the general public to the implications of the Bill for Churches and charities, and the evidence is that the deep disquiet of those most closely involved is shared generally throughout the country.

I come now to the problems presented by this Bill for the Churches and of the negotiations which have preceded it. As long ago as October 1972, the Churches Main Committee received representations from the Department of Health and Social Security regarding the place of the clergy within the reconstructed National Insurance Scheme. In the course of negotiation it became apparent that the Department, very reasonably, wished to treat with the Churches en bloc through the Churches Main Committee, and that it would need to have one policy for clergymen of all denominations, and that whereas the Department would consider sympathetically representations made to it, it reserved the right to require the Churches to accept "employed" status for their ministers.

The negotiations have been protracted both because of the complications of the scheme and because of the varied status of ministers of religion within their respective communions. By the middle of this year the answers had come in and had been collated. The Church of Ireland wished to remain self-employed. The Roman Catholic Church asked for special consideration by reason of the particular status of its priests. All the others opted for employed status, reserving the right to contract in or out at a later date. These decisions were of course reached on the information of the costs involved in contributions as they were then known.

Perhaps I may illustrate the situation by describing the position of the Church of England, since this is the one which I know most intimately. The clergy of the Church of England are proud of their independence and of being self-employed persons. But after very careful weighing of all the factors it was thought that the advantages of employed status were sufficiently strong that it would be worth while accepting this position. The issues were fully debated in the General Synod at York in July of this year, and it was agreed that for the purposes of the new Social Security scheme, the clergy of the Church of England should be advised to accept employed status and then to "contract out". It was recognised that this would cost £350,000 a year, above vs hat the clergy are already paying, and that this sum could only come from the Church Commissioners, and that in consequence there would be that amount less available for distribution for clergy stipends and pensions. But it was thought that the long-term advantages justified this expense.

My Lords, these decisions were reached on Friday, 16th July, in good faith that this would be the extra cost to the Church of England with its 12,000 clergy. Comparative figures relate to the other Churches. Consider our dismay, therefore, when six days later, on 22nd July, the Chancellor of the Exchequer announced in another place that he intended to place a 2 per cent. point surcharge on the employer's contribution as a tax. The effect of this would be at one stroke to double the cost of the new scheme. For the Church of England it would mean not £350,000 a year, but £700,000 a year. For the Churches together the Chancellor's tax would cost at least a further £675,000 per annum. I need hardly expand further on the devastating effect that these sums will have on the economy and effectiveness of the Churches. Doubtless the noble Lord, Lord Allen of Abbeydale, will point out a similar situation regarding charities. The figures speak for themselves.

On a number of grounds we of the Churches and charities are bound to record our most energetic protest against the imposition of this tax. We do so on the following grounds. First, we consider it to represent a clear breach of the repeated assurances given by the present Government that they do not intend to tax Churches and charities beyond the indirect taxes which have obtained for some time. I do not want to go over again the ground we covered in the debates on the Community Land Bill and the Community Land Tax Bill. Suffice it to say that by reason of their service to the community, Churches and charities have for 400 years been exempted from direct taxation. This principle has been maintained until recently by all Governments. Churches and charities are not liable to income tax, corporation tax, capital gains tax, and receive favourable treatment over capital transfer tax. The Government have said that if a wealth tax were to be introduced, it would not apply to charities. The Layfield Committee recently recommended the continuance of partial exemption for charities from local rates. The recent Goodman Committee recommends that, subject to certain technical conditions, the present relief granted to charities should be continued". There was an entitlement to refund on SET. The development land tax, we were told, was not a tax at all. The Churches and charities pay VAT because this was an indirect tax replacing purchase tax. The clearest statement of Government policy in recent months was that of Mr. Denzil Davies, the Financial Secretary, in the Committee stage of the Development Land Tax Bill in another place when he said: Again I can say quite clearly … that there is no intention of extending taxation to charities in general".—[official Report, Commons, 13/5/76; col.1172.] And later: … there is no intention of extending taxation, be it income tax, capital gains tax, corporation tax, or any other tax, except those indirect taxes which we have imposed on charities for a long time. Any other direct taxation will not be extended to charities". Nothing could be clearer than that.

I hope it is not going to be suggested that this surcharge is an indirect tax and therefore may properly be imposed on Churches and charities. I do not know whether there is any clear-cut definition of the difference between "direct" and "indirect" in this connection. I have consulted a number of people experienced in tax matters, and they all agree that whatever this surcharge may be, it certainly is not an "indirect" tax, if only for the reason that it is inescapable for those who pay the employer's contribution. ft is a direct tax laid upon that contribution. The Financial Secretary on 13th May said —and I have already quoted him: There is no intention of extending taxation, be it income tax, capital gains tax, corporation tax, or any other tax, except those indirect taxes which we have imposed on charities for a long time". Surely, my Lords, if the English language means anything, the implication of those words in this case is clear beyond any question.

My Lords, I hope no one is going to suggest that exemption for Churches and charities is impossible for practical reasons. One of the commendations we have already heard accorded to this surcharge is that it is so easy to compute and to levy. If such be the case, then it must be equally easy to grant exemptions, and I cannot believe that it is beyond the wit of the Treasury to do so. It has been done in the case of SET. The Prime Minister himself, when Chancellor of the Exchequer, in June 1966 devised a scheme for refunds, and the Churches and charities were grateful to him for his understanding. I hope we may have similar reason in this case to be grateful to him and his successor, for it should not be impossible to find a method of exemption either by way of non-payment of the surcharge or refunds.

Secondly, this surcharge is highly discriminatory and unjust. The Churches and charities have no desire to opt out of the responsibility which lies upon all of us to shoulder the burden of restraint and sacrifice which the state of the economy requires. Nor do they ask for special treatment other than that which has been traditionally accorded to them. But they do ask that they shall be treated in this instance in the same way as others and not discriminated against. They ask that the Chancellor's assertion, repeated by the noble and learned Lord, that this is a broad-based tax shall be implemented in their case. For this is precisely what it does not do.

Most employers other than the Churches and charities, with the possible exception of those who can afford domestic service, will be able to pass this tax on to the consumer or to deduct it against corporation tax. The whole tenor of the presentation of this case by the noble and learned Lord was that it was a tax that employers could pass on to others. The Chancellor said in another place on 22nd July, The addition, like the existing contribution, will be an allowable cost for purposes of the Price Code and corporation tax". On the Second Reading of the Bill on December 6th, Mr. Sheldon said: We must expect that the surcharge will be deductible against corporation tax, just as the employer's National Insurance contribution is deductible. We must expect that, over a period, the bulk of the surcharge will be passed on into prices … As the House is also aware, the surcharge will be an allowable cost under the Price Code in the terms in which such costs are defined in the code". Local Authorities will be able to charge it against the rate support grant.

But, my Lords, the Churches and charities have no one on to whom the surcharge may be passed; no corporation tax against which it may be set. Nor is there any wealthy sponsoring body that can carry the burden. As regards the Church of England, the extra £350,000 will have to come from the funds of the Church Commissioners, out of funds which are provided for the increase of stipends and pensions each year. Nor can the Churches, thank God, sack overnight the clergy whose contributions they might not be able to afford. In the case of Churches and charities this tax must eventually be paid by the lowly-remunerated clergymen and parish workers, by retired clergymen and widows; or in the case of charities—as the noble Lord, Lord Allen, will no doubt tell us—by the children cared for by Dr. Barnardo's Homes or the National Children's Homes or by the blind and the spastics. I mention these cases not to wring your Lordships' emotional heartstrings but to remind you of the facts. This is not a broad based tax. This is a grossly discriminatory tax against a small minority who have a right to look to the Government for protection.

There is another area in which this surcharge could discriminate against the clergy or the employees of charity. We indicated our readiness to enter the scheme on the figures before us. The resources of the Churches were going to be stretched very tight in order to do so, but they reckoned that they could just about manage it. With this new impost some of the Churches may be forced to say that they simply cannot afford the price which they would be required to pay. So the clergy might have to remain self-employed. Thus, for reasons totally unrelated to the terms of the social security scheme—for that is what this surcharge is—a clergyman could be deprived of the opportunity of enjoying the full benefits of a National Insurance scheme which is his right as a citizen. It could be too expensive, not as a scheme, but because of a charge laid upon the employer which has nothing to do with the insurance at all. Here again, the impost on the Churches and charities is discriminatory and unjust.

Finally, my Lords, the application of this surcharge would place the Churches and charities in a position of the utmost jeopardy. We know that the 2 percentage points levy will double the cost to the Churches. Since this new tax is so easy to compute and to collect, there will be a great temptation to use it again in the future. If the percentage rate were to be increased to 4 per cent. a further £350,000 would be required for the Church of England alone, and the overall cost, contribution and tax, for the Church of England would rise to £1,050,000; if the levy were to be increased to 6 per cent., the overall cost for the Church of England would be £1,400,000. My Lords, we simply do not have the money to talk in these terms, when there are so many commitments over and above the provision of a proper stipend for the clergy and church workers.

Moreover, my Lords, it is particularly unjust when, at a time when the Churches are trying to raise the stipends of the clergy, and there is so much sacrificial giving from church people, any modest increases that we are able to achieve would mean that the costs of employed status and the 2 percentage points levy would both rise. It is reasonable that the contribution to social security should rise. It would be very hurtful, however, if the reward of giving for clergy stipends were to be the necessity to pay a large slice of it away in this surcharge. Incidentally, I note that there have been indications recently that the Chancellor hopes in his next Budget to reduce income tax. This would, of course, be a very welcome step for all of us. But I hope he will not attempt to compensate the Exchequer by increasing the percentage points of the surcharge. If he were to do this, it might well in the long run harm the clergy more seriously than the paying of direct income tax.

My Lords, I apologise if I have occupied too much of your time and your attention. My reason for speaking at length is to ensure that your Lordship's House and Her Majesty's Government are left in no doubt about the extreme gravity with which the Churches and charities view the consequences of this surcharge. We find it difficult to understand how it can be that, at a time when charitable activities are being asked by the Government to renew their efforts and to fill the gaps left by the inability of Government to meet the essential needs of society, they are being subjected to the punitive provisions of this measure and to the uncomfortable threat that the Government intend, little by little, to erode the protection which has over the centuries been extended to them. They want to get on with their work; they want to be free to do so.

We should have liked to amend the Bill by including a power to enable the Minister to exempt Churches and charities from its provision. Unfortunately, we were precluded from proceeding in this way by the terms of the Ways and Means Resolution. We take some comfort from the observations of Mr. Denzil Davies in winding up the Second Reading in another place on December 6th, which have been confirmed by the noble and learned Lord. Mr. Davies on that occasion assured the House that without entering into any commitment the Government would listen to representations and consider them in depth, and, if satisfied that they should be acceded to, would put the matter right before the tax is introduced on April 6th 1977. I hope the Government will consider the representations I have made in the light of Mr. Davies's observations on May 13th that there is no intention of extending taxation to charities, and that they will, in his words, "consider" our representations "with great sincerity", and "put right what a great many people believe to be a major act of injustice.

4.8 p.m.

Lord ALLEN of ABBEYDALE

My Lords, I rise to speak about the position of charities under this Money Bill. I must begin by declaring an interest, not a financial one, in that I am chairman of the National Council of Social Service, a body which has in membership a wide variety of voluntary organisations which serve the community. I do not propose to detain your Lordships by repeating the arguments which have been so clearly put by the right reverend Prelate, or by going again over the earlier history of our exchanges with the Government, but I do want to say that, like him, I was encouraged by the undertaking given by the Treasury Minister of State in another place, that if the Government decided to make a concession it would be possible to "put the matter right"—and those were his actual words—before the tax was introduced next April. I listened also with appreciation and hope to what the noble and learned Lord said when introducing the Bill this afternoon. But Mr. Denzil Davies did not say quite how this would be done. No matter. He left the door slightly ajar, and I hope that the debate this afternoon may help to push it open.

I am urging this for two main reasons. In the first place, this extra tax would be a blow to charities just at a time when the Government themselves, because of the financial pressures on local authorities, have urged increased reliance on voluntary organisations concerned with care in the community. I must say that I found it slightly ironic that earlier this afternoon, at Question Time, we heard tributes paid to the increasing work done by voluntary organisations in dealing with certain social problems in London on the same day as we are taking the Second Reading of this Bill. The Social Services Secretary said this summer that, pound for pound, the Government could often buy more service through a voluntary channel than through a statutory one. Indeed, he felt able to promise some extra money to those charities which were already grant aided by his Department. But there are not very many of these, and, grateful though we must be for this concession, I am afraid it goes nowhere near to solving the problem created for charities by this Bill.

As has been said, charities cannot set off their extra expense against corporation tax; charities cannot increase their prices across the board; charities, at best, can recover only a limited amount by increasing their charges, if that is how they raise some of their income—and by no means all of them do—and some rather anxious calculations have been going on. Out of the cases I have been looking at, I should like to give just three examples. The Royal National Institute for the Blind calculate that the net extra cost to them would be of the order of £50,000 a year, which would somehow have to be met from their own charitable funds. This is a pretty discouraging prospect for an organisation which, over the last four years, has contributed very nearly £2 million from its own funds on providing homes and hostels, training and rehabilitation centres, and education for the blind, and has spent another £1½ million from its own funds on braille.

The Spastics Society, for their part, calculate that the extra cost to them would be nearly £40.000 a year. For Dr. Barnardo's the figure works out at some £75,000. These are all net annual figures and they assume, for example, that local authorities will have the money to pay increased charges—itself not a totally reliable assumption. At a time when charities are naturally finding it harder to raise money, the results could only be a cutting back of voluntary work which is provided inexpensively (which surely matters in these days of financial troubles) and is much needed for the wellbeing of the community.

I come now to my second main reason for urging a concession. This is one of principle. It is quite simply that the current proposal runs counter to long accepted principles relating to the taxation of charities, and fills me with foreboding for the future. From the correspondence I have had with Ministers and from the debates, I think that I can identify four separate arguments advanced so far against the concession which Churches and charities are seeking, and I should like to take them in order, very briefly.

The first is the argument that hitherto charities have not necessarily been completely relieved of indirect taxation such as VAT. The right reverend Prelate has already commented with some eloquence on this point. I would simply add that I too am not aware of any universally accepted definitions of direct taxation and indirect taxation, but certainly if one of the criteria of indirect taxation is that by refraining from doing certain things, or refraining from making certain purchases, it is possible to avoid paying the tax, then this tax certainly does not meet that criterion. Any of the charities concerned could meet it only by sacking its staff and closing down. But anyway the tax is no more indirect than was SET, from which charities were exempt. Nor is it more indirect than rates, from which charities get a certain mandatory relief.

The second of these four arguments is that to relieve charities of this new tax would be administratively impracticable, as the Chancellor first put it, or very expensive, as the Prime Minister put it subsequently. On this I would repeat that it proved perfectly feasible to work out procedures for the recovery of SET. The present problem is admittedly somewhat different since SET was designed as a wide-ranging and deliberately discriminatory fiscal device, and the methods of collection which have been explained this afternoon make the deduction, or the recovery, of a surcharge by charities slightly more complicated. These are intricacies which obviously cannot be lightly brushed aside, but nevertheless I can see no reason at all why some pretty simple and inexpensive machinery should not be devised for the recovery of this tax by charities.

The third argument is that if a concession were made to charities it would be impossible to stop there. But it proved quite acceptable to Parliament to make concessions in the recent community land legislation which were limited to charities, and to charities alone, and to refuse to extend them to other claimants, such as pension funds. For the life of me I cannot see why this should not be done again.

But there is a fourth argument which has just been touched on but which has never been made quite so explicit as the others. I suspect that a difficulty which the Government have had in mind is that to make any concession would involve making a concession to some organisations which—how shall I put it?—count as charities but are somewhat less than favourite children in the eyes of Her Majesty's Government. There is a general issue involved here which will no doubt be discussed in the coming months in the light of the recent report of the committee which the noble Lord, Lord Goodman, was good enough to chair for the National Council. But whatever emotions this issue may arouse, I would argue that it is marginal in the present context. I certainly hope that the voluntary bodies which look after the blind and the spastics, and some of the other unfortunates of Our society, are not going to lose this battle on the playing fields of Eton.

4.18 p.m.

Viscount NORWICH

My Lords, I do not intend to delay your Lordships for very long at this hour. Most of the points I was going to make have already been admirably put before your Lordships by the right reverend Prelate and by the noble Lord, Lord Allen of Abbeydale. I think I shall confine myself this afternoon therefore to the effects, in perhaps slightly more detail than that just given by the noble Lord, on one particular charity about which I suppose I should declare an interest, though once again it is far from being a financial one. I speak of the National Trust, on whose executive committee I have the honour to serve.

The National Trust is, I suppose, in many ways fairly typical of virtually all the charities in this country in that it stands to be desperately hit by the new legislation which is proposed. It is untypical, however, in that, first, it has already been hit even more than most of them by galloping inflation, since many of the endowments which enable it to maintain the very large number of properties it owns were calculated with great care some years ago so that almost every one of them is totally inadequate for the purpose at the present time. Secondly, as these properties are extremely widespread all over England, Wales and Northern Ireland, it is obviously necessary to have a large number of individual employees looking after them, and by definition the organisation has to be very decentralised.

The result of this, briefly, is that with a total staff of about 1,200, the National Trust will have to pay between £45,000 and £50,000 a year. This is not just on the staff who run the Trust at head offices and in regional offices but the gardeners, woodsmen, caretakers, curators, nature reserve wardens, any number of people on all of whom this new tax will have to be paid. They cannot possibly any more be reduced in number. Having run at a very serious deficit for the last two years, we have reduced all we possibly can and to reduce further would be dangerous. If this money is to be found, the only alternative will be to cut back to a very dangerous degree on the maintenance on the houses which were given to us on trust and which it is our trust and duty to preserve. In this connection, it is worth metnioning that we already spend rather over 85 per cent. of our income on the maintenance of these houses. It is nowhere near sufficient at present prices and the Historic Buildings Council said only recently that it would be an extremely grave mistake if urgent maintenance were postponed until brighter days in future; the longer we wait the more expensive these things will be.

I need not say more. I wanted to give a brief indication of the kind of thing I am sure all charities are facing in various degrees and I can only say how glad I was to hear of the delegation under the leadership of the right reverend Prelate which will he calling on the Prime Minister in the near future. I hope the Government will, even at this late date, find it within their power to do something to stop this appalling and, I believe, disastrous injustice.

4.23 p.m.

Lord GORE-BOOTH

My Lords, like the noble Viscount, Lord Norwich, I will not detain the House for long. Nor is it my purpose to develop anything I say into a general attack on Governmental fiscal or taxation policy. My principal purpose is to put the matter in yet another way. The right reverend Prelate said he did not wish to enter into an emotional aspect of the matter, but I suggest that a little emotion belongs because, after all, people who contribute to charities do so not wholly cold-bloodedly but with a feeling of emotion.

Perhaps I can put it simply by saying that in the case of the Save the Children Fund, in which I declare a similar interest to that of other noble Lords in relation to other charities, if the Bill in its present form becomes an Act, the children will pay £25,000 in tax. I am not being unfair about this because the Bill is perfectly honest, in its reference to the Consolidated Fund, in making it clear that the children will not get the £25,000 back again, and I would assure your Lordships that even in this inflationary time one can do a lot for deprived children with £25,000.

The only other argument I would add to those which have been so brilliantly and thoroughly expounded by the right reverend Prelate and by my noble friend Lord Allen of Abbeydale, is that the housemaid's baby is not always a wicked thing and it may be a method by which highly desirable reforms have gradually been inserted into our political and economic system. Thus, I would not be so rash as to condemn all housemaids and all babies proceeding therefrom. But in this case it is surely very easy to see that the principle of adding just a little more to the burdens on the Churches and just a little more to the burden on charities can go further and wider each time there is a financial crisis, so that each time the Government will, in the name of economy or in the name of balance, be placing a greater burden on people who are still gallantly ready to go on paying what money they have left, after they have been taxed, towards good causes. If that principle were to spread—and I think that if the Bill goes through it would tend to spread—then the taxation on the lame, the halt, the blind and the children would become more and more formidable, to the disadvantage of them all.

I beg the noble and learned Lord, Lord McCluskey, not to refer this matter to the borrowing requirement. Without being oflensive, I would say that your Lordships have provided the Government with a number of alternative methods to reduce the borrowing requirement rather than taxing the unfortunate. I will of course not enumerate them for fear of prolonging my speech or transgressing my initial principle of not attacking the Government's policy in general, which could then indeed happen. I would urge that in advising his right honourable friend the noble and learned Lord should not use that particular argument, which is so easy to refute. I hope that when there is an interview with the Prime Minister, Mr. Callaghan will be briefed to consider what is said to him both with his mind and with his heart, and indeed, as we heard, by a curious providence, in the prayer that was read to us before we started this Sitting, that the Government will make use of … the true Christian act of charity towards another".

4.28 p.m.

Baroness PHILLIPS

My Lords, I, too, will not delay the House for long as the argument has been so splendidly put by the right reverend Prelate. However, I should be betraying my own small charity if I did not intervene. When I was a very young Socialist we used to perform a play which was supposed to describe the capitalist economy. In the play, two men started out with a shilling and handed it hack and forth, one to the other, and at the end of the day the man who started with a shilling still had it and the other man had nothing. Listening to the explanation of this new surcharge and constantly listening to the explanation of the economy, I begin to think that that strange play was indeed correct.

I can say straightaway in the case of my charity, that the recipients, the consumers, are young mothers and children to whom we are not able to pass on any more extra charges: they are already beset on all fronts and it would be quite impossible for us to do that. We receive from the Government a grant, for which we are very grateful, which has hitherto met the cost of the salaries. Like most charities, we depend heavily on voluntary labour. We have a very small, very low-paid staff, and the grant just covered our expenses until last year. The staff met together and, being women and practical and patriotic, we all agreed that there would be no increase during a period of 18 months. However, unfortunately that did not solve the problem because postage went up, travelling went up, the cost of electricity and gas went up—in other words, there was nothing on which we could cut back except by sacking the people who were working for us.

It is not my intention to make an emotional speech: I am merely stating the facts as they are. One of our staff is a young widow whose case I have pleaded many times. She is not entitled to the full pension nor, indeed, to reasonable increases in pension. Another is a deserted wife who gets the minimum from the State and who receives a very low wage from us because it is all we can pay. One is a single woman who, because she has retired, has to pay back part of her pension under the earnings rule. The rest of us who receive our wages pay back the normal tax to the State, so that, out of the original grant, I have worked out that nearly half already goes back to the State. There must be a more economic way of handling that, though, no doubt, like Parkinson's Law, it keeps some people in jobs.

When it comes to VAT, we have small educational conferences and I am at present engaged in a battle to the death with the Customs and Excise—and whoever thought of giving the Customs and Excise the job of collecting VAT? The Customs and Excise were trained as revenue officers on the assumption that smugglers were doing something wrong. Those of us who have to pay VAT arc not doing anything wrong. On our small conferences we now have to pay VAT. If we have a charitable exercise, if we have a carol concert, we have to pay VAT. There is no question but that a large amount of the money that we receive from a grateful State already goes back to the State: now we come to this new surcharge.

I must say straight away to the Government, though I feel sure that highly intelligent economists have thought this out, that it is introducing a totally new principle to put a surtax on what is virtually a National Insurance fund. I agree with those of your Lordships who have already expressed the fear that, though it is 2 per cent. now, there is always the danger that this could be increased. It is all too easy to add to an existing surcharge rather than think up a new tax.

I was a little confused by the explanation given by the noble and learned Lord, Lord McCluskey, that this would mean no additional work. Surely each extra tax that has to be collected means additional work. When one considers that, as a charity, because of what we already have to collect for the State, we have to employ a highly skilled accountant, whereas in other circumstances we could employ a much less well paid bookkeeper, I suggest that already most employers are doing part of the State's work. They may be doing this with great joy and enthusiasm, but I suggest that it is not wise to stretch it too much. I can only say in the case of my own charity that we have come to the end of the road. If one more tax is imposed upon us there is no question but that we shall go out of existence. Maybe that will not matter to some people, but it will matter a great deal to the 50,000 mothers and babies whom I hope I have served.

4.34 p.m.

Baroness ELLIOT of HARWOOD

My Lords, there is one point that I should like the noble and learned Lord, Lord McCluskey, to clear up if he can or at any rate to give me some information about when he replies to this most interesting and moving debate. I have spent almost all my life in voluntary organisations raising huge sums of money for various good causes. I have also spent a lot of my life on the committees of big trusts that donate their funds, which are entirely charitable and have absolutely nothing to do with any kind of taxation of any sort for they all have charitable status, in distributing such charity money to organisations that have been carefully considered and looked at by these committees. What is to happen now? Are the gifts of these trusts, whose money is entirely charitable and has nothing on earth to do with taxation, to be falsified if their money is given to the organisations? I could cite any number with which I am associated, like the noble Baroness, Lady Phillips.

What will be the position if, in giving out money from these trusts, we find that a proportion of it will have to be given to the Exchequer in taxation? Would not that have some legal aspect which would falsify the wills and deeds under which such great funds have been set up? I am speaking of funds that were set up many years ago and whose interest is, as it has always been, devoted to charitable objects. I believe that this may complicate matters in a court of law if somebody were to go into the matter, because we are not allowed by law to use our money except for organisations that are charitable and whose funds all go to the objects for which they raise and administer money.

I believe that this is one of the most iniquitous pieces of taxation I have ever heard any Government put forward. I am not saying that because we have a Labour Government. If it had been my own Government, I should have been just as angry. I think that it is monstrous and I found the speeches of the right reverend Prelate the Bishop of London and the noble Lord, Lord Allen of Abbeydale, for the Council of Social Service, with which I have been associated all my life, and everybody else most moving, as was the appeal of the noble Baroness, Lady Phillips, whose work for voluntary organisations is very well known. I hope that the Government will look at this again because it seems to be something which is altogether without foundation. It is like a vicious circle. It will go round and round and it will make everything much more difficult just when we are all longing for people to give voluntary service in order to save money for the Government and when a great number of organisations are doing that. I hope that the noble and learned Lord, Lord McCluskey, will also take into account the fact that many great trusts are only allowed to give their money to organisations that have charitable status and do not pay tax at all. If this is introduced, it may add a complication which would be very difficult and would mean that a lot of money would be wasted by the giving trusts. I hope that the noble and learned Lord will think about this as well as about everything else that has been said here today.

Baroness GAITSKELL

My Lords, I should like to add just one sentence to this debate to which I have listened after an absence of two and a half months from this Chamber. It has been a very moving debate. We are asked to make sacrifices, but I have not heard one speech that has given any alternative to this proposed tax or surcharge. The noble Baroness, Lady Elles, attacked the Government for raising unemployment by this tax, but I always thought that the Conservative Party had up till now urged higher unemployment in order to deal with our problems. That is all I have to say.

Baroness ELLES

My Lords, perhaps may be allowed to intervene. The Conservative Party has never recommended higher unemployment at any stage of any of its policies. If the noble Baroness took the trouble to read the Hansard of another place, she would have seen that the Financial Secretary himself stated that there would be further unemployment as a result of this tax. This has not been denied by the Government. I think it is only a question of how many, but it has never been denied by the Government that this tax will create further unemployment.

Lord DRUMALBYN

My Lords, I shall certainly not delay the House for more than a minute or two. I do not want to add to all the many things with which I have entire sympathy which have been said about the effect on Churches and charities. I think that the case has been fully made there. I want to make two simple points. First, it seems to me to be wrong in principle to use a Department such as the Department of Health and Social Security and the National Insurance Scheme as a tax gatherer. This seems to be wrong in principle. It can in the future open the way for very serious extension, and I should go so far as to say serious abuse. The second point is this. The noble and learned Lord, Lord McCluskey, agreed that this proposed tax would be passed on to the consumer; that is, the consumer of goods produced at home. It must follow that to that extent it will make it easier for the foreigner to compete on the British market.

My Lords, this is a serious aspect of the problem. The noble Baroness has just challenged us to say what we would do. If a tax of this kind were being introduced, should have thought that some adjustment should also be made to equate the effect on imported goods with the effect on goods manufactured in this country. May we not finish up by finding that one result of this tax is a further decline in our position so far as the adverse balance of payments is concerned, which again would have to be made up by borrowing from abroad?

4.41 p.m.

Lord McCLUSKEY

My Lords, as the right reverend Prelate pointed out, I was brief in introducing the Bill, but I regret to say that in the light of the debate I have heard I will need to be a little longer in replying. Having regard to what was said by the noble Baroness, I should like to begin by turning to the general matter. Noble Lords will be aware that the debate today is not a general economic debate. It is the Second Reading of the National Insurance Surcharge Bill, although I do not pretend that general economic considerations are entirely irrelevant to it, nor did I do so in my opening speech; and I am not seeking to suggest a censure of the noble Baroness for raising the matters that she did. Of course it is true that the Bill forms part of the Government's general economic strategy, as do the measures which the Chancellor announced last week. That is why, in my opening speech, I explained, I hope briefly, the economic background to the decision taken six months ago to introduce this tax. Once the decision had been taken however and was announced in July, the yield of this tax became one of the important and the fixed factors for 1977–78 against which the Chancellor had to view the changing economic forecasts for the domestic and world economies presented to him this autumn: in other words, if I may be forgiven by the noble Lord, Lord Gore-Booth, for saying so, a reduction in the public sector borrowing requirement of £700 million in the first year, which will result from the introduction of this new tax, is part of the base line from which the Chancellor decided to reduce the PSBR still further last week.

This second stage decision, which was announced last week, does not therefore properly fall within the scope of this debate. I think that Members of this House will recognise that, and I must ask noble Lords to accept that I cannot, on behalf of the Government, properly comment further on the measures before they are debated in this House. I think that noble Lords will know that they are to he debated in another place tomorrow—

Lord GORE-BOOTH

My Lords, I hope that as the noble and learned Lord referred to me he will give way for a moment. I think that he will be aware that I was purposely trying to avoid the general economic discussions. I was arguing for charities, and of course that makes the borrowing requirement argument rather different.

Lord McCLUSKEY

Yes, my Lords; of course I entirely accept what the noble Lord says.

The noble Baroness suggested that the Title of the Bill was misleading; the noble Lord, Lord Gore-Booth, said that the Bill was a perfectly honest Bill. I would hope that in emphasing, as I did at the beginning, that the important word in the Title is the word "Surcharge" that helps direct attention to the true character of the Bill; but plainly, in the light of this debate, this House fully understands the true character of the Bill. It is a taxation measure pure and simple, riding, one might put it, on the back of the National Insurance Scheme, and I shall address myself to the propriety of that in a moment or two.

I will come later to the matter of charities and specifically Churches, and I hope that noble Lords will allow me to reply to that in some detail. But before I do so I want to make it quite plain that although this is levied as a tax on earnings, it is in fact, with these exceptions in relation to charities and the Churches, a tax upon consumption. The noble Baroness cannot have it both ways; it is not both at the same time. It is one or the other. In fact, it is a tax on consumption because under the provisions of the Price Code and the special arrangements relating to distributors, retailers and the like, the extra cost to manufacturers, distributors and so on will be able to be passed on. That is why ultimately there will be an effect upon the RPI, and in that sense the tax is an indirect tax. I am hesitant to involve myself in an argument about the borderline between direct and indirect taxes. It is not a borderline which is well defined, and I understand that economists are departing from the use of these terms simply because of the difficulties that exist where the tax which starts with one character appears in its incidence to acquire a different character—

The Earl of SELKIRK

My Lords, I should like to ask the noble and learned Lord this. He says that it falls on the consumer. Would this also include cases of professional services, some of which are regulated not only by the prices and incomes regulations but also by the courts in certain cases?

Lord McCLUSKEY

My Lords, I happen to be aware of the kind of matter of which the noble Earl is speaking, and I would hope that the courts, in taking into account applications by those whose fees are regulated by Statutory Instruments (for which the courts are responsible) would take account of all the additional costs which they can properly bring to the attention of the courts in relation to the cost of running the businesses out of which they have to make such profit as they can in rendering their services to the public. But of course I accept that in that type of case it is not simply a question of going to the Price Commission and getting authority to raise a charge. It has to be done through this other mechanism.

Baroness ELLES

My Lords, the noble and learned Lord has been very tolerant about the way we have intervened, but I hope that he will allow me to intervene again because I really question this definition of a tax on consumption. Surely it is a tax on earnings and a tax on earnings is a tax on income. It is not just passed on to the consumer. Surely there will be a 2 per cent. tax on, for instance, the earnings of nurses in hospitals. Presumably the whole of the National Health Service will be affected by this surcharge. A great many services not within the field of consumers on to whom profits and prices can be passed will be affected by the surcharge. I do not want to be contentious about this; it is just a matter of querying the definition. It is not a tax on consumption that can be passed on to a consumer. It is a tax on earnings of people regardless of the kind of job they are doing.

Lord McCLUSKEY

My Lords, I do not mean nationalised industries' employees because the nationalised industries will be able to pass on the extra cost in the prices they charge, but there is the case of public employees—the case of local authorities has already been mentioned—and this extra impost is a matter which qualifies in relation to the calculation of the rate support grant. In relation to central Government employees, the central Government as employers are liable for the surcharge like any others, but their increased costs will be met by adjustments to the relevant supply estimates. We are concerned here with part of the reason why one does not get a yield which is directly related to the number of persons who are employed, as the noble Baroness plainly knew before she asked me.

I said—and I apparently puzzled my noble friend Lady Phillips—that this scheme, this form of tax, would not require extra civil servants. I think I puzzled her in the respect that she thought it must require extra work on the part of the employer. I think I can assure her on that point. The way the tax will work is this—and I shall have to come back to this in another context. At the present time, as noble Lords will be aware, the Department of Health and Social Security issues tables, and these tables are used by the employer or by his accountant, or by whoever is responsible for it, to calculate the amount which is due. At the present time, in respect of this class of contribution, the sum which is due is shown as a percentage; that is to say, 8¾ per cent. The new tables, which will be issued to take effect from 6th April 1977, will simply show the figure to be 10¾ per cent. Therefore, it is not extra work. Instead of having to calculate 8¾ per cent., one calculates 10¾ per cent. One does not write out an extra cheque or anything of that kind; there is no extra work on the employer. Of course, noble Lords see the benefits of such a simple tax as being entirely sinister because they see that, in future, Chancellors, recognising that it is such a simple and cheap tax to operate, might be tempted to go a little further. I can express no commitment on that; it is not for me to make any statement about the attitudes of future holders of that high office.

May I, then, before 1 come to the charities, look at certain matters which were raised? Both the noble Lord, Lord Drumalbyn, and the noble Lord, Lord Banks, suggested that this was an abuse of the National Insurance system. I hope I can answer that in this way. The new tax, which is enshrined in this short but important Bill, is a tax which simply uses the National Insurance collection machinery. It is properly a surcharge. The Government have never sought to disguise the fact that this is in fact a tax. It will operate—and these are the important words, I think—as though the rate of employers' contribution had been increased by two percentage points. As I have explained, that goes for ease and cheapness of collection. But it is not using the National Insurance system; it is using the existing machinery. As I think the noble Lord will understand, the present system is that the Inland Revenue in fact collects the National Insurance contribution in the first place from the employer at the same time as it collects PAYE. Then, these two separate sums, collected together, are divided by the Inland Revenue, and the National Insurance contribution is paid over to the DHSS. That will continue; but, of course, the DHSS will simply repay the surcharge to the Treasury. So I do not accept that this is an abuse of the system; it is a use of the system. And, in so far as it avoids recruiting extra civil servants, avoids increasing bureaucratic burdens and avoids increasing staffing and other such burdens upon employers—in these respects it is surely deserving of a welcome.

Lord BANKS

My Lords, I am grateful to the noble Lord for giving way. Would he not agree that it will be exactly as if the Treasury contribution to the National Insurance Fund had been substantially reduced? That is precisely the effect that the measure will have, although such a proposition has not been before this House or another place.

Lord McCLUSKEY

My Lords, I would certainly not agree with what the noble Lord suggests. The Government's contribution to the National Insurance Fund is one thing; this is something entirely different. They are two separate things. The Exchequer supplement to the National Insurance Fund, as the noble Lord will be aware, is provided out of general taxation. It is some 18 per cent. of contributions at the present time. It represents the Government's contribution to the tripartite partnership of Government, employers and employees. So this sum is paid out of general taxation. The surcharge is in addition to general taxation, and thus contributes towards that very sum which provides the Exchequer supplement. Therefore, in my submission, it cannot properly and accurately be said that this is somehow subtracting from that Fund, or from that contribution.

I also take note of the suggestion that was made by the noble Lord, Lord Banks, that it would be possible to eliminate this tax altogether. I would remind noble Lords that it is calculated that the tax will bring in something of the order of £1,000 million, or a little more, in a full year. It was suggested by the noble Lord that one might raise the same sum of money by a tax upon drink or tobacco.

Lord BANKS

No, my Lords.

Lord McCLUSKEY

I think some such thing was suggested. I think the words drink and tobacco "were used; I certainly have them noted. Certainly, if one was tempted to do that one would be raising the cost of these items by a staggeringly large amount, and the effect upon the retail price index would be immediate and perhaps catastrophic for general social policies.

Lord BANKS

My Lords, may I correct the noble Lord on that point? What I was suggesting was that there should be a 2 per cent. increase in VAT and double the amount which was actually put on drink and tobacco, which is very much less on drink and tobacco than the whole amount. It might be a quarter of it.

Lord McCLUSKEY

Certainly, my Lords, if one increased VAT by 2 per cent. the effect on the retail price index would be the same as this; if one put the rest of the burden of the tax upon drink and tobacco, the effect upon the retail price index would be that much larger. If one raised VAT by 2 per cent., one would achieve only half the revenue yield of this particular tax.

My Lords, I would come, then, to the matter which has plainly disturbed your Lordships most of all, and that is the matter of charities and Churches. Let me say, first of all, that the right reverend Prelate the Bishop of London referred to a suggestion that the Churches had dragged their feet. I make no suggestion, and the Government make no suggestion, that the Churches have dragged their feet in the matter. The timetable which the right reverend Prelate the Bishop of London gave is entirely accurate. would seek to add only this to it, that the first request to meet the Prime Minister was made on the 5th November 1976. Of course, representations had been made to the Chancellor of the Exchequer before that, and there had been some correspondence. Those representing the Churches did not ask at any time for a meeting with any Treasury Minister; and, indeed, when the Prime Minister, in reply to the letter of the 5th November, suggested that they should meet the Chief Financial Secretary to the Treasury, who was the senior Minister in charge of introducing this tax, they would not do so. I am sorry, if I may say so, that the right reverend Prelate should refer to the proposal that they should meet the Chief Secretary to the Treasury as a proposal which they rejected because they did not want a meeting at that level. He was, after all, the senior Minister in charge of this particular tax.

The Lord Bishop of LONDON

My Lords, will the noble Lord give way? When the Archbishop of Canterbury, the head of the Roman Catholics, the head of the Jewish Church and the head of the Free Churches all ask to see the Prime Minister, that is the level at which they wish to have their discussions. No disrespect of any kind to Mr. Joel Barnett was intended; but when no satisfaction can be gained from the Chancellor of the Exchequer, it is surely only reasonable and proper that the heads of the Churches should have the right of access to the Prime Minister himself.

Lord McCLUSKEY

My Lords, as have already said, the Prime Minister, it is hoped, will meet representatives of the Churches in the fairly near future.

I began by saying, but I want to repeat this because it is important that we deal with the matter fully, that the National Insurance surcharge is, and is intended to be, a broadly-based tax. It is based upon consumption in so far as it will be passed through into prices, and in that respect it most closely resembles the other indirect taxes such as VAT. These indirect taxes traditionally have been—and that applies to VAT as well—generally paid by both the Churches and charities. Let me make the point which the noble Lord, Lord Allen of Abbeydale, foreshadowed; that is, that charity law does not, in fact, differentiate between different sorts of charities. Indeed an object may be a charitable object in the legal sense, notwithstanding that it will benefit the rich as well as the poor. General fiscal relief would therefore benefit all charities including, for example—and I do not hesitate to mention it—the one which the noble Lord had in mind, professional associations and public schools, just as much as the concessions would benefit organisations for the relief of poverty, of disease and other forms of personal distress.

Indeed, the noble Viscount, Lord Norwich, mentioned that one of the charities which he was interested in was the National Trust. That, in association with the other examples I have given, gives some idea of the scope of the word "charity" in English law and adopted in the whole of the tax law of the United Kingdom.

My Lords, let me make it plain—and I hope that noble Lords will take it into account—that the Department of Health and Social Security makes specific grants to certain voluntary organisations. There is selection there, not for everybody calling themselves a charity but for certain voluntary organisations. In 1977–78 these grants are to be increased by about 60 per cent. to a sum of some £5 million. I think that my noble friend Lady Phillips gave an example of a charity in receipt of such a grant. So that the Government give, and intend to increase, selective help to charities judged to be at present of the greatest service to the community

Baroness PHILLIPS

My Lords, this is too good an opportunity to miss getting it on the record. The noble Lord has said that there will be an increase in grants to those given under the Department of Health and Social Security. The grant that I receive comes from a different Department, the Department of Education and Science. Can I hope that they also will be increasing their grants?

Lord McCLUSKEY

My Lords, no doubt they will note what the noble Baroness has said. The announcement which I was referring to, that grants are to be increased by 60 per cent., was made in June. My Lords, I should like to say something about the Churches. At the present time, as the right reverend Prelate has made clear, the clergy are, for National Insurance purposes, regarded as self-employed; and there are the negotiations to which he referred that would lead to the result that they would become employed persons for National Insurance purposes from a date which may be April, 1977. That course has been chosen because it confers some benefits on those who chose it; although I do not suggest that the matter is one-sided. It is accepted that the National Insurance surcharge will increase the cost to the Churches of the projected change-over once it takes place. I think it is correct to say that the right reverend Prelate has asked on behalf of the Churches' main committee that the change-over should be deferred until a later date. The Government understand, and regret, that the new tax creates problems for the Churches but the fact remains that until the clergy become employees of the kind to whom the tax applies the surcharge will not apply to them.

Let me look at some of the arguments that have been put forward with such clarity by noble Lords. The first argument was that charities are, in principle and traditionally, not subject to direct taxes. As the right reverend Prelate has pointed out, the Churches enjoy, along with the charities, a uniquely privileged position in relation to non-payment of tax. They are relieved of taxes and he specified them; but they are not and have never been relieved of indirect taxes. Similar arguments to those heard today were put forward in respect of VAT but VAT applies to these bodies. They are not exempt, for example, from revenue duties; they are not exempt from he duty on petrol and on vehicles and they are not exempt from certain aspects of development land tax

Baroness ELLES

My Lords, would not the Government consider that the Church plays a special role in the community? You cannot consider the Church and the charities which have been mentioned in this House on the same basis as companies which are making profits. Is the argument of the noble Lord that because he is afraid that the Etonians (as have already been mentioned) should not be subject to tax, Dr. Barnardo's Homes must suffer as well? It is a curious way of arguing that because one might have to pay a tax, everybody must pay it—rather than think of those who are desperately in need.

Lord McCLUSKEY

My Lords, that was not the argument that I put forward. I accept that the Churches and the charities are in a unique position. That is why they pay no income tax, that is why they pay no corporation tax, that is why they pay no capital gains tax and no other direct taxes. The point that I made, and seek to make, in relation to charities of a kind which are entirely different—for example, the public schools and the like —is simply this. Once you recognise that you have to draw a distinction between charities for the relief of poverty and misery and so on and the so-called charities existing as charities in English law from the time of Elizabeth I, then, in order to administer a scheme which selects some of them for exemption and leaves others within the tax, then you begin to increase the administrative and bureaucratic costs both for the persons on whom the tax is or may be imposed and for central Government.

Mention was made of SET. That was a special case because that was always intended to be and was designed as a discriminatory fiscal device. It was designed to help encourage the transfer of resources to manufacturing industry; and there was deliberately set up a system of machinery for making refunds. Accordingly, it was possible within the scope of that machinery to exempt persons or bodies from the tax. The tax with which this Bill is concerned is designed as a broad-based revenue raising instrument using the National Insurance machinery and there is to be no costly administrative machinery for refunds and exemptions.

My Lords, on the matter of selectivity, there are certain possibilities and they are being given consideration. You can have selectivity by exemption. That requires you to make judgments between those which are, as it were, deserving charities (to use an old phrase) and those which are non-deserving charities in the sense in which noble Lords have spoken and have heard this afternoon. You can have selectivity by exemption; but there arise formidable problems of definition. You can have selectivity by repayment. That also raises the same problems of definition and considerable administrative problems. Many more civil servants will be required to inspect individual deduction cards and generally to police the exceptions.

Furthermore, and this is a point of some substance, one starts off highly sympathetic as the Treasuary Ministers are, to the points made by the right reverend Prelate; but, in no time at all, those who claim exemption as a special case become wider and wider. We have gone from the extremely deserving and sympathetic cases of the blind and of Dr. Barnardo's Homes and the like to the case of the National Trust. One can then see that other groups would come forward and seek exemption, or selection to come out of the tax, on the ground of employment in the depressed areas, in parts of Scotland or Merseyside; and one could have employers of the disabled making the same point. One could have small firms claiming exemption. One would end up not with a broadly-based tax at all, but with a tax with a much heavier incidence upon certain parts of the community and one would then change the character of the tax altogether.

The Lord Bishop of LONDON

My Lords, before the noble and learned Lord moves on from this part of his speech, will he explain how it is that charities and Churches are already exempt and are perfectly clearly defined? Charities are those which are recognised by the Charity Commissioners; Churches are clearly defined. Why should it be so difficult to apply to this one tax a principle which has been universally applied for the past 400 years in protection of Churches and charities?

Lord McCLUSKEY

My Lords, I am not suggesting that it is administratively difficult to accept as a charity those bodies which are regarded as charities by the Commissioners of Inland Revenue. I am suggesting that, within that general bracket of bodies which are entitled in law to be known as "charities", there are organisations which in no popular or ordinary sense can be regarded as charities.

The Lord Bishop of LONDON

My Lords, I am sorry to interrupt again, but the noble and learned Lord has not answered my question. They are exempt at the moment and there is no difficulty about this. Why should there be difficulty applying to this one particular tax which has now been produced?

Lord McCLUSKEY

My Lords, I have tried to explain the administrative difficulties, apart from the difficulties of definition. I do not want to appear—although plainly I may be failing in this regard—as if I am saying that the mind of the Government is closed on this; I am seeking to answer particular points. In so far as I do not do so, I regret that I cannot answer them. Noble Lords will recall what I said and perhaps I should close on that. There are to be further discussions and one hopes matters can be taken further in the course of these discussions. My Lords, may I conclude by saying that the noble Baroness, Lady Elliot of Harwood, asked a question and, in so far as I followed it, I think there is no difficulty. May I be allowed to write to the noble Baroness to seek to answer her question when I have studied it in Hansard?

Baroness ELLIOT of HARWOOD

My Lords, the words of the right reverend Prelate the Bishop of London apply exactly. It is the Commissioners of Inland Revenue that decide which organisations are charities. To those organisations, because they do not pay any tax, great sums of money are paid out by trusts, the Carnegie Trust, Pilgrims Trust and all the others. They would be unable to do that if the money that they were giving out went in taxation.

Lord McCLUSKEY

My Lords, all charities pay some tax; I think that the noble Baroness is mistaken in supposing that some charities pay no tax. All charities pay certain indirect taxes. I will write to the noble Baroness on that matter. The noble Lord, Lord Drumalbyn, made a point in relation to competition with those who import into this country and difficulties for exports. In this regard, surely the House will acknowledge that in recent times, owing to the changes in the exchange rate, the competitive position of those who export from this country is considerably advantaged by the decline in the value of the pound; and, similarly, difficulties have been created for those who seek to import into this country. The effect of this surcharge is thought to be relatively small in relation to that effect on the exchange rate. My Lords, I should like to thank all those who have taken part in this debate. I apologise for having taken so long to reply. I hope that noble Lords will accept the length of my reply—whatever its content—as a mark of the appreciation of the lucidity, cogency and passion of the points which have been made.

On Question, Bill read 2^a; Committee negatived.