HL Deb 24 January 1977 vol 379 cc315-22

7.10 p.m.

Lord ORAM rose to move, That the Counter-Inflation (Price Code) Order 1976 (Amendment) Order 1976, laid before the House on 24th December, be approved. The noble Lord said: My Lords, I beg to move that the Counter-Inflation (Price Code) Order 1976 (Amendment) Order 1976 be approved. This order amends two paragraphs of the Price Code. The more important of the changes is the Amendment concerning sales of alcoholic drink and tobacco products, and I propose to deal with that first. It is an underlying principle of the Price Code that firms should not make a profit on indirect tax increases. The way in which the Code has tried to ensure this has changed over time. It may, therefore, help the House to better understand the order if I explain a little of this evolution.

Before they could calculate net and gross profit margins as percentages of sales firms were required—under Price Codes prior to August 1976—to deduct from the value of their sales the cash value of indirect tax increases made since the beginning of the Code. In this way, no profit could be taken on the tax increase. Distributors of alcoholic drinks and tobacco objected to this approach, arguing that it caused an unjustifiable erosion of their net profit margins. For this reason, they pressed to be allowed to make a margin on indirect tax increases. In 1975 we asked the Price Commission to examine this question. They found that distributors' margins had held up as well as any other sectors of distribution. There was, there fore, no reason to change the basic principle that firms should not profit from tax increases.

But the Commission also found that distributors of alcoholic drink and tobacco products were unable to work out accurately the cash value of duty increases on the goods they were selling. This was due to the fact that manufacturers and importers, rather than distributors, usually pay the excise duty. The Commission therefore recommended that standard rates of deduction should be applied, and these were introduced in the new Code which came into effect on 1st August last year.

The rates introduced in August reflect only the increases in indirect taxes from the start of the Code until last August. As a result of the higher excise duties announced by the Chancellor on 15th December, it is now necessary to increase the standard rates of deduction to allow for the extra tax. If this is not done, firms would be entitled to apply their permitted maximum net and gross profit margins to sales values which are inflated by the tax increase. In effect, they would then be taking a margin on the tax increase. The main purpose of the order before the House is to prevent this.

The order proposes that from 17th January this year the standard rates of deduction will increase from 15 per cent. to 20 per cent. in the case of alcoholic beverages and from 20 per cent. to 25 per cent. in the case of tobacco products. These proposals are to be applied by amendment of paragraph 87 of the Code and therefore apply directly to net profit margins. Indirectly, they apply also to gross margins, by virtue of paragraph 110. In the case of both alcoholic drink and tobacco products, the increase in the rate of deduction is to be 5 per cent. The figure is an average one. For wines and beers the effect of the extra duty is rather less than the 5 per cent. figure would suggest. On the other hand, 5 per cent. is not high enough in the case of cigarettes and spirits, for example. The Government believe that a relatively broad-brush approach is inevitable if we are to avoid excessive increase in the complexity of the Code. On this basis, an increase of 5 per cent. in the standard rates of deduction is, in our view, the right overall figure for distributors of alcoholic drink and tobacco products.

As I said, the higher rates became effective from 17th January this year. Although the higher duties came into effect at the beginning of this year, traders will not feel the effects immediately. They first have to sell off old stock carrying lower duties. The date at which the new duties affect traders—and, therefore, the date at which they should, in theory, begin to apply the higher rates of deduction—depends on how quickly they sell off old stock. This will, of course, vary enormously from firm to firm.

I think the House will agree that it would have been impossible to have a multitude of starting dates for the new deductions. The 17th January date is, therefore, a compromise. Some traders will find that they have to apply the new deductions before they feel the effects of the higher taxes. In other cases, it will be just the opposite. But looked at on the broadest basis, the Government consider that the proposed starting date is the right one for all distributors taken together. It is a feature of the Price Code that, whatever a particular provision might say, there is usually a safeguard to make sure that firms are not unduly damaged by the inflexibility inherent in any written set of rules. So it is in the case of this provision before the House today.

The primary safeguard is in the levels of the duty deductions themselves. Last August the Government set deductions which were more generous to the distributors than had been recommended by the Price Commission. When the Price Com mission suggested the introduction of standard rates of deduction, they recommended they be set at 20 per cent. of sales in the case of alcoholic drink and retail sales of tobacco and 25 per cent. for whole sale sales of tobacco. And, indeed, the higher duties introduced in the April 1976 Budget would have justified figures several percentage points higher than those recommended by the Commission.

However, the deductions actually introduced were only 15 per cent. for alcoholic drink and 20 per cent. for all tobacco products. By setting them at fairly generous levels, we tried to ensure that traders suffered no ill effects from the introduction of standard rates. Despite the increases in the rates proposed in the order, much of the original benefit will continue, thereby safeguarding distributors' legitimate interests. Should there be any firms who find themselves in difficulties there are further safeguards specifically written into the Code to help them. Paragraph 87 itself provides that firms may apply to the Price Commission for a lower deduction if this appears justified in the light of their particular sales mix.

Furthermore, should the new deductions or a decline in the volume of sales unduly depress distributors' net profit margins then the Code allows them to increase their gross margins to take account of this. I think the House will agree, there fore, that, so far as the extra duties on alcoholic drink and tobacco products are concerned, two important points are met. First, the amendment proposed in the order adequately prevents firms from making a profit out of the higher taxes; and, secondly, because of the levels at which the deductions were originally set and with the safeguards written into the Code, no firm should be significantly damaged by the proposed Amendment.

I turn now to the second of the changes proposed in the order concerning certain port charges in Northern Ireland. This is a simple technical change tidying up an anomaly in the Code. As there must be a substantive change to the Code to take account of the higher duties on alcohol and tobacco, we are taking this opportunity to make this minor amendment as well.

In the revised Price Code introduced last August, certain port charges in Great Britain were exempted from control. We did that because under the Harbours Act 1964 parties affected by an increase in ship, passenger and goods dues have a right of objection to the National Ports Council. We saw little point in controlling such port dues under the Price Code when there was already a designated authority with responsibility for them. The order before the House will extend exemption to the same category of port charges in Northern Ireland. The reason for doing this is the same. Under the Harbours Act (Northern Ireland) 1970 there is a right of objection to the Department of Commerce against increases in ship, passenger and goods dues. In the circumstances the Government felt that control in this case should also be left to the designated authority.

Interested organisations have been consulted about our proposals through the issue of a Consultative Document on 15th December. Although some organisations in the distributive field object to the proposals, we felt it right to go ahead with them for the reasons I have explained. No objections were made to the changes concerning Northern Ireland ports.

If I may sum up, the order before the House proposes two changes in the Price Code. The new rates of deduction for indirect tax increases will prevent firms from making a profit on the higher excise duties announced by the Chancellor. In addition, certain port charges in Northern Ireland are placed on the same footing as charges in Great Britain and become exempt from control under the Code. The measure before the House is therefore a modest one, but none the less of some importance, particularly to the consumer. I therefore commend it to the House.

Moved, That the Counter-Inflation (Price Code) Order 1976 (Amendment) Order 1976, laid before the House on 24th December be approved.—(Lord Oram.)

7.24 p.m.

Lord LYELL

My Lords, we are very grateful to the noble Lord for presenting what I thought was to be a fairly simple measure. I think that he maintained it was fairly simple but it took him 12 minutes to explain it clearly and in detail. Nevertheless, we are grateful to him for putting so much effort and detail into these small changes, as he put it, in the Price Code. We are interested that there is so much difficulty in working out the various and relevant increases in direct taxes on tobacco products and alcoholic beverages. In my professional life whenever I attempted to obtain figures from tobacco firms I always found it exceeding difficult to obtain the net and gross of tax. I am sure the noble Lord will agree that we suffer together in this particular matter.

In the course of his observations the noble Lord pointed out that increases of 5 per cent. had been taken. He thought that this was a fairly broad brush attitude after all the calculations had been made. Perhaps he would give a reasonable estimate of the effect in pounds, in quantity, in a full year. We should be very grateful for such information. We were also pleased to see that under paragraph 87 firms could apply to the Price Commission in the light of their particular circumstances. I believe that the noble Lord said: …in the light of their sales mix". Some firms which might sell a high proportion of wines as opposed to spirits might be unduly harmed by these measures, but under that paragraph they would have a right of appeal to the Price Commission. We are grateful for that safeguard. Would the noble Lord please note that he seeks to minimise what he calls the "damage" to any firm. In the light of his observations he might possibly have chosen a more suitable word. It seems that there is some malevolence there. I do not think that the noble Lord, nor indeed the Price Code, intend this. We are grateful that he explained in detail the measures which apply to Northern Ireland. It was interesting that, in spite of the fact that objections could be raised on port increases, none in fact was. The noble Lord has explained these rather complicated transactions in great detail. I do not think we wish to quibble with either him or the Government. We thank him for putting them forward.

Lord ORAM

My Lords, in view of the noble Lord's rather uncritical acceptance of my remarks, for which I thank him, I do not need to add greatly to the 12 minutes which I have already taken. I am not in a position to give the figure in pounds sterling, but I shall let him know if that figure is available. I agree that the word "damage" was rather a hard one. However, distributors have claimed that this system causes damage 1o some of their members. We do not think it does. But that is why I used that term. The noble Lord was quite right in saying that if a particular trader has what I called a mix of sales, which means that this formula works to his disadvantage, he has the right to go to the Price Commission for some relaxation. That is all I need to say. I commend the order to the House.

On Question, Motion agreed to.

House adjourned at twenty-eight minutes past seven o'clock.