Value Added Tax Bill

James Cartlidge Excerpts

Friday 8th February 2019 Commons Chamber

[Sir Christopher Chope (Christchurch) (Con)]

I beg to move, That the Bill be now read a Second time.

I presented the Bill on 5 September 2017, and it is with a wry smile that I rise to speak to it today, with some four hours ahead of us—perhaps not all of that time will be needed to consider it. I put it down on the Order Paper for consideration very late in the Session because I anticipated that it would be a topical matter on the eve of our departure from the European Union. We are now just seven weeks away from the UK’s independence day, on 29 March, when UK citizens will end their enslavement by the European Union.

There has been a lot of discussion about trade, but leaving the EU is about much more than that; it includes control over our own taxes. Reducing VAT, as the Bill proposes, will reduce the cost of living for consumers and the burdens on business, and it will reduce significantly the cost of living for people living in fuel poverty, which is also topical, bearing in mind yesterday’s announcement that what we all thought would be a cap on fuel prices has turned out to be more like an opera hat—it can go up very significantly at short notice. The Bill is therefore particularly relevance at this time.

When the Prime Minister made her Lancaster House speech some two years ago, she talked about the UK being able to develop an alternative economic model in the event that the European Union tried to impose what are effectively punishment terms as part of the withdrawal agreement. I think that we are now in that situation. The deal that the European Union is offering is not satisfactory. We are moving towards leaving without a deal, but in circumstances in which it will be open to the Government to take back control over important parts of the economy, and VAT is an important part of that.

The history of VAT goes back to 1 January 1973, when the United Kingdom joined the European Economic Community and, as a consequence, purchase tax had to be replaced by value added tax, which came in on 1 April that year. The then Conservative Chancellor, Lord Barber, set a single VAT rate of 10% on most goods and services. That standard rate is now 20%, which indicates the increasing burden of taxation upon ordinary people up and down the country.

[James Cartlidge (South Suffolk) (Con)]

I congratulate my hon. Friend on introducing the Bill. It is certainly very timely, but the increase in the tax rate and in taxes generally is due to the increase in our outgoings on the national health service, the state pension and so on. Although I welcome the principle, I am concerned that to fund any significant changes in VAT will be expensive to the Treasury at a time when we face increasing costs in the health service and so on.

[Sir Christopher Chope]

I disagree with my hon. Friend; he is taking a conservative view rather than looking at the dynamic effect on the economy of making tax reductions. My hon. Friend is not yet a Parliamentary Private Secretary in the Treasury and that is why he is able to participate in this debate, but I know that he would very much like to be a Treasury Minister in due course. When we were in opposition and I was a shadow Minister, my hon. Friend was an important adviser in that Ministry. I know that he has a keen interest in the Bill. One of my concerns is that the Treasury is not always on the side of the dear British consumer, and I am putting the case on behalf of the consumer today.

Let us remind ourselves of the history of VAT. When the Labour Government came into office in 1974, they attempted to introduce extra rates of VAT. One way and another, things were changed around, but eventually Denis Healey reduced the higher rate to 12.5% in April 1976. Geoffrey Howe organised an increase in VAT when he was the Conservative Chancellor. He raised the standard rate from 8% to 15% in June 1979, but in so doing abolished the higher rate.

After that, the rate stayed the same until 1991, but was then raised from 15% to 17.5% by Norman Lamont, now Lord Lamont, when he was Chancellor. At the 1992 general election, the Conservatives were elected—unfortunately, I was not among them; I was defeated in that election—on a promise not to extend the scope of VAT. In March 1993, Norman Lamont announced that domestic fuel and power, which had previously been zero-rated, would have VAT levied at 8% from April 1994. My Bill would take us back to the time before 1994 when there was no VAT on domestic fuel and power. That is one the most important parts of my Bill.

This issue is close to my heart, not least because I was present during the by-election campaign in Christchurch in July 1993, when the biggest issue on the doorsteps was the Government’s imposing VAT on fuel, reneging on their manifesto commitments. That by-election saw the largest ever swing against the Conservatives, and a Conservative majority of more than 20,000 was converted into a Liberal Democrat majority of more than 17,000. That was my inheritance when I became the prospective parliamentary candidate. I know that my constituents feel strongly about VAT on domestic fuel and power, and I hope that the Government regret the decision that was taken then, over which they were subsequently not able to have any control. Although the Labour Government eventually reduced the rate to 5%, under European Union rules it is not possible for this sovereign Parliament to reduce VAT below 5% when it has already been set in train. That opportunity will be available to us as soon as we leave the EU.

Another criticism of VAT is that it is regressive because it is paid by all consumers whether they be rich or poor, young or old. The poorest spend a larger proportion of their disposable income on VAT than those who are financially much better off. The Office for National Statistics report has shown that in 2009-10 the poorest 20% spent 8.7% of their gross income on VAT while the richest 20% spent only 4%. That is another reason why reducing or eliminating VAT on various goods and services would be an effective way of creating a dynamic effect in the economy, and would be fair and equitable at the same time.

I have outlined some of the general issues relating to the Bill. It paves the way for sharing and securing for consumers and businesses one of the key benefits of leaving the EU on 29 March, taking back control over indirect tax policy on goods and services.

The first key element of the Bill is to enable the Government to raise the maximum turnover thresholds for exemption from the requirement to register for VAT. That is set out in clause 1. We in the United Kingdom have a registration threshold of £85,000, the highest in the EU. In my submission, it is not high enough. That is why I have put in clause 1 a suggestion that there be a modest initial increase in the threshold to £104,000 and that the threshold for deregistration should be £100,000. The consequence would be that many small businesses would be taken out of VAT and consumers would be saved the cost of VAT on the services provided by them.

I am delighted that my hon. Friend the Exchequer Secretary to the Treasury is on the Front Bench to answer this debate. I have been perplexed about Government policy on VAT thresholds. Currently the threshold is £85,000 and that was due to be the situation until March 2020, but under EU law it is open to the Government to increase the thresholds every year in real terms. That has traditionally been what has happened. However, the present Government, for reasons that I hope my hon. Friend will be able to explain, have decided to freeze the threshold until the end of March 2022. The consequence, apart from giving some extra money to the Treasury through what is effectively a stealth tax, is that many more small businesses will be caught up in VAT registration.

The current threshold means that 3.5 million businesses do not have to account for VAT, which is half of all businesses in the United Kingdom. We know how important small business is. It provides half of all the private sector jobs and accounts for more than a third of our national income. Why would it not be sensible for the Government’s policy to be to increase the VAT threshold to the maximum that is allowable under EU law rather than freeze the threshold, thereby making it difficult to increase it in the future by a significant amount?

The Government issued a consultation paper on the VAT threshold and called for evidence following a paper the Chancellor commissioned from the Office of Tax Simplification, and that consultation made it clear that the threshold cost the Exchequer £2.1 billion in 2017-18—the cost has not risen since because the threshold has not been increasing as it was before that date.

Following the OTS paper, the Government consulted on whether to increase or reduce the threshold. A table annexed to the call for evidence showed that the £81,000 threshold in 2014-15 had deterred 50% of sole proprietor and partnership businesses from increasing their economic activity for fear of passing the threshold. What a ridiculous artificial constraint on enterprise! Surely, we should be encouraging businesses to expand, not introducing measures that deter that activity.

The consultation concentrated on the large number of businesses just below the threshold and on what could be done to reduce the cliff edge and smooth the transition for businesses registering for VAT. Following the consultation, the Government concluded that nothing had been decided—in that respect, it was not an unusual process of public consultation. Paragraph 4.35 of the paper that summarised the responses reads:

“Many responses committed to the view that an increase to the threshold would make it much easier for newly-registered businesses to cope with the administrative and financial implications of registration. For example, if the threshold were to be raised to £100,000, businesses would likely be able to afford the cost of professional advice to cope with the administrative burden, while also being more able to absorb the cost of VAT. One representative body felt that the administrative burden would only be taken out of the equation if the threshold was much higher. The UK is currently unable to increase the level of its VAT registration threshold in real terms, under EU law, but there may be scope to review this in the future.”

It will come as no surprise to the Minister to learn that I took the figure of £100,000 in my Bill from that paragraph. I have not gone as far as the OTS suggested in its original paper, but I could see the merit, if the Bill ever gets into Committee, of raising the threshold to something like £500,000. Then we would be talking only about really substantial businesses having to pay VAT, which would significantly reduce the burden on business and encourage entrepreneurial activity in our enterprise society.

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[James Cartlidge]

I hate to sound like a stuck record but want to repeat a point. My hon. Friend gave a basic estimate of the cost of raising the threshold, but it seems to me that this would bring a separate cost to the Exchequer; has he a cost for these exemptions in terms of potential lost revenue?

[Sir Christopher Chope]

Yes, of course I do. I have an estimate—not quite done on the back of an envelope, but on a rough piece of paper. The Government’s figures say that the reduced rate—5% instead of 20%—for domestic fuel and power, which is by far the largest item here, currently costs the Exchequer £4.8 billion. That implies, based on my maths, a yield of some £1.6 billion from having the rate at 5%. Therefore, of all the measures in clause 2, that is by far the largest cost. However, I would have thought that that cost was more than justified by the social and economic benefit of introducing such a policy.

The Government told domestic consumers of electricity and gas that they were on their side and that they wanted to cap their costs, so they introduced, with the sounding of trumpets, a cap on energy costs. We then found out yesterday that the cap is being increased by some 10%, the consequence of which will be an increase of £100 on an average household bill of about £1,200 a year. If we add VAT, that is another additional cost. If we removed VAT from a £1,200 bill, that would be a saving of about £60 per household on average. I would have thought that that would be worth while, and it would be one way of mitigating the effects of rising energy prices across the world and rising prices of the raw materials. Why not go for that? If we look at all this like an accountant—although I am not an accountant, I did once work for a large firm of accountants, so I know the mindset that can be associated with such activity—why are we not considering the political benefits that will flow from eliminating VAT on domestic fuel and power?

[James Cartlidge]

Many households in my constituency, including my own, use heating oil, and I am sure that people would be very grateful. However, it is not an accountancy view to ask about the impact on the Treasury given the cost of vital public services, such as health and education, which we all want to see better funded. That is my angle, and it not about accountancy.

[Sir Christopher Chope]

If we look at things in a dynamic way, what is the extent of the burden on the health service and social services of having people who are unnecessarily cold in their own homes because they cannot afford the cost of heating? I give that as an example of why we need to consider the wider picture, rather than just focusing on the accountants and the numbers. I do not know whether my hon. Friend is an accountant, but if he is, I had not intended any criticism of him specifically. As the public’s representatives, we should be examining such things on the basis of what is in their interest. If there ever was a demonstration of how hostile people are to the idea of being taxed on domestic fuel or power, it was apparent during the Christchurch by-election to which I referred earlier.

I presume that the only reason why my hon. Friend would be in favour of some of the items in clause 2(2) is that there would hardly be any significant cost associated with them. However, if one thinks about repairs and improvements to historic buildings, for example, is it not important that there should be an incentive? There certainly should not be a disincentive for people to repair and improve historic buildings—the heritage of our great nation. As for insulating materials for home improvement, surely it is sensible that if people are to improve the energy efficiency of their homes, they should not be subject to a disincentive tax.

I shall now turn to clause 2(2)(b). Fitness is something of which we speak frequently in in this House, and it is directly linked with the health service, the obesity agenda and so on. Why are we charging VAT on a whole range of fitness services? How can that be consistent with the public policy objective of encouraging people to get fit and thereby not only improve their quality of life, but relieve the burden on the health service?

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[Sir Christopher Chope]

Yes, but the problem is that all that was subject to decisions by the European Court of Justice. Can my hon. Friend think of anything more ridiculous? If the matter had been under the control of our domestic laws set by Parliament, we would have been able to amend a finance Bill to redefine something, and the situation could have been changed overnight. However, because this all comes under the complex regime in the European Union, all of which is subject to the European Court of Justice, lawyers who specialise in this area can have a field day. The volume of law on VAT is vast, and surely there is a case for keeping it much simpler and well defined.

It would also be useful to have more transparency over what is subject to VAT. Supermarkets do not currently provide VAT receipts, so people do not know whether the digestive biscuits or the Jaffa Cakes that they just bought were or were not subject to VAT. However, there are various blogs that enable people to discover the best value items to purchase that are not subject to VAT but are quite similar to other products that are subject to VAT.

Speaking of transparency, clause 2(2)(c) would exempt from VAT goods that are already subject to excise duties, because I strongly believe that we should not have double taxation. Why should somebody who is paying duty on petrol then also have to pay VAT on that duty?

[James Cartlidge]

It raises a lot of money.

[Sir Christopher Chope]

But would it not be much more transparent if excise duty was raised and petrol was not then subject to VAT, which is a hidden tax? When my hon. Friend campaigns so actively to ensure that fuel duty is frozen, I hope he will extend his campaign to ensure that fuel duty is not subject to VAT. Clause 2(2)(c) would achieve exactly that objective.

[James Cartlidge]

My hon. Friend knows what I am going to ask. How much?

[Sir Christopher Chope]

Nothing. It need not be anything. To be transparent, whether on cigarettes, fuel or any other item subject to excise duty, it should just be excise duty, which could be set at whatever level the Chancellor or Parliament chooses. It should not be distorted and disguised by adding extra VAT. When the Chancellor increases the excise duty on a bottle of whisky, he never says, “By the way, it is also going to be subject to 20% VAT.” He puts VAT on the increase in excise duty. Why do we not make it simpler and more transparent? That is what clause 2 would achieve. I am glad that my hon. Friend has been softened up, and I hope he sees the benefits.

Clause 2(3) properly defines domestic fuel or power in some detail, which I hope will meet with the approval of interested colleagues. As I said earlier, items under groups 18 to 22 are less well defined in the Bill, although the items in group 22 are specifically defined.

We were told by the EU that women’s sanitary products would be, or could be, exempted from VAT. We were told there would be an EU consultation. That was all the talk when the former Prime Minister David Cameron was trying to negotiate a better deal for the United Kingdom in the European Union. Women’s sanitary products being subject to VAT is a controversial issue, but nobody seemed to be prepared to stand up and defend such a policy. In the end, the European Union promised that it would consult and look at it with a view to amending the policy, but it never did. That has resulted in the Government having to continue charging VAT, and they have used the revenue generated therefrom for other purposes. What a ridiculous distortion. What a waste of energy. Why cannot we just change the law and do what we think suits us best as an individual Parliament, and not be subject to the ghastly laws of the European Union?

I have explained some of the Bill’s content, but it only touches the surface—a starter for 10—because I see the opportunities opening up beyond 29 March. We will have the opportunity to change our laws on VAT much more imaginatively than we could with this Bill, and I will give just one example.

To protect and encourage British manufacturing after 29 March, why could we not remove VAT on all cars, or any other product, manufactured 100% in the United Kingdom? Obviously, we cannot do that at the moment because of the VAT rules and the European Union state aid rules. If we want to generate a dynamic offshore economy in which taxes are low but with strong incentives for manufacturing, why not do something like that? It might be a step too far for this Bill, but I put it down as a marker. It will be interesting to see whether my hon. Friend the Minister has a briefing on such a proposal. When the Prime Minister said that no deal is better than a bad deal, she said that no deal would be really good because it could enable us, as a United Kingdom, to develop a dynamic alternative economic model.

There is a lot of food for thought in this Bill, and I remind my hon. Friends that it is not within its scope to increase VAT or to remove any exemptions. Before they get on their hobby horses and say that we need more money from VAT and from consumers, I remind them that that is outside the Bill’s scope.

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[James Cartlidge (South Suffolk) (Con)]

It is a great pleasure to follow my hon. Friend the Member for Erewash (Maggie Throup). She has highlighted how the VAT rules do somewhat take the biscuit when it comes to gingerbread men. My hon. Friend the Member for Christchurch (Sir Christopher Chope) has shown that, on Europe, we really cannot have our cake and tax it.

I wanted to clarify one point that my hon. Friend the Member for Christchurch made earlier in reference to me. He very kindly referred to me as a former senior Treasury adviser. In fact, I did serve a brief apprenticeship after leaving university at the Policy Research Unit when it was founded, but I then started my own business. I was never at the Treasury—although it can feel like that when running a business.

Interestingly, when I was a mortgage broker, I found that mortgages were exempt—mortgage commissions are exempt from VAT. We were very much of the belief that mortgages would one day be done online—this was back in 2004—and, of course, many of them now are. When we invested for the first time in a new souped-up piece of IT kit, we received a very expensive bill with VAT on it, which we could not offset, and that created many problems for us. Since then, we have diversified. Most of our income is VATable: we run a big home show at the QE2 and a property portal for shared ownership properties. It is a good business. The great frustration that I have with VAT is that it is very unpredictable in those quarterly comings and goings, particularly as we have a home show every six months. As my hon. Friend said, we should run our businesses as if we are reviewing them quarterly to make sure that we can fund them.

The key point that I wanted to touch on with this Bill is the issue of unfunded tax commitments—a central point on which, in effect, my hon. Friend the Member for Christchurch and I debated through interventions. We were joined by my hon. Friend the Member for Harborough (Neil O'Brien) who was here earlier. That is not to say that any of the measures in this Bill would not be desirable. As I said earlier, I represent a rural constituency. Most of my constituents are on heating oil, so why would I object to cutting the VAT on heating oil? Of course I would not do so on principle. The same is true for sanitary products. My hon. Friend the Member for Berwick-upon-Tweed (Anne-Marie Trevelyan) made a very good case for reducing the VAT on those to zero, which I am sure the Treasury will do once it has the power. The question is not necessarily about desirability, but, of course, about affordability.

[Anne-Marie Trevelyan]

My hon. Friend and I both have rural constituencies and constituents who do not keep their houses as warm as they should because the cost is too high. The question is one of breaking the silos of government to assess the differential in loss to the Treasury compared with the saving to the NHS for those health and lung issues that would not end up in the health service at all. The challenge, if we need to prove it before we make a change in policy, is how we do that across departmental boundaries.

[James Cartlidge]

Of course. Although that is a very good point, it does assume a competitive marketplace where that tax change would be passed on in full to the consumer, and it remains to be seen whether that would be the case.

The point that I was trying to make is that when the Labour party makes unfunded commitments, we talk about the magic money tree. I have to say that I was trying to keep a tally as my hon. Friend the Member for Christchurch was speaking, and he seems to have opened up something that we might call a wondrous wonga arboretum of revenues. At one point, we were looking at £7.6 billion, once we added in the heating exemptions and the potential increase in the threshold to half a million pounds. These are not inconsiderable sums of money. The key thing that we have to remember is that, yes, there are those who argue about dynamic effect on behaviour, which means that these things are revenue-neutral. Perhaps I am a small c conservative, like a former great Chancellor, my right hon. and learned Friend the Member for Rushcliffe (Mr Clarke), whom I admire greatly. He was talking about this very Budget. He used to take the view that we should never rely on forecasts; everything has to be paid for. If we make a commitment, we have to find a corresponding item to fund it. I take that view as well. That is how one should run a business. It is cautious—one always assumes that there is a downside and an upside. Unfortunately, we now live in an era in which we cannot talk about downsides, because there is this “Project Fear” thing, but that is the sensible way of politics and prudence.

[Stephen Pound (Ealing North) (Lab)]

I rather doubt that the hon. Gentleman spent a great deal of his life at Labour party conferences back in the ’60s and ’70s. Had he done so, he would have recalled Barbara Castle’s blackboard—it is probably called a chalkboard now—on which she entered every single spending commitment ever agreed by the Labour party conference with two totals. Every time we made a spending commitment, we had to vire something in the other direction. Does he pay tribute, as many of us do, to the late Barbara Castle?

[James Cartlidge]

The hon. Gentleman is correct: I do not spend a lot of time at Labour party conferences. I am sure that, because he is there, it is huge fun. I know that he has a great sense of humour and so on. I never met Barbara Castle, but I am sure that it would have been a great honour to meet her. I do agree with that basic set of housekeeping accounts, which, by the way, the great Margaret Thatcher also used to believe in.

[Maggie Throup]

As my hon. Friend mentioned Barbara Castle, I want to put it on the record that she had the same education as I did. We went to the same school—Bradford Girls’ Grammar School. On both sides of the House, we can make sure that we chalk up our balances on the chalkboard—or the whiteboard as it would be now.

[James Cartlidge]

That is an excellent point. What worries me is that if we make unfunded commitments that do not result in the so-called dynamic behaviour that has been predicted and the Treasury loses revenue, the people who pay will not be us in this Chamber or anyone outside, but people who have not yet been born. We will stick the balance on the national credit card and, ultimately, the national debt. That is what happens if we do not take control of public finances.

I also want to talk about the transition period and leaving without a deal. My hon. Friend the Member for Christchurch seemed to suggest that we would benefit from not having a transition, because we would be able to vary VAT. He will remember that in his speech in the recent no-confidence debate—he spoke eloquently, although it took me some time to work out whether he had confidence in the Government or not—he advocated a WTO-terms exit. I intervened on him to ask what he would do about the 40% tariff on sheep meat, and he said to me that that was “Project Fear”.

In fact, if we leave without a deal, we will have to have the default WTO schedule, because there is nothing else. That schedule includes some very onerous tariffs indeed, not least for our farmers and exporters. In a debate about the cost to consumers of VAT, it is quite something to advocate allowing certain household items that we take for granted—such as dry pasta and tinned tomatoes—to be tariffed at 15% or 20% in a few weeks’ time. This is most significant for our exporters. In my constituency, I have household name companies—by that, I mean that they are very well known in the constituency—that have written to me about no deal. The matter is critical for them; in one case, the default tariff exceeds the margin that the company makes. That is serious stuff, which we need to be prepared for.

[Victoria Prentis (Banbury) (Con)]

My hon. Friend is making an important point about tariffs on agricultural products. Does he agree that it is very difficult for farmers, who are dealing with living animals, to plan their sales in the most helpful way? I meet a farmer regularly—indeed, whenever I drop my children off at the school bus—who tells me that he is selling sheep at the moment, much earlier than he would have liked, because he is worried about the effect of no deal.

[James Cartlidge]

That is a good point. I was simply trying to make the point that we are talking about the impact of VAT on the consumer, yet if the no-deal scenario that some Members wish for happens, consumers will face onerous costs. By the way, even if we decided that we wanted to cut tariffs unilaterally, we could not; we are not taking back control of France, Germany and the rest. We cannot cut tariffs on our exports, and we would have far less leverage in trade deals. That is an extremely serious prospect, and we need to think about it.

[Anne-Marie Trevelyan]

I have a large number of lamb farmers in my constituency—the finest lamb comes from Northumberland, of course—and the challenge for them is: what are the Government preparing to do in the case of no deal? I certainly would not prefer that outcome; it would be much more constructive to have a deal. Should we leave without one, however, I hope very much that my Government will be prepared, and that there will be plans—contingency plans, if we want to call them that—in place to support the farming industry.

One of the great challenges has been the lack of communication from the Treasury and DEFRA. That is quite understandable, because we are still making our best endeavours to reach a deal, but there is a real difficulty in suggesting that it is therefore better to say we cannot have a no-deal scenario because of the risk. That leaves the business community at the greatest risk of facing challenges without knowing the answers.

[James Cartlidge]

I am grateful to my hon. Friend for that intervention. It will be the last intervention that I take, because I am a strong supporter of the Bill promoted by my right hon. Friend the Member for Chipping Barnet (Theresa Villiers), and I want her to be able to speak to it shortly.

I want to finish with a point about productivity and investment, which has been made by several people. Going back to what I said earlier about IT and so on, the key to productivity is investment, and as a country we under-invest, relatively speaking. For most of the larger companies that want to invest, the ability to offset VAT is fundamental. If I had a wondrous wonga arboretum and I was told that I could cut some money for business tomorrow, I would go for business rates. I would do so because business rates are an on-cost that directly hits investment in small businesses, and I am convinced that they are what is holding back productivity in the SME sector. I will stop there, because I think the next Bill is an excellent one. I hope that if the Bill promoted by my hon. Friend the Member for Christchurch makes progress, we will find a prudent and responsible way of implementing it.