Value Added Tax Bill

Stephen Pound Excerpts

Friday 8th February 2019 Commons Chamber

[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.

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[Lyn Brown (West Ham) (Lab)]

I am delighted to be here today to discuss this fascinating subject—what a lovely way to spend a Friday morning!

Unlike most other taxes, VAT is paid by us all, and we all have an interest in ensuring that it is applied in the fairest and most effective way possible. As Members know, 16.8% of tax collected in 2018-19 is forecast to come from VAT, according to the Office for Budget Responsibility. With that in mind, we must weigh our words carefully. As we have rehearsed, we have to consider both the rate and the tax base of VAT, as VAT revenue goes towards the public services that most of us rely on. The significance of VAT to the Exchequer has fluctuated over the years. The total amount raised from VAT has grown over time from £57 billion in 1999 to 2000 to £122 billion in 2012-13, with the only sustained dip being in the years of the financial crisis, when VAT revenue dropped from £81 billion in 2007-08 to £74 billion in 2009-10. However, as we know, as a proportion of GDP it has increased only slightly, from 5.5% in 1999-2000 to 6.1% in 2016-17.

As we have discussed today—I think that almost every speaker has alluded to it—VAT does not affect our constituents equally. The most recent data from the Office for National Statistics shows that the poorest fifth of households paid 13% of their disposable income in VAT compared with 7% paid by the richest fifth of households. To quote the ONS,

“indirect taxes increase inequality of income.”

As we all know, different Governments have taken different approaches. Members with long memories—I see that my hon. Friend the Member for Ealing North (Stephen Pound) is behind me, and I am sure that the hon. Member for Christchurch (Sir Christopher Chope) will be included in this group—may remember that it was a Conservative Government who first introduced VAT in 1973, another Conservative Government who raised it to 15%, and yet another Conservative Government who raised it to 17.5%. It was therefore a bit of a surprise when, ahead of the 2010 election, the Conservative party spokespeople said that they had

“absolutely no plans to increase VAT”

to 20%. I think I hardly need remind the House of what happened next, or of the fact that the headline rate of the VAT has remained at 20% since the coalition Government put it there. I always like to remember the Liberal Democrats at this point. They are not here today.

[Stephen Pound]

They are not anywhere.

[Lyn Brown]

They are not anywhere today.

After considering these matters of history, let me touch on the question of which goods and services VAT is applied to. The choice of which goods and services we apply reduced rates to is political, not just technical. It is an example of the priorities we have as a society. We see that in some of the items that are exempt from VAT, such as sports activities because we want to encourage physical and mental health, and admission charges to museums, art exhibitions and education services because we think that that sort of thing is good for the education and mental health of our nation. There has been much discussion—I thank hon. Members in all parts of the House for this—about the imposition of VAT on sanitary products. When the rate was reduced by the last Labour Government, it was the lowest rate permissible under European legislation. On the other hand, my party unveiled plans ahead of the 2017 general election to charge VAT on private school fees. The money we raised could have been used to pay for free school meals for all primary school children—a policy that has already been implemented at local level by some really insightful Labour councils, including my own in Newham.

The current Chancellor was reportedly considering copying the idea—if newspapers are ever to be believed.

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[The Exchequer Secretary to the Treasury (Robert Jenrick)]

From the heart-warming and uplifting bravery of Finn and his fellow service dogs, to VAT—such is the unique ability of the Treasury to change the mood in the Chamber. I thank my hon. Friend the Member for Christchurch (Sir Christopher Chope) for promoting this Bill and raising these issues, and all hon. Members across the House who have had the chance to contribute today. In my experience, my hon. Friend’s rather dim view of the bean-counting accountants at the Treasury is unfair to the excellent civil servants who work there. My office has a portrait of Nigel Lawson on the wall. He was one of the great Chancellors who understood the dynamic effect of simpler and lower taxes.

[Stephen Pound]

And now he lives in France.

[Robert Jenrick]

Part of the time.

I am grateful to my hon. Friends the Member for Berwick-upon-Tweed (Anne-Marie Trevelyan), and for Erewash (Maggie Throup)—not “ear wash” as it was pronounced in the previous debate by my hon. Friend the Member for South Suffolk (James Cartlidge), who is the voice of small c conservatism in this place. The hon. Member for Ealing North (Stephen Pound) made a fleeting cameo appearance in the debate to recommend Barbara Castle, who I agree was one of the great politicians of the 20th century. Modern politics might have been different if she had been able to take forward the reforms that she set about in the late 1960s. Briefly—he is no longer in his place—my hon. Friend the Member for Harborough (Neil O’Brien) set out the twin pillars that any Conservative Chancellor must balance: sound money and respect for the public finances so that we do not leave the next generation worse off than we found it, and the liberating dynamic effect of lower taxes. Every Chancellor has the opportunity to balance the two responsibly and drive the economy forward, and that is very much the context for this debate.

The Government champion small business people and entrepreneurs, who are the backbone of our economy. A simple tax system helps those individuals and the businesses they create to operate in a productive and profitable manner, as we heard from numerous colleagues across the House. We want to find opportunities wherever we can to help them move their businesses forward.

Under UK VAT rules, UK businesses must register for VAT once their total taxable turnover crosses the threshold, which is currently set at £85,000. Businesses can de-register if their turnover falls below £83,000. The Government recognise that accounting for VAT can be burdensome on small businesses, but it should not be over-estimated—our research shows that the cost to a small business of meeting its VAT responsibilities is generally around £300 a year. That is not inconsiderable, but it is perhaps not as much as some might suggest.

We want to maintain a VAT threshold that supports small businesses, and we do. As we heard from my hon. Friend the Member for Erewash, the United Kingdom’s VAT threshold is the highest in the European Union and the OECD. To put that in context, the EU average is €33,000, and $44,000 in the OECD. The German threshold is only £15,600, and ours is £85,000. We compare extremely favourably with our competitors around the world. That benefits 3.5 million UK businesses that are not required to account for or pay VAT—not half of all small businesses, but 60%. It is also worth noting the large and growing number of enterprises in the sharing economy, such as individuals taking up Airbnb businesses, generally below the VAT threshold, providing the kinds of services that might, in an era before the technology was available, be provided by VAT-registered businesses such as hotels and B&Bs.

Views on the right level at which to set the threshold are divided, despite the fact that it is, by international comparisons, very generous. Two years ago, the Chancellor asked the Office of Tax Simplification to examine the impact of making the threshold higher or lower. We did not prejudice that research; we asked the OTS to come forward with its views. Its report, published in November 2017—colleagues have quoted it today—found that the relatively high level of the threshold in the UK has a distortionary effect on business growth.

One reason for that, as we have already heard, is the “bunching” phenomenon, whereby small businesses limit their turnover to remain below the threshold. In the same way that welfare reform improves the ability of individuals to work extra hours or take a promotion, we do not want to discourage entrepreneurs from taking on an extra client, expanding their business or growing their sales. The bunching effect is significant, and raising the threshold somewhat, for example to £100,000, would not eliminate it; it would just move the problem further up the chain.

As a result of that report, the Chancellor committed to explore whether the design of the threshold could better incentivise growth. He launched a call for evidence in March last year, to understand the effects of the threshold on small businesses and ways of easing the burden once they become VAT-registered. During the call for evidence, businesses raised concerns, not dissimilar to those we have heard today, about the administrative and financial implications of registration, but there was no clear consensus on reform. That was not obfuscation of the kind alluded to by my hon. Friend; there was simply no clear answer on how to proceed. Numerous businesses wanted the threshold to be increased, and numerous wanted it to be decreased. The Chancellor therefore announced that the Government would maintain the threshold at its current level of £85,000 until March 2022, taking a balanced approach, with the UK continuing to lead the EU and the OECD in support for small businesses in this manner.