Amendment of the Law

Part of the debate – in the House of Commons at 12:00 am on 3rd May 1966.

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Photo of Sir Tatton Brinton Sir Tatton Brinton , Kidderminster 12:00 am, 3rd May 1966

I would like to confine my speech, since other hon. Members have covered various aspects of the Budget, to some comments about the Selective Employment Tax. I see from the White Paper, which I have not had time thoroughly to read, that the objectives are first to improve the structure of the tax system by redressing the balance between services and manufacturing. It seems to me that a basic fallacy is implied in that phraseology, because in the end the people who pay taxes are individuals. They are the source of all effort and of all wealth through the work they do, and in the end it is they who have to suffer tax in one form or another, whether directly or indirectly.

What the Government are saying in that sentence is not that they are redressing the balance between a service or services and manufacturing industry. They are saying that they will make the products of service industries less attractive, because they will be taxed more than they were before. That is fairly obvious. To that extent, there are various kinds of service industries. First, one has the real service industries such as catering, the distribution of food and, perhaps, laundries—a number of service industries might occur to one—in which there is a very small tax content. The greater part of the service industries, however—and I speak here of the true service industries, and not as these industries have been defined today by the Chancellor of the Exchequer—are in the distribution of goods which at various stages in their manufacture bear a certain amount of tax, either as Purchase Tax, Excise duty or in other ways.

To the person who purchases goods at the end of the process, it does not matter whether the tax falls at the manufacturing or the distributive stage. He still has to pay it in the price of the article. It is naive in the extreme to suggest that taxation can be imposed upon the service industries without its ultimately falling upon the pocket of the consumer. That is what must happen in the long run. The consumer is the ultimate source of the taxation which the Chancellor collects. It does not seem to me, therefore, that there is very much truth about the object of redressing the balance except in so far as this new tax will bear on various commodities which so far have largely escaped tax, mainly in food and catering.

The second object which is mentioned in the White Paper is encouraging economy in the use of labour in services and thereby making more labour available for the expansion of manufacturing industry. The question has already been asked whether, if one were looking round the country to find where there is spare labour, it would be in the service industries that one would look first. I do not think that I would. There is greater featherbedding and greater retention of unnecessary labour, for reasons which we quite understand, in the manufacturing industries than there ever is in the service industries.

What the Government are saying, therefore, is not that they are trying to squeeze spare labour from the service industries and get it into making some form of practical use or exportable value. They are saying that they will deliberately discourage the service industries in order to get more and more people into the factories. That is surely the truth behind this tax.

It may be that that is a desirable objective, but there is no greater fallacy in life than to suppose that the man who manufactures a rolled steel girder is in some way morally superior and more economically and more socially desirable than the man who cooks a first-class dinner, because in the long run the man who is making the steel girder is doing so only so that in the ultimate somebody may enjoy a better meal, wear a better suit, watch a better television set or drive a better motor car. That is what it is all about. The whole process is designed for human satisfaction and nothing else. It is not an end in itself. Therefore, do not let us have any kind of moral judgment about what people should be doing. In present circumstances, we must take account of what they are doing because of our acute economic crisis outside.

The point has been made that many of our service industries are of considerable importance to us. In the short time since the Chancellor spoke, I have not been able to discover the value, for instance, of the tourist industry in terms of foreign exchange, but it must be one of our foremost industries. In neglecting such industries, we are neglecting an export industry.

Several of my hon. Friends have mentioned agriculture. I find it extraordinary that the Chancellor should classify this great productive industry as a service industry or that he should ever have considered it as such. It is an industry the efficiency of which has increased by more than that of practically any manufacturing industry over the last few years. It is now treated as if it were an industry from which further labour should be squeezed for the benefit of people who produce manufactured products. This is extraordinary. I can only hope that the Chancellor will reconsider it, because to place a further burden on agriculture, which under the existing system of subsidies can be covered in the long run only by a further subsidy from the public purse, is both unnecessary and illogical.

Even if we accept the desirability of the objectives of this tax, I suggest that it is still the wrong tax to have imposed. I accept, as many of my hon. Friends have done, that there is a strong case for a turnover tax. Whether it should differentiate between one form of enterprise and another is a separate question. For the sake of my argument, however, let us accept that we need the power to differentiate between one enterprise and another.

Why have not the Government considered—or perhaps they have considered and rejected—the possibility of a value-added tax? We have been told on previous occasions, not only by Socialist Chancellors, but by at least one Conservative Chancellor, that there is good reason why a value-added tax does not work. It works in other countries, but apparently it would be difficult to work here. Yet the Government are imposing a form of pay-roll tax which could perfectly well have been a value-added tax, in my belief. What are the advantages of a value-added tax?

First, the Government could if they wished differentiate between one industry and another by varying the rates to be applied. They could differentiate between one specific enterprise and another in the same way as they now propose to differentiate between service and manufacturing industries. Secondly, the tax would be more closely related to the total size of a business, very nearly as closely related to its pay roll and more closely related to its profitability than the proposed new tax will be. The Chancellor's new tax is a blunt instrument. It is "so much a nob". It will not matter whether a man is earning £50 or £5 a week—he will cost the same.

Thirdly, the value-added tax would have a vital bearing on exports because it would be remittable. Under the terms of international agreements it can be remitted on exports. This useful tax is already in existence in France. Why is it not being used for the purpose for which the Government are using their Selective Employment Tax? It could have been made selective if the Government wished, although I have serious doubts about selectivity.

In applying the principle of selectivity, what sort of omelette will the Government be creating? Is this to be a situation similar to that of the Purchase Tax situation, where one used to pay 20 per cent. on a match box but only 10 per cent. on a pill box, so that match boxes were sold as pill boxes and vice versa? My hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) had many years of fun out of these anomalies.

What sort of situation will we get into? When will an industry be a service and when manufacturing? There will be many marginal cases very difficult to define. What will be done if a manufacturer, discovering the cost of pay-roll tax on, for example, those employed to run the canteen for him, instead of employing outside contractors, which is a common practice, decides to run his own canteen? Are those workers then manufacturing or service?

Will a firm have to list every single person in a factory employing, say, between 500 and 20,000 people, dividing exactly the sort of jobs the people do, whether manufacturing or service, or will the process begin with the definition of the enterprise? What about enterprises with a little bit of both manufacturing and service? What about the man who makes and sells goods in his own shop? Is he manufacturing or distributing? How easy will it be to define these marginal differences?

There is a further danger inherent in this differentiation. We have already heard how, in the construction industry, as a result of the high turnover, there has grown up the practice in many parts of the country of people contracting with an employer instead of becoming proper employees. They are self-employed and contract their labour to a construction concern. Will we see more of this happening? Will a man self-employed and selling his labour as a free agent on an hourly or perhaps weekly basis attract this tax? Are we to create the awkward situation where people are constantly trying to find loopholes to escape a heavy tax which, in one capacity, they will have to pay but in another capacity will not? That is the danger of differentiation. If everyone across the board had to pay there would not be this danger but the differentiation will cause trouble.

I hope that the Treasury Ministers during the debate will give us their ideas about how this is to work, because it seems to me that, in principle, there are dangers in it. I would still plead for the Government to think very carefully about the value-added tax instead.