Value Added Tax Bill

Part of the debate – in the House of Commons at 10:35 am on 8th February 2019.

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Photo of Christopher Chope Christopher Chope Conservative, Christchurch 10:35 am, 8th February 2019

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.