Value Added Tax Bill

Part of the debate – in the House of Commons at 11:27 am on 8th February 2019.

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Photo of Anne-Marie Trevelyan Anne-Marie Trevelyan Conservative, Berwick-upon-Tweed 11:27 am, 8th February 2019

It is a pleasure to follow my hon. Friend Sir Christopher Chope, although I would highlight that I am a chartered account—and proud to be so. My training perhaps gives me a different perspective on politics, and I often from myself thinking in a different way from Members who are lawyers—not in a good or a bad way, but simply in a different way. Such training offers a breadth of policy, planning and thinking that we need to bring together. I am thrilled to speak on my hon. Friend’s important Value Added Tax Bill, and about how we might start to make significant improvements to this regressive and most punitive of taxes on the poorest, and on small businesses’ growth and productivity, after we leave the EU—very shortly, I hope—and are free to make such improvements once again.

I will address three areas of policy change proposed by the Bill, although there is much more I could discuss: VAT thresholds for small businesses; the flexibility of VAT rates on energy; and the big, thorny question of the sanitary products challenge that we have to solve. The first area on which this Bill offers an excellent improvement to our present VAT rules is the threshold for paying VAT. A small business whose main activity is one of human endeavour—the “services” part of goods and services—must monitor its monthly sales on a rolling 12-month basis these days, and must register to pay VAT as soon as the cumulative total reaches £85,000. Most small businesses that have many VAT-charged goods, such as plumbing businesses, are more likely to be VAT registered from the beginning, so such monitoring does not have to happen—those businesses are already in the VAT system because they want to reclaim the VAT on goods they have to use.

The threshold means that, overnight, a business suddenly goes from not being VAT registered to being VAT registered, and having to charge an extra 20% on its bills. Imagine going in for a monthly haircut that used to cost £20 and suddenly finding that it costs £24. That business will then find that a smaller, non-VAT registered business down the road is more competitive, and it will immediately risk losing customers, so what does it do? Does it hold down prices by employing another staff member, at great speed, to increase business and grow the volume of sales, or does it stop accepting custom in order not to hit the threshold in the first place? My hon. Friend gave the example of cafés, but in Northumberland, there are tourism businesses that see the threshold coming and therefore slow down or close their doors early in order to not make further sales. This arrangement is simply anti-competitive and surely it is not the sort of business driver that any Conservative Government would mean to be encouraging.

A real-life example that highlights the problem is that of a young businesswoman with exactly this dilemma in my constituency. This young woman owns a small hairdressing business in a small town, and employs two stylists full time and one part time. Her turnover is about £100,000—above the £85,000 threshold—and she is therefore VAT registered. Her VAT payments to the Treasury are in the region of £16,000, leaving her with net sales of £84,000. A number of competitors have set up business in the area and purposely kept their audited income below the £85,000 threshold to avoid paying VAT, while still charging prices comparable to VAT-registered retailers. Of course, the clients do not know whether a business is VAT-registered in that small business environment, but there is a 20% advantage in favour of that non-VAT-registered business—20% more for doing less work. This young woman does not make any profit worth mentioning, but she pays herself a wage and keeps three trainees employed, and she enjoys her work. Her father, who is also a constituent, has advised her to close the business and save all the hassle that goes along with self-employment and running a business. Is it not a tragedy that a father feels he has to say that to his energetic and business-focused daughter?

Let us look at this woman’s options and the consequences. She could follow her father’s advice and close her business, putting four people out of work. That would involve vacating the premises and creating an empty shop on one of the small high streets in my constituency. She could lay off a member of staff to reduce the income to below the threshold and de-register for VAT, although perhaps still charge the VAT-hiked prices and seeing whether clients will pay. This is a simple but brutal example of the anti-business growth of our present VAT rules. I have been frustrated by this for a long time—as an accountant and in politics—because we have been trapped in this position. We have no control over it because we are operating under the EU VAT directive.

I would go further than my hon. Friend has proposed in his Bill so far. It is wonderful to have a Treasury Minister in the Chamber, because I have written a number of times to a number of Chancellors on this subject, and I have the opportunity to make my argument again verbally today. Where other thresholds exist, such as for income tax, national insurance and stamp duty, there is an exemption on charges for amounts up to the threshold, with payments made only against the remaining amount over the threshold limit. If, in the case of any small business, we made VAT payable only on income above the threshold, we would offer a sliding scale of price increases or sales volume that would support the business and encourage the employment of more staff, unlike with the disincentive of the dramatic cliff edge at £85,000. Whether we are talking about £100,000 or £20,000, the effect is the same: there is a cliff edge from paying no VAT to entering the VAT world, with all the commensurate costs, stress and extra time spent dealing with it. It seems odd that there is no threshold step for VAT, just a cliff edge.

In the context of small business as a whole, the threshold is very low, despite the fact that it is one of the higher ones in the EU. It is an excellent start to see the Bill’s proposal of, in the first instance, raising the threshold to £104,000. Should this excellent Bill gain Government support and make progress, however, I would propose to go further and call on the Treasury to make all income below the threshold exempt from VAT, with further turnover up to a certain point—for example, £150,000—having VAT charged only on that marginal trading activity. Businesses could then carry the sales tax burden across all sales without having to force it on the customer in the hard way that happens now. This is important for the small business cohort; we are not talking about businesses whose turnover has reached £1 million and are employing 10, 15, 20 or more people. We are talking about the small business that suddenly falls under the complex and heavy burden of VAT, which is genuinely having an anti-competitive effect on them. We are doing ourselves and our businesses no favours at all.

The approach I am setting out would give small businesses a window of growth and investment opportunity, and the chance to take on more staff, before being hit with a 20% surcharge on all sales. Such a fairer, graduated system would level the playing field between small below-the-threshold firms and those growing businesses. It would stimulate growth in the small independent retail sector and might even be a policy that could help to revitalise our empty high street shops.

The Bill offers much more besides increasing the threshold for VAT for small businesses, as it takes up the long-overdue opportunity to exempt some critical goods from VAT altogether once we have left the EU and the limitations that the EU’s VAT directive forced upon us in 2006. The directive aimed to harmonise VAT across the European Union. Although it makes cross-border sales activity easier and has some merit for the simplification of sales taxes, it has limited any individual country’s ability to determine whether or not to exempt goods from VAT. VAT on fuel has been a matter of contention for years. To his credit—everyone take note, because I am not going to say that very often—the then Chancellor, Gordon Brown, brought that tax levy down to 5%, which was a very creditable decision, but under the EU directive, he had no independent authority to scrap it completely.

Let us consider the position for my poorest constituents in rural Northumberland—“deepest, darkest rural Northumberland”, as my mother refers to some of my more wonderful and hard-to-reach communities. In these areas, the choice in heating solutions is limited to wood, coal, expensive electric heating, which often does not work when the weather is really bad, or oil tanks, assuming the snow does not prevent the tanker from getting to a farm in the first place. There is no mains gas, so people do not have the opportunity of consumers in more urban areas of choosing a supplier from a competitive range of offers. The 5% VAT levy adds to their already higher than average heating cost burden, because all those other products are just more expensive. It would be a wise Government, after Brexit, who at last agreed that rural poverty—it has been ignored for far too long by Whitehall, in my humble opinion—could be alleviated in the first instance by removing this tax. As my hon. Friend identified, there might be an initial cost to the Exchequer of up to £1.6 billion, but the policy would have a broad range of principled and practical social and health benefits. The Government’s commitment to those is clear by their words, but such a change would make that clear by their actions, too.

If my rural constituents are disadvantaged by VAT on fuel supplies to keep their families warm, how much worse is it that our own Government could not unilaterally determine—nor indeed manage to persuade the EU while we have still been within its laws—that a 5% tax on sanitary products is a direct discriminatory charge against all women of menstruating age? A friend said to me on learning that I was going to speaking in support of my hon. Friend’s Bill today that

“women really ought to have tax deductions for being female—what with tampons and tights that ladder, being expected to wear makeup and have changes of wardrobe, you all should get a discount from the Government”

I concur wholeheartedly, as I am sure you do, Madam Deputy Speaker, although that might be a step too far for the Treasury. A small and immediately helpful step in that direction would be to scrap VAT on all sanitary products, and indeed on incontinence products, which are also listed in the Bill. This outrageous tax puts these things into the “luxury items” category of products and reminds me that we have far to go to make sure that policy making has common sense at its heart.

It is wonderful that, as in the battles for women’s voting rights 100 years ago, there are men like my hon. Friend leading the charge to change the law in support of women’s rights and fairness. There have been excellent campaigns from across this House in recent years to push the Government to effect change, and the Bill is the next step to get this VAT discrimination sorted out. By scrapping VAT on sanitary products and making them exempt, as is the case for food and children’s clothes, this Government would be sending a clear message that they understand that the tax system can be an incentiviser or a punisher. For too long, I have been shocked that the EU has chosen to continue to ignore this call for fairness, allowing—no, forcing—women to have to pay more for sanitary products, which are an indispensable part of our daily lives, in order to boost Treasury coffers across Europe. I look forward to hearing from the Treasury in the Budget that follows our departure from the EU that it has understood and will immediately remedy this discriminatory tax.