House of Commons Hansard Debates for 15 May 1990

Mr. Beith : The banks' readiness to lend in circumstances in which individuals should be much more

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cautious about the pressure put on people to borrow money has been part of the recent economic problems, although the record of recovery at the personal debt level is very much better than it is in some other areas. I singled out agriculture and debts in Third-world countries as areas where the banks have seriously overcommitted themselves far more, to their own detriment. In personal debt, they have caused considerable damage to individuals by encouraging them to take out debts that they cannot repay.

Sir Alan Glyn (Windsor and Maidenhead) : Does the hon. Gentleman agree that by giving enormous advances to Third-world countries, which will never be repaid, the banks have made it almost impossible or far more difficult to lend to smaller businesses?

Mr. Beith : No, because the banks still have the capacity to provide loans to small businesses. I am critical of the way in which they carried out lending operations to Third-world countries, but we shall have plenty of opportunity to talk about that when we debate other provisions in the Bill.

I and my right hon. and hon. Friends have tabled amendments designed to improve clause 10. Amendment No. 37, which overlaps with amendment No. 2, seeks to delete the word "accounts" and to insert "books and records". It is worrying that, if full statutory accounts are required, it will be a long time before a business can make a claim for relief from VAT. It could be a process of two years to have audited accounts available and unless the word "accounts" is used in a looser and more general way, the clause could present a real obstacle and could leave small businesses wondering whether it will be worth the effort and time involved in following the matter through over so long a period. I hope that the Economic Secretary will tell us that the word "accounts" in this case does not mean final audited or statutory accounts.

Amendment No. 38 seeks to remove clause 10(4)(b) which denies relief where the goods have been supplied under a reservation of title, or what is known as a Romalpa title in the trade, in which the title remains with the vendor until payment is received. The logic is that the vendor can simply repossess the goods to meet his VAT payments and the debt to him, but that is not always easy. A hire purchase item may mysteriously disappear from the premises of the person who has incurred the debt. A piece of equipment may be supplied to another company which, strangely, has disappeared. Access to the premises may not be easily obtained. There are many reasons why repossession may not be feasible in the circumstances. If the debt is treated as a bad debt, but the item is subsequently reclaimed or returns to the possession of the business, the value would come back via clause 10(5)(e) and would be repaid. There are provisions there to ensure that a bad debt that ceases to be a bad debt is not the subject of a double benefit. I hope that the Minister will either accept amendment No. 38 or find some other way to ensure that people trading in that manner can obtain VAT relief. We are dealing with a sector that is important not only in the retail hire purchase trade, but in small business generally.

Small businesses that face difficulties in obtaining capital are frequently involved in arrangements under which they have equipment whose title remains with the vendor until payment is received or completed. It is a

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common method and is an alternative to full- scale leasing which many small businesses use for the equipment they need. I look to the Minister to find a way of meeting those difficulties. If he does so, he will improve what is already a useful clause.

Mr. David Nicholson (Taunton) : This is the first debate on a Finance Bill in which I have taken part which has been initiated by the hon. Member for Islington, South and Finsbury (Mr. Smith), for whom I have some admiration. However, I am sorry that he spoke at some length and somewhat controversially in the early part of his speech. He spent so long in setting the scene that I hope, Mr. Lofthouse, that you will permit me to respond to his remarks on interest rates, for example. All hon. Members recognise that interest rates are a major problem for all kinds of businesses at present. However, let the House not forget that, under the previous Labour Government, the rate of interest was normally below the rate of inflation, so savers were losing all the time. It is appropriate to make that point in the debate on a Budget that aims to help saving. The hon. Member for Islington, South and Finsbury also referred to the uniform business rate as a source of burdens on small businesses. He will recall that we have previously debated the Labour party's attitude to the revaluation of business rating, which is by far the greatest cause of the burdens facing many businesses at the moment. The Labour party supports that revaluation.

We welcome the measure in clause 10 which, as has been stated, will cost between £150 million and £200 million. That is a substantial amount at a time when budgetary pressure is significant. I listened with interest to the hon. Member for Islington, South and Finsbury. Certain business organisations share some of the reservations that have been expressed. I understand that the Confederation of British Industry has expressed reservations, although I have not been in direct contact with it. I believe that it has made representations to one or two of my hon. Friends.

I must declare an interest because I am an adviser to the Building Employers Confederation which, in collusion with the CBI, has expressed concern about the way in which the bad debt relief might work. The BEC does not want traders to have to wait two years for the relief to take effect. It also sees certain advantages in running the new system in parallel with the old so that there will be an alternative. I hope that my hon. Friend the Economic Secretary to the Treasury will address those concerns expressed by business organisations and consider further possible representations that they might make in writing after this debate.

Mr. Allen : It is worth noting that it was a Conservative Administration who raised VAT from 8 per cent. to 15 per cent. in their first year of office. We must view some of the problems that are related to clause 10 against that background and against a wider background of small businesses suffering the highest interest rates of any G7 country and the highest rate of inflation in industrialised Europe. I must make those points as we discuss what some people outside this place might consider a rather technical clause. You were right, Mr. Lofthouse, to call me to order earlier when I referred to the uniform business rate. That also forms part of the background to this debate, in which

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we are considering small businesses that might be forced out of business. The registration requirement might be the final straw for them. Because of the wider factors to which I have referred, many small businesses will find that any additional impositions might be enough to force them over the brink. Dun and Bradstreet estimate that in 1989 bankruptcies were running at 26.3 per cent. in London and the south-east, while the figure was 9.3 per cent. for England as a whole. Those figures appeared in March 1990.

Mr. Hanley : Of what was that 9.3 per cent.?

Mr. Allen : Of 100 per cent.

We must also put the problem of late payments into perspective. My hon. Friend the Member for Ashfield (Mr. Haynes) paid tribute to his predecessor and I wanted to pay tribute to my predecessor, who was also a Conservative, Mr. Richard Ottaway. He often raised the issue of small claims and late payments. I am glad to see Conservative Back Benchers picking up on that campaign once again. I hope that they will find a ready response from the Government Front Bench.

Mr. Hanley : Will the hon. Gentleman consider the number of liquidations against the number of new companies being formed? If he did that, he would see that in all parts of the country the net number of new companies is higher than ever in our history.

Mr. Allen : We must be very careful about the number of companies and businesses that are being created. We must consider how long they last. The companies that become bankrupt or go out of business may be different companies from those that are being created. My hon. Friend the Member for Wrexham (Dr. Marek) has just arrived in the Chamber hot foot from his constituency. I understand that he has lost 1,000 jobs in his constituency over the past couple of days. Frankly, even a dozen new hamburger stalls would not compensate to that loss of jobs.

Dr. John Marek (Wrexham) : I hope that we have not yet lost those jobs. Brymbo was one of the most profitable steelworks in the country. It takes genius on the part of the Government to lose those jobs.

Mr. Allen : All new business is welcome. However, we must ensure that the balance in our economy, which has been distorted over the past 10 years, reaches some equilibrium. We need full-time jobs that pay a reasonable rate for the job. People should not be forced into low-income employment to supplement otherwise inadequate earnings. Wives should not have to go out to work when they would rather look after young families at home when their husbands are at work. I understand that the measure in clause 10 will cost about £150 million. I do not want the measure to be withdrawn and I do not say that £150 million should not be spent. However, I hope that we will refer to the measure constantly in our proceedings on this Bill as an illustration of where the Government's spending priorities lie. In an earlier debate, the Department of Employment's training programmes were cut by £212 million. Today the Prime Minister refuted the need for more resources to be devoted to tracking down sex

offenders--something that is close to the hearts of some Opposition Members.

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The Temporary Chairman : Order. The hon. Gentleman is straying. He should return to the amendment.

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Mr. Allen : I accept that reprimand, but I was trying to draw a perspective on the spending involved in clause 10. That spending amounts to £150 million. While I do not believe that that money will not be spent properly, there are other spending priorities, which should be examined thoroughly in our debates on this Bill.

Mr. Tim Smith : The hon. Gentleman is complaining about the cost of the measure. However, his hon. Friend the Member for Islington, South and Finsbury (Mr. Smith) has already welcomed it. He is proposing an amendment to reduce the period to one year, and no doubt that would increase the costs a great deal. What does the hon. Gentleman say about that?

Mr. Allen : I am sorry that my arguments went over the hon. Gentleman's head. I will try to explain them more simply, so that he can understand them. We are used to his interventions in the Public Accounts Committee, where he is usually a little more perceptive. We are entitled to examine the Government's spending priorities as a whole in the Finance Bill. I welcome the spending on this measure of VAT relief. I also welcome the speech of my hon. Friend the hon. Member for Islington, South and Finsbury. My point is that there are many other spending priorities, but you, Mr. Lofthouse, would draw me to order if I were to refer to them in detail. However, those other priorities should also be taken into account. They illustrate the philosophy of a Government who, in many aspects in the Budget, have decided to do very little. They are holding the ship as steady as possible while it is surrounded by icebergs. Nevertheless, other areas are involved and need to be examined.

The first of the three amendments explained by my hon. Friend the Member for Islington, South and Finsbury seeks to ensure that the baby is not thrown out with the bath water. Although we welcome clause 10, we should ensure that companies that are insolvent retain their current abilities and are not ruled out of the provisions. The second of our group of amendments seeks to help with small traders' claims for relief. That point has been well covered. The final amendment in this group, on which I have no doubt that my hon. Friend the Member for Workington (Mr. Campbell-Savours) wishes to comment, relates to the delay in claiming VAT relief on all written-off debts. Again, I hope that the Government will feel that it is possible to reduce the two years to one and that they will accept the amendment as proposed. If that is not possible, I hope that the Economic Secretary will at least agree to consider the matter in some detail and that he will make some verbal commitment when he replies.

Mr. Tim Smith : When VAT was first introduced, the position on bad debt relief was clear--there was no bad debt relief. It is important that the Committee understands how unfair that was. Value added tax was organised in such a way that a business had to pay over the VAT whether or not the registered trader had received the cash. If the trader never received the customer's cash, he never received the cash back from Customs and Excise. My right hon. Friend the Member for Brentford and Isleworth (Sir B. Hayhoe) was the Minister responsible for Customs and Excise at the time. He introduced what he has just

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conceded was a step in the right direction on the issue of bad debt relief, but it provided only for businesses that were already insolvent. There was therefore still a problem, because many businesses still had to pay VAT to Customs and Excise, but were unable to recover it.

It is important to understand that registered traders are effectively unpaid collectors of taxes. They are not dealing with their own liability ; they are collecting a tax and paying it to Customs and Excise. It was a most unfair system, because they were required to pay a tax when somebody else was unable to pay it. The clause is welcome, as it introduces a comprehensive system of bad debt relief for the first time.

The hon. Member for Nottingham, North (Mr. Allen) does not seem to understand a great deal about VAT and would do well to listen at the moment -- [Interruption.] I am glad that the Opposition Front Bench spokesmen are listening. The hon. Gentleman complained about the cost of the relief and suggested that it was an indication of the Government's public spending priorities. However, we are not talking about public spending priorities ; we are talking about taxation yields.

If the cost of the relief is £150 million, we must remember that that £150 million is the bottom line for businesses that are not responsible for the fact that the tax has not been paid in the first place. It was not those businesses' fault that their customers had become insolvent or did not pay, but they had to pay the tax over to the Customs and Excise. It is because that system was so unfair that this change is so welcome.

The only point that I did not understand in the speech of the hon. Member for Islington, South and Finsbury (Mr. Smith) was his explanation of the importance of the clause for small businesses. I remind him that, in the past few years, another important change has been made--since the introduction of VAT--

Mr. Allen : Is the hon. Gentleman saying that providing the relief does not involve real money or real spending or certain priorities in relation to Government spending?

Mr. Smith : Of course it involves real money, but it has nothing to do with the Government spending. The provision involves a reduction in the yield of VAT, and for the reasons that I have explained, I believe that that reduction in the yield is wholly justified. I was about to say that another important change that has been made to the VAT regime in recent years is the change to cash accounting. Any business with a turnover of £250,000 or less, which must accommodate a large number if not the majority of registered traders, can switch to a system of cash accounting if it so chooses, and at any time that it so chooses. It can then not only accommodate bad debts--there will be no problems about customers who have not paid--but it has a solution to the problem of customers who pay late. Cash accounting means that the trader pays the VAT to Customs and Excise only when it has been collected from the customers.

Can my hon. Friend the Economic Secretary tell us what proportion of VAT traders have opted for cash accounting? Surely more small businesses should be encouraged to make the change, because they would not have to worry about complying with all the requirements of the provisions on bad debt relief, and they would not

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have to worry if some of their debtors took a long time to pay their debts, because all those factors are taken into account in cash accounting.

I believe that only a relatively small proportion of VAT traders have changed to cash accounting, and I wonder why. Is it because the system has not been publicised sufficiently? If more traders switched to that system, they would find substantial cash flow benefits and would no longer have to worry about the problems of bad debt relief. Clause 10 would then be relevant to large businesses with a turnover of more than £250,000. Although I hope that my hon. Friend the Economic Secretary will comment on that, I conclude by welcoming the new provisions.

Mr. Hanley : I welcome the speech of my hon. Friend the Member for Beaconsfield (Mr. Smith), which was in stark contrast to that of the hon. Member for Nottingham, North (Mr. Allen) in that it contained great good sense and was both accurate and to the point.

I, too, welcome clause 10. As my hon. Friend the Member for Beaconsfield said when he traced the history of bad debt relief--or the absence of bad debt relief--businesses of all kinds have been hard done by in the past, which is why the relief is so welcome. However, although the previous relief needed amending to some extent, it should not be thrown out altogether. The Institute of Chartered Accountants in England and Wales believes that the clause is a welcome extension to the existing bad debt reliefs, at least where there is no formal insolvency. However, either the present relief should be allowed to continue in addition to the new relief that has been proposed--perhaps the former should be amended to provide for the repayment of VAT for amounts that are subsequently recovered, with proof of the insolvency for the VAT-inclusive amount of the debt--or the requirement for a two-year period should be substantially reduced. It has been suggested that the two-year period should be reduced to one year. That would be possible, but I accept that if the period were reduced there would be many more cases of doubt in which a bad debt was initially claimed but where the amount was subsequently paid.

We are all aware of the need for Customs and Excise to ensure that companies do not claim double relief. However, if the two systems of bad debt relief--the old system and the new system--were allowed to run in tandem, and if a VAT payer could opt for the system that he found preferable, he might be able to avoid claiming double relief simply by the inclusion of an additional box on VAT form 100, in which only the amount of the relief that has actually been claimed would need to be given. In that way, no one could enjoy double relief.

The Institute of Chartered Accountants in England and Wales also believes that the new relief is unduly restrictive because there is an unwarranted delay where the debt has become irrecoverable within a short period after the date of supply because of the insolvency of the debtor. That point has been raised by several hon. Members, including the hon. Member for Islington, South and Finsbury (Mr. Smith).

There is support for the fact that this is welcome relief, unless the debtor goes bankrupt, and then the delay seems far too long. In his brief sketch of the legislation, the hon. Member for Islington, South and Finsbury--

Mr. Tim Smith : It was an outline.

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8 pm

Mr. Hanley : As my hon. Friend says, it was an outline or perhaps even briefer than that. I am sure that we shall hear longer speeches from the hon. Gentleman in Committee. He also mentioned Romalpa-type goods, where goods are sold subject to reservation of title. The hon. Member for Brent, South (Mr. Boateng) would understand the legal title. Where the property and goods have not passed, the owner of those goods is placed in a difficult position. If the goods have disappeared, there is a bad debt, but, because the title has not passed, he is still deemed to own those goods, so there is a serious problem with clause 10(4)(b). It would operate unfairly if the title proved to be unenforceable. I am sure that the effect of that clause was not intended and was a straightforward slip which needs to be addressed. Hire purchase contracts or goods sold under reservation of title should not cause unfair disadvantage to those who have lost both the goods and, subsequently, the VAT.

Clause 10(5) mentions "regulations". It would be most helpful for all hon. Members on both sides of the Committee if those regulations were issued in draft form for comment before being laid before the House. There have been many cases during the past few years where the Revenue and the Department of Trade and Industry have been helpful over company legislation, and draft regulations issued for comment have helped to reduce final inaccuracies and argument.

That is particularly important in this clause, because accountants would like to feel that the definition of writing off a debt is at least consistent with their way of doing it. Will a debt being written off mean that the debt has to be written out of the books, or will it suffice if the full provision is made against it? The law is not clear and it would be much better if published accounts were consistent with what my hon. Friend the Economic Secretary is trying to bring into the legislation.

Presumably, the regulations will also specify the additional records that the taxpayer will have to keep to make a claim, and in what form. It is only right that practising accountants should be able to comment on that before the regulations are presented to the Committee. The Institute of Chartered Accountants in England and Wales has written to the Treasury saying it would be happy to discuss the draft with Her Majesty's Customs and Excise if it so wishes. The bad debt relief should be available where a provision is made in respect of a debt, rather than its being written off. Should the amount prove recoverable, the debt would be repayable. It would be disappointing if best accounting practice was distorted as a result of the need to comply with the write-off requirements under the regulations. Therefore, I welcome the clause, but believe that the two or three issues raised by hon. Members from both sides of the Committee are worthy of comment. In that spirit, I support the clause.

Mr. Campbell-Savours : When one misses a Finance Bill or two, one becomes quite rusty on such matters, and I must confess that I feel a little rusty on this issue.

I should like to raise a couple of points because, if I recall correctly, early in the 1980s I spoke on an amendment to the Finance Bill in some detail having done a considerable amount of homework. I am trying to empty my mind of what I said then. Now that a scheme is in place

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--at that time I was arguing for the introduction of a scheme--I am concerned about what would happen if someone claimed relief, having written off a debt, and subsequently reclaimed the goods. The hon. Member for Richmond and Barnes (Mr. Hanley) alluded to what would happen if relief was claimed and the goods were subsequently re- acquired

Mr. Hanley : If the goods were reclaimed, the relief would have to be repayable.

Mr. Campbell-Savours : I can understand that if settlement of the account finally took place, the VAT would have to be adjusted to take that into account. However, I am not sure that it is the function of the Customs and Excise authorities to police where goods have been re-acquired by manufacturers or distributors from customers who have not paid, but have been willing to relinquish control of the goods.

Mr. Hanley : I do not believe that the hon. Gentleman was in the House when the hon. Member for Islington, South and Finsbury made exactly the same points as I did. If the hon. Member for Workington (Mr. Campbell- Savours) disagrees with what I said, he is disagreeing with his own Front- Bench spokesman.

Mr. Campbell-Savours : It is not unknown for me to depart from the views of my Front-Bench spokesmen. This is the House of Commons, a debating Chamber, and we are free to speak. This is hardly a matter of huge political dimension, requiring us to take an entrenched ideological position. We are discussing to and fro the merits of a scheme. I was not here earlier because I was in the Select Committee on Members' Interests, dealing with matters that I find important and interesting.

I support the amendment to reduce the period to one year. It seems that it will be hard for Customs and Excise to police where goods have been reclaimed from customers who have had their VAT liability to the seller, distributor or supplier of the goods written off. It would be hard to monitor that.

It might be that firm A supplies to firm B £5,000-worth of merchandise. Firm B dillies and dallies and at the end of two years, firm A claims relief. Six months later, firm A may send round a couple of wagons to firm B and say, "We know that you have the goods in there and we want them back. You never paid us. We have received the money back from Customs and Excise, but you never actually paid us and we want our goods back." Firm A may go in and secure those goods. That is a reasonable case. What would happen in that instance? Will the VAT monitoring apply equally in that case, or will it partially apply? How will it be policed? I do not know.

I believe that the provision is a major concession. I remember the old days when purchase tax was 25 per cent. There was a time when it was even more. There was a purchase tax surcharge in the late 1960s when I was in business when it was as much as 35 or 37.5 per cent.--extremely high. At that time one could not reclaim it and when someone did not pay, it was a big wallop out of one's cash flow. We have seen purchase tax reduced to 8 per cent. as VAT and rise to 15 per cent. and I am sure that

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today, while it will not be on such a high scale, it will certainly have a major effect on cash flow when companies do not pay their bills or VAT liabilities.

I remember a particular incident in which I was involved. In 1976, in my former incarnation as a business man, I was supplying clocks to a large retailing organisation. It advertised my clock in full-page advertisements in one of the Sunday colour supplements. The company performed some clever manoeuvres when placing its orders. I was not too intelligent at the time ; I was just banging out the gear, getting it into the shops to our clients, and perhaps forgetting that certain customers were building up a lot of credit. One particular customer built up credit of about £10,000-- worth about £30,000 today--and then took our company for a ride. Of course, we were left to pay the bill for VAT. The rogue company never went into liquidation and we never found out what happened to it. By that time I had retired from the business to come into this blessed place. No claim was ever made, and what had previously been partly my company ended up subsidising Customs and Excise. That was wrong, and it has perhaps gone on to this day when liquidations have not taken place. Based on my experience, I welcome a reform of this nature. But we should also consider the implications for many businesses suffering from high interest rates. Many companies in times of comparatively declining consumption and difficult market conditions--we are now entering such a period--find it hard to use all their capacity, and often find their profits falling as a result. At a time when such companies are borrowing more and more from the banks to invest in technology, as the Government told them they should, and when they are having to pay high interest rates, concessions of this sort are important because they save companies money and have a significant and positive effect on their cash flow.

Mr. Neil Hamilton : I mean no disrespect to my hon. Friends or even, unusually, to Opposition Members when I say that the most fascinating speech in the debate so far has been that of my right hon. Friend the Member for Brentford and Isleworth (Sir B. Hayhoe), who I well remember defending with passionate intensity in previous such debates positions that he now declares he believed all along to be indefensible. I know that the Economic Secretary will not be unfamiliar with that aspect of a Minister's life ; but I have often spoken on previous Finance Bills to advocate broadly the sort of relief that the Government propose this evening. I greatly welcome it.

I was most interested by the speech of the hon. Member for Islington, South and Finsbury (Mr. Smith). I am delighted that he accepts the recommendations of the Institute of Directors on this matter. This is a most welcome new alliance with the Labour party, and I hope that it is contagious and will extend in due course to many of the other policies of the institute. Then we will know that perestroika has come to the Labour party in a big way.

Only one of my two amendments has been selected. They propose a slight modification of the Government's legislative proposals. In particular, they would reduce the two-year period before relief can be claimed to 13 months. It may be wondered why I selected 13 months, as opposed to 12. My first reason was that I discovered that the Labour party had selected 12--my original suggestion. However, I have been able to think up a rational

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justification for my change of mind. It is that 13 months can be justified as one year from the usual due date for payment after presentation of an invoice--usually 30 days or one month.

My second amendment seeks to bring forward the earliest date at which a claim under these rules can be made to 1 April 1991. That has been necessitated because my amendment to reduce to 13 months the period before relief can be claimed has the consequential effect, given the way the clause is drafted, of bringing forward the earliest claim date to 1 April 1990. Clearly it would be impossible to have a claim date earlier than that on which the regulations under the clause come into force, so I chose 1 April 1991 as a date which accommodates the reasonable suggestions of the Customs and Excise as to what is practically possible, but which seeks to bring forward the date on which the relief will become available in the interests of those who will be able to claim.

8.15 pm

I greatly welcome the Government's proposals, because proper relief of VAT on bad debts has been a notable omission from United Kingdom tax legislation, as my hon. Friend the Member for Beaconsfield (Mr. Smith) pointed out, since the inception of VAT. This inequity has been staring Governments in the face for a great many years and hon. Members on both sides of the House have campaigned strongly for many years against it, in the interests, particularly but not exclusively, of small businesses.

It is perhaps interesting to look back over the various reforms of the past 15 years or so and to see the slow steps by which we have reached this point. Section 22 of the VAT Act 1983 re-enacted provisions in the Finance Act 1978 and gave relief in cases in which there had been a formal insolvency. Then, in 1985, as my right hon. Friend the Member for Brentford and Isleworth recalled, relief was extended to include administrative receiverships. And then, in the Finance (No. 2) Act 1987, we introduced that most valuable provision, the cash accounting scheme, for traders with a turnover of up to £250,000.

If I may supply my hon. Friend the Member for Beaconsfield with the answer with which the hon. Member for Nottingham, North (Mr. Allen) was unable to supply him as to why we need this new relief, inasmuch as most small businesses can avail themselves of the cash accounting system which would remove the necessity for it, it is that, for whatever reason, there will be traders who do not appreciate where their true commercial tax advantage lies, and it would therefore be right to provide a catch-all relief. This provision certainly does that.

I share the view of my hon. Friend the Member for Beaconsfield that it would be in the interests of many more firms to take up the opportunities that the Government have provided for them. They perhaps do not sufficiently realise the advantages to their cash flow that the cash accounting scheme would provide. I should be very surprised to hear from my hon. Friend the Economic Secretary figures to show that more than a very small proportion of those who qualify for the cash accounting scheme have actually taken up the opportunity with which the Government have provided them, and I hope that they will be encouraged to do so.

In July 1988, Customs and Excise announced a review, following a commitment in the enterprise and deregulation unit's progress report earlier in the year, to look into the

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matter. We have been waiting a long time for this most welcome change, which the Government have introduced after a period of consideration.

My amendments seek to bring forward the point at which the benefits of this relief become available. One of the reasons why that is necessary is the very length of the period of gestation that I have described. Business deserves prompt and full relief without further ado, and I do not believe that the arguments for a two-year period are very compelling.

Attention has rightly been concentrated on the cost to the Treasury of the reduced yield of VAT that these proposals would cause. If their proper relief is expensive, that is merely a measure of the unfair burden that those businesses have had to endure for many years.

We should not be apologetic in any way about the cost to the Treasury of these proposals. That burden falls especially on small businesses which do not have the muscle that larger businesses use to make their customers pay promptly. For many small businesses, a bad debt can prove fatal. It can be the straw that breaks the camel's back, and being able to recover VAT promptly on a large bad debt can be the difference that enables a firm to survive and can stop the domino effect of default, bankruptcies and insolvencies.

This is a valuable means of preserving businesses that might otherwise be threatened. It has job-saving potential, and also the revenue-raising potential that comes from profitable businesses paying taxes rather than becoming a charge on the taxpayer as a result of failure.

The reason that I have sought to reduce the two-year period to 13 months, and why the Opposition have sought to reduce it to 12 months, is that, for most businesses, once a debt is over a year old, the likelihood of recovery is small. We should recognise that one year is a sensible period to choose, because at the end of that time, the debt is in practice unlikely to be recoverable. I hope that my hon. Friend the Economic Secretary to the Treasury can offer some comforting words when he replies to the points that I have made. My hon. Friend the Member for Richmond and Barnes (Mr. Hanley) and the hon. Member for Islington, South and Finsbury spoke of running in tandem the old section 22 relief and the proposals in the Bill. I support that contention, because I see nothing wrong with running the two in tandem. It may be more advantageous to businesses to seek the section 22 relief, and businesses that are used to doing that should be allowed to continue in that way.

I do not wish to sound churlish because I greatly welcome the birth of this advantageous tax relief. It coincides with the appointment to his distinguished office of my hon. Friend the Economic Secretary to the Treasury. I congratulate him on building on the work of our right hon. Friend the Member for Brentford and Isleworth (Sir B. Hayhoe) who covertly and strongly fought the mandarins of the Treasury all those years ago. I congratulate the Government on their proposals.

Mr. Ryder : I reiterate my gratitude to my right hon. Friend the Member for Brentford and Isleworth (Sir B. Hayhoe). I am sure that my right hon. Friend the Chancellor, being a generous man, would be happy to share the credit for the implementation of this clause with my right hon. Friend the Member for Brentford and Isleworth, for whose kind remarks I am grateful.

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I start by responding to some specific and technical points that were made by some of my hon. Friends and by Opposition Members, including the hon. Members for Islington, South and Finsbury (Mr. Smith) and for Workington (Mr. Campbell-Savours). My hon. Friend for Richmond and Barnes (Mr. Hanley) spoke about extra boxes. I understand that the return has just been revised to make it shorter, simpler and easier for traders, and that that has been done very much along the lines that my hon. Friend suggested. That is part of the Government's deregulation drive.

My hon. Friend the Member for Beaconsfield (Mr. Smith) asked about numbers. I think that about 83,000 have taken up cash accounting out of a total of 600,000. That represents about 15 per cent. so far. The hon. Member for Workington conceded that he was a little rusty after all these years. This is the first time that I have had to speak about VAT from the Front Bench and I can tell him that he is not the only one who feels a little rusty.

In the debate on last year's Finance Bill, which I have read, the hon. Member for Workington spoke about corporation tax. This time he has raised the matter of policing. VAT officers will be instructed to pay special attention to bad debt relief claims during normal control visits, and they will carry out cross checking of supplies, verification and transaction testing, especially in relation to associated companies and connected persons. We have approved 20 extra staff for that very purpose and with the full implementation of the Keith committee proposals, Customs and Excise now has a fuller armoury of criminal and civil evasion powers to deal with any dishonesty that is discovered.

Mr. Campbell-Savours : Is not there a danger that the defaulting company could claim that it has paid its account and the value added tax that was due, when in fact it has been written off by the supplying company?

Mr. Ryder : I do not think that that is a danger. During discussions that I have had about the clause it has never been drawn to my attention that it could be a danger. If the hon. Gentleman feels that the matter is worthy of further investigation, I shall certainly carry out an examination on his behalf.

The hon. Member for Islington, South and Finsbury raised three specific points about clause 10(5)(g) and the powers of VAT commissioners. We are looking at the feasibility of a consultation exercise on the draft regulations. If the hon. Gentleman has any specific matter that he would like to draw to our attention in connection with that exercise, we would be grateful to receive it. Clause 10(4)(a) is a straight copy of section 32(4)(a) of the Finance Act 1985. There is no case for giving more relief than the supply is worth. I think that traders might be tempted fraudulently to inflate the value. The other technical point raised by the hon. Gentleman was in the context of section 22 of the 1983 legislation, which has been superseded by section 32 of the Finance Act 1985.

The hon. Member for Islington, South and Finsbury made a great deal of the problem that some small businesses are suffering because of high interest rates. At the moment, lower interest rates are not a viable option if inflation is to come down. I draw his attention to an article last week in the Bank of England Quarterly Bulletin which

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stated that interest rates are an extremely effective policy instrument and that, if anything, their effectiveness has increased rather than decreased in recent years. I cannot share what I would describe as the hon. Gentleman's gloom merchant's analysis of small businesses. As one of my hon. Friends said in an intervention, there are now about 1,500 net new businesses starting every week.

Ms. Abbott : How many bankruptcies are there?

Mr. Ryder : The figure that I have given is net. The net figure during the last full year of a Labour Government was a loss of 100 rather than a gain of 1,500. It was minus 100 and not plus 1,500.

Mr. Battle : Is not the crucial point how long those businesses last? Businesses may start up, but if they do not survive the year, the figures are meaningless.

Mr. Ryder : If they do not survive the year, they go into the next year's figures. This is a net figure, a rolling figure. It is the figure of the new VAT regulations, which is in the public domain and constantly used by the Government.

Mr. Campbell-Savours : I do not think the Minister understands the importance of the intervention made by my hon. Friend the Member for Leeds, West (Mr. Battle). We are discussing bad debt. If, while pressing his case, the Minister is forced to accept that a large number of companies are dropping out of business or becoming insolvent, he is accepting that there is a disproportionately higher level of debt today than previously. If people are dropping out of business, the chances are that it is because of insolvency and they will leave debts behind. Surely it cannot be the Government's policy to promote a climate of business expansion which is reliant on the odd few getting through and a majority dropping out, creating immeasurable damage in terms of bad debt liability with the consequences of that on those who survive. We cannot run a modern economy on that basis. Who is protecting whom in those circumstances?

8.30 pm

Mr. Ryder : I do not deny that many small businesses are experiencing serious problems. With interest rates at their present level, it would be unusual if they were not. But I gave the net figure of new businesses starting up. There is no denying that many small businesses are closing and that many that are not closing are suffering from some of the problems to which the hon. Gentleman referred.

Clause 10 is another step towards improved conditions for small businesses, and most hon. Members who have spoken have expressed their support for it. It follows a catalogue of tax cuts undertaken by the Government since 1979. I am grateful for that support for the general thrust of the measures that have been incorporated in the clause.

Clause 10(6) provides for the making of regulations to cover the accounting requirements of the new scheme. They will provide that any trader wishing to claim bad debt relief will be required to maintain a separate bad debt relief account. When a debt is deemed to be bad, the trader will enter the debt in the bad debt relief account. That will be regarded as write-off for the purpose of the clause, as the debt will have been tranferred from whatever form of current account the trader maintains.

Concern has been expressed by hon. Members and by interested organisations outside the House that the requirement for write-off might not be met until a trader's

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accounts are audited or approved at a general meeting. I hope that the hon. Member for Berwick-upon-Tweed (Mr. Beith) will accept that amendment No. 37 addresses an unfounded fear. However, should the accounts subsequently be rejected by the auditors or the general meeting in matters affecting bad debts, the clawback procedures would be appropriate.

Amendment No. 38 has been tabled by the hon. Member for Berwick-upon-Tweed because he believes that traders supplying goods under certain contracts-- for example, Romalpa--will be at a disadvantage. I do not think that that will be the case, because under such contracts the seller reserves title until the customer has paid for the goods. If the customer does not pay, the seller can either reclaim the goods, in which case there is no debt, or he can relinquish title to the goods and become eligible for bad debt relief. The amendment would allow the seller to do both. In other words, there would be double relief, and that would not be wholly justified.

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