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Taylor, Ian (Esher)Taylor, John M. (Solihull)
Taylor, Sir Teddy (Southend, E)
Temple-Morris, Peter
Thomason, Roy
Thompson, Patrick (Norwich N)
Thornton, Sir Malcolm
Thurnham, Peter
Townsend, Cyril D. (Bexl'yh'th)
Tracey, Richard
Tredinnick, David
Trend, Michael
Trotter, Neville
Twinn, Dr Ian
Viggers, Peter
Waldegrave, Rt Hon William
Walden, George
Walker, Bill (N Tayside)
Waller, Gary
Wardle, Charles (Bexhill)
Waterson, Nigel
Watts, John
Wells, Bowen
Wheeler, Rt Hon Sir John
Whitney, Ray
Whittingdale, John
Widdecombe, Ann
Wiggin, Sir Jerry
Wilkinson, John
Willetts, David
Wilshire, David
Winterton, Mrs Ann (Congleton)
Winterton, Nicholas (Macc'f'ld)
Wolfson, Mark
Wood, Timothy
Yeo, Tim
Young, Sir George (Acton)
Tellers for the Noes :
Mr. Sydney Chapman and
Mr. Timothy Kirkhope.
Question accordingly negatived .
Clause 183 ordered to stand part of the Bill .
Clause 48
Bad Debts
8 pm
Mr. Andrew Smith (Oxford, East) : I beg to move amendment No. 41, in page 29, line 32, leave out six' and insert three'.
The purpose of the amendment is to allow businesses to recover more quickly the output VAT that they accounted for when making supply to a customer where the debt proves to be bad. It provides the opportunity for us to discuss more generally the extent of bad debt and its serious consequences for small businesses in particular, which make the measure all the more necessary.
Let me make it clear at the outset that we welcome the fact that the clause proposes to reduce the waiting period from one year to six months, which will be of benefit to businesses large and small. As firms that are not in the cash accounting scheme for VAT--I shall return to that scheme in due course--become liable for VAT when they send out invoices, but only get the money back when their customers pay them, which in some cases is never, the provisions have serious consequences for business cash flows.
We believe that, given the comment before the Budget--for example, in the Financial Times of 8 March speculating on the benefit of immediate relief on bad debt, given that the CBI was calling for relief on bad debt to be immediately available when provision is made in the traders' account--we feel that the Government may be being unnecessarily cautious in moving only to six months and we should like to press the case for three months instead. That would give a cash flow benefit to small businesses in addition to that estimated by the Chancellor in the Budget.
Such a measure is especially important at a time when bankruptcies are running at such a high level. Dun and Bradstreet reports that in the first quarter of this year there were no fewer than 15,443 businesses collapsing- -a 3.8 per cent. increase on the same period last year. In those circumstances, bad debts themselves become a principal cause of business failure. There is a vicious circle. Firms that do not receive payment find it increasingly difficult to meet their own debts. That compounds the problem and if
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such firms are not themselves pitched into bankruptcy or liquidation--as, sadly, many are--they are at the very least more likely to join the legions of late payers, stoking up the overall burden of corporate debt overhang, itself aggravated by high real interest rates, which make forced inter-company credit the borrowing of first resort. That exerts financial stress throughout the business network to the point where those unlucky or adventurous enough to be the weakest links in the chain then break, with knock-on consequences all round.I think that it is now generally acknowledged that that is an extremely serious problem, not only in the United Kingdom but, as Michael Cassell reported in the Financial Times of 23 February, throughout the European Community, where the problem has become steadily worse as the recession has deepened. Michael Cassel reported the Association of British Factors and Discounters estimate of the time taken for European companies to pay as having increased by on average no less than one third in 1992. That is borne out by a disturbing report in today's Financial Times. Apparently, a survey by NCM Credit Insurance shows that
"One in five UK companies lost money as a result of non-payment by an EC customer in the year ended March 1993, compared with one in eight in the year to March 1989."
Clearly, that augurs badly for British companies looking to the EC for business which Britain so desperately needs given the yawning balance of payments deficit.
All of that places a very real premium on the help that the Government can give as regards domestic late payments and VAT on bad debts. After all, in both cases, firms are merely trying to get back more quickly the money that is due to them.
We welcome the CBI prompt payers' code and hope that the CBI is successful in getting a much larger proportion of its membership to sign up to it. We believe, too, that the Government should be setting an example both in public sector payments and through their readiness to legislate where that would be of benefit.
It is an absolute disgrace that the Property Services Agency, being fattened up for privatisation, was revealed by the Public Accounts Committee to be making contractors wait months for payment because of delays by the Ministry of Defence in paying it. The Guardian obtained an internal PSA newsletter called "Paid when Paid", which revealed that the Minister for Local Government and Inner Cities, no less, was expecting companies to wait 44 days for payment in connection with defence, prison, courts and royal palace contracts, in contravention of the 30-day maximum target that the Chancellor of the Exchequer set in his Budget last year.
It is not enough for the Government simply to require Departments to publish details of their payments performance in their departmental reports. Although that is all well and good in itself, it does not give any immediate incentive to recalcitrant Departments, nor does it offer redress to contractors waiting for bills to be paid by those Departments. As the Government operate a system of penalties for businesses that are late in paying their VAT, why not apply a system of penalties--perhaps precisely the same penalties--to Government Departments that are late in paying their bills to businesses?
If that were brought in as an automatic supplement to which the trader would have a legal right, it would not only be seen to be fair but would offer some automatic compensation to the trader, would set a good example and
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would concentrate minds wonderfully in the Department concerned. It would show that the Government were prepared to match their words, which are cheap, with actions which might not be so cheap. I am sure that it would be welcomed by the business community.The other important question to which the debate gives rise is why more small businesses do not take advantage of the cash accounting scheme which enables smaller businesses to account for VAT on the basis of payments received and made rather than the usual liability on the basis of invoices issued and received.
The Customs and Excise press notice issued on 16 March estimated that only about 40 per cent. of those traders who could benefit from the scheme were doing so. So although the announcement in the Budget that the threshold for eligibility for the scheme is to be raised from £300,000 to £350,000 and entry is to be made easier is to be welcomed, if small businesses are to derive the full benefit of the scheme and thereby escape the perils of late payment, we need to be assured that early action is in prospect on the outcome of the consultation exercise that is under way. I should be grateful if the Minister could tell us how soon the Government expect to be able to implement measures to improve take-up and ease of entry to the scheme.
I should be grateful if the Paymaster General could tell us whether any specific effort has been made to survey the 60 per cent. of eligible businesses to find out why they are not using the system. That is an obvious step to take. It may well be that the answer to that question--why businesses are not using the scheme--which does not appear on the Customs and Excise consultation paper on the operation of the scheme, is pertinent and the right route to finding a way towards higher take-up and thereby more benefits to small businesses in Britain.
Small businesses have been going through a difficult time. The VAT regime is often experienced as a real headache, making things harder for business rather than easier. We do not dispute that there are a number of measures in the Finance Bill that will help small businesses. We advocated those measures, and they are to be welcomed.
The Government need to accept that there is a long way to go as far as small businesses are concerned. That was underlined in a timely fashion by the publication today of a report by Grant Thornton which surveyed the opinions on economic prospects of small and medium-sized enterprises across the European Community. The report makes sorry reading. When such reports are published, it is important to underline that they do not tell the whole story hat many are doing well.
The survey shows that many small businesses are gloomy about their prospects. The Press Association report on the survey says : "Britain's small and medium-sized businesses are among the gloomiest in the EC about future prospects there is pessimism about turnover, employment and investment--and Britain is the only country where research and development spending is expected to fall. It also has the weakest forecast for spending on training".
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The survey, which covered 5,000 businesses throughout the Community, underlines the severity of the problems which firms in Britain and elsewhere in the Community face with late payments. There seemed to be vulnerability to pressures on finance arising from the problem of late payers.The widening skills gap is underlined in the report. That is one area where the United Kingdom comes out badly. It is bad news at a time when small businesses in Britain need help with upskilling their employees and with the advice available to the management of small firms. Another relevant outcome of the survey is that the size of management teams in small firms in Britain is, on average, much greater than that of their European competitors. That inevitably means that a higher proportion of costs is spent on management, with a consequent undermining of competitiveness.
The findings of the survey bear out everything that the Labour party has been saying about the need for the British economy to have more investment in infrastructure and skills and more support for our small businesses. The Paymaster General should tell the Committee what action the Government will take on the findings of the survey. He should also respond to the question which he did not have an opportunity to answer in the turmoil and somewhat torrid time that he was having at the end of yesterday's debate : what will be the effect of the increase in VAT on small firms--those businesses that people have started from home which are not paying any VAT on their fuel at present because they do not use more than 40 per cent. of their fuel consumption for business purposes? The imposition of VAT on fuel will hit those small businesses. The Paymaster General owes the Committee an explanation as to how the Government can possibly impose that measure on those businesses. He also owes the firms involved an apology.
8.15 pm
If the Government want small businesses to thrive, they must take action. As I suggested, they need to act to improve the overall economic position and climate that small businesses face. They also need to act specifically with regard to the consequences of bad debts for creditor firms. There are other provisions in the Bill with regard to small businesses, and we shall have a good deal to say about them--notably, the provisions relating to the VAT penalty regime and the right of recourse to VAT tribunals.
The Government need to take action to tackle the underlying causes which are giving rise to escalating bad debts. Those causes are fundamentally to be found in the consequences of recession and the fragility of recovery which still sees 1,200 businesses going under every week. Unemployment still casts an unacceptably long shadow over prospects for business recovery because of the greatly depressed purchasing power of the unemployed and because the fear of unemployment continues to corrode general confidence. Labour Members must stress the importance of tackling the causes of business failure and bad debt as well as the symptoms.
Small businesses add up to big business and they deserve every support. Labour's policies to that end are being developed further in consultation with small businesses. The key elements on which the construction of a supportive framework for small businesses need to focus
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were spelt out by my hon. Friend the Member for Leeds, Central (Mr. Fatchett) in a speech to the Small Business Development conference in April.Those elements are, first, finance--the need to free small businesses from dependency on short-term and expensive finance and from excessive exposure to personal risk by encouraging longer-term financial support and an equity share on the part of banks. Secondly, there must be improved advice and encouragement for the development of managerial skills. I have already referred to that matter in the context of the Grant Thornton survey. Thirdly, there must be better support for technology transfer, technological innovation and bringing new ideas to the market place. We believe that, with a supportive fiscal framework and a proper overall strategy for economic growth, infrastructure, investment and training, small businesses will have an even more important role to play in securing Britain's economic recovery and sustainable prosperity.
With regard to the specific provisions in clause 48, a further reduction, to three months, in the elapsed time for eligibility for VAT bad debt relief would give more help to the cash flow of many businesses, thereby staunching job losses and boosting confidence and recovery. I commend the amendment to the Committee.
The Paymaster General (Sir John Cope) : It might be helpful to the Committee if I intervene at this point to talk specifically about clause 48 and the amendment. The hon. Member for Oxford, East (Mr. Smith) ranged a good deal wider than that to other subjects relating to small businesses. I may refer to some of those wider aspects at the end of the debate if I have a further opportunity.
The Committee will appreciate that the Government have given a good deal of attention to the problems of VAT and small businesses, especially in relation to bad debts, over the past year that I have been doing this job and, indeed, under my predecessor. I have long been involved in the support of small businesses. I am anxious to ensure that VAT is fairly operated and takes account of the difficulties of businesses, especially cash flow difficulties. Customs and Excise has experienced increased bad debts in the form of VAT arrears. That is not surprising in a time of recession. The House may have seen from the Customs and Excise annual report covering the last fiscal year, which was published not long ago, that arrears increased, in spite of some special measures, from 4.2 to 4.4 per cent. The Public Accounts Committee has rightly and fairly criticised those arrears.
It is essential, if we are to be fair to those who pay their VAT on time, that we collect the VAT due from their competitors as promptly as possible. It is not fair to the majority for us to allow a minority to postpone their obligations, particularly in cases where the trader has collected the VAT from his own customers--I am thinking especially of retail businesses--and then fails to hand it over to the Customs and Excise when it is due.
Conversely, we also recognise the problems of some traders, especially when they have not been paid by their customers. That is the problem to which the clause is directed. As the hon. Member for Oxford, East correctly said, my right hon. Friend the Chancellor of the Exchequer has taken two specific measures in the Budget
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to help people in that position. First, he has widened and improved the cash accounting scheme. Secondly, he has made bad debts easier to write off for VAT purposes.The promised improvements in the cash accounting scheme can be put in place by order and administrative action. They do not require clauses in the Finance Bill. So there will not be an opportunity to mention them at another stage. The threshold has been raised to a turnover of £350,000 per annum. Traders whose turnover rises up to 25 per cent. above that can remain in the scheme until they come out of the top end. All that takes place under the VAT (Cash Accounting) (Amendment) Regulations 1993, which took effect on 1 April 1993. Not only that statistical change has occurred. We have also made changes to the arrangements for the scheme so that any trader whose turnover is below the new threshold can automatically use the cash accounting system without having to apply for and receive approval, as he previously did. Clearly, if it turns out that he was not eligible, he has to put the matter right later. We have tried to get rid of the bureaucracy involved in signing up to the cash accounting scheme.
The hon. Member for Oxford, East asked me about the consultation with the trade organisations, which is now in progress. We have asked for responses to the consultation by 31 May. We shall consider carefully the responses that we receive as soon as possible thereafter.
We have done a certain amount to publicise the cash accounting scheme especially to new traders. The packs for new traders include advertisements explaining the scheme and the other schemes available to traders. Further details are offered to anyone who is interested to know more. We have drawn the scheme to the attention of practitioners, banks and so on, so that they can advise clients about the scheme and tell them to take advantage of it, if it is desirable and if they wish to do so. We have conducted various exercises to publicise the scheme among traders who might wish to benefit from it.
The hon. Member for Oxford, East mulled over why more traders who, on paper, are eligible for the scheme do not take it up. When one ponders the matter one sees that there are some fairly obvious reasons why some do not choose to take up the scheme. First, the retail schemes and other related schemes for retailers are better for some small businesses. It is not necessary for them to take up the cash accounting scheme to obtain similar benefits or benefits that they consider more desirable in making their arrangements for VAT. For some traders who take cash over the counter, there is no advantage in the cash accounting scheme in dealing with bad debts. If one does business for cash, by definition one does not have any bad debts--unless one takes some dud notes--so some people do not become involved in the cash accounting scheme. It may be better for some traders from the input point of view not to be in the cash accounting scheme, depending how promptly they pay their suppliers and whether supplies are provided on credit.
Some traders find that the Inland Revenue cash accounting scheme does not blend as easily as it might with the VAT cash accounting scheme. They prefer not to be involved in the VAT scheme for that reason. Some additional accounting is required to keep the accounts on the basis that we require--necessarily, I believe--so that we can operate the scheme with due regard to the revenue.
Apart from the cash accounting scheme, which is highly desirable and which we have improved and extended in the
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Budget, my right hon. Friend and I were also anxious to improve the position of those who have bad debts and are VAT traders. That is the reason for clause 48 and the provisions that we are considering. The present scheme was introduced by section 11 of the Finance Act 1990. Before then, there was a scheme of VAT relief for bad debts. It depended on the formal insolvency of the debtor. That led to difficulties. Apart from anything else, it provided a VAT incentive to traders to go through the formal insolvency procedures to get back the VAT, and for no other reason. That was correctly regarded as an unnecessary incentive to go through the formal insolvency procedures. That was partly why the new scheme was introduced in the Finance Act 1990.Initially, the cash accounting scheme provided eligibility for relief on all debts in respect of supplies that were made after 1 April 1989 which were two years old and were written off in the trader's accounts.
A clawback provision still exists in respect of belated payments received by claimants. A debt may be regarded as bad at a certain time, but the trader may still chase it and he may succeed in getting some of the money back. We would obviously need to recover the VAT in that case.
The waiting period was reduced from two years to one year before the scheme came into full effect under section 15 of the Finance Act 1991. The new scheme has been generally welcomed and it has been discussed in the House and in Committee on a number of occasions. Representations have been made, however, from professional and business organisations and individuals about the fact that the waiting period is too long. Given the recession, those
representations have had greater validity because of the cash flow problems that have thus been caused. We have responded to those representations with the proposal in the Bill to reduce the waiting period from one year to six months.
8.30 pm
The decision to halve the waiting period is a reflection of the attention paid to the representations made and significantly enhances a scheme that has already led to a major improvement for businesses chasing bad debts. The one-year cost of the scheme--it is only one year because the scheme brings forward the time at which bad debts are written off--is estimated at £150 million. In other words, the cash flow of those businesses affected by bad debt has been improved by £150 million as a result of the Government's efforts in the current financial year.
The hon. Member for Oxford, East has suggested that we should reduce the waiting period from six months to three months, but I do not believe that it would be wise to pursue that proposal. If it is possible to write off a bad debt too soon after that debt is incurred, the necessary provisions will become unduly bureaucratic and difficult. The necessary clawback of debts paid after the end of the proposed 90-day period would increase considerably.
We must remember that different types of businesses use different credit arrangements. Credit of 90 days is not unusual in some lines of business. If the amendment of the hon. Member for Oxford, East were accepted, it would mean that every debt that was more than one day or a week outstanding after 90 days could be written off for VAT. That VAT would then need to be clawed back at a later date.
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I should make it clear that any waiting period, be it six months or, were we to accept the amendment, which I do not recommend, three months, runs from the day of supply. It runs from when the goods are delivered and the invoice arrives. The period does not run from when the credit allowed by the supplier has expired. I do not believe that VAT should be written off as early as three months after the date of supply, because that would add to the control problems of Customs and Excise when managing write-offs. It is necessary to establish that a debt is genuinely bad. Just because someone has been a bit dilatory in coming up with the money does not make for a bad debt. That is why the waiting period of six months is appropriate.Mr. Andrew Smith : Why is it more difficult to validate that the debt is a genuine bad debt when it is reclaimed after three months rather than after six? Surely the same evidence will be available for the VAT inspectors.
The right hon. Gentleman referred to the increased bureaucracy that that shorter period would impose on a business. I certainly do not see why the VAT inspectors or businesses should be subject to any more bureaucracy. If a business wanted to operate a 90-day or an even longer credit system, it would have that choice under our proposals. It would be up to businesses to decide whether to reclaim VAT after three months, six months or longer. Although our amendment would enable businesses to make a claim after three months, it would not preclude them, from choice, from deciding to wait longer, if they operate an extended system of credit. Surely our amendment gives business more choice than the right hon. Gentleman has tried to suggest.
Sir John Cope : Yes, in some senses it does, but a business will have to decide whether to place itself at a disadvantage in comparison with some of its competitors by not reclaiming the VAT as soon as it could, as proposed under the hon. Gentleman's amendment. At the same time, a business would have to be sure that it got its clawback right. From our point of view and that of Customs and Excise, we would also need to try to be sure that no bad debt that had been written off at the end of three months had not been paid afterwards. From a technical point of view, that is quite a difficult thing to do. I speak as a former auditor who had to go over transactions and find out what happened. Sometimes it is difficult to be certain that a debt has not been paid belatedly.
The hon. Member for Oxford, East picked up my phrase about validating a debt as genuinely bad. There is no validation of the kind to which he referred, for example through the production of some documents to demonstrate that a debt is bad. The only validation that is required under the scheme is the length of time during which the debt has been in existence ; in other words, from the date of supply until the six months period has expired. Providing that the debt has been outstanding for six months, no further validation in terms of documents is required.
For the scheme to be simple and easy to operate from the point of view of the trader and Customs and Excise, it is wise that a simple period of time should elapse. That provides reasonable protection and it is not necessary to
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