Value Added Tax Bill

I beg to move, That the Bill be now read a Second time.

I presented the Bill on 5 September 2017, and it is with a wry smile that I rise to speak to it today, with some four hours ahead of us—perhaps not all of that time will be needed to consider it. I put it down on the Order Paper for consideration very late in the Session because I anticipated that it would be a topical matter on the eve of our departure from the European Union. We are now just seven weeks away from the UK’s independence day, on 29 March, when UK citizens will end their enslavement by the European Union.

There has been a lot of discussion about trade, but leaving the EU is about much more than that; it includes control over our own taxes. Reducing VAT, as the Bill proposes, will reduce the cost of living for consumers and the burdens on business, and it will reduce significantly the cost of living for people living in fuel poverty, which is also topical, bearing in mind yesterday’s announcement that what we all thought would be a cap on fuel prices has turned out to be more like an opera hat—it can go up very significantly at short notice. The Bill is therefore particularly relevance at this time.

When the Prime Minister made her Lancaster House speech some two years ago, she talked about the UK being able to develop an alternative economic model in the event that the European Union tried to impose what are effectively punishment terms as part of the withdrawal agreement. I think that we are now in that situation. The deal that the European Union is offering is not satisfactory. We are moving towards leaving without a deal, but in circumstances in which it will be open to the Government to take back control over important parts of the economy, and VAT is an important part of that.

The history of VAT goes back to 1 January 1973, when the United Kingdom joined the European Economic Community and, as a consequence, purchase tax had to be replaced by value added tax, which came in on 1 April that year. The then Conservative Chancellor, Lord Barber, set a single VAT rate of 10% on most goods and services. That standard rate is now 20%, which indicates the increasing burden of taxation upon ordinary people up and down the country.

I congratulate my hon. Friend on introducing the Bill. It is certainly very timely, but the increase in the tax rate and in taxes generally is due to the increase in our outgoings on the national health service, the state pension and so on. Although I welcome the principle, I am concerned that to fund any significant changes in VAT will be expensive to the Treasury at a time when we face increasing costs in the health service and so on.

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.

What estimate has my hon. Friend made of the cost to the Exchequer of increasing the threshold to that level?

The estimate made is not mine but comes from the OTS paper:

“Raising the threshold significantly, for example to £500,000, would potentially impact around 800,000 businesses. Of those, between 400,000 and 600,000 businesses might choose to deregister, while 200,000–400,000 might choose to remain…registered. This would simplify the tax obligations for businesses that chose to deregister, reduce VAT-related competitive distortions between registered and unregistered small businesses, and reduce the administrative burden on those businesses. However, raising the threshold to such a high level would cut the funds available for public services by between £3bn and £6bn a year.”

My hon. Friend will be conscious, however, that those figures are much lower than the £39 billion figure that is on the lips of most members of the public, if not Members of this House, as we prepare to leave the EU on 29 March, when we will have the opportunity to save ourselves £39 billion.

I congratulate my hon. Friend on introducing the Bill to discuss this important issue and this potentially big simplification, but am I right that the £6 billion price tag is roughly equivalent to half the budget for the entire police force of England? This is a substantial sum. Beyond the £39 billion, does he have an suggestions for how to raise enough money to make good the hole?

I do. It is a mistake to look at these issues without considering the dynamic behavioural effects flowing from changes in the regulatory environment. We are all agreed—certainly the Treasury and the Chancellor have expressed concern about it—that the country is suffering from a crisis in productivity, and it is clear from the OTS reports and the consultation that people in the engine room of our economy find VAT to be very burdensome and that it adversely affects their productivity. The problem of productivity centres around this bunching issue. Why are we inhibiting businesses from expanding and becoming more economically productive by imposing an artificial threshold? To an extent, it has been imposed on us by the EU, but we can break free on 29 March. I hope my hon. Friend will take a dynamic perspective and not just look at the straight line figures produced by the Treasury.

I want to highlight the point my hon. Friend is making. When the income tax rate went up to 50%, I had small businessmen come to me saying, “I’m not going to work any harder if I have to hand over 50%. I’ll work four days a week and play golf on Fridays. I’m not going to invest my capital in a business if the Treasury doesn’t understand the pressures of running a small business,” and they stepped away from increasing their productivity—indeed, went backwards—until we started to reduce the rate. Too often, we fail to understand the consequences of tax policy on behavioural patterns.

My hon. Friend makes a brilliant point. This used to be at the heart of Conservative thinking and policy making on the Treasury Bench. It was that dynamic thinking that was behind past decisions to significantly reduce the top rates of tax. I hope we can rediscover that much more dynamic approach to the behavioural consequences of high taxes and artificial thresholds.

I thank my hon. Friend for being so generous in giving way again. I think he is wrong to say that it is not the approach of our Front Benchers to think in dynamic terms: the Treasury has produced a wonderful paper showing that a third of the cuts in corporation tax are made up for by dynamic gains. Active work is being done on this; it is a Conservative belief. However, I would only ask my hon. Friend what proportion of the £4 billion or £6 billion loss to the Exchequer that he is talking about does he think might be made up for by dynamic effects? I agree that there are dynamic effects and I agree that this is a wonderful simplification; I just caution him that another Conservative principle is sound money and not running a huge £150 billion a year deficit like Labour did.

Obviously, we are all united in wanting to be fiscally and financially prudent, and, going back to the intervention of my hon. Friend the Member for Berwick-upon-Tweed (Anne-Marie Trevelyan), having looked at the evidence that came forward on this issue, I was horrified to see that, for example, if some cafés in tourist resorts think they are going to exceed the VAT threshold in a particular quarter they will close down for a week or two. What contribution does that make to the UK economy? How ridiculous is that, with the consequence that people are not being employed in those cafés and so on? I agree it is desirable that more work be done on this, and that in a sense is the purpose of today’s debate: to try to get people to think about the radical ways in which we could change VAT now that we are going to have the freedom to do it. VAT is the third largest tax in this country; it generates £120 billion or thereabouts. Surely we should now be looking at our ability to examine the best way in which that tax on goods and services can be applied so that it delivers the best productivity results and does not lead to the distortions we have been speaking about.

There is a problem with the Treasury approach to a lot of this. It produces a document setting out the cost of reliefs. It says that not having VAT on food—having zero rating on food—costs the Exchequer some £18 billion a year. We should look at that not in the context of saying, “We can’t afford to lose £18 billion,” but in the context of saying, “Why should we be charging people who want to go off and buy some food £18 billion?” The mere fact that the Treasury continues to draw up estimated costs of principal tax reliefs shows that it is looking at this from the wrong end of the telescope. The Treasury also says the reduced rate for domestic fuel and power is costing the Exchequer £4.85 billion. What an extraordinary approach that is, as it implies that the Treasury might be minded to put domestic fuel and power VAT back up to 20%. This gives me the feeling that the mindset in the Treasury needs a lot of alteration and that at the moment it is far too negative and unimaginative on a lot of these issues.

I hate to sound like a stuck record but want to repeat a point. My hon. Friend gave a basic estimate of the cost of raising the threshold, but it seems to me that this would bring a separate cost to the Exchequer; has he a cost for these exemptions in terms of potential lost revenue?

Yes, of course I do. I have an estimate—not quite done on the back of an envelope, but on a rough piece of paper. The Government’s figures say that the reduced rate—5% instead of 20%—for domestic fuel and power, which is by far the largest item here, currently costs the Exchequer £4.8 billion. That implies, based on my maths, a yield of some £1.6 billion from having the rate at 5%. Therefore, of all the measures in clause 2, that is by far the largest cost. However, I would have thought that that cost was more than justified by the social and economic benefit of introducing such a policy.

The Government told domestic consumers of electricity and gas that they were on their side and that they wanted to cap their costs, so they introduced, with the sounding of trumpets, a cap on energy costs. We then found out yesterday that the cap is being increased by some 10%, the consequence of which will be an increase of £100 on an average household bill of about £1,200 a year. If we add VAT, that is another additional cost. If we removed VAT from a £1,200 bill, that would be a saving of about £60 per household on average. I would have thought that that would be worth while, and it would be one way of mitigating the effects of rising energy prices across the world and rising prices of the raw materials. Why not go for that? If we look at all this like an accountant—although I am not an accountant, I did once work for a large firm of accountants, so I know the mindset that can be associated with such activity—why are we not considering the political benefits that will flow from eliminating VAT on domestic fuel and power?

Many households in my constituency, including my own, use heating oil, and I am sure that people would be very grateful. However, it is not an accountancy view to ask about the impact on the Treasury given the cost of vital public services, such as health and education, which we all want to see better funded. That is my angle, and it not about accountancy.

If we look at things in a dynamic way, what is the extent of the burden on the health service and social services of having people who are unnecessarily cold in their own homes because they cannot afford the cost of heating? I give that as an example of why we need to consider the wider picture, rather than just focusing on the accountants and the numbers. I do not know whether my hon. Friend is an accountant, but if he is, I had not intended any criticism of him specifically. As the public’s representatives, we should be examining such things on the basis of what is in their interest. If there ever was a demonstration of how hostile people are to the idea of being taxed on domestic fuel or power, it was apparent during the Christchurch by-election to which I referred earlier.

I presume that the only reason why my hon. Friend would be in favour of some of the items in clause 2(2) is that there would hardly be any significant cost associated with them. However, if one thinks about repairs and improvements to historic buildings, for example, is it not important that there should be an incentive? There certainly should not be a disincentive for people to repair and improve historic buildings—the heritage of our great nation. As for insulating materials for home improvement, surely it is sensible that if people are to improve the energy efficiency of their homes, they should not be subject to a disincentive tax.

I shall now turn to clause 2(2)(b). Fitness is something of which we speak frequently in in this House, and it is directly linked with the health service, the obesity agenda and so on. Why are we charging VAT on a whole range of fitness services? How can that be consistent with the public policy objective of encouraging people to get fit and thereby not only improve their quality of life, but relieve the burden on the health service?